Americas Chinese disease (not quite what you think)

Fed chairman are expected to speak in code, so that reading their remarks is a bit like watching the famous scene in Annie Hall where the conversation between the lovers is subtitled with what theyre really saying. So when Ben Bernanke says this: Another set of lessons that Asian economies took from the crisis of the 1990s may be more problematic. Because strong export markets helped Asia recover from that crisis, and because many countries in the region were badly hurt by sharp reversals in capital flows, the crisis strengthened Asias commitment to export-led growth, backed up with large current account surpluses and mounting foreign exchange reserves. In many respects, that model has served Asia well, contributing to the rapid growth rates in the region over the past decade. In fact, it bears repeating that evidence from the world over shows trade openness to be an important source of economic growth. However, too great a reliance on external demand can also pose problems. In particular, trade surpluses achieved through policies that artificially enhance incentives for domestic saving and the production of export goods distort the mix of domestic industries and the allocation of resources, resulting in an economy that is less able to meet the needs of its own citizens in the longer term. the subtitle reads HEY, CHINA, STOP ACCUMULATING DOLLARS ITS TIME TO REVALUE YOUR CURRENCY But does the United States dare put pressure on the Chinese to do that? People constantly say that we cant risk it that

were dependent on China to keep buying our debt. Yet this is all wrong under current circumstances. How do I know its all wrong? Heres one way to think about the issue that I havent seen anyone else put forth (if they have, Ill be happy to give credit.) Right now, were in a situation in which conventional monetary policy is hard up against the zero lower bound; rules of thumb that track past Fed behavior suggest that the shortterm interest rate should be -5% or lower. To partially make up for its lack of traction, the Fed is engaged in massive quantitative easing a misleading term, but I guess were stuck with it. What it basically means is that the Fed is selling Treasury bills or their equivalent (interest-paying excess bank reserves are essentially the same thing), while buying other assets, expanding its balance sheet enormously in the process. What kinds of other assets? Mortgage-backed securities; securities backed by credit-card debt; longer-term government debt; etc.. One type of asset the Fed has not been buying is foreign shortterm securities. But thats not because such purchases would be ineffective. On the contrary, selling domestic short-term debt and buying its foreign-currency counterpart is the essence of a sterilized foreign-exchange-market intervention, which is a time-honored way of gaining a competitive advantage and helping your economy expand. And some countries have, in fact, made foreign-currency purchases a part of their quantitative easing strategy Switzerland in particular. The only reason the Fed isnt doing this is that were a big player, and cant be seen to be pursuing a beggar-thy-neighbor strategy.

But now ask the question: what would the effect be if China decided to sell a chunk of its Treasury bill holdings and put them in other currencies? The answer is that China would, in effect, be engaging in quantitative easing on behalf of the Fed. The Chinese would be doing us a favor! (And doing the Europeans and Japanese a lot of harm.) Conversely, by continuing to buy dollars, the Chinese are in effect undermining part of the Feds efforts theyre conducting quantitative diseasing, I guess you could say, hence the title of this post. The point is that right now the United States has nothing to fear from Chinese threats to diversify out of the dollar. On the contrary, if the Chinese do decide to start selling dollars, Tim Geithner and Ben Bernanke should send them a nice thankyou note.

Bernanke, Blower of Bubbles?

By PAUL KRUGMAN

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

So when people talk about bubbles, you should listen carefully and evaluate their claims not scornfully dismiss them, which was the way many self-proclaimed experts reacted to warnings about housing. And theres a lot of bubble talk out there right now. Much of it is about an alleged bond bubble that is supposedly

keeping bond prices unrealistically high and interest rates which move in the opposite direction from bond prices unrealistically low. But the rising Dow has raised fears of a stock bubble, too. So do we have a major bond and/or stock bubble? On bonds, Id say definitely not. On stocks, probably not, although Im not as certain. What is a bubble, anyway? Surprisingly, theres no standard definition. But Id define it as a situation in which asset prices appear to be based on implausible or inconsistent views about the future. Dot-com prices in 1999 made sense only if you believed that many companies would all turn out to be a Microsoft; housing prices in 2006 only made sense if you believed that home prices could keep rising much faster than buyers incomes for years to come. Is there anything comparable going on in todays bond market? Well, the interest rate on long-term bonds depends mainly on the expected path of short-term interest rates, which are controlled by the Federal Reserve. You dont want to buy a 10-year bond at less than 2 percent, the current going rate, if you believe that the Fed will be raising short-term rates to 4 percent or 5 percent in the not-too-distant future. But why, exactly, should you believe any such thing? The Fed normally cuts rates when unemployment is high and inflation is low which is the situation today. True, it cant cut rates any further because theyre already near zero and cant go lower. (Otherwise investors would just sit

on cash.) But its hard to see why the Fed should raise rates until unemployment falls a lot and/or inflation surges, and theres no hint in the data that anything like that is going to happen for years to come. Why, then, all the talk of a bond bubble? Partly it reflects the correct observation that interest rates are very low by historical standards. What you need to bear in mind, however, is that the economy is also in especially terrible shape by historical standards once-in-three-generations terrible. The usual rules about what constitutes a reasonable level of interest rates dont apply. Theres also, one has to say, an element of wishful thinking here. For whatever reason, many people in the financial industry have developed a deep hatred for Ben Bernanke, the Fed chairman, and everything he does; they want his easy-money policies ended, and they also want to see those policies fail in some spectacular fashion. As it turns out, however, dislike for bearded Princeton professors is not a good basis for investment strategy. And one should never forget the example of Japan, where bets against government bonds justified by more or less the same arguments currently made to justify claims of a U.S. bond bubble ended in grief so often that the whole trade came to be known as the widow maker. At this point, Japans debt is well over twice its G.D.P., its budget deficit remains large, and the interest rate on 10-year bonds is 0.6 percent. No, thats not a misprint. O.K., what about stocks? Major stock indexes are now higher than they were at the end of the 1990s, which can

