All posts by David Knieriem

Can China Govern Better Than the U.S.?

Today, Chinese students and officials hurtle around the world, studying successful models from Chile to Sweden. Some 1,300 years ago, Celap’s staff remind you, imperial China sought out the brightest young people to become civil servants. For centuries, these mandarins ran the world’s most advanced government—until the Europeans and then the Americans forged ahead. Better government has long been one of the West’s great advantages. Now the Chinese want that title back.

Western policy makers should look at this effort the same way that Western businessmen looked at Chinese factories in the 1990s: with a mixture of awe and fear. Just as China deliberately set out to remaster the art of capitalism, it is now trying to remaster the art of government. The only difference is a chilling one: Many Chinese think there is far less to be gained from studying Western government than they did from studying Western capitalism. They visit Silicon Valley and Wall Street, not Washington, D.C.

The West pulled ahead of “the rest” because it created a permanent contest to improve its government machinery. In particular, it pioneered four great revolutions. The first was the security revolution of the 16th and 17th centuries, when Europe’s princes created modern nation states. As Spain, England and France competed around the globe, they improved statecraft in a way that introverted China never did.

The second great revolution, of the late 18th and 19th centuries, championed liberty and efficiency. Aristocratic patronage systems were replaced with leaner, more meritocratic governments, focused on providing services like schools and police. Under Britain’s thrifty Victorians, the world’s most powerful country reduced its tax take from £80 million in 1816 to less than £60 million in 1860—even as its population increased by 50%.

This vision of a limited but vigorous state was swept away in the third revolution. In the 20th century, Western government provided people with ever more help: first health care and unemployment pay but eventually college education and what President Lyndon B. Johnson called the Great Society. Despite counterattacks, notably the 1980s half-revolution of Ronald Reagan and Margaret Thatcher, the sprawling welfare state remains the dominant Western model.

In the U.S., government spending increased from 7.5% of GDP in 1913 to 19.7% in 1937, to 27% in 1960, to 34% in 2000 and to 42% in 2011. Voters continue to demand more services, and politicians of all persuasions have indulged them—with the left delivering hospitals and schools, the right building prisons, armies and police forces, and everybody creating regulations like confetti.

In all three of these revolutions, the West led the way. But now, as China’s ambitions illustrate, the emerging world is eager to compete again.

And why not? Over the past two years, while the U.S. political system has torn itself apart over Obamacare, China has extended pension coverage to an additional 240 million rural people. Lee Kwan Yew’s authoritarian Singapore offers dramatically better education and health care than Uncle Sam, with a state that is a fraction of the U.S.’s size. If you are looking for the future of health care, India’s attempt to apply mass-production techniques to hospitals is part of the answer. So too, Brazil’s conditional cash transfers are part of the future of welfare. At the very least, the West no longer has a monopoly on ideas.

But it hasn’t run out of them—yet. As the economist Herb Stein once wryly observed: “If something cannot go on forever, it will stop.” The same can be said of bloated government in the West. The West’s next decade will be dominated by arguments about what sort of state we want—for three key reasons.

The first is that, while Western voters have overloaded the state with demands, they abhor the result. The U.S. Congress regularly scores an approval rating of 10%. In Britain, membership of the Tory Party slid from 3 million in 1950 to 123,000 today, a performance that would have put a private company into receivership. Voters are frustrated.

Second, government is going broke. The U.S. government has run a surplus only five times since 1960; France hasn’t had one since 1974-75. And now the demographic challenge of caring for aging populations will push even left-wing parties toward hard choices about what—and whom—they want to save.

The third reason is more positive. Government can be reformed, but only if Western politicians and electorates decide what they want it to do.

Our own answer is, simply, much less. The overloaded modern state is a threat to democracy: The more responsibilities the worse it performs them, and the angrier citizens get. Such a state is also a threat to liberty: When the state takes half of everything that you produce and regulates the smallest details of daily life, it has become a master rather than a servant. Better to do fewer things—and to do them better.

via Can China Best the West at Statecraft? – WSJ – Essay by John Micklethwait & Adrian Wooldridge.

