Good Reading -- May 2011

This email has started to take on a life of its own, and I'm always working to make more interesting and helpful to everyone who receives it. The most common comment I get is something about struggling to get through all the material. /the goal was always to encourage people to pick and choose just the reading of interest, but that said, I'm going to try to include more links with a description of the article so everyone can pick and choose more quickly. Facts and Figures

In a study of the world's 100 largest market cap companies in 1912, only half were still in existence by 1995; only 20 were still in the top 100; and adjusted for inflation, 60% of the companies shrank in value. (Source: Leslie Hannah)
According to Gallup poll conducted in February 2011, a majority of Americans now believe that China is the world's leading economic power.
Money managers (as opposed to individuals) held less than 10% of all shares of American corporations in the 1950s. Today, they hold 70%. (Source: John C. Bogle)
There are about 10.5 million households in the U.S. with a net worth greater than $1 million (that is roughly 9% of the population). Interestingly, that level is still down sharply from 2005-2007 levels but up considerably from 2000-2003 levels (see attached chart).

At the same time, there about 15 million households (roughly 12% of the total) that receive more cash from the IRS than they pay in federal income taxes and payroll taxes (see article below).

Just over 80% of men in America between ages 25 and 54 currently have a job; that figure was 95% in the late 1960s, near or above 90% in the 1970s, and above 85% until 2008. (source: OECD via The Economist of 4-30-11)

The fraction of prime-age (25-54 y/o) men on disability benefits has more than tripled from 1.5% in 1970 to 4.9% [in 2009]. Federal spending on those benefits has risen to $120 billion, or just less than 1% of GDP.
With one-in-five men age 25-54 unemployed, the U.S. has the smallest share of prime-age working men of any country in the G-7.

“The biggest growth in private-sector job creation in the past year occurred in positions in the low-wage retail, administrative, and food service sectors of the economy. While 23% of the jobs lost in the Great Recession that followed the economic meltdown of 2008 were ‘low-wage’ (those paying $9-$13 an hour), 49% of new jobs added in the sluggish ‘recovery’ are in those same low-wage industries. On the other end of the spectrum, 40% of the jobs lost paid high wages ($19-$31 an hour), while a mere 14% of new jobs pay similarly high wages.” (National Employment Law Project)

Quoted "The major accidents in the United States -- Bear Stearns, Lehman, Fannie and Freddie -- had nothing to do with Glass-Steagall." -- Former Treasury Secretary Larry Summers, responding to questions about his prior support of the repeal of Glass-Steagall and his prior opposition to stricter regulation of derivatives Links

"Nearly 100 Pieces of Fantastic Journalism" -- don't miss this exceptional anthology of non-fiction from the past year. Something for everyone.
"Global Energy: The Latest Infatuations" -- a recent article from Vaclav Smil with some great thoughts on energy policy.
"The Science of Why We Don't Believe Science" -- a good overview of several important concepts in psychology that come up repeatedly in investing.
"The Power of Lonely: What We Do Better Without Other People Around" -- I'd certainly add investing to this list. (See also the article pasted below.)
"What Keeps the World's Ships Going?" -- an excellent and concise look at the global shipping industry, which is a vital but often overlooked that occasionally offers tremendous values for patient investors.
"Deeply Conflicted" -- behavioral economists find that disclosure meant to manage conflicts of interest is often ineffective, and can even have the opposite effect of the one intended.
"The Chilling Story of Genius in a Land of Chronic Unemployment" -- a fascinating look at the "Yahoo Boys" of Nigerian internet scams (also known as Nigerian Letters, 419 fraud or 419 scams). One of the author's major points is that amazing technical prowess combined with entrepreneurial drive and a bleak economic future can yield very different results, depending on the location and the circumstances. “You white people have very flexible hearts. We’ve seen it. That’s why there can be no true love in Nigeria. Your closest friends rip you off here.”

Books I just got my copy of Howard Marks' book, "The Most Important Thing," and I can't wait to read it. Based on his outstanding memos to clients, this is a must-read book. A good review (and a great blog) is here, and see the very bottom for an interview with the man himself. I've also attached the 1990 memo that started it all (which is also mentioned in the interview). Attached

"Time to Wake Up: Days of Abundant Resources and Falling Prices are Over Forever" -- Jeremy Grantham's latest. I get nervous about that word "forever"...and while I've found most of Grantham's writing to be useful over the years, suffice it to say that I have some major issues with this one. (The comment about the weather of the past 12 months having been as hostile as any in the past 100 years is particularly egregious. You'd think he, of all people, would remember the 1930s...). Anyway, this is a very important topic, and there are some very worthwhile data in here, so I decided to include. I just wish the analysis were more level-headed.
Graphic -- U.S. Consumer Credit Outstanding -- a friendly reminder that the U.S. consumer, while certainly in (slowly) improving condition, hasn't really delevered all that much. The $2.4 trillion in consumer credit outstanding is down only slightly from its all-time peak in late 2008, and it's still 5 times larger than it was 25 years ago (hint: median earnings and GDP have decidedly not grown 5x over the same time horizon). And it follows that a still-large share of that credit (namely, more than one-third) goes to "sub-prime" consumers.
Graham and Doddsville -- Spring 2011 -- features a great interview with preeminent value investor Michael Price.
"All Those Numbers -- Logistics, Territory, and Walmart" -- about a year old, but an absolutely fascinating profile of Walmart's operations from a design/architecture/logistics perspective. Don't miss this one.

Copied Below

"Solitude and Leadership" -- continuing the loneliness/solitude theme, this article is a must read. I've been meaning to include it for months and just remembered it because of the prior article in the links section.
Steve Jobs's 2005 Commencement Address at Stanford University -- after reading that amazing interview I sent around a few months ago, I came across some other good stuff, including this speech.
"Be Careful Wishing for the Fed's End" -- an excellent and very timely historical primer on money and the Fed from the preeminent financial journalist Roger Lowenstein. As he notes, all currency systems have flaws, but simply "abolishing" the Fed in favor of gold "replaces the Fed chief with the collective wisdom (or luck) of the mining industry." Bernanke deserves some criticism, but gold is certainly not a perfect antidote. (Sidenote: I wonder if Ben Graham's Storage and Stability and the ever-normal granary commodity basket will ever be brought back into the conversation. It seems like it would, or should, appeal to the pro-gold crowd.)
"51% of Americans Pay No Federal Income Taxes" -- not exactly an earth-shattering revelation, but the charts show interesting trends in pre-tax income and tax burden by bracket over time.
"FDIC's Bair Says U.S. Money Funds 'Highly Unstable in a Crisis'" -- I think the major role that money market funds played in the financial crisis continues to be unappreciated. They were (and are) basically unregulated banks, buying more than 1/3 of all outstanding commercial paper. And although most operate sensibly, more than a few stretch(ed) for yield by buying "highly rated" asset-backed commercial paper (a euphemism for often risky mortgage-linked debt) and short-term obligations of Lehman Brothers, Bear Stearns, ABS/ABCP, et al. The arguments employed by the industry are, shockingly, based purely on self-interest rather than reason. The entire money-market industry holds more than $2.5 trillion in assets, so this is a material problem, as evidenced by the classic panic, run-on-the-bank that would have brought the country to its knees had the government not scrambled to stop it in September 2008.
"A New Gauge to See What's Beyond Happiness" -- interesting insights regarding the urge to "win for its own sake" and a sense of meaning and earned success in one's life.

Solitude and Leadership

Posted By William Deresiewicz On March 1, 2010 @ 3:18 pm In Spring 2010, Top Story,

The lecture below was delivered to the plebe class at the United States Military Academy at West Point in October of last year.

My title must seem like a contradiction. What can solitude have to do with leadership? Solitude means being alone, and leadership necessitates the presence of others—the people you’re leading. When we think about leadership in American history we are likely to think of Washington, at the head of an army, or Lincoln, at the head of a nation, or King, at the head of a movement—people with multitudes behind them, looking to them for direction. And when we think of solitude, we are apt to think of Thoreau, a man alone in the woods, keeping a journal and communing with nature in silence.

Leadership is what you are here to learn—the qualities of character and mind that will make you fit to command a platoon, and beyond that, perhaps, a company, a battalion, or, if you leave the military, a corporation, a foundation, a department of government. Solitude is what you have the least of here, especially as plebes. You don’t even have privacy, the opportunity simply to be physically alone, never mind solitude, the ability to be alone with your thoughts. And yet I submit to you that solitude is one of the most important necessities of true leadership. This lecture will be an attempt to explain why.