sound ominous. It sounds a lot less ominous, however, when you learn that corporate profits which are, after all, what stocks are shares in are more than two-and-ahalf times higher than they were when the 1990s bubble burst. Also, with bond yields so low, you would expect investors to move into stocks, driving their prices higher. All in all, the case for significant bubbles in stocks or, especially, bonds is weak. And that conclusion matters for policy as well as investment. For one important subtext of all the recent bubble rhetoric is the demand that Mr. Bernanke and his colleagues stop trying to fight mass unemployment, that they must cease and desist their efforts to boost the economy or dire consequences will follow. In fact, however, there isnt any case for believing that we face any broad bubble problem, let alone that worrying about hypothetical bubbles should take precedence over the task of getting Americans back to work. Mr. Bernanke should brush aside the babbling barons of bubbleism, and get on with doing his job.

The 1 Percents Solution

Economic debates rarely end with a T.K.O. But the great policy debate of recent years between Keynesians, who advocate sustaining and, indeed, increasing government spending in a depression, and austerians, who demand immediate spending cuts, comes close at least in the world of ideas. At this point, the austerian position has imploded; not only have its predictions about the real world failed completely, but the academic research invoked to support that position has turned out to be riddled with errors, omissions and dubious statistics.

Yet two big questions remain. First, how did austerity doctrine become so influential in the first place? Second, will policy change at all now that crucial austerian claims have become fodder for late-night comics? On the first question: the dominance of austerians in influential circles should disturb anyone who likes to believe that policy is based on, or even strongly influenced by, actual evidence. After all, the two main studies providing the alleged intellectual justification for austerity Alberto Alesina and Silvia Ardagna on expansionary austerity and Carmen Reinhart and Kenneth Rogoff on the dangerous debt threshold at 90 percent of G.D.P. faced withering criticism almost as soon as they came out. And the studies did not hold up under scrutiny. By late 2010, the International Monetary Fund had reworked Alesina-Ardagna with better data and reversed their findings, while many economists raised fundamental questions about Reinhart-Rogoff long before we knew about the famous Excel error. Meanwhile, real-world events stagnation in Ireland, the original poster child for austerity, falling interest rates in the United States, which was supposed to be facing an imminent fiscal crisis quickly made nonsense of austerian predictions. Yet austerity maintained and even strengthened its grip on elite opinion. Why? Part of the answer surely lies in the widespread desire to see economics as a morality play, to make it a tale of excess and its consequences. We lived beyond our means, the story goes, and now were paying the inevitable price.

Economists can explain ad nauseam that this is wrong, that the reason we have mass unemployment isnt that we spent too much in the past but that were spending too little now, and that this problem can and should be solved. No matter; many people have a visceral sense that we sinned and must seek redemption through suffering and neither economic argument nor the observation that the people now suffering arent at all the same people who sinned during the bubble years makes much of a dent. But its not just a matter of emotion versus logic. You cant understand the influence of austerity doctrine without talking about class and inequality. What, after all, do people want from economic policy? The answer, it turns out, is that it depends on which people you ask a point documented in a recent research paper by the political scientists Benjamin Page, Larry Bartels and Jason Seawright. The paper compares the policy preferences of ordinary Americans with those of the very wealthy, and the results are eye-opening. Thus, the average American is somewhat worried about budget deficits, which is no surprise given the constant barrage of deficit scare stories in the news media, but the wealthy, by a large majority, regard deficits as the most important problem we face. And how should the budget deficit be brought down? The wealthy favor cutting federal spending on health care and Social Security that is, entitlements while the public at large actually wants to see spending on those programs rise.

You get the idea: The austerity agenda looks a lot like a simple expression of upper-class preferences, wrapped in a facade of academic rigor. What the top 1 percent wants becomes what economic science says we must do. Does a continuing depression actually serve the interests of the wealthy? Thats doubtful, since a booming economy is generally good for almost everyone. What is true, however, is that the years since we turned to austerity have been dismal for workers but not at all bad for the wealthy, who have benefited from surging profits and stock prices even as long-term unemployment festers. The 1 percent may not actually want a weak economy, but theyre doing well enough to indulge their prejudices. And this makes one wonder how much difference the intellectual collapse of the austerian position will actually make. To the extent that we have policy of the 1 percent, by the 1 percent, for the 1 percent, wont we just see new justifications for the same old policies? I hope not; Id like to believe that ideas and evidence matter, at least a bit. Otherwise, what am I doing with my life? But I guess well see just how much cynicism is justified.

Not Enough Inflation

Ever since the financial crisis struck, and the Federal Reserve began printing money in an attempt to contain the damage, there have been dire warnings about inflation and not just from the Ron Paul/Glenn Beck types.

