USA Fire Sale, 2nd Meeting, June 2009: Political capital call - Eric Janszen

[EJ]

USA Fire Sale, 2nd Meeting, June 2009: Political capital call

The following fictional conversation never occurred in June 2009 between Treasury Secretary Tim Geithner and a Chinese negotiator named Cheng for the sale of U.S. assets, at least not that we know of.

The first fictional meeting July 3, 2007 between Cheng and America’s representative broke off without a deal. Maybe Geithner did better on his latest trip to China.

Cheng: You’re back.

Geithner: I’m here to represent the government of the people of the United States of America...

Cheng: Of course you are.

Geithner: ...and I’d like to begin by saying that I cannot speak to commitments made by the previous administration by my predecessor...

Cheng: This is the difficulty with your “multi-party” system. Leadership change there between your two political parties controverts the principle of accountability that is supposedly the chief benefit of your so-called “democratic” system. The system is supposed to replace ineffective leadership with more effective leadership. Represent the will of the people? In truth both political parties in the United States are captive of influence from your finance, insurance, real estate, weapons manufacturing, and pharmaceutical industries that finance elections there. The leaders they choose constantly rotate in and out of power, avoiding blame for the problems they leave behind. Voters chase one meaningless promise for “change” after another. The latest administration is not held responsible for the previous administration’s mistakes. There is no continuity or sustained effort toward a goal for the nation and its people. Errors accumulate.

Geithner: I do not hope to get into a political argument...

Cheng: I'm getting to my point. The greatest accumulated error of all? Foreign government debt.

Geithner: If we can get back to...

Cheng: Your so-called economy, and those of your western allies who have followed you on your misguided path to finance-based wealth, have become a burden to the savers of the world. How do you feel to come here once again, hat in hand, to us, a nation that the west only recently granted admission to the WTO but still holds out of the OECD and other international governing bodies? We read in your press that China is a third world country. Why then is the United States, the leader of western democracies, borrowing from us, and under ever more desperate circumstances?

Geithner: I’d like to get back to the matter at hand...

Cheng: Please be patient. I not you will frame this discussion, thank you.

We are tired of the accusations of your Congress that we manipulate our currency. Tired of your western paid so-called “economists” criticizing our use of our “excess” savings, as you call them, as we see fit. Tired of so-called human rights organizations, financed by your British allies, accusing us of human rights abuses because we will not abide dangerous cults inside our own borders. Tired of your “Pentagon” accusing us of increasing our military capabilities to threaten the United States, even though our spending is a fraction of your own. There is not a single Chinese military base outside Chinese territory yet America has 747 bases around the world, including many near to China. Everyone can see that your weapons industry has ties to your government. It creates this excuse of a military threat from China to justify appropriations of public funds from your legislature. And who do you ask to cover the gap in funding for these programs when you can’t raise the funds through taxes or from domestic or foreign borrowing? Us! Your “enemy.” It’s outrageous. Ridiculous.

Geithner: To keep this conversation constructive...

Cheng: These are the matters that we will discuss today.

Geithner: I’m am not sure how in the context of these negotiations I can address your...

Cheng: I will help you. All in good time. When we met in July 2007 we held $480 billion in U.S. Treasury bonds. Now we hold $768 billion, an increase in nearly 40% in less than two years. Obviously, our foreign exchange needs did not grow by 40% in two years. We want to exchange a portion of these securities for assets of value to us. What have you come to offer?

Geithner: I have come prepared with a few ideas, but before I get to those there is a matter of concern to us. Officials of the Chinese government have over the past months made a number of public statements questioning U.S. sovereign debt quality, particularly since we began to execute emergency government investment programs to support our economy similar to the Chinese government spending programs. Your central bank representative Yu Yongding repeated these points to me yesterday, and the matter also came up at a speech I gave at Peking University. U.S. government bonds represent the gold standard of sovereign debt in the world...

Cheng: Yes, we read the reports in your press.

Geithner tells China its dollar assets are safe
June 1, 2009 (Reuters)

"Chinese assets are very safe," Geithner said in response to a question after a speech at Peking University, where he studied Chinese as a student in the 1980s.