We need to begin by talking about what leadership really means. I just spent 10 years teaching at another institution that, like West Point, liked to talk a lot about leadership, Yale University. A school that some of you might have gone to had you not come here, that some of your friends might be going to. And if not Yale, then Harvard, Stanford, MIT, and so forth. These institutions, like West Point, also see their role as the training of leaders, constantly encourage their students, like West Point, to regard themselves as leaders among their peers and future leaders of society. Indeed, when we look around at the American elite, the people in charge of government, business, academia, and all our other major institutions—senators, judges, CEOs, college presidents, and so forth—we find that they come overwhelmingly either from the Ivy League and its peer institutions or from the service academies, especially West Point.

So I began to wonder, as I taught at Yale, what leadership really consists of. My students, like you, were energetic, accomplished, smart, and often ferociously ambitious, but was that enough to make them leaders? Most of them, as much as I liked and even admired them, certainly didn’t seem to me like leaders. Does being a leader, I wondered, just mean being accomplished, being successful? Does getting straight As make you a leader? I didn’t think so. Great heart surgeons or great novelists or great shortstops may be terrific at what they do, but that doesn’t mean they’re leaders. Leadership and aptitude, leadership and achievement, leadership and even excellence have to be different things, otherwise the concept of leadership has no meaning. And it seemed to me that that had to be especially true of the kind of excellence I saw in the students around me.

See, things have changed since I went to college in the ’80s. Everything has gotten much more intense. You have to do much more now to get into a top school like Yale or West Point, and you have to start a lot earlier. We didn’t begin thinking about college until we were juniors, and maybe we each did a couple of extracurriculars. But I know what it’s like for you guys now. It’s an endless series of hoops that you have to jump through, starting from way back, maybe as early as junior high school. Classes, standardized tests, extracurriculars in school, extracurriculars outside of school. Test prep courses, admissions coaches, private tutors. I sat on the Yale College admissions committee a couple of years ago. The first thing the admissions officer would do when presenting a case to the rest of the committee was read what they call the “brag” in admissions lingo, the list of the student’s extracurriculars. Well, it turned out that a student who had six or seven extracurriculars was already in trouble. Because the students who got in—in addition to perfect grades and top scores—usually had 10 or 12.

So what I saw around me were great kids who had been trained to be world-class hoop jumpers. Any goal you set them, they could achieve. Any test you gave them, they could pass with flying colors. They were, as one of them put it herself, “excellent sheep.” I had no doubt that they would continue to jump through hoops and ace tests and go on to Harvard Business School, or Michigan Law School, or Johns Hopkins Medical School, or Goldman Sachs, or McKinsey consulting, or whatever. And this approach would indeed take them far in life. They would come back for their 25th reunion as a partner at White & Case, or an attending physician at Mass General, or an assistant secretary in the Department of State.

That is exactly what places like Yale mean when they talk about training leaders. Educating people who make a big name for themselves in the world, people with impressive titles, people the university can brag about. People who make it to the top. People who can climb the greasy pole of whatever hierarchy they decide to attach themselves to.

But I think there’s something desperately wrong, and even dangerous, about that idea. To explain why, I want to spend a few minutes talking about a novel that many of you may have read, Heart of Darkness. If you haven’t read it, you’ve probably seenApocalypse Now, which is based on it. Marlow in the novel becomes Captain Willard, played by Martin Sheen. Kurtz in the novel becomes Colonel Kurtz, played by Marlon Brando. But the novel isn’t about Vietnam; it’s about colonialism in the Belgian Congo three generations before Vietnam. Marlow, not a military officer but a merchant marine, a civilian ship’s captain, is sent by the company that’s running the country under charter from the Belgian crown to sail deep upriver, up the Congo River, to retrieve a manager who’s ensconced himself in the jungle and gone rogue, just like Colonel Kurtz does in the movie.

Now everyone knows that the novel is about imperialism and colonialism and race relations and the darkness that lies in the human heart, but it became clear to me at a certain point, as I taught the novel, that it is also about bureaucracy—what I called, a minute ago, hierarchy. The Company, after all, is just that: a company, with rules and procedures and ranks and people in power and people scrambling for power, just like any other bureaucracy. Just like a big law firm or a governmental department or, for that matter, a university. Just like—and here’s why I’m telling you all this—just like the bureaucracy you are about to join. The word bureaucracy tends to have negative connotations, but I say this in no way as a criticism, merely a description, that the U.S. Army is a bureaucracy and one of the largest and most famously bureaucratic bureaucracies in the world. After all, it was the Army that gave us, among other things, the indispensable bureaucratic acronym “snafu”: “situation normal: all fucked up”—or “all fouled up” in the cleaned-up version. That comes from the U.S. Army in World War II.

You need to know that when you get your commission, you’ll be joining a bureaucracy, and however long you stay in the Army, you’ll be operating within a bureaucracy. As different as the armed forces are in so many ways from every other institution in society, in that respect they are the same. And so you need to know how bureaucracies operate, what kind of behavior—what kind of character—they reward, and what kind they punish.

So, back to the novel. Marlow proceeds upriver by stages, just like Captain Willard does in the movie. First he gets to the Outer Station. Kurtz is at the Inner Station. In between is the Central Station, where Marlow spends the most time, and where we get our best look at bureaucracy in action and the kind of people who succeed in it. This is Marlow’s description of the manager of the Central Station, the big boss:

He was commonplace in complexion, in features, in manners, and in voice. He was of middle size and of ordinary build. His eyes, of the usual blue, were perhaps remarkably cold. . . . Otherwise there was only an indefinable, faint expression of his lips, something stealthy—a smile—not a smile—I remember it, but I can’t explain. . . . He was a common trader, from his youth up employed in these parts—nothing more. He was obeyed, yet he inspired neither love nor fear, nor even respect. He inspired uneasiness. That was it! Uneasiness. Not a definite mistrust—just uneasiness—nothing more. You have no idea how effective such a . . . a . . . faculty can be. He had no genius for organizing, for initiative, or for order even. . . . He had no learning, and no intelligence. His position had come to him—why? . . . He originated nothing, he could keep the routine going—that’s all. But he was great. He was great by this little thing that it was impossible to tell what could control such a man. He never gave that secret away. Perhaps there was nothing within him. Such a suspicion made one pause.

Note the adjectives: commonplace, ordinary, usual, common. There is nothing distinguished about this person. About the 10th time I read that passage, I realized it was a perfect description of the kind of person who tends to prosper in the bureaucratic environment. And the only reason I did is because it suddenly struck me that it was a perfect description of the head of the bureaucracy that I was part of, the chairman of my academic department—who had that exact same smile, like a shark, and that exact same ability to make you uneasy, like you were doing something wrong, only she wasn’t ever going to tell you what. Like the manager—and I’m sorry to say this, but like so many people you will meet as you negotiate the bureaucracy of the Army or for that matter of whatever institution you end up giving your talents to after the Army, whether it’s Microsoft or the World Bank or whatever—the head of my department had no genius for organizing or initiative or even order, no particular learning or intelligence, no distinguishing characteristics at all. Just the ability to keep the routine going, and beyond that, as Marlow says, her position had come to her—why?

That’s really the great mystery about bureaucracies. Why is it so often that the best people are stuck in the middle and the people who are running things—the leaders—are the mediocrities? Because excellence isn’t usually what gets you up the greasy pole. What gets you up is a talent for maneuvering. Kissing up to the people above you, kicking down to the people below you. Pleasing your teachers, pleasing your superiors, picking a powerful mentor and riding his coattails until it’s time to stab him in the back. Jumping through hoops. Getting along by going along. Being whatever other people want you to be, so that it finally comes to seem that, like the manager of the Central Station, you have nothing inside you at all. Not taking stupid risks like trying to change how things are done or question why they’re done. Just keeping the routine going.

I tell you this to forewarn you, because I promise you that you will meet these people and you will find yourself in environments where what is rewarded above all is conformity. I tell you so you can decide to be a different kind of leader. And I tell you for one other reason. As I thought about these things and put all these pieces together—the kind of students I had, the kind of leadership they were being trained for, the kind of leaders I saw in my own institution—I realized that this is a national problem. We have a crisis of leadership in this country, in every institution. Not just in government. Look at what happened to American corporations in recent decades, as all the old dinosaurs like General Motors or TWA or U.S. Steel fell apart. Look at what happened to Wall Street in just the last couple of years.

Finally—and I know I’m on sensitive ground here—look at what happened during the first four years of the Iraq War. We were stuck. It wasn’t the fault of the enlisted ranks or the noncoms or the junior officers. It was the fault of the senior leadership, whether military or civilian or both. We weren’t just not winning, we weren’t even changing direction.

