~ Thursday, June 05, 2003
May 31, 2003
Frugal Japanese Dig Into Savings

OKYO, May 27 — In more prosperous times just a few years ago, Kiwako Kaiyama and Kiyoko Kitamura looked to a future of kicking back on their husbands' salaries. Instead, to make ends meet, the 40-something housewives have had to cut their spending, take part-time jobs and — shockingly, for Japan — dip into their savings.

For decades, the Japanese routinely socked away 10 to 20 percent of their incomes, earning a reputation as one of the world's most frugal people. In those years, Japan badgered the United States about its wasteful ways and trade deficits, even as Japanese companies benefited from selling Americans cars and electronics.

But a decade of recession here and a rapidly aging society are changing all that. Japan's household savings rate fell to a postwar low of 6.9 percent in 2001, the last year for which complete figures are available, from 11 percent in 1999 and 14 percent in 1990.

Based on preliminary data, the savings rate fell another two percentage points in 2002, economists said. Within a decade, if current trends persist, Japan's savings rate will hit 1.5 percent, according to HSBC Securities, pushing it below America's, which rose to 3.7 percent in 2002.

This reversal of fortune for the world's two largest economic powers could have far-reaching consequences. For Japan, already the most heavily indebted nation in the developed world, the declining savings pool could lead to higher interest rates, making it harder to finance the debt.

Japan also helps America finance its debt by purchasing United States Treasury bonds. As Japan's savings shrink, it will have less money to export, which might push up American interest rates as well.

While economists can offer numerous technical explanations for Japan's declining savings rate, the reasons are clear enough to Ms. Kaiyama, 47.

Sitting around a snug kitchen table with her 52-year-old husband, Naoyuki, and his elderly parents, she cataloged the economic uncertainties between sighs and sips of tea. Taxes are rising, wages are falling, health benefits are being slashed and, most worrisome of all, Mr. Kaiyama's job and pension at an electronics maker are no longer safe.

"Every day, I wonder whether my husband's company will go under," she said uneasily. "Money just seems to drain away."

Some of the erosion in Japan's savings rate was inevitable. In the postwar era, Japan benefited greatly from a young and expanding population, which helped to expand both growth and savings rates. Today, more Japanese are reaching retirement age and are dipping into their savings accounts to pay for everyday costs, a trend expected to continue.

By 2010, more than 22 percent of Japan's 127 million citizens will be at least 65 years old, up from 17 percent just three years ago. By 2015, the elderly will outnumber the young, because of a record low birthrate. With interest rates near zero and life insurance companies cutting payouts, pensioners are already having a harder time.

Working families, suffering from economic stagnation and deflation, are also saving less. That is what Mrs. Kitamura, who works part time in a bank, has been forced to do. The salary of her husband, a Tokyo city employee, has been cut, something previously unheard of. With home loan payments piling up and a third child in school, "our savings are down to zero," she said.

To cut corners, the Kitamuras have given up on eating out and pack lunch boxes to take to work. Like other Japanese, they are spending less on cars, homes and other big-ticket items. A higher percentage of income now goes to ordinary things like food, clothing and education.

"People are hanging on, not letting their hair down," Chris Walker, an economist at Credit Suisse First Boston in Tokyo, said, referring to the declining savings rate. "If things continue as they are, Japan will subside toward a middle-income country."

Mr. Walker's pessimism stems from Japan's national debt, which is 150 percent of gross national product, highest among the major industrialized nations. Though the government can issue bonds indefinitely, sooner or later it has to pay them back. Assuming the economy grows at 1.5 percent a year over the next decade, as the government expects, lawmakers will have to raise taxes, commandeering even more of the country's savings.

That process is already under way. In April, the government raised the portion of medical costs salaried workers have to pay, to 30 percent from 20 percent. On a recent visit to have his ears checked, Mr. Kaiyama discovered that the cost of his medicine had increased by 50 percent. Worse, the government's new tax formulas will substantially reduce Mr. Kaiyama's annual bonus — worth five months' pay to the typical Japanese workers.

Together, the measures will extract 2.5 trillion yen, $21 billion, from consumers' pockets.

"With these extra increases, the burden on me just gets heavier," Mr. Kaiyama said.