Thus, in 2009, the influential conservative monetary economistAllan Meltzer warned that we would soon become inflation nation. In 2010, the Parisbased Organization for Economic Cooperation and Development urged the Fed to raise interest rates to head off inflation risks (even though its own models showed no such risk). In 2011, Representative Paul Ryan, then the newly installed chairman of the House Budget Committee, raked Ben Bernanke, the Fed chairman, over the coals, warning of looming inflation and intoning solemnly that it was a terrible thing to debase the dollar. And now, sure enough, the Fed really is worried about inflation. You see, its getting too low. Before I get to the trouble with low inflation, however, lets talk about what we should have learned so far. Its not hard to see where inflation fears were coming from. In its efforts to prop up the economy, the Fed has boughtmore than $2 trillion of stuff private debts, housing agency debts, government bonds. It has paid for these purchases by crediting funds to the reserves of private banks, which isnt exactly printing money, but is close enough for government work. Here comes hyperinflation! Or, actually, not. From the beginning, it was or at least should have been obvious that the financial crisis had plunged us into a liquidity trap, a situation in which many people figure that they might just as well sit on cash. America spent most of the 1930s in a liquidity trap; Japan

has been in one since the mid-1990s. And were in one now. Economists who had studied such traps a group that included Ben Bernanke and, well, me knew that some of the usual rules of economics are in abeyance as long as the trap lasts. Budget deficits, for example, dont drive up interest rates; printing money isnt inflationary; slashing government spending has really destructive effects on incomes and employment. The usual suspects dismissed all this analysis; it was liquidity claptrap, declared Alan Reynolds of the Cato Institute. But that was four years ago, and the liquidity trappers seem to have been right, after all. And its worth mentioning another issue on which the inflation non-worriers have been vindicated: how to measure inflation trends. The Fed relies on a measure that excludes food and energy prices, which fluctuate widely from month to month. Many commentators ridiculed this focus on core inflation, especially in early 2011, when rising food and energy prices briefly sent headline inflation above 4 percent even as the core stayed low. But, sure enough, inflation came back down. So all those inflation fears were wrong, and those who fanned those fears proved, in case you were wondering, that their economic doctrine is completely wrong not that any of them will ever admit such a thing. And, at this point, inflation at barely above 1 percent by the Feds favored measure is dangerously low.

Why is low inflation a problem? One answer is that it discourages borrowing and spending and encourages sitting on cash. Since our biggest economic problem is an overall lack of demand, falling inflation makes that problem worse. Low inflation also makes it harder to pay down debt, worsening the private-sector debt troubles that are a main reason overall demand is too low. So why is inflation falling? The answer is the economys persistent weakness, which keeps workers from bargaining for higher wages and forces many businesses to cut prices. And if you think about it for a minute, you realize that this is a vicious circle, in which a weak economy leads to toolow inflation, which perpetuates the economys weakness. And this brings us to a broader point: the utter folly of not acting to boost the economy, now. Whenever anyone talks about the need for more stimulus, monetary and fiscal, to reduce unemployment, the response from people who imagine themselves wise is always that we should focus on the long run, not on shortrun fixes. The truth, however, is that by failing to deal with our short-run mess, were turning it into a long-run, chronic economic malaise. I wrote recently about how, by allowing long-term unemployment to persist, were creating a permanent class of unemployed Americans. The problem of too-low inflation is very different in detail, but similar in its implications: here, too, by letting short-run economic

problems fester were setting ourselves up for a long-run, perhaps permanent, pattern of economic failure. The point is that we are failing miserably in responding to our economic challenge and we will be paying for that failure for many years to come. DETROIT Dozens of companies from China are putting down roots in Detroit, part of the countrys steady push into the American auto industry. Chinese-owned companies are investing in American businesses and new vehicle technology, selling everything from seat belts to shock absorbers in retail stores, and hiring experienced engineers and designers in an effort to soak up the talent and expertise of domestic automakers and their suppliers. While starting with batteries and auto parts, the spread of Chinese business is expected to result eventually in the sale of Chinese cars in the United States. The Chinese are well behind the Japanese when they hit our shores 30 years ago, said David E. Cole, a founder of the Center for Automotive Research in Ann Arbor, Mich. They lack the know-how, and theyre coming here to get it. As businesses sprout up with little fanfare, Chinese companies seem to be trying to avoid the type of public opposition experienced by the Japanese automakers Toyota and Honda in the 1980s, when the sudden influx of foreign cars competing head-on with cars from General

Motors, Ford and Chrysler was perceived as a threat to American jobs. In contrast to the Japanese, Chinese auto companies are assiduously avoiding the spotlight. Last year, the biggest carmaker in China, Shanghai Automotive Industries,opened new offices in suburban Detroit without any publicity, which is almost unheard-of in an industry that thrives on media coverage. But Chinas growth in the American auto industry is drawing notice in Washington. Last year, the Obama administration filed a complaint with the World Trade Organization that Chinas government was unfairly subsidizing the production of some parts shipped to America. And the countrys inroads into American-made batteries and electric vehicleshave drawn scrutiny because that sector of the industry has been heavily subsidized by the United States government. The American industrys overall resurgence has drawn a growing Chinese population to Detroit, with Chineseowned suppliers bringing executives from their country and American automakers adding new talent. About 50,000 Chinese, many of them engineers and other professionals who work at General Motors and the Ford Motor Company, live in the metropolitan area. Business networks are growing too. The Detroit Chinese Business Association boasts a flourishing membership, and counts about 100 Chinese-owned businesses, mostly auto-related, in the region.