Square Pulls Failed Wallet App as Troubles Mount

Square is shuttering its Square Wallet app for smartphones, a sign the mobile-payment startup is struggling to expand beyond its low-margin business of credit-card readers. Square Wallet was recently pulled from Apple’s App Store and Google Play because the app “didn’t have a lot of the utility value” for consumers, Square director Ajit Varma said in an interview with technology blog Recode.

The company will continue to support the service for customers who have already downloaded the app.In its place, Square unveiled a new mobile app called Order, designed to let customers place take-out orders from local businesses and skip the line when they arrive. “We learned from Wallet that people loved paying with their name and we knew there was more value we could add to the customer experience,” a Square spokeswoman said in an email. “We moved fast on this strategy and decided that the most efficient way to add this value was to build a new technology on a more agile platform, hence we built Square Order.”

Square is trying to appeal to more consumers and create new lines of revenue as losses in its core business of credit-card readers mount. The company charges merchants 2.75% to swipe cards through the readers, but pays about four-fifths of that money out in fees to payment networks like Visa and MasterCard.

Square recorded a loss of roughly $100 million in 2013, broader than its loss in 2012, two people familiar with the matter said last month. The closely held San Francisco company has suspended plans for a possible initial public offering and held talks about a potential sale to Google Inc. and others has losses mount.

The new Order app will eventually charge merchants a higher rate of 8% to take orders and process transactions. The service competes with a growing field of food-ordering apps that includes Grubhub and Eat24.

Square has been adding services that could eventually be more profitable than its main payments business. In the past 12 months it began Square Cash, which helps people send money to friends via email, and Square Market, a digital marketplace for small businesses. It also offers Square Register to help stores track customer data and is testing a lending program for merchants who have difficulty getting a bank loan.

via Square Pulls Failed Wallet App as Troubles Mount – Digits – WSJ Article by Douglas Macmillan.

Square Pulls Failed Wallet App as Troubles Mount – WSJ Article by Douglas Macmillian – PDF

 

Boards Race to Bolster Cybersecurity

Even before hackers stole 40 million credit- and debit-card numbers from Target Corp. stores last year, Wal-Mart directors received frequent rundowns from outside consultants on cyberthreats, including gangs of Russian-speaking hackers who target payment-card data, a person familiar with the meetings said.

A Wal-Mart spokesman didn’t dispute that account.

So far this year, 1,517 companies traded on the New York Stock Exchange or Nasdaq Stock Market listed some version of the words cybersecurity, hacking, hackers, cyberattacks or data breach as a business risk in securities filings, according to a Wall Street Journal analysis. That is up from 1,288 in all of 2013 and 879 in 2012.

Still, federal officials and others say many companies remain ignorant of, and unprepared for, Internet intruders.

“There may be a gap that exists between the magnitude of the exposure presented by cyber-risks and the steps, or lack thereof, that many corporate boards have taken to address these risks,” Securities and Exchange Commissioner Luis Aguilar told directors earlier this month at a cybersecurity conference at the New York Stock Exchange.

via Boards Race to Bolster Cybersecurity – WSJ Article by Danny Yadron.

Credit Unions Ramp Up Risky Lending

Credit Union Investments R1

WASHINGTON—Credit unions in search of higher returns are loosening lending standards and piling into longer-term assets, exposing the firms to potentially significant losses if interest rates rise and worrying regulators in the process.

Such moves are raising concerns at the National Credit Union Administration, the sector’s regulator, which said a rise in interest rates could make loans and investments unprofitable. Some analysts also said credit unions likely are unaware of the risk they are taking on because they largely avoided the housing downturn. That has raised worries that lax underwriting standards could fuel another bubble.

“I am concerned that the message [about rates] is either not getting through, or it’s getting through and they are just choosing not to do anything about it,” said Debbie Matz, chairman of the NCUA, who has long sounded the alarm about the industry’s exposure to interest-rate risk.