The possibility of more tax increases, which the government is discussing, has led the Kaiyamas to buckle down. Every morning, Ms. Kaiyama scans the newspapers in search of bargains, riding 15 minutes out of her way by bicycle to track down cheaper vegetables.

Vacations, never extravagant, are now limited to sleepovers at a resort near Mount Fuji owned by her husband's company. To help pay for her two daughters' education, she works four days a week at a local grocery.

"I cannot put the burden only on my husband," she said.

Mr. Kaiyama, a personnel manager, is among the legions of "salarymen" who are being pushed to retire early so companies can trim their bloated payrolls. In Japan's seniority-based system, he cannot hope to get a new job that pays as much. So he hangs on, hoping to reach the mandatory retirement age of 60.

The government's prescription for its woes is higher taxes. To keep the health care system afloat, lawmakers are considering forcing those aged 75 and older to pay for 10 percent of their medical costs, while those from 65 to 74 would pay 20 percent.

Others favor a different approach. Keidanren, Japan's largest business lobby, wants to more than triple the national sales tax, to 18 percent, over the next dozen years. This way, it reasons, the entire nation can share the burden of paying for the elderly, not just working families.

The trouble is that a tax on nearly every transaction in the economy could set off another recession, like in 1997, when the consumption tax was raised to 5 percent from 3 percent. This would force consumers to use even more of their savings to make ends meet, economists said, increasing their uneasiness.

While Americans have been known to take to the streets or vote their representatives out of office, Japanese are more resigned about their plight. Openly discussing personal woes is less common in Japan, and with the Liberal Democrats in power for almost five decades, many voters have given up going to the polls.

"I can't trust the politicians to solve these problems," Ms. Kitamura said.

So she and her family, like the Kaiyamas, are learning to adjust their expectations. No grand trips to Hawaii or fancy dinners on the town. No guarantees that their husbands' jobs will be enough to retire on. Most of all, no big savings account to fall back on if times get tougher.

June 5, 2003
Many Say Europe Needs More Than Just a Rate Cut

ERLIN, June 4 — With Europe's biggest countries stagnating and its currency soaring, the European Central Bank has been thrust into a new, not entirely comfortable role: economic savior for the Continent.

Senior bank officials, including the president, Wim Duisenberg, have signaled in recent days that they will cut interest rates at their meeting on Thursday, perhaps as much as half a percentage point.

Mr. Duisenberg said inflation no longer posed much of a risk in Europe, given the rise of the euro against the dollar. In the coded language used by central bankers, that means, "It's time to cut."

The question is whether Europeans — uneasy about the harmful effects of a strong euro, exhausted by their chronic economic woes and despairing that their governments will ever fix things — are putting too much faith in the restorative powers of a single rate reduction.

While virtually all economists here favor a monetary easing, many say the effect will be short-lived, because it will be no surprise and because the Federal Reserve may soon cut rates further in the United States.

That would preserve the disparity in borrowing costs between Europe and the United States, one reason the euro has appreciated so much against the dollar in recent months.

Moreover, Europe has made little progress with other economic remedies, like shaking loose its labor markets, that could restore growth in a more lasting way. And because of the strictures built into the agreement that created the euro currency, the 12 countries that use it are limited in the amount of deficit spending they can use to stimulate lagging demand.

"Everybody would welcome more substantial remedies," said Norbert Walter, the chief economist at Deutsche Bank. "But these take time to work. If you have been given an iron-fisted law on spending and you have a rising euro, then you have no other option but to cut rates."

The economic cul-de-sac in which Europe finds itself made the tone grim today at a conference of bankers in Berlin. Speaker after speaker laid out dispiriting forecasts of sluggish long-term growth. Anything more than that, they said, would depend on the ability of European leaders to make painful economic reforms.

Stephen S. Roach, the chief economist at Morgan Stanley and the lone American speaker at the meeting, went further. "Europe is the new weak link in the global growth chain," Mr. Roach said, "and Germany is its biggest, weakest link."

The big danger for Germany, he said, is deflation, a self-reinforcing spiral of falling prices. He said the European Central Bank was ill equipped to defuse that threat because, in its determination to formulate a one-size-fits-all monetary policy, it focused too much on the higher inflation rates in smaller, faster-growing euro countries.

As a result, its benchmark rate of 2.5 percent is too high for Germany, the union's biggest economy, which is on the brink of another recession.