The Ford Chinese Association, with 650 white-collar workers, predominantly from mainland China, has become one of the largest employee groups at the company. Its president, Raymond Xu, recalled that in 1999, when he came to Detroit to attend college, there were very few Chinese in the area. I think people are going to get more and more comfortable with it, Mr. Xu said. Typical of the Chinese expansion are the nondescript offices of Changan Automotive in an industrial park in the suburban city of Plymouth. Changan, a major carmaker in China, set up a research center to better understand the structural chassis of a vehicle then hired about 20 Detroit engineers, some of whom had been laid off from Detroits auto companies, to staff the project. Most of the engineers are very young in China, said Hong Su, the Changan executive heading the American facility. They know how to make vehicles, but they dont know how to develop them.One of his employees is Alan Wall, 54, a former contract engineer at Chrysler who lost his job during the recession. It was an opportunity, he said. And those tend to come from a company that is trying to expand. Last year, China exported about $13 billion in automotive goods to the United States tires, wheels and radios that are sold as replacement parts according to AlixPartners, a consulting firm.

But many Chinese suppliers are pursuing direct business with the Detroit car companies, which now get many of their most common parts from low-wage nations like Mexico. One supplier, Brilliance Auto, an industrial giant with about 500,000 employees in the city of Shenyang in northeast China, is still an underdog in Detroit, trying to crack an intricate network of suppliers that have long relationships with G.M. and the other carmakers. We have been exporting our parts to North America for 15 years for the aftermarket, said Dongbin Chen, a Brilliance executive, referring to retail sales of replacement parts. Now our biggest opportunity is with G.M. and the other big companies. Brilliance scored a coup last year by supplying lightweight engine mounts for the new Cadillac ATS sedan made by G.M. in Lansing, Mich., which has whetted the companys appetite for more. At a United States-China conference held here in November, Brilliance displayed a large exhibit showcasing a range of mundane parts including seat belts, steering wheels and shock absorbers that it hopes to export to America. We have the ability and the capacity to supply these kinds of parts, Mr. Chen said. And I think right now, it is very important for us to be here. In addition to Chinese companies locating in Detroit, a cottage industry of lawyers, accountants and corporate advisers has grown up to assist them. Their numbers are

small now, but the impact of the Chinese on the local economy is slowly expanding. Industry analysts are hard-pressed to put a number on the Chinese suppliers operating in the United States. We simply dont know how many there are, said David Andrea, an official with the Original Equipment Suppliers Association, a trade organization for auto parts makers. In one of the more prominent deals, the Wanxiang Group bought most of the assets of the battery maker A123 Systems, which filed for bankruptcy last year despite receiving $132 million of $249 million in federal grants to build two factories in Michigan. Congressional Republicans criticized the deal, saying A123s technology could support military applications in China. Still, the buyout was approved this year by the Committee on Foreign Investment in the United States, a federal government panel. Wanxiang, which has its United States headquarters near Chicago, has acquired several American auto parts and solar companies in recent years. But it attracted little attention until it took an interest in A123 Systems. I wasnt surprised by the negative reaction, said Pin Ni, president of the companys American unit. The reality is we grow here like a small seed into a bigger tree, and we cannot avoid this type of response. He said that Wanxiang employed several thousand American workers, and kept local management in place at companies it had bought. We act, talk and walk like an

American company, Mr. Ni said. In the end, its all about making money. Other Chinese companies are averse to publicity. Shanghai Auto is the largest carmaker in China and has major joint ventures there with G.M. and the German automaker Volkswagen. But when the company opened its new Detroit-area offices last year, even G.M. was surprised. Since we do not do business with SAIC in the U.S., there is no connection between G.M. and the SAIC office in the U.S., said Dayna Hart, a G.M. spokeswoman. The arms-length reaction underscores the sensitivity surrounding Chinas presence in the American industry. Only about 4 percent of Chinese-made light vehicles are exported now, mostly to countries in Africa and the Middle East. But the Detroit automakers are bracing for the day when competitive Chinese cars hit the American market. The Chinese have a lot of money and they are moving fast, said Mr. Cole. Were going to see a lot more of them here. The growth in the Chinese professional class has had a ripple effect on the broader community, as well, with Chinese community groups sponsoring youth soccer leagues, basketball tournaments and musical performances at Detroit Tigers games. One organization runs a Chinese soup kitchen every year at a local homeless shelter. Frank Chiu was an engineer for an auto supply company when he saw the growing number of Chinese professionals

entering the industry and saw an opportunity. He left his job to open a Chinese grocery store in Canton, Mich, a bedroom community not far from Ford headquarters. The timing was very good for this type of business, said Mr. Chiu, whose store features Chinese delicacies like chicken feet, snow fungus and pork uterus. As customers roamed the store around him, Mr. Chiu reflected on how much had changed since he moved from Taiwan more than 20 years ago. What was it like then? he said. Lonely is the first word that comes to mind. At Ford, Chinese employees play an integral part in the companys expansion in China, where it is building several new factories. They also help prepare American executives for transfers to China, and play host to Chinese car dealers when they visit Fords headquarters. On Feb. 14, hundreds of Ford employees celebrated the Chinese New Year at the stately Dearborn Inn, which was conceived by Henry Ford in the 1930s as a replica of an early American village, with guest cottages that copied the homes of historical figures like Walt Whitman and Patrick Henry. We definitely see more openness to the Chinese culture, said Mr. Xu, the Ford Chinese Association president. We started small here, but we are coming on strong.

If Practice Makes Perfect, Why Dont Companies Practice More?