We have a crisis of leadership in America because our overwhelming power and wealth, earned under earlier generations of leaders, made us complacent, and for too long we have been training leaders who only know how to keep the routine going. Who can answer questions, but don’t know how to ask them. Who can fulfill goals, but don’t know how to set them. Who think about how to get things done, but not whether they’re worth doing in the first place. What we have now are the greatest technocrats the world has ever seen, people who have been trained to be incredibly good at one specific thing, but who have no interest in anything beyond their area of expertise. What we don’t have are leaders.

What we don’t have, in other words, are thinkers. People who can think for themselves. People who can formulate a new direction: for the country, for a corporation or a college, for the Army—a new way of doing things, a new way of looking at things. People, in other words, with vision.

Now some people would say, great. Tell this to the kids at Yale, but why bother telling it to the ones at West Point? Most people, when they think of this institution, assume that it’s the last place anyone would want to talk about thinking creatively or cultivating independence of mind. It’s the Army, after all. It’s no accident that the word regiment is the root of the wordregimentation. Surely you who have come here must be the ultimate conformists. Must be people who have bought in to the way things are and have no interest in changing it. Are not the kind of young people who think about the world, who ponder the big issues, who question authority. If you were, you would have gone to Amherst or Pomona. You’re at West Point to be told what to do and how to think.

But you know that’s not true. I know it, too; otherwise I would never have been invited to talk to you, and I’m even more convinced of it now that I’ve spent a few days on campus. To quote Colonel Scott Krawczyk, your course director, in a lecture he gave last year to English 102:

From the very earliest days of this country, the model for our officers, which was built on the model of the citizenry and reflective of democratic ideals, was to be different. They were to be possessed of a democratic spirit marked by independent judgment, the freedom to measure action and to express disagreement, and the crucial responsibility never to tolerate tyranny.

All the more so now. Anyone who’s been paying attention for the last few years understands that the changing nature of warfare means that officers, including junior officers, are required more than ever to be able to think independently, creatively, flexibly. To deploy a whole range of skills in a fluid and complex situation. Lieutenant colonels who are essentially functioning as provincial governors in Iraq, or captains who find themselves in charge of a remote town somewhere in Afghanistan. People who know how to do more than follow orders and execute routines.

Look at the most successful, most acclaimed, and perhaps the finest soldier of his generation, General David Petraeus. He’s one of those rare people who rises through a bureaucracy for the right reasons. He is a thinker. He is an intellectual. In fact,Prospect magazine named him Public Intellectual of the Year in 2008—that’s in the world. He has a Ph.D. from Princeton, but what makes him a thinker is not that he has a Ph.D. or that he went to Princeton or even that he taught at West Point. I can assure you from personal experience that there are a lot of highly educated people who don’t know how to think at all.

No, what makes him a thinker—and a leader—is precisely that he is able to think things through for himself. And because he can, he has the confidence, the courage, to argue for his ideas even when they aren’t popular. Even when they don’t please his superiors. Courage: there is physical courage, which you all possess in abundance, and then there is another kind of courage, moral courage, the courage to stand up for what you believe.

It wasn’t always easy for him. His path to where he is now was not a straight one. When he was running Mosul in 2003 as commander of the 101st Airborne and developing the strategy he would later formulate in the Counterinsurgency Field Manualand then ultimately apply throughout Iraq, he pissed a lot of people off. He was way ahead of the leadership in Baghdad and Washington, and bureaucracies don’t like that sort of thing. Here he was, just another two-star, and he was saying, implicitly but loudly, that the leadership was wrong about the way it was running the war. Indeed, he was not rewarded at first. He was put in charge of training the Iraqi army, which was considered a blow to his career, a dead-end job. But he stuck to his guns, and ultimately he was vindicated. Ironically, one of the central elements of his counterinsurgency strategy is precisely the idea that officers need to think flexibly, creatively, and independently.

That’s the first half of the lecture: the idea that true leadership means being able to think for yourself and act on your convictions. But how do you learn to do that? How do you learn to think? Let’s start with how you don’t learn to think. A study by a team of researchers at Stanford came out a couple of months ago. The investigators wanted to figure out how today’s college students were able to multitask so much more effectively than adults. How do they manage to do it, the researchers asked? The answer, they discovered—and this is by no means what they expected—is that they don’t. The enhanced cognitive abilities the investigators expected to find, the mental faculties that enable people to multitask effectively, were simply not there. In other words, people do not multitask effectively. And here’s the really surprising finding: the more people multitask, the worse they are, not just at other mental abilities, but at multitasking itself.

One thing that made the study different from others is that the researchers didn’t test people’s cognitive functions while they were multitasking. They separated the subject group into high multitaskers and low multitaskers and used a different set of tests to measure the kinds of cognitive abilities involved in multitasking. They found that in every case the high multitaskers scored worse. They were worse at distinguishing between relevant and irrelevant information and ignoring the latter. In other words, they were more distractible. They were worse at what you might call “mental filing”: keeping information in the right conceptual boxes and being able to retrieve it quickly. In other words, their minds were more disorganized. And they were even worse at the very thing that defines multitasking itself: switching between tasks.

Multitasking, in short, is not only not thinking, it impairs your ability to think. Thinking means concentrating on one thing long enough to develop an idea about it. Not learning other people’s ideas, or memorizing a body of information, however much those may sometimes be useful. Developing your own ideas. In short, thinking for yourself. You simply cannot do that in bursts of 20 seconds at a time, constantly interrupted by Facebook messages or Twitter tweets, or fiddling with your iPod, or watching something on YouTube.

I find for myself that my first thought is never my best thought. My first thought is always someone else’s; it’s always what I’ve already heard about the subject, always the conventional wisdom. It’s only by concentrating, sticking to the question, being patient, letting all the parts of my mind come into play, that I arrive at an original idea. By giving my brain a chance to make associations, draw connections, take me by surprise. And often even that idea doesn’t turn out to be very good. I need time to think about it, too, to make mistakes and recognize them, to make false starts and correct them, to outlast my impulses, to defeat my desire to declare the job done and move on to the next thing.

I used to have students who bragged to me about how fast they wrote their papers. I would tell them that the great German novelist Thomas Mann said that a writer is someone for whom writing is more difficult than it is for other people. The best writers write much more slowly than everyone else, and the better they are, the slower they write. James Joyce wrote Ulysses, the greatest novel of the 20th century, at the rate of about a hundred words a day—half the length of the selection I read you earlier from Heart of Darkness—for seven years. T. S. Eliot, one of the greatest poets our country has ever produced, wrote about 150 pages of poetry over the course of his entire 25-year career. That’s half a page a month. So it is with any other form of thought. You do your best thinking by slowing down and concentrating.

Now that’s the third time I’ve used that word, concentrating. Concentrating, focusing. You can just as easily consider this lecture to be about concentration as about solitude. Think about what the word means. It means gathering yourself together into a single point rather than letting yourself be dispersed everywhere into a cloud of electronic and social input. It seems to me that Facebook and Twitter and YouTube—and just so you don’t think this is a generational thing, TV and radio and magazines and even newspapers, too—are all ultimately just an elaborate excuse to run away from yourself. To avoid the difficult and troubling questions that being human throws in your way. Am I doing the right thing with my life? Do I believe the things I was taught as a child? What do the words I live by—words like duty, honor, and country—really mean? Am I happy?

You and the members of the other service academies are in a unique position among college students, especially today. Not only do you know that you’re going to have a job when you graduate, you even know who your employer is going to be. But what happens after you fulfill your commitment to the Army? Unless you know who you are, how will you figure out what you want to do with the rest of your life? Unless you’re able to listen to yourself, to that quiet voice inside that tells you what you really care about, what you really believe in—indeed, how those things might be evolving under the pressure of your experiences. Students everywhere else agonize over these questions, and while you may not be doing so now, you are only postponing them for a few years.

Maybe some of you are agonizing over them now. Not everyone who starts here decides to finish here. It’s no wonder and no cause for shame. You are being put through the most demanding training anyone can ask of people your age, and you are committing yourself to work of awesome responsibility and mortal danger. The very rigor and regimentation to which you are quite properly subject here naturally has a tendency to make you lose touch with the passion that brought you here in the first place. I saw exactly the same kind of thing at Yale. It’s not that my students were robots. Quite the reverse. They were intensely idealistic, but the overwhelming weight of their practical responsibilities, all of those hoops they had to jump through, often made them lose sight of what those ideals were. Why they were doing it all in the first place.