"What would be worse?" Mr. Roach asked. "Higher inflation in Ireland, Spain and Greece, or deflation in Germany?"

The prospect of deflation has loomed large here recently, after the publication of a report by the International Monetary Fund that said Germany faced a considerable risk of a deflationary spiral.

The German finance minister, Hans Eichel, said in a speech here that he did not see a big risk of deflation. He said German consumers did not yet think that prices would continue to drop if they put off spending, a behavioral pattern that is considered central to deflation.

"We have a problem with G.D.P. growth, no doubt about it," Mr. Eichel said.

Nevertheless, he repeated that Germany would obey a European Union directive to cut its budget deficit to less than 3 percent of gross domestic product by 2004. This year and in 2002, Germany breached that ceiling, required by the Stability and Growth Pact, which underpins the euro.

German newspapers have suggested that the government may violate it again in 2004, which could make it liable for heavy fines. Though Mr. Eichel dismissed the report, Chancellor Gerhard Schröder said the government would not strangle a recovery with overly harsh spending cuts.

While Germany waffles, France has taken a more defiant approach. It says it will not raise taxes this year to cut its deficit, which is also above the 3 percent cap.

On Tuesday, finance ministers from the 12 euro countries told France to do more to reduce its budget shortfall. But Prime Minister Jean-Pierre Raffarin says new taxes would hobble France's fragile recovery.

Mr. Walter suggested that Europe's troubled economies should negotiate a deal with the European Commission to put off complying with the pact until their economies recover.

"You don't undo past mistakes by making fresh ones," he said in an interview during a break in the conference.

Mr. Walter also suggested that the European Central Bank cut rates 75 basis points, a bold stroke that he said would close the interest rate gap with the United States, even if the Federal Reserve cuts its rates another half-point, as he and others expect.

The most eagerly awaited speaker today was Jean-Claude Trichet, the governor of the French central bank and a board member of the European bank. His topic was how to avert a financial crisis. To the audience's frustration, he said nothing about Thursday's meeting and left without taking questions.

"He's probably gone to persuade his fellow board members to do the right thing," Mr. Roach said afterward.

June 4, 2003
In the Affluent Suburbs, an Invisible Race Gap


ACROSS America, there may be two or three dozen suburban school districts similar to this one, towns like Evanston, Ill.; Shaker Heights, Ohio; Arlington, Va.; White Plains. They are heavily upper middle class, are racially mixed and feature high quality public schools.

The high school here, Columbia High, is 51 percent black and sends 77 percent of its seniors to four-year colleges.

Five percent are accepted to the Ivy League. A lot of black Columbia High graduates go on to big things. Rhena Jasey went to Harvard, Colin Brown to Princeton, Carla Peterman won a Rhodes, Lauryn Hill won five Grammys.

From afar, these racially mixed suburbs appear to be the fulfillment of the Brown v. Board of Education desegregation ruling a half century ago. Green and tree-lined, they look like the quintessential level playing field. They seem to make the need for affirmative action passe.

But they are not what they appear to be, as Ronald Ferguson, a Harvard professor, knows from surveying 34,000 seventh to eleventh graders in 15 of these racially mixed suburbs across the nation.

Everywhere, he finds the achievement gap, with whites averaging B+ and blacks C+. Professor Ferguson calculates about half the Gap can be explained by economic differences.

When the wealth of the 15 towns is dissected into four socioeconomic classes, 79 percent of blacks are in the bottom 50 percent; 73 percent of whites are in the top 50 percent. Fifty-three percent of these suburban black children live with one or neither parent, compared with 15 percent of whites.

Twenty-two percent of the blacks have no computer at home compared with 3 percent of whites. Forty percent of blacks own 100 or more books, compared with 80 percent of whites.

All this spills into these schools. "Teachers see black kids not doing as well academically, getting more incompletes on their homework," Professor Ferguson said. "They interpret that to mean black kids don't care, don't work as hard."

Yet whites and blacks taking similar level courses report that they spend the same time on homework. It is just that the results are different: 38 percent of whites who spend two hours on homework nightly get all their work done; only 20 percent of blacks spending two hours finish their homework — the Gap.

It would be politically convenient for Professor Ferguson, a black man raising his two children plus a nephew in a Boston suburb, if the Gap could be explained away by economics.

It cannot. When he controls for income, half the Gap persists. Among the richest families, blacks average B+, whites A-. How to explain it?