In his terrific book Outliers, Malcolm Gladwell writes about the importance of practice and, specifically, the necessity of completing 10,000 hours of practice in a particular field to become proficient. This makes sense to me. Everything I did before starting in business taught me that practice was essential to achieving success. In school, I had two or three exams each semester, but I went to class every day. Moreover, I had voluminous amounts of homework each night to refine my skills in a particular subject. In football, there were 10 games in a season, but nearly 100 practices. Why is it that, in business, no one ever practices? At my previous company, practice was viewed as an afterthought. Once a year, someone would say, Maybe we should do some training. Heads would nod, and the person who had come up with the idea would arrange for a thirdparty specialist to come in to conduct training for a particular group within the company. Members of that group would shuffle into the room, help themselves to the coffee and bagels, nod politely to the instructor as a lesson was presented and then shuffle out at the end knowing that they would not be subjected to practice or training again until the next year. Every day was a game, and excellence was expected despite the utter absence of practice. I view this as a massive opportunity. If most companies put their players on the field without the benefit of practice, surely those that put real emphasis on practice would gain a distinct advantage. Heres what were doing at H.Bloom: SEED Program We introduced our SEED Program at the beginning of 2011. The program recruits people who aspire to run their own

business but know that they need to learn the basics. We bring these ambitious folks into one of our already-existing markets and have them rotate through all aspects of the business: buying, production, delivery, account-management, sales and customer service. Those who graduate have the opportunity to move to a different city to open and run a new H.Bloom market. Today, four of our five markets are run by SEED graduates, and we have another three SEED participants in rotation now, hoping for their chance to open and lead a new market. The SEED Program for market managers has worked so well that we are starting a SEED Program for sales people. I alluded to this possibility in a previous post, and I am happy to report that it is happening. Even more exciting, the ambitious person I interviewed in Pittsburgh a few weeks ago has accepted our offer and is moving to New York City to be our first Sales-SEED participant. We expect to start the program by the end of May with a group of people who will engage in a three-to-six-month program that consists of daily lead-generation activities, weekly sales training, on-theground training in our New York market and monthly classes with members of our executive team. Successful graduates will have the opportunity to move to a new market and lead our sales efforts there. H.Bloom University At the end of last year, we started H.Bloom University. While the SEED Program is focused on training people to take on a new role, H.Bloom University is meant to refine the skills of people in their current roles. We are running two tracks, and a few other tracks are under development: Sales

Our entire sales team meets monthly, by video conference, to work on specific sales skills. One of our sales managers leads each of the sessions. Training classes have included: time management, building a sales pipeline, cold calling and using Salesforce. The instructor builds a slide deck to present and oversees a skills workshop for each participant. Management One of the most fulfilling aspects of my job is leading the monthly management classes. Again, these are done by video conference. I do two each month on the same topic: one for our market managers and one for our sales managers. I split the group to ensure that each persons face can show up on the video screen we use Adobe Connect to facilitate the conference, and a session of six people is about the maximum for getting ideal user engagement. Recent classes have covered communication, feedback, expectation/goal setting, inspection of results and data-driven decision-making (which I will cover in more detail in my next post). I come up with the topic, and then our head of talent, Rebekah Rombom, finds reading material that is germane to the coming discussion. Recent readings have included chapters from Jim Collins Good to Great and Kenneth Blanchards The One Minute Manager. This week, Ill be reviewing our profit-and-loss statement in detail, walking through the things I look at in the income statement and the levers we can flip to improve the economics of our business. At the end of each class, I make an assignment (based on feedback I got from our Dallas manager, Julie Schiller, a former school teacher, who told me that retention of lessons is highest when an assignment is given immediately after a class so that students have the

chance to put the new information into practice). We then schedule a follow-up for each attendee to present their work for that assignment to the group. Operations and Floral Design Rebekah is developing a program for these two position-types. We expect to start the programs for our operations team members and floral designers by the end of the year. Engineers Weve engaged with a third party to help arrange customized training classes for our software engineers. Ill have more to discuss on this topic after the first sessions are held. Weve really just gotten started with our efforts. I dont think we do it well yet or with the frequency that Id like. But I do believe we have identified an opportunity to build a fundamental advantage in our business.

There Is an Algorithm for Everything, Even Bras

THE two and a half miserable hours that Michelle Lam spent in a fitting room, trying on bras, one fine summer day in 2011 would turn out to be, in her words, a life -changing experience. After trying on 20 bras to find one that fit, and not particularly w ell at that, she left the store feeling naked and intruded upon.

It occurred to me in that fitting room, as I was waiting for that saleswoman to bring me bras: Wow, this is the worst shopping experience on earth, she said. (My wife concurs.) From her frustration that day emerged an idea for a business calledTrue&Co.

The history of e-commerce is marked by start-ups devising ways to sell products that were once thought of as unsuitable for sale online. Shoes were not supposed to be something customers would buy online, but then Zapposshowed it could be done. The same thing was said about eyeglasses, until Warby Parker came along. But bras, which are among the most personal items someone can buy, represent the Everest of online retail challenges. Ms. Lams company opened True&Co last year along with two co-founders, Dan Dolgin and Aarthi Ramamurthy. The company, based in San Francisco, is certainly not the first to sell lingerie online. Older sites include the Web arm of Victorias Secret andHerRoom.com, which was founded in 1998, near the dawn of the Age of E-Commerce. Professional bra fitters have also moved online. Linda Becker, whose family owns two bra stores in New York, says she sells twice as many bras online today atLindaTheBraLady.com as she does in her stores. Some of her online customers have previously visited one of her shops and been fitted in person. But new customers take their own measurements and work with customer service representatives on the phone. She says only 10 percent of online orders are returned. But some customers turn out to be extremely hard to fit and its hard to tell why, Ms. Becker says. That kind of customer will be impossible to fit online because the problem is unseen. Theres no way of figuring it out over the phone.