So it’s perfectly natural to have doubts, or questions, or even just difficulties. The question is, what do you do with them? Do you suppress them, do you distract yourself from them, do you pretend they don’t exist? Or do you confront them directly, honestly, courageously? If you decide to do so, you will find that the answers to these dilemmas are not to be found on Twitter or Comedy Central or even in The New York Times. They can only be found within—without distractions, without peer pressure, in solitude.

But let me be clear that solitude doesn’t always have to mean introspection. Let’s go back to Heart of Darkness. It’s the solitude of concentration that saves Marlow amidst the madness of the Central Station. When he gets there he finds out that the steamboat he’s supposed to sail upriver has a giant hole in it, and no one is going to help him fix it. “I let him run on,” he says, “this papier-mâché Mephistopheles”—he’s talking not about the manager but his assistant, who’s even worse, since he’s still trying to kiss his way up the hierarchy, and who’s been raving away at him. You can think of him as the Internet, the ever-present social buzz, chattering away at you 24/7:

I let him run on, this papier-mâché Mephistopheles and it seemed to me that if I tried I could poke my forefinger through him, and would find nothing inside but a little loose dirt. . . .

It was a great comfort to turn from that chap to . . . the battered, twisted, ruined, tin-pot steamboat. . . . I had expended enough hard work on her to make me love her. No influential friend would have served me better. She had given me a chance to come out a bit—to find out what I could do. No, I don’t like work. I had rather laze about and think of all the fine things that can be done. I don’t like work—no man does—but I like what is in the work,—the chance to find yourself. Your own reality—for yourself, not for others—what no other man can ever know.

“The chance to find yourself.” Now that phrase, “finding yourself,” has acquired a bad reputation. It suggests an aimless liberal-arts college graduate—an English major, no doubt, someone who went to a place like Amherst or Pomona—who’s too spoiled to get a job and spends his time staring off into space. But here’s Marlow, a mariner, a ship’s captain. A more practical, hardheaded person you could not find. And I should say that Marlow’s creator, Conrad, spent 19 years as a merchant marine, eight of them as a ship’s captain, before he became a writer, so this wasn’t just some artist’s idea of a sailor. Marlow believes in the need to find yourself just as much as anyone does, and the way to do it, he says, is work, solitary work. Concentration. Climbing on that steamboat and spending a few uninterrupted hours hammering it into shape. Or building a house, or cooking a meal, or even writing a college paper, if you really put yourself into it.

“Your own reality—for yourself, not for others.” Thinking for yourself means finding yourself, finding your own reality. Here’s the other problem with Facebook and Twitter and even The New York Times. When you expose yourself to those things, especially in the constant way that people do now—older people as well as younger people—you are continuously bombarding yourself with a stream of other people’s thoughts. You are marinating yourself in the conventional wisdom. In other people’s reality: for others, not for yourself. You are creating a cacophony in which it is impossible to hear your own voice, whether it’s yourself you’re thinking about or anything else. That’s what Emerson meant when he said that “he who should inspire and lead his race must be defended from travelling with the souls of other men, from living, breathing, reading, and writing in the daily, time-worn yoke of their opinions.” Notice that he uses the word lead. Leadership means finding a new direction, not simply putting yourself at the front of the herd that’s heading toward the cliff.

So why is reading books any better than reading tweets or wall posts? Well, sometimes it isn’t. Sometimes, you need to put down your book, if only to think about what you’re reading, what you think about what you’re reading. But a book has two advantages over a tweet. First, the person who wrote it thought about it a lot more carefully. The book is the result of hissolitude, his attempt to think for himself.

Second, most books are old. This is not a disadvantage: this is precisely what makes them valuable. They stand against the conventional wisdom of today simply because they’re not from today. Even if they merely reflect the conventional wisdom of their own day, they say something different from what you hear all the time. But the great books, the ones you find on a syllabus, the ones people have continued to read, don’t reflect the conventional wisdom of their day. They say things that have the permanent power to disrupt our habits of thought. They were revolutionary in their own time, and they are still revolutionary today. And when I say “revolutionary,” I am deliberately evoking the American Revolution, because it was a result of precisely this kind of independent thinking. Without solitude—the solitude of Adams and Jefferson and Hamilton and Madison and Thomas Paine—there would be no America.

So solitude can mean introspection, it can mean the concentration of focused work, and it can mean sustained reading. All of these help you to know yourself better. But there’s one more thing I’m going to include as a form of solitude, and it will seem counterintuitive: friendship. Of course friendship is the opposite of solitude; it means being with other people. But I’m talking about one kind of friendship in particular, the deep friendship of intimate conversation. Long, uninterrupted talk with one other person. Not Skyping with three people and texting with two others at the same time while you hang out in a friend’s room listening to music and studying. That’s what Emerson meant when he said that “the soul environs itself with friends, that it may enter into a grander self-acquaintance or solitude.”

Introspection means talking to yourself, and one of the best ways of talking to yourself is by talking to another person. One other person you can trust, one other person to whom you can unfold your soul. One other person you feel safe enough with to allow you to acknowledge things—to acknowledge things to yourself—that you otherwise can’t. Doubts you aren’t supposed to have, questions you aren’t supposed to ask. Feelings or opinions that would get you laughed at by the group or reprimanded by the authorities.

This is what we call thinking out loud, discovering what you believe in the course of articulating it. But it takes just as much time and just as much patience as solitude in the strict sense. And our new electronic world has disrupted it just as violently. Instead of having one or two true friends that we can sit and talk to for three hours at a time, we have 968 “friends” that we never actually talk to; instead we just bounce one-line messages off them a hundred times a day. This is not friendship, this is distraction.

I know that none of this is easy for you. Even if you threw away your cell phones and unplugged your computers, the rigors of your training here keep you too busy to make solitude, in any of these forms, anything less than very difficult to find. But the highest reason you need to try is precisely because of what the job you are training for will demand of you.

You’ve probably heard about the hazing scandal at the U.S. naval base in Bahrain that was all over the news recently. Terrible, abusive stuff that involved an entire unit and was orchestrated, allegedly, by the head of the unit, a senior noncommissioned officer. What are you going to do if you’re confronted with a situation like that going on in your unit? Will you have the courage to do what’s right? Will you even know what the right thing is? It’s easy to read a code of conduct, not so easy to put it into practice, especially if you risk losing the loyalty of the people serving under you, or the trust of your peer officers, or the approval of your superiors. What if you’re not the commanding officer, but you see your superiors condoning something you think is wrong?

How will you find the strength and wisdom to challenge an unwise order or question a wrongheaded policy? What will you do the first time you have to write a letter to the mother of a slain soldier? How will you find words of comfort that are more than just empty formulas?

These are truly formidable dilemmas, more so than most other people will ever have to face in their lives, let alone when they’re 23. The time to start preparing yourself for them is now. And the way to do it is by thinking through these issues for yourself—morality, mortality, honor—so you will have the strength to deal with them when they arise. Waiting until you have to confront them in practice would be like waiting for your first firefight to learn how to shoot your weapon. Once the situation is upon you, it’s too late. You have to be prepared in advance. You need to know, already, who you are and what you believe: not what the Army believes, not what your peers believe (that may be exactly the problem), but what you believe.

How can you know that unless you’ve taken counsel with yourself in solitude? I started by noting that solitude and leadership would seem to be contradictory things. But it seems to me that solitude is the very essence of leadership. The position of the leader is ultimately an intensely solitary, even intensely lonely one. However many people you may consult, you are the one who has to make the hard decisions. And at such moments, all you really have is yourself.

Article printed from The American Scholar: http://www.theamericanscholar.org

'You've got to find what you love,' Jobs says

This is a prepared text of the Commencement address delivered by Steve Jobs, CEO of Apple Computer and of Pixar Animation Studios, on June 12, 2005.

I am honored to be with you today at your commencement from one of the finest universities in the world. I never graduated from college. Truth be told, this is the closest I've ever gotten to a college graduation. Today I want to tell you three stories from my life. That's it. No big deal. Just three stories.

The first story is about connecting the dots.

I dropped out of Reed College after the first 6 months, but then stayed around as a drop-in for another 18 months or so before I really quit. So why did I drop out?