On a political level, he believes the human damage from two centuries of slavery plus legalized segregation that persisted until the mid-1960's will simply not be undone in a generation, not even in suburbia.

On a personal level, he has looked hard at the data for ways to narrow the Gap.

While 31 percent of whites say that a teacher's encouragement motivates them to work hard, 47 percent of blacks cite teacher encouragement as crucial. Professor Ferguson believes this may reflect the black children's insecurity.

"Even in our own towns, we may feel like outsiders," he says. And so, Professor Ferguson runs seminars for teachers that emphasize the importance of encouraging these children to excel.

If whites and blacks spend the same time on homework, and the black child is not getting as much done, says Professor Ferguson, "that's a skills gap." He works with schools to focus on the points in the curriculum where children fall behind, and to develop smarter ways to teach those lessons.

His research shows that in the years before school, white parents spend more time reading to their children, while blacks devote more to song and play — the start of the Gap. Professor Ferguson writes, "As a black parent, I acknowledge there might be differences in what we do with our preschool children that would put them on a more equal footing with whites on the first day of kindergarten."

While he practices that at home, quizzing his 3-year-old with math problems, he is hesitant to speak too much publicly about advising black parents.

"If it shows up in The New York Times, it's like, wait a minute, here's another guy saying to black parents, `It's your fault.' This needs to be done within the community."

In this community, Robert Marchman, 45, a lawyer with the New York Stock Exchange, has taken on the Gap. He is chairman of the South Orange/Maplewood Community Coalition on Race, which has been sponsoring discussions on the Gap and helped bring Professor Ferguson here.

Mr. Marchman is one of a dozen black dads who run a mentoring program for 30 black eighth graders. "We talk about stuff you hear, like, `being smart is acting white,' " Mr. Marchman said. "I'll say to them, `So what does being black mean? To be an idiot?' "

Mr. Marchman himself has bridged the Gap. He grew up in a Brooklyn housing project and when he was a senior, took the SAT, without any preparation. In the high school guidance office, he picked a college by starting with the letter "A" which landed him at Alleghany College.

By law school — at the University of Pennsylvania — he was no longer making educational decisions based on alphabetical order.

Last summer, before his older son, David, entered 10th grade, Mr. Marchman bought the boy his first SAT study guide.

While Mr. Marchman played basketball ("that's all there was"), he encouraged David to switch from football to lacrosse, because it is a niche sport that might help get him into a top college.

Though Mr. Marchman has made it to the far side of the Gap, he keeps his guard up. At the start of each school year, he makes appointments to see the teachers of his sons, David and Travis. "I put on a business suit," he says. "I want to set the tone with the teachers. I want them to know we have high expectations." His are black children to be encouraged, he wants the teachers to know.

And though Mr. Marchman no longer needs affirmative action, he supports it, for even in this suburban place, he can see more clearly than most all those children still finding their way across the Gap.

June 4, 2003
Iraq Arms Report Now the Subject of a C.I.A. Review

ASHINGTON, June 3 — A top secret United States intelligence report last fall is now at the center of an internal C.I.A. review to determine whether American intelligence miscalculated the extent of the threat posed by Saddam Hussein's weapons programs. The report had concluded that Baghdad had chemical and biological weapons and was seeking to reconstitute its nuclear program.

The document, which was described by intelligence officials familiar with the review, provided President Bush with his last major overview of the status of Iraq's program to develop weapons of mass destruction before the start of the war.

The document, called a national intelligence estimate, was issued last October. It is significant because it provided the White House with the last attempt by the entire intelligence community to reach a consensus concerning Iraq's weapons programs before the war started in March.

The national estimate has been an early focus of attention for a small team of retired C.I.A. analysts who have been brought in by the agency's director, George Tenet, to assess the accuracy of the intelligence reports produced before the war, according to officials familiar with the review. Separately, the C.I.A. is now in the process of turning over to Congress the underlying documents that were used by analysts to prepare the national estimate, just as lawmakers in both the House of Representatives and the Senate are preparing for their own reviews of the prewar intelligence.

Traditionally, a national intelligence estimate is one of the most important reports produced by the intelligence community. It is intended to provide a forum for analysts from all of the different American intelligence agencies to express their differences on a specific topic and then reach a position on an assessment on which they can agree. Such broad-based involvement from top analysts throughout the government lends the estimates special weight among policy makers, including the president.