True&Cos innovation is to put a batch of bras into customers hands so they can choose what fits best. New customers take a quiz modeled on the ones in Cosmopolitan magazine that Ms. Lam fondly remembers filling out in high school to collect the information needed to fit the bra properly. They are then invited to pick three bras in different styles. True&Co uses an algorithm to pick two additional bras to send out, based on what can be discerned from the customers choices. So the customer ends up with five bras to try on at home, with no obligation to buy. Most of the companys bras are priced from $45 to $62. The 15-question quiz asks for the customers band and cup size and the manufacturer of her current best fitting (and beloved) bra, and works from there to determine how the fit of that favorite bra could be improved. Other quiz questions include: Do your cups runneth over? citing things like cleavage or underarms or No spills, all good. The question What is your shape? is followed by these choices: Well-Rounded, Bottom Happy, Taking Sides and Bottom & Sides. We have an algorithm that defines 2,000 body types, Ms. Lam said. True&Co does not make customized bras for each of those 2,000 body types, however, so much of the taxonomys precision is lost when it must be translated into the far fewer combinations of band and cup measurements used by bra makers. True&Co has drawn the attention of some skeptics. Last month, a blogger at Open Source Fashion, Sindhya

Valloppillil, dismissed the companys bra-fitting algorithm as ridiculous, arguing that a bra must be touched and tried on. She mocked the credulity of True&Cos venture capital investors in a post titled V.C.s Think My Boobs Need an Algorithm. True&Co actually makes no patently ridiculous claims about the algorithm, which involves matching a womans body type to a particular bra based partly on consistent variations among manufacturers for a given size and style. One manufacturers 32C may work better for breasts of a certain shape, for example, even if a woman is used to buying a 34B. Customers buy an average of two bras from each batch of five. The company says women end up buying more of the bras chosen by the algorithm than the ones they select themselves. But as with shoes and eyeglasses, so too with bras: its love at first touch and try, even in the digital age. Mr. Free Market, Raghuram Rajan, Goes to India
Raghuram Rajan fit in quite comfortably at the University of Chicago. Like other free-marketers, the Indian-born economist and professor at Chicagos Booth School of Business was inspired by Friedrich Hayek, the Austrian thinker. On the wall of his Hyde Park office, Rajan had an autographed photo of conservative icons Milton and Rose Friedman. Rajan warned of a global economic crash three years before it happened, and his 2010 book on the financial crisis, Fault Lines, got a scathing review

from Princeton professor and Keynesian guru Paul Krugman, cementing Rajans Chicago School credentials. Today Rajans office is in the red sandstone headquarters of Indias Ministry of Finance, where he has served as chief economic adviser to the government since last August under the direction of Finance Minister Palaniappan Chidambaram. Instead of the Friedmans, portraits of two well-known local critics of capitalism, Mahatma Gandhi and Jawaharlal Nehru, gaze down at him.

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

than $180,000. There are a large number of people who ought to be paying their taxes who are not, he says, likening Indias business elite to Russian oligarchs. On March 13 he told Indian broadcaster New Delhi Television that India is overregulated, and that sick companies dont die quickly enough. This candor is what helped get Rajan his current job. As the International Monetary Funds former chief economist, he also lends credibility to Prime Minister Manmohan Singhs beleaguered government coalition, which has been hammered by a weak economy, corruption scandals, and the recent desertion of a regional party from the coalition. Despite the dissimilarities between free-market Chicago and interventionist India, Rajan says he is not out of place. Im a believer in free markets, but Im not a believer in laissez -faire, he says. There is a distinction. India, he says, is still working out the difference. Singh, an economist who managed Indias first wave of market -opening reforms in 1991, has presided over quickening inflation and slowing growth as prime minister. Rajans solutions, which he laid out in the annual Economic Survey published in February, include cutting the number of regulations to reduce opportunities for corruption, tearing down trade barriers to allow more foreign competition, dismantling labor laws that stifle hiring, and overhauling the financial system to make it more responsive to ordinary customers. An important item on his agenda is to replace Indias mishmash of state and local taxes with a broad-based tax on goods and services. Too many of Indias small businesses are stuck in the informal economy, with no access to capital to improve productivity and no protections for workers. Rajan, who wont comment on Indian media reports that he will be the next central bank governor, says that a second generation of reforms to improve infrastructure, schools, and manufa cturing is critical to ensuring long-term success. Indias continuing on a rapid growth path is not preordained, he wrote in the annual Economic Survey.

Rajiv Biswas, Asia-Pacific chief economist for IHS Global Insight (IHS), says Rajan and his boss Chidambaram are making progress in reducing subsidies and improving the business climate for foreign investors. Rajan is definitely one of the brightest, most cogent economists around, says Glenn Levine, senior economist with Moodys Analytics (MCO) in Sydney. Levine says hes impressed with moves to open closed in dustries like retail and insurance to foreigners. Subsidy and spending cuts, higher taxes, and asset sales have trimmed the budget deficit from 5.8 percent of gross domestic product last year to a more manageable 5.2 percent this year. In 2014 the budget deficit is expected to slip to 4.8 percent. The governments handling of its fiscal woes over the last six months has been fantastic, says Levine. Recent success isnt enough to conquer the cynicism born of decades of mismanagement. Turning that country around strikes me as a tall order, says Tim Condon, chief Asian economist for ING (ING) in Singapore, who notes India is at risk of stagflation. The confid ence switch is off. Both Standard & Poors (MHP) and Fitch Ratings have negative outlooks for India amid concern that government spending on the rural population will wipe out the benefits of deficit-cutting elsewhere. The Bombay Stock Exchanges Sensex is down 2.79 percent for the year, one of the worst performances in Asia. Although Rajan would be the last to play down Indias challenges, he says critics need to take the long view. Sometimes India can become a darling and can do no wrong, he says. Then something happens, and the market tanks, and its all doom and gloom. But the growth rate over the last 20 years has been much more stable. The growth has stability which is not reflected in the gyrations of sentiment.
The bottom line: A Chicago School free-marketer is advising Indias government on reforming the economy. His work may take decades.