It started before I was born. My biological mother was a young, unwed college graduate student, and she decided to put me up for adoption. She felt very strongly that I should be adopted by college graduates, so everything was all set for me to be adopted at birth by a lawyer and his wife. Except that when I popped out they decided at the last minute that they really wanted a girl. So my parents, who were on a waiting list, got a call in the middle of the night asking: "We have an unexpected baby boy; do you want him?" They said: "Of course." My biological mother later found out that my mother had never graduated from college and that my father had never graduated from high school. She refused to sign the final adoption papers. She only relented a few months later when my parents promised that I would someday go to college.

And 17 years later I did go to college. But I naively chose a college that was almost as expensive as Stanford, and all of my working-class parents' savings were being spent on my college tuition. After six months, I couldn't see the value in it. I had no idea what I wanted to do with my life and no idea how college was going to help me figure it out. And here I was spending all of the money my parents had saved their entire life. So I decided to drop out and trust that it would all work out OK. It was pretty scary at the time, but looking back it was one of the best decisions I ever made. The minute I dropped out I could stop taking the required classes that didn't interest me, and begin dropping in on the ones that looked interesting.

It wasn't all romantic. I didn't have a dorm room, so I slept on the floor in friends' rooms, I returned coke bottles for the 5¢ deposits to buy food with, and I would walk the 7 miles across town every Sunday night to get one good meal a week at the Hare Krishna temple. I loved it. And much of what I stumbled into by following my curiosity and intuition turned out to be priceless later on. Let me give you one example:

Reed College at that time offered perhaps the best calligraphy instruction in the country. Throughout the campus every poster, every label on every drawer, was beautifully hand calligraphed. Because I had dropped out and didn't have to take the normal classes, I decided to take a calligraphy class to learn how to do this. I learned about serif and san serif typefaces, about varying the amount of space between different letter combinations, about what makes great typography great. It was beautiful, historical, artistically subtle in a way that science can't capture, and I found it fascinating.

None of this had even a hope of any practical application in my life. But ten years later, when we were designing the first Macintosh computer, it all came back to me. And we designed it all into the Mac. It was the first computer with beautiful typography. If I had never dropped in on that single course in college, the Mac would have never had multiple typefaces or proportionally spaced fonts. And since Windows just copied the Mac, it's likely that no personal computer would have them. If I had never dropped out, I would have never dropped in on this calligraphy class, and personal computers might not have the wonderful typography that they do. Of course it was impossible to connect the dots looking forward when I was in college. But it was very, very clear looking backwards ten years later.

Again, you can't connect the dots looking forward; you can only connect them looking backwards. So you have to trust that the dots will somehow connect in your future. You have to trust in something — your gut, destiny, life, karma, whatever. This approach has never let me down, and it has made all the difference in my life.

My second story is about love and loss.

I was lucky — I found what I loved to do early in life. Woz and I started Apple in my parents [sic] garage when I was 20. We worked hard, and in 10 years Apple had grown from just the two of us in a garage into a $2 billion company with over 4000 employees. We had just released our finest creation — the Macintosh — a year earlier, and I had just turned 30. And then I got fired. How can you get fired from a company you started? Well, as Apple grew we hired someone who I thought was very talented to run the company with me, and for the first year or so things went well. But then our visions of the future began to diverge and eventually we had a falling out. When we did, our Board of Directors sided with him. So at 30 I was out. And very publicly out. What had been the focus of my entire adult life was gone, and it was devastating.

I really didn't know what to do for a few months. I felt that I had let the previous generation of entrepreneurs down - that I had dropped the baton as it was being passed to me. I met with David Packard and Bob Noyce and tried to apologize for screwing up so badly. I was a very public failure, and I even thought about running away from the valley. But something slowly began to dawn on me — I still loved what I did. The turn of events at Apple had not changed that one bit. I had been rejected, but I was still in love. And so I decided to start over.

I didn't see it then, but it turned out that getting fired from Apple was the best thing that could have ever happened to me. The heaviness of being successful was replaced by the lightness of being a beginner again, less sure about everything. It freed me to enter one of the most creative periods of my life.

During the next five years, I started a company named NeXT, another company named Pixar, and fell in love with an amazing woman who would become my wife. Pixar went on to create the worlds [sic] first computer animated feature film, Toy Story, and is now the most successful animation studio in the world. In a remarkable turn of events, Apple bought NeXT, I returned to Apple, and the technology we developed at NeXT is at the heart of Apple's current renaissance. And Laurene and I have a wonderful family together.

I'm pretty sure none of this would have happened if I hadn't been fired from Apple. It was awful tasting medicine, but I guess the patient needed it. Sometimes life hits you in the head with a brick. Don't lose faith. I'm convinced that the only thing that kept me going was that I loved what I did. You've got to find what you love. And that is as true for your work as it is for your lovers. Your work is going to fill a large part of your life, and the only way to be truly satisfied is to do what you believe is great work. And the only way to do great work is to love what you do. If you haven't found it yet, keep looking. Don't settle. As with all matters of the heart, you'll know when you find it. And, like any great relationship, it just gets better and better as the years roll on. So keep looking until you find it. Don't settle.

My third story is about death.

When I was 17, I read a quote that went something like: "If you live each day as if it was your last, someday you'll most certainly be right." It made an impression on me, and since then, for the past 33 years, I have looked in the mirror every morning and asked myself: "If today were the last day of my life, would I want to do what I am about to do today?" And whenever the answer has been "No" for too many days in a row, I know I need to change something.

Remembering that I'll be dead soon is the most important tool I've ever encountered to help me make the big choices in life. Because almost everything — all external expectations, all pride, all fear of embarrassment or failure - these things just fall away in the face of death, leaving only what is truly important. Remembering that you are going to die is the best way I know to avoid the trap of thinking you have something to lose. You are already naked. There is no reason not to follow your heart.

About a year ago I was diagnosed with cancer. I had a scan at 7:30 in the morning, and it clearly showed a tumor on my pancreas. I didn't even know what a pancreas was. The doctors told me this was almost certainly a type of cancer that is incurable, and that I should expect to live no longer than three to six months. My doctor advised me to go home and get my affairs in order, which is doctor's code for prepare to die. It means to try to tell your kids everything you thought you'd have the next 10 years to tell them in just a few months. It means to make sure everything is buttoned up so that it will be as easy as possible for your family. It means to say your goodbyes.

I lived with that diagnosis all day. Later that evening I had a biopsy, where they stuck an endoscope down my throat, through my stomach and into my intestines, put a needle into my pancreas and got a few cells from the tumor. I was sedated, but my wife, who was there, told me that when they viewed the cells under a microscope the doctors started crying because it turned out to be a very rare form of pancreatic cancer that is curable with surgery. I had the surgery and I'm fine now.

This was the closest I've been to facing death, and I hope it's the closest I get for a few more decades. Having lived through it, I can now say this to you with a bit more certainty than when death was a useful but purely intellectual concept:

No one wants to die. Even people who want to go to heaven don't want to die to get there. And yet death is the destination we all share. No one has ever escaped it. And that is as it should be, because Death is very likely the single best invention of Life. It is Life's change agent. It clears out the old to make way for the new. Right now the new is you, but someday not too long from now, you will gradually become the old and be cleared away. Sorry to be so dramatic, but it is quite true.

Your time is limited, so don't waste it living someone else's life. Don't be trapped by dogma — which is living with the results of other people's thinking. Don't let the noise of others' opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition. They somehow already know what you truly want to become. Everything else is secondary.

When I was young, there was an amazing publication called The Whole Earth Catalog, which was one of the bibles of my generation. It was created by a fellow named Stewart Brand not far from here in Menlo Park, and he brought it to life with his poetic touch. This was in the late 1960's, before personal computers and desktop publishing, so it was all made with typewriters, scissors, and polaroid cameras. It was sort of like Google in paperback form, 35 years before Google came along: it was idealistic, and overflowing with neat tools and great notions.

Stewart and his team put out several issues of The Whole Earth Catalog, and then when it had run its course, they put out a final issue. It was the mid-1970s, and I was your age. On the back cover of their final issue was a photograph of an early morning country road, the kind you might find yourself hitchhiking on if you were so adventurous. Beneath it were the words: "Stay Hungry. Stay Foolish." It was their farewell message as they signed off. Stay Hungry. Stay Foolish. And I have always wished that for myself. And now, as you graduate to begin anew, I wish that for you.

Stay Hungry. Stay Foolish.

Thank you all very much.

April 30, 2011

Be Careful Wishing for the Fed’s End

By ROGER LOWENSTEIN

Ben S. Bernanke, the Federal Reserve chairman, faces a crisis of confidence. He is excoriated on the right for debasing the currency, and blasted on the left for failing to stimulate more than he has. It has gotten so bad that last week Mr. Bernanke, who prefers to discuss monetary policy with erudite professors like himself, submitted to the indignity of a news conference. Among the uninvited was Representative Ron Paul, who is flirting with a presidential run, and who, if he took office in 2013, would like nothing more than to celebrate the Fed’s centennial by ... abolishing it.