The review of the intelligence estimate made last fall comes as the failure to find Iraq's weapons of mass destruction so far is flaring into a major political issue for the Bush administration. Both Secretary of State Colin L. Powell and Mr. Tenet have been forced in recent days to defend their handling of intelligence in the months that lead up to the war. At the same time, intelligence analysts inside the government continue to complain about the role played over the past year by a special Pentagon unit that provided policy makers with an alternative, and more hawkish, view of intelligence related to Iraq.

In a prepared statement issued by the C.I.A. late last week, Mr. Tenet denied that the intelligence on Iraq was warped in order to satisfy the Bush administration's desire to find evidence to support its policies. "The integrity of our process was maintained throughout, and any suggestion to the contrary is simply wrong," Mr. Tenet said. But several C.I.A. officials interviewed recently declined to comment on or defend the actions over the past year of the Pentagon's special intelligence unit, which sought to highlight information from Iraqi exiles and other sources that had frequently been dismissed by C.I.A. analysts. And some C.I.A. analysts have said they felt pressure to make their reports conform to the Bush administration's Iraq policy.

Now, officials say that the C.I.A. review team examining prewar intelligence plans to ask the Pentagon for documents from the special intelligence unit to try to determine what its role was in shaping the intelligence during the months leading up to the war.

In Congress, the Senate Select Committee on Intelligence and the Senate Armed Services Committee have announced plans to conduct a joint inquiry into the prewar intelligence, while the House Permanent Select Committee on Intelligence plans its own examination. In a May 22 letter, the leaders of the House panel asked Mr. Tenet to provide answers to a series of questions on the issue, including whether the "sources and methods that contributed to the community's analysis on the presence and amount of W.M.D. in Iraq were of sufficient quality and quantity to provide sufficient accuracy."

One official familiar with the C.I.A. review said the answer to that fundamental question may be no. The official said it appeared that the C.I.A. and other intelligence agencies had developed fairly solid intelligence on Iraq's weapons programs after the Persian Gulf war in 1991 and through much of the 1990's, as United Nations inspectors scoured the country.

During that time, the United States grew convinced that Iraq had chemical weapons, was trying to develop biological agents and was seeking to reconstitute a nuclear program that had been disrupted by the war. But the official said it now appeared that the quality of the intelligence concerning Iraq's weapons programs subsequently declined, particularly after the inspectors were withdrawn in 1998.

Without conclusive new intelligence to the contrary, it appears that the intelligence community continued to make projections assuming a continued Iraqi weapons effort, in line with its earlier assessments, the official said. The fragments of intelligence that came in periodically after the inspectors were withdrawn were never enough to prove that Mr. Hussein had abandoned his weapons programs, and so the natural inclination was to assume that those programs were still under way.

United States intelligence officials still caution that American forces may yet find conclusive evidence of Iraq's chemical or biological weapons. Mr. Bush has pointed to the discovery of two suspected mobile labs as evidence that Iraq was trying to develop biological weapons.

However, officials now acknowledge that at least some of the pre-war analysis was inaccurate. The United States had, for example, received reports indicating that Iraqi military units had received the authority to deploy and use chemical weapons against advancing American troops. But postwar searches of Iraqi military facilities and interrogations of Iraqi officers have failed to turn up any evidence that chemical weapons were deployed.

It was perhaps inevitable that the national estimate on Iraq's weapons programs would receive special scrutiny. Even as it was being produced last fall, the estimate was already at the center of a political struggle between Democrats in Congress and the C.I.A. and the Bush administration over the threat posed by Mr. Hussein's government.

Last summer, Democrats on the Senate Intelligence Committee, including Bob Graham of Florida and Dick Durbin of Illinois, asked the C.I.A. to produce a national intelligence estimate that would review all of the major policy issues related to Iraq. The intelligence community resisted, agreeing instead to produce one that was more narrowly focused on the status of Iraq's weapons programs.

When Mr. Graham, then the intelligence committee's chairman, finally saw the report, he asked that its findings be declassified in time for the Senate debate on a resolution to support the war in Iraq. When Mr. Tenet provided a letter to Mr. Graham that included some of the report's findings, Mr. Graham complained that only those findings that supported the administration's position on Iraq had been declassified, while others that raised questions were not.

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