From theory to practice

A WORLD-CLASS economist accepts one of the worlds most poisoned chalices. That is the most tempting conclusion about the news that the next chief economic adviser to the government of India will be Raghuram Rajan. He is the author of Fault Lines, a superb account of the subprime crisis; a professor at the University of Chicago; and a former bigwig at the IMF. He is also a proponent of liberal reform, something of an endangered species in Delhi today. The timing is fortunate in one respect: a new finance minister has been appointed and there has been a reshuffle of some officials, which could herald a bout of better decision making, as my colleague explains. But in other ways it is terrible. GDP growth could slip further, to 4-5%, over the next couple of quarters as a bad monsoon bites. Industrial production figures for June, released on August 9th, showed a decline of 1.8%. Production of capital goods collapsed. Rohini Malkani, of Citigroup, worries the government will find it harder than ever to hit its borrowing figures and that the risk of a credit downgradeto junk statusis rising. The job comes with a palatial office and its own waiting rooma true sign of status in India. But it does not come with a clear description. Beyond formal duties such as preparing the governments annual economic survey, the chief advisers task is to discuss, analyse and inform; but not to decide. Being at the intersection of politics and economics in India is not easy. The previous advisor, Kaushik Basu, who returns to Cornell University this month, was in close touch with Manmohan Singh, the prime minister, and had decent access to Sonia Gandhi, the matriarch of the ruling Congress party. He was also an eloquent advocate of reform. But under the previous finance minister, Pranab Mukherjee, few of his ideas were reflected in decision making. If anything Mr Rajan is even more of a free-market man than Mr Basu. Fault Lines attacks state subsidies of housing finance as well as Wall Street. He has been vocal about Indias troubles. The latest Indian edition of the book contains a postscript that criticises cronyism and corruption and notes that self -delusion is the first step towards disaster for individuals as well as countries. In April Mr Rajan made a biting speech in Delhi to an audience that included the prime minister. Mr Rajan also favours financial deregulation, something the Reserve Bank of India (RBI) is nervous about, and worries that the central bank is complicit in high government borrowing, something the RBI denies. Mr Rajan will have to bite his tongue and polish his political skills. The trick, according to Mr Basu, is to win the confidence of politicians across the spectrum and communicate economic ideas simply and clearly. Mr Rajan is not a novice at the finer skills of working the Indian establishment, having chaired a government-commissioned committee in 2009 that looked into financial reform. Nor can he be unaware of the task ahead: although some of that reports recommendations found their way into policy, such as the unique identity scheme, plenty were ignored. Still, hats off to him for taking the plunge. As his book says of India, there are very real dangers that face our country. The battle lines are laid out. The choice between self interest and public interest is clear. And if all of us join the battle, I have no doubt who will succeed.

INDIAS TRAINS MOVE slowly. That gives passengers plenty of time to observe their fellow riders. They are travelling far to visit a hospital, take up a job, enroll at college. Odishan coffee pickers in Karnataka, Assamese students in Kerala and Bihari diamond polishers in Gujarat all move as freely around their country as Americans hop from state to state. That mobility should give India an advantage over countries like China that penalise farmers when they leave their land. Indians are also increasingly well connected. On one 4,200km train ride, through 615 stations, your correspondent never once lost his mobile-phone signal. A decade ago few would have cared, since only 9% had a phone of any kind. Now, according to census data from last year, 63% of householders have a phone, usually a mobile. Ericsson, a maker of phone handsets, said this month that three-quarters of Indians now have access to a mobile.

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The endless rows of concrete houses with trailing wires seen from the windows tell a story too. The same census showed that of Indias 247m households, two -thirds have electricity and nearly half TV. A similar number own bicycles, though only 5%, so far, have a car. According to a new report by PricewaterhouseCoopers, in 2010 some 470m Indians had incomes between $1,000 and $4,000 a year. The consultancy reckons that this figure will rise to 570m within a decade, creating a market worth $1 trillion. The big Indian firms that are doing bestsuch as Mahindra and Mahindra, a carmaker, Hero MotoCorp, which makes motorbikes, or Hindustan Unilever, which produces small consumer goodsare those targeting such buyers. Yet the rosy forecasts were drawn up when the economy was roaring ahead and it seemed that another decade or two of similarly high growth would deliver a big midincome economy. Now that prospect is in question. The next few years are likely to see much slower expansion. Doubters had long been saying that Indias potential rate of growth was bound to be lower than, say, Chinas. They agreed that India could achieve much more than the 3%

stopper-train growth rate that was the norm before reforms in 1991. But they gave warning that it could not keep up an express-train speed of close to 10% because its economic engine quickly overheats. Recent years have brought high inflation, especially in food prices. Roads, ports and railways are overwhelmed, blackouts are common and labour has become as expensive as in China, even though the Chinese, on average, are three times richer. The Transport Corporation of India, a logistics firm, reported in May that every one of 17 important road routes was clogged. To drive the 1,380km from Delhi to Mumbai, for example, takes an average of nearly three days, an average of just 21km an hour. The firm says the delays are getting worse: the road network is growing by 4% a year but traffic by 11%. The railways are no better. Raising passenger fares is politically impossible. When Dinesh Trivedi, then the railways minister, tried it in March, for the first time in nine years, his party leader forced him out. To subsidise the fares, freight charges keep being raised, pushing many goods off the tracks and into overloaded lorries on crowded roads.