And that got me to thinking: What if there were no Fed? Don’t laugh; it has happened before. The United States had a primitive central bank, conceived by Alexander Hamilton, but President James Madison let its charter lapse in 1811. A second such bank became the target of President Andrew Jackson, who viewed it as a “hydra” and a “curse” upon the nation. Jackson sought to decertify the bank and, in 1836, succeeded. Never mind that the following year, the United States was plunged into a serious financial panic. The curse had been lifted, not to reappear for nearly a century.

Established in 1913, the Fed was to be a banker to the nation’s banks, controlling the money supply and, thus, the value of the currency. Without a Fed, someone else would have to handle these (and other) tasks of central banking.

“Money,” observes the Fed historian Allan H. Meltzer, “does not take care of itself.” But who else could regulate the value of money? And regulate its value in relation to what?

In its founding days, the United States defined the dollar by an explicit weight of gold or silver. During the first half of the 19th century, state-chartered banks issued notes, preferably backed by metal, that circulated much as dollar bills do today. But since these banks were private, and differed widely in their standards, their notes were accorded different values. In effect, the country had lots of “monies.”

The United States moved to normalize the situation during the Civil War. It restricted the issuance of notes to more uniform, federally chartered banks, which were required to hold Treasury bonds (as well as gold) in reserve.

Should the Fed be interred, this abbreviated history provides some clues about alternatives. One solution would be for private banks to issue money — perhaps bearing the likeness of Jamie Dimon and the seal of his bank, JPMorgan Chase. Alternatively, the Treasury could do it.

But what will the money represent? Gold is the first obvious answer. James Grant, the newsletter writer, author and gold bug par excellence, asserts that gold money is superior to the “fiat” money of the Fed. By fiat, he means that it has value only because the Fed says it does. (Representative Paul, less diplomatically, refers to Federal Reserve notes as “counterfeits” and to the Fed as a price fixer.)

Let us interject that in any monetary system, some authority must fix either the price of money or the supply. McDonald’s can either set the price of a hamburger and let the market consume the quantity it will — or, it can insist on selling a specified quantity, in which case consumer demand will determine the price.

The Fed has a similar choice with money. The Bernanke Fed, which is trying to stimulate the economy, regulates the price of money — the interest rate — presently 0.0 percent. Paul Volcker, who assumed command of the Fed in 1979, when inflation was rampant, chose the opposite tactic. Mr. Volcker provided a specific (and, dare I say, miserly) quantity of liquidity, letting interest rates go where the market directed — ultimately 20 percent. There is an element of arbitrary choice either way.

The gold standard, in effect, replaces the Fed chief with the collective wisdom (or luck) of the mining industry. Rather than entrust the money supply to a guru or a professor, money is limited by the quantity of bullion. The law in the early 20th century stipulated that dollars be backed 40 percent in gold. This fixed the dollar in relation to metal but not in relation to things, like shoes or yarn, that dollars could buy. This was because the quantity of bullion that banks had in reserve, relative to the size of the economy, fluctuated. As a historian noted, it was as if “the yardstick of value was 36 inches long in 1879 ... 46 inches in 1896, 13 and a half inches in 1920.”

The gold standard — which John Maynard Keynes termed a “barbarous relic” — led to ruinous deflations. When gold reserves contracted, so did the money supply. David Moss, a Harvard Business School professor, asserts that the United States experienced more banking panics in the years without a central bank than any other industrial nation, often when people feared for the quality of paper; specifically, it experienced them in 1837, 1839, 1857, 1873 and 1907.

The Fed was conceived to alleviate such crises; that is, to be “the lender of last resort.” This function was fulfilled, ad hoc, by the financier J. P. Morgan in the panic of 1907. But Morgan was old, destined to die the year the Fed was created; some institution was needed. Hostility toward central banks, an American tradition, was such that in 1910, lawmakers and bankers convened at Jekyll Island, Ga. — under the ruse of going duck hunting — to sketch a blueprint.

Part of the aim of the new central bank was a more flexible money supply — for instance, to lend to farmers in the winter. Another was to lend into the teeth of a panic — though only to solvent institutions and on sound collateral. The insurance giantAmerican International Group — a controversial bailout recipient in 2008 — would not have qualified.

In its early days, the Fed maintained the gold standard — forcing it to maintain tight money even in 1931, in the midst of the Great Depression. Economists today regard this as a mistake.

The circumstances are relevant to those who envision a Fed-less future. England had departed from the gold standard; worried that the United States would follow suit, people demanded to trade dollars for gold. Professor Meltzer deduces that the gold standard doesn’t work for one country alone; the bad paper money corrupts the good.

An alternative to gold, and to the Fed, was suggested by Mr. Bernanke’s hero, Milton Friedman: let a computer govern the money supply. John Taylor, a former Treasury official, has derived a formula, the Taylor Rule, which Fed policy often agrees with. Adopting the formula in a mechanical way would trim the deficit a bit, since the Fed could dismiss every one of its 200 economists. The problem with a formula (also its virtue) is its lack of flexibility. Alan S. Blinder, a former Fed vice chairman, notes that strict adherence to the Taylor Rule during the recent crisis would have mandated an interest rate of negative 5 percent. (That is, the economy was so weak, and people so unwilling to borrow money, the computer would have paid people 5 percent a year to accept it.) This being impractical, Mr. Bernanke was moved to improvise a remedy other than negative rates.

If the computer is out and the Fed shuttered, Professor Meltzer suggests that the dollar be backed by euros, pounds and yen (and, eventually, the renminbi). This new money would require that each of the financial powers commits to a targeted rate of inflation — say, 2 percent a year. People who didn’t trust the dollar to maintain its value could trade them for euros. Now there’s an idea that would delight the Tea Party — American money backed by France.

Actually, this system is not terribly different from today’s. We have, indeed, fiat money, convertible into foreign exchange and regulated, not always successfully, with the intent of maintaining (or not too quickly depreciating) the dollar’s purchasing power. And if money is a unit of value, it is hard to conceive of a yardstick better than purchasing power.

But the Fed, thanks to an act of Congress in 1978, and perhaps to America’s suspicious anti-central banking culture, has a dual mission — protecting the value of the dollar and promoting long-term growth and employment. In this, it differs (at least in degree) from Europe’s and other central banks. In many ways, this mission creep — the Fed’s expanded power and role in the economy — lies at the root of the animus that Americans feel for it.

Banking purists would like, if not to abolish the institution, to return it to the job envisaged on Jekyll Island. They are, in a sense, the financial equivalent to strict constitutionalists. Nostalgia has its place, but so does pragmatism. Mr. Bernanke and his colleagues may be flawed, but democracy trusts in the power to elect, appoint and, if need be, remove. It is fine to lament their alleged excesses — for instance, the Fed’s swollen balance sheet in the name of stimulation, or “quantitative easing.” It is another to imagine that regulating the money could be as simple as it was in 1913, or that a formula, or a barbarous relic, could do the job.

51% of Americans Pay No Federal Income Taxes

By Derek Thompson

Half of American tax payers owe no federal income tax, and most of those filers actually net tax benefits from federal income taxes, according to analysis from the Joint Committee on Taxation in a letter to the Republicans on the Senate Finance Committee. This is the kind of statistic that is bound to get traction as Osama news subsides, and here are two ways to look at it. THEY'RE STILL PAYING TAXES (MOST OF THEM, ANYWAY) The majority of households who pay no income tax still pay net taxes to the IRS. Federal income taxes account for about 40 percent of total government receipts. Most of the rest comes from payroll taxes, which workers of all income levels do pay. Since every dollar up to $106,800 is subject to taxes, a typical middle class family pays payroll taxes on all its income while a millionaire employee pays payroll taxes on only a tenth of his income. At the same time, there are Americans -- millions of them -- who really do pay practically zero overall taxes. About fifteen million American households, or 10 percent of all taxpayers, receive more cash from the IRS than they contribute in federal income taxes and payroll taxes. That's thanks to "refundable credits," tax credits that can bring your tax bill into negative territory. To some, these 15 million are low-income Americans benefiting from smart and targeted welfare run through the tax code. To others, they are unacceptable free riders, citizens with a vote but no stake in federal government. THE TOP 20% EARNS 50% OF THE INCOME The richest 20 percent of the country pays more than half of income taxes for two simple reasons: America's wealthiest 20 percent earns half the nation's income and their income is taxed at a higher rate. The Wall Street Journal brings the visuals: The wealthiest quintile's share of federal taxes has grown more rapidly than their share of income. This suggests that the rich are facing steeper taxes. Not so. Effective tax rates at the top have fallen in every decade since 1970. But since effective tax rates also fell for every other quintile, the share of taxes paid by the rich has increased. I have a feeling we're going to hear variations of the question: How can the rich be paying too much while income inequality is at an 80 year high? I think it's better to see both stats as a part of the same story rather than two conflicting narratives. In the last 30 years, incomes have grown faster at the top than the middle. Over the same time, effective tax rates fell for every family. And because a four percentage-point tax cut means a 50 percent tax cut for the poor but only a 10 percent tax cut for the rich, the share of overall taxes paid by the middle- and lower-class has decreased faster than their share of pretax income.