Credit unions, which have been expanding steadily for years and now serve more than 97 million members nationwide, collectively held $1.098 trillion in assets at the end of the first quarter of 2014.

For the lenders, taking on more risk can help boost returns in a low-rate environment. A firm that offers a low-rate, long-term loan might win business over a competitor, and a credit union that invests in a mortgage bond with a relatively longer term can often demand a higher return.

But if interest rates rise, the money in those loans or investments will be locked in, generating relatively less revenue than a new loan or investment made in the higher-rate environment. Meanwhile, those banks and credit unions will have to pay depositors higher interest rates, otherwise those customers could move elsewhere.

“It’s a double-edged sword,” said Federal Deposit Insurance Corp. Chairman Martin Gruenberg at a news conference last week.

Credit unions’ net holdings of long-term assets, a measure of exposure to rising interest rates, rose to an all-time high at the end of 2013 to 35.85% of total assets, according to the NCUA. The increase comes as some credit unions are adopting lax standards for mortgage and home-equity loans and lines of credit reminiscent of those leading up to the financial crisis, according to interviews. Credit unions also are extending the duration on investments like mortgage bonds, regulatory data show.

“In periods of declining mortgage volume, people start loosening underwriting to boost business,” said Guy Cecala, chief executive at Inside Mortgage Finance, an industry newsletter. “They seem to be taking on a lot more risk than in the past.”

via Credit Unions Ramp Up Risky Lending – WSJ Article by Ryan Tracy, Scott Patterson & AnnaMaria Andriotis.

Credit Unions Ramp Up Risk – WSJ – PDF

Wal-Mart Dives Deeper in Banking

Wal-Mart Stores Inc. is taking another step deeper into banking, rolling out a new money-transfer service that undercuts rivals including Western Union Inc. and MoneyGram International Inc. with lower and simplified fees.

The giant retailer on Thursday unveiled the new service, Walmart-2-Walmart, which will allow customers to send and receive up to $900 at a time at more than 4,000 stores. The new service applies only to payments that are sent and received in the U.S.

It aims to take a bite of the roughly $900 billion in so-called person-to-person payments made each year in the U.S., often in the form of cash or checks.
“This is a relatively easy service for Wal-Mart to develop, because it fits with the customer base that they already have, and they don’t have to spend a lot of money to create, implement or market the service,” said Ron Shevlin, a senior analyst at Aite Group, a consulting firm that specializes in the payments industry.

The service launches April 24. Wal-Mart said the service fees – $4.50 for transfers up to $50 and $9.50 for transfers up to $900 – are 50% or more below the cost of existing offerings. For its new service, Wal-Mart is partnering with Euronet Worldwide Inc.’s Ria Money Transfer subsidiary.

The money-transfer business carries substantial regulatory burdens aimed at preventing money laundering. Wal-Mart has been registered with the Treasury Department’s Financial Crimes Enforcement Network as a money-services business since 2011, according to FinCen’s public database. The move also could place Wal-Mart under the scrutiny of the U.S. Consumer Financial Protection Bureau, which was set up after the financial crisis to police the lending industry for abusive practices involving consumers. The CFPB already has proposed supervising nonbank providers of international money transfers. The vast majority of U.S. money transfers involve sending money overseas, according to payments experts. The U.S. is the largest sender of such payments, accounting for nearly one-quarter of the $529 billion in remittances that international migrants sent to their home countries in 2012, according to the World Bank.

In addition to competing with Western Union and MoneyGram, Wal-Mart also is taking on banks that allow their customers to transfer money to other customers. In 2011, J.P. Morgan Chase & Co., Bank of America Corp. and Wells Fargo & Co. formed a joint venture to let people use their checking accounts to send each other money with an email address or cellphone number.

“The banks have failed miserably in capturing the person-to-person payments business,” said Mr. Shevlin, the payments analyst.

Walmart transfer pricing

via Wal-Mart Undercuts Rivals With New U.S. Money Transfer Service – WSJ.com – Article by Paul Ziobro & Robin Sidel.

Wal-Mart Dives Deeper in Banking – PDF