Seen in that light, the slowdown in economic growth to about 5% was almost welcome. We should not try to get back to the highest growth path. India hurts when it is growing at 8.5%, argues Cyrus Guzder, a Parsi businessman in Mumbai. His particular worry is energy. India has a voracious appetite for energy and minerals, he suggests, but cannot dig, import or shift enough coal to keep the lights on even though there are new power stations, and in theory quite a lot of capacity. Nor have Indias politicians shown much appetite for reforms to improve matters. One obvious remedy would be to deregulate the distribution of coal, argues N.K. Singh, an MP from Bihar and economic adviser to the BJP-led government of 1998-2004. The government could even break up or sell off Coal India, a massive and badly run state monopoly.

Congress did free petrol prices in 2010, and over the years the rupee has been allowed to float more freely, but reforms tend to be introduced only little by little. Some scarce goods are now sold by auction, but only after years of scams. Single-brand retailers, such as IKEA, have been allowed in, and multi-brand ones look set to follow. But sustained rapid growth would require a slew of big second-round reforms, to include things like land acquisition, labour laws and tax. Politicians naturally prefer to spend. Congress is fond of entitlement schemes such as NREGA, which promises 100 days of paid work a year for every rural household. That, along with other new welfare measures, is helping some o f Indias poorest people, lifting rural incomes and boosting consumer markets, but probably also raising labour costs. Surjit Bhalla, a Delhi-based economist, points out that spending on welfare to relieve poverty now represents 2.5% of GDP. That is not a huge share, but it is rising fast: during Mr Singhs first government it was just 1.6%. Mr Bhalla worries that this sort of spending does less to help the poor than, say, the creation of productive jobs. Fiscal policy is generally profligate. Diesel prices went up this month, but the fuel remains massively subsidised, along with kerosene, fertiliser and food. All this suggests that potential growth is nowhere near double digits but close to what India has today, especially given a weak global economy. Businessmen, particularly those enjoying buoyant consumer demand, are still cheerful. Sevantilal Shah, the boss of Venus Jewel, a big diamond polisher and producer in Surat, says domestic sales are flourishing. Anand Mahindra, of the Mahindra Group, says he cant imagine anything but an improvement on a dreadful year: I remember that old watch ad, takes a licking, keeps on ticking, thats what I hope well say of India soon.

Compare contrasting GDP and population levels across Indias states with our interactive map and guide

Economists are more cautious. At a meeting in April Raghuram Rajan, an academic and former chief economist at the IMF who has just taken over as the governments chief economic adviser, inveighed against the paralysis in growth -enhancing reforms and an unholy alliance of some businessmen and politicians that blocks change. He said India had to raise fuel prices rapidly, to be kinder to investors in order to attract capital, and to become paranoid again about generating growth. At the time Mr Rajan had not yet

been appointed to his new job, but the prime minister was at his side and clapped. In private, most senior officials say something similar. Sadly Mr Rajan, like his affable and clever predecessor, Kaushik Basu, lacks political clout. Mr Basu remains an optimist on the economy, contrasting it with the late 1980s when the country felt like a warmer outpost of Soviet thinking. He is particularly pleased that India has persistently high national savings and investment which in his view can be sustained, despite some recent slippage. So he reckons that the country will return to a high growth rate, near 9%, once the current uncertainty and urgent fiscal problems are dealt with. He puts faith in the expanding young, urban and literate population and in new technology. As for the rotten bits of the economy, the state-run firms, thankfully they account for only 14% of GDP (against about a third in China).
A hole in the middle Yet optimists need to address another problem: the structure of employment, which is very different from that in most East and South-East Asians economies. Agriculture still employs roughly half of all working Indians, many of whom are much less productive than they might be. And the service sector already makes up 59% of GDP (see chart 3) and is still growing rapidly. In particular, IT and outsourcing companies such as TCS and HCL are performing well, despite global worries.

The missing middle is industry and manufacturing, of the sort that thrives in China and drives exports. More factories could provide more jobs for the 13m people that join Indias workforce every year, many still poorly educated. Manufacturing makes up just 15% of the economy, much the same as in the 1960s. More than other sectors, it suffers from Indias entrenched bureaucracy and wretched infrastructure. Indian labour costs are high and laws are restrictive. As Chinese wages rise, countries such as Bangladesh are well placed to pick up business, but India is not. When firms persuade unions to allow contract labour to increase flexibility, workers can end up getting paid different rates for the same job. At a Maruti factory near Delhi this summer, that led to clashes which left an HR manager dead.

Manufacturers also complain about the high cost of credit in India. This may ease a bit as inflation subsides, allowing interest rates to come down. A weaker rupee will make the country more attractive as a base for exporters. And its own booming markets offer a growing incentive for manufacturers to overcome their problems. Indias carmakers, by and large, have done well (though Tatas Nano, a cheap small car, is not yet the triumph it was billed as). But there seems no prospect of a big leap in Indian manufacturing in the near future. And if services are to keep expanding, the country needs huge quantities of skilled labour that will not be easy to come by.