This article available online at:

http://www.theatlantic.com/business/archive/2011/05/51-of-americans-pay-no-federal-income-taxes/238329/

+------------------------------------------------------------------------------+ FDIC’s Bair Says U.S. Money Funds ‘Highly Unstable in a Crisis’ 2011-05-11 04:01:01.9 GMT By Christopher Condon May 11 (Bloomberg) -- Federal Deposit Insurance Corp. Chairman Sheila Bair called money-market mutual funds “destabilizing” to the financial system and said investors would be served just as well if share prices floated. “Money-market funds are maintaining a fiction of a stable” net-asset value, as shown by the September 2008 failure of the $62.5 billion Reserve Primary Fund, Bair said yesterday at a round-table meeting of fund-company executives and regulators arranged by the U.S. Securities and Exchange Commission in Washington. “That is skewing investment dollars into a structure that is highly unstable in a crisis.” Former Federal Reserve Chairman Paul A. Volcker called a floating share price the “simplest” solution to the risk posed by money funds, which trade at a constant $1 a share. Their remarks lent support to proposals fund executives have said may ruin the product’s appeal to investors, and its role as the biggest collective provider of short-term financing for U.S. corporations through the commercial-paper market. Calls to make funds safer began after Reserve Primary’s collapse helped freeze global credit markets. The SEC, after passing rules last year that made funds more liquid and more transparent, is considering whether further changes are needed. Representatives of Fidelity Investments, JPMorgan Chase & Co. and Federated Investors Inc., the three biggest money-fund providers, defended the business as popular among investors and crucial to the financing of U.S. companies and municipalities. Capital Requirements The industry has said bank-like regulations, including capital requirements or forcing funds to abandon their stable $1 share price, would destroy their appeal to customers while failing to prevent runs. Money funds book their holdings based on their value at maturity and round to the nearest cent, allowing customers to buy and sell shares at $1. Returns are distributed monthly in cash or new shares. Reserve Primary suffered a loss, initially set at 3 percent of assets, on debt issued by bankrupt Lehman Brothers Holdings Inc., causing the fund to close on Sept. 16, 2008, and denying shareholders access to most of their cash for months as it liquidated. Investors, fearing that other funds might “break the buck,” withdrew $230 billion from the industry by Sept. 19 in a run that threatened to cripple issuers of short-term debt. Volcker has previously said the stable share price creates an incentive for investors to flee at the first sign of trouble. Preventing Panic The government in 2008 “had to run from one extreme action and safeguard to another” to prevent additional money-fund failures amid the panic, Volcker said at yesterday’s meeting. “What is the public good that makes it worthwhile to run such a big risk?” he said. The run on money funds that followed Reserve Primary’s collapse abated only after the Treasury Department guaranteed shareholders against losses and the Federal Reserve loaned money to purchase fund holdings at face value. Robert Brown, head of Boston-based Fidelity’s money-market fund group, said rules already enacted by the SEC had made the industry better prepared to handle a run by investors. The changes forced funds to hold more in securities easily convertible to cash and to reveal more about their holdings. “There is a great danger in looking at all sorts of mechanisms for reinventing the money-market fund business,” said John D. Hawke, of Washington law firm Arnold & Porter LLC, who represented Pittsburgh’s Federated. “The danger is that people who find money-market funds extremely useful will be denied the usefulness of those funds.” Government ‘Subsidy’ The regulators at the forum examined two industry proposals for backing money funds with emergency liquidity. A plan put forward by the Investment Company Institute, the mutual-fund industry’s Washington-based trade group, was criticized for its provision that in a crisis funds should enjoy access to the Fed’s discount borrowing window. “You are in effect asking for some kind of subsidy to be transferred from the federal government to the corporate sector and this is a distorting thing,” said Paul Tucker, deputy governor of the Bank of England. U.S. Treasury Undersecretary Jeffrey A. Goldstein questioned whether the proposed facility’s size, $24 billion after 10 years, would be “even close to enough.” Goldstein was one of six present representing the Financial Stability Oversight Council, the regulatory panel charged with addressing companies and activities that can endanger the U.S. economy. The council was created by last year’s Dodd-Frank Act.

A New Gauge to See What’s Beyond Happiness

By JOHN TIERNEY

Is happiness overrated?

Martin Seligman now thinks so, which may seem like an odd position for the founder of the positive psychology movement. As president of the American Pyschological Association in the late 1990s, he criticized his colleagues for focusing relentlessly on mental illness and other problems. He prodded them to study life’s joys, and wrote a best seller in 2002 titled “Authentic Happiness.”

But now he regrets that title. As the investigation of happiness proceeded, Dr. Seligman began seeing certain limitations of the concept. Why did couples go on having children even though the data clearly showed that parents are less happy than childless couples? Why did billionaires desperately seek more money even when there was nothing they wanted to do with it?

And why did some people keep joylessly playing bridge? Dr. Seligman, an avid player himself, kept noticing them at tournaments. They never smiled, not even when they won. They didn’t play to make money or make friends.

They didn’t savor that feeling of total engagement in a task that psychologists call flow. They didn’t take aesthetic satisfaction in playing a hand cleverly and “winning pretty.” They were quite willing to win ugly, sometimes even when that meant cheating.

“They wanted to win for its own sake, even if it brought no positive emotion,” says Dr. Seligman, a professor of psychology at the University of Pennsylvania. “They were like hedge fund managers who just want to accumulate money and toys for their own sake. Watching them play, seeing them cheat, it kept hitting me that accomplishment is a human desiderata in itself.”

This feeling of accomplishment contributes to what the ancient Greeks called eudaimonia, which roughly translates to “well-being” or “flourishing,” a concept that Dr. Seligman has borrowed for the title of his new book, “Flourish.” He has also created his own acronym, Perma, for what he defines as the five crucial elements of well-being, each pursued for its own sake: positive emotion, engagement (the feeling of being lost in a task), relationships, meaning and accomplishment.

“Well-being cannot exist just in your own head,” he writes. “Well-being is a combination of feeling good as well as actually having meaning, good relationships and accomplishment.”

The positive psychology movement has inspired efforts around the world to survey people’s state of mind, like a new project in Britain to measure what David Cameron, the prime minister, calls GWB, for general well-being. Dr. Seligman says he’s glad to see governments measuring more than just the G.D.P., but he’s concerned that these surveys mainly ask people about their “life satisfaction.”

In theory, life satisfaction might include the various elements of well-being. But in practice, Dr. Seligman says, people’s answers to that question are largely — more than 70 percent — determined by how they’re feeling at the moment of the survey, not how they judge their lives over all.

“Life satisfaction essentially measures cheerful moods, so it is not entitled to a central place in any theory that aims to be more than a happiology,” he writes in “Flourish.” By that standard, he notes, a government could improve its numbers just by handing out the kind of euphoriant drugs that Aldous Huxley described in “Brave New World.”

So what should be measured instead? The best gauge so far of flourishing, Dr. Seligman says, comes from a study of 23 European countries by Felicia Huppert and Timothy So of the University of Cambridge. Besides asking respondents about their moods, the researchers asked about their relationships with others and their sense that they were accomplishing something worthwhile.

Denmark and Switzerland ranked highest in Europe, with more than a quarter of their citizens meeting the definition of flourishing. Near the bottom, with fewer than 10 percent flourishing, were France, Hungary, Portugal and Russia.

There’s no direct comparison available with the United States, although some other researchers say that Americans would do fairly well because of their sense of accomplishment. The economist Arthur Brooks notes that 51 percent of Americans say they’re very satisfied with their jobs, which is a higher percentage than in any European country except Denmark, Switzerland and Austria.

In his 2008 book, “Gross National Happiness,” Dr. Brooks argues that what’s crucial to well-being is not how cheerful you feel, not how much money you make, but rather the meaning you find in life and your sense of “earned success” — the belief that you have created value in your life or others’ lives.

“People find meaning in providing unconditional love for children,” writes Dr. Brooks, who is now president of the American Enterprise Institute. “Paradoxically, your happiness is raised by the very fact that you are willing to have your happiness lowered through years of dirty diapers, tantrums and backtalk. Willingness to accept unhappiness from children is a source of happiness.”

Some happiness researchers have suggested that parents delude themselves about the joys of children: They focus on the golden moments and forget the more frequent travails. But Dr. Seligman says that parents are wisely looking for more than happy feelings.

“If we just wanted positive emotions, our species would have died out a long time ago,” he says. “ We have children to pursue other elements of well-being. We want meaning in life. We want relationships.”

In observing people’s need for accomplishment, Dr. Seligman says, he’s reminded of his early experiments that famously identified the concept of “learned helplessness.” He found that when animals or people were given a series of arbitrary punishments or rewards, they stopped trying to do anything constructive.

“We found that even when good things occurred that weren’t earned, like nickels coming out of slot machines, it did not increase people’s well-being,” he said. “It produced helplessness. People gave up and became passive.”

To avoid that sort of malaise, Dr. Seligman recommends looking at the basic elements of well-being, identifying which ones matter most to you, setting goals and monitoring progress. Simply keeping track of how much time you spend time each daily pursuing each goal can make a difference, he says, because it’s easy to see discrepancies between your goals and what you do.

You might also start to question some of your goals and activities, the way that Dr. Seligman occasionally wonders why he spends so much time playing bridge. It’s brought him some clear achievements — including a second-place finish in the North American pairs championship — but he doesn’t pretend that bridge provides any meaning in life. He says he plays for another element of well-being, the feeling of engagement. “I go into flow playing bridge,” he writes, “but after a long tournament, when I look in the mirror, I worry that I am merely fidgeting until I die.”

Is playing bridge for the feeling of flow any more worthwhile than playing it just to win? Dr. Seligman doesn’t want to judge.

“My view of positive psychology is that it describes rather than prescribes what human beings do,” he says. “I don’t want to mess with people’s values. I’m not saying it’s a good or a bad thing to want to win for its own sake. I’m just describing what lots of people do. One’s job as a therapist is not to change what people value, but given what they value, to make them better at it.”

Howard Marks’s Missives, Now for the Masses

By PETER LATTMAN

The writings of Howard Marks, chairman of Oaktree Capital Management, have a cult following on Wall Street.

Published about six times a year, his memos to Oaktree clients have become required reading in certain investment circles. The dispatches have been praised by everyone from Warren E. Buffett to “Tyler Durden,” the anonymous blogger for Zero Hedge, the popular finance Web site. Mr. Durden recently called Mr. Marks “one of the most thoughtful observers on the markets” and described his recent memo on gold as a “must read.”

After 20 years of churning out the letters, Mr. Marks is now a published author. His book, “The Most Important Thing,” was released last week by Columbia Unversity Press. In 192-pages, he weaves excerpts from two decades’ worth of the missives into a single volume, dispensing gobs of investing insights obtained in his 42-year career.

Oaktree, based in Los Angeles, manages $82 billion for clients, mostly in fixed-income strategies. Mr. Marks and four co-founders started the firm in 1995 after spinning out from the asset manager TCW. Before TCW, Mr. Marks, a native New Yorker, spent 16 years at Citibank, where he began as a stock analyst and later managed convertible and high-yield bond portfolios.

DealBook’s Peter Lattman recently caught up with Mr. Marks, who was back at work in London after returning from his 65th birthday celebration in Spain.

When did you realize that your memos were reaching a broader audience than just your clients and colleagues?

Well, I wrote the first memo in 1990, and it was two pages about what I called “The Route to Performance,” how it’s through consistency and loss avoidance rather than spectacular achievements. And I had no response. On the first day of 2000, I published one called “Bubble.com,” about how I thought that the tech stocks were a bubble. Within a few months that proved right. I then started to hear from people. So after 10 years I became an overnight success.

The book’s title comes from your first 19 chapters, each one arguing this thing or that thing is the most important thing in investing. Who came up with that device?

Actually, I’ve used it before. I published a memo several years ago called “The Most Important Thing.” I wrote that I found myself sitting in a client’s office saying the most important thing is controlling risk. And then 15 minutes later I say the most important thing is buying cheap. And then 15 minutes after that, I say the most important thing is realizing that you don’t know what the future holds. So I said these are all the most important things.

The book draws heavily on newspaper articles and the writings and quotes of famous investors, even Mark Twain. I have this image of your traveling around with a pair of scissors and a burgeoning file of newspaper clippings. Tell me about your writing process.

That’s just what I’ve been doing this morning. I have a clip file spread out on my desk for the next memo. It’s working title is “How Quickly They Forget,” and it’s about short memories and how that dooms people to repeating mistakes. Nobody remembers the crisis anymore.

I recall a John Kenneth Galbraith quote from your book related to that.

Galbraith said: “Contributing to euphoria are two further factors little noted in our time or past times. The first is extreme brevity of a financial memory. Financial disaster is quickly forgotten. When the same or closely similar circumstances occur again, sometimes only in a few years, they are hailed by a new, often youthful, and always supremely self-confident generation as a brilliantly innovative discovery.” What could be more true of the years leading up to the crisis?

You call Los Angeles home, but for the past half-decade you and your wife, Nancy, have spent four months a year living in London. What effect has that had on your investment outlook?

I think it has given me, and hopefully the firm, a more global perspective. London is now our second largest office. The other thing is that I find it very interesting to look at the United States from the outside.

I’ll give you one brief example. Think about gold. We tend to think that what’s been happening with the price of gold is that it is now worth more dollars than it used to be. But outside the United States when you talk to people, you see people think that it’s not an increase in the price of gold in terms of dollars but a decrease in the price of dollars in terms of gold. And seeing it reflectively like that I think is very helpful.

Other than you and your Oaktree colleagues, if you had to pick one person to manage your money who would you choose and why?

In the late ’60s, when I was a rookie analyst following office equipment companies, a portfolio manager asked me, “Who’s the best sell-side analyst on Xerox?” I answered, “The one who thinks most like me is so-and-so.” As far as I can tell, Seth Klarman of the Baupost Group and I think the most alike. His returns are great and his risk control is stellar.

In your book you mention Michael Milken as a major influence. His creation of the junk bond market played a key role in your career.

Marshall McLuhan said “the medium is the message.” I think high-yield bonds have been the medium for a lot of my philosophy. Your philosophy comes from the events you live through. I started at Citibank in the late ’60s when the bank was what was called a Nifty Fifty investor. It bought the stocks of the best companies in America: IBM, Xerox, Merck, Coke, etc. Once analysts ascertained that the growth prospects were bright, the stocks were bought without regard to valuation and we ended up paying P.E. ratios in the 80s and 90s. A few years later you had lost 90 percent of your money.

Then I met Mike Milken in ‘78, and he said if you buy the bonds of B-rated companies and they survive, all the surprises will be on the upside, and a little light bulb went on. I realized that you could invest in the debt of the worst companies in America and make a lot of money if you were paid an appropriate risk premium. That’s really a big part of the philosophy, that quality investing is not about buying good things, it’s about buying things well. The most important thing is the relationship between price and value. If you can figure out the fair value of an asset and buy it for less, that is the best, most dependable way to invest.

You mention Milken but not me, which is frankly a bit disappointing because I once make an appearance in one of your memos, albeit anonymously.

That memo was from early October 2008. We were speaking and I told you we were buying aggressively, and you said to me, “You are?!” That conversation became the basis for a memo. We decided that if we’re spending a lot of our clients’ money during what some people thought was about to be the end of the world, we should at least fill them in. So we talked about how this is the third debt crisis we’ve lived through, and to us the pattern was obvious and the wrongness of not buying was obvious. There’s a canard that people retreat behind in a crisis. They say you really shouldn’t try to catch a falling knife and they say we’re waiting for the dust to settle and the uncertainly to be resolved. Then by the time the dust settles and the uncertainty is resolved and the knife clearly stops falling, there are no more bargains.

Good Reading -- May 2011

'You've got to find what you love,' Jobs says

Be Careful Wishing for the Fed’s End

51% of Americans Pay No Federal Income Taxes

A New Gauge to See What’s Beyond Happiness

Howard Marks’s Missives, Now for the Masses

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