His answer drew loud laughter from his student audience, reflecting skepticism in China about the wisdom of a developing country accumulating a vast stockpile of foreign reserves instead of spending the money to raise living standards at home.

But again, the purpose of this meeting, nor the last one, is not about future purchases. We own a great deal of U.S. debt. We do not need to be “sold” on U.S. debt. The question is, what do we do with the U.S. government securities we already hold? This question has been a matter of intense internal debate here, and—quite frankly—deep and growing concern. We used to argue within the government about the urgency of it, about the soundness of the policy of buying U.S. debt with savings of our people, but there is no disagreement anymore. The actions of your department, and your central bank, and your legislature over the past year have decided the argument. Something must be done. Something has to change.

Geithner: Are you referring to our fiscal stimulus programs? These amount to 5.5% of 2009 GDP. These are reasonable compared to China’s outlays of 6.8% of GDP...

Cheng: Your projections assume that your GDP will not shrink. That is unrealistic. Our stimulus programs are not, as you claim, like those pursued by your government. They are not even remotely similar. When your legislature approved spending in February this year no national improvement plan existed to build on. The as yet unelected Obama administration hastily threw together a plan that focused on infrastructure and alternative energy, near as we can tell based on articles published in magazines. But here in China we accelerated a well-defined and efficient plan for investment. Our spending will result in an even more competitive economy, yours in even more public debt and little improvement in infrastructure to help make your economy more productive. And if not in rising productivity, then in what are we investing by buying your bonds?

No, we are certain that we will not make additional purchases of US treasury bonds, or at least no significant new purchases, and only in short term instruments. Further purchases shall be modest and sufficient to avoid a dollar crash.

Geithner: The US dollar is not in danger of crashing.

Cheng: You have us "over a barrel," right? If we do not buy a certain quantity of US debt, and Japan does not, and the UK does not, and other nations do not—and who but China is in a position to buy now?—that U.S. interest rates will rise, by our estimates 100 basis points per year. Such a rise in interest rates in the U.S., caused simply by your creditors collectively “doing nothing” will halt and reverse your economy’s weak recovery. Your already falling housing market will crash from rising mortgage rates. If the U.S. economy shrinks more than others’ then the dollar falls against the others, and the value of our U.S. debt holdings with it. Then your interest rates rise more. And so on. We want to use these holdings to finance purchases of assets abroad. We want to avoid that cycle. We have an interest in seeing the purchasing power of these remain high, but do not take that for a perpetual commitment to buying US debt. We shall purchase U.S. debt only at levels necessary to avoid such an outcome if we can, but no more.

Geithner: I appreciate that, your position. As you know, our central bank has taken steps to mitigate the problem of rising interest rates caused by reductions in foreign purchases of U.S. debt, to support the U.S. housing market, by making purchases of treasury and agency debt directly.

Cheng: I hope you are not suggesting that your central banks’ monetization of expenditures appropriated by your legislature for the benefit of politically important industries was done for the benefit of your foreign creditors? Quite obviously these are desperate measures, covering for the damage done by your corrupt financial industry. If continued these spending policies lead to certain calamity for your currency no matter what we want, unless your economy recovers within, say, six months and tax receipts with it.

We see your state media selling the idea of recovery hard, for the benefit of the currency and bond markets. Consumers are asked to go spend money. Your stock markets are inflated to increase consumer confidence. The hope is that recovery of the American Economy can be willed into being. But if economic growth were so easy to accomplish why can’t the Mexican economy become as strong as Canada’s by the act of convincing the Mexican people to spend more? The idea is absurd.

Look at the data. Your people don’t have money to spend. They have debts. They have no savings. Their incomes are falling. Tax receipts are off by more than 30%.

Closing a multi-trillion dollar gap in tax receipts and foreign borrowing by monetizing debt is a dangerous game. Your government is playing with the reserve status of the currency. Every other nation that has tried this has failed. The dollar has saved you so far, but the reprieve is temporary. That gives this meeting urgency.

Geithner: The reserve currency status of the dollar is not in question.

Cheng: Your creditors will be the judge of that.

Geithner: China purchased U.S. assets for the risk-adjusted returns and let us not forget that China pursues a policy foreign bond purchases, especially U.S. debt, in order to effectively make the yuan more competitive, to improve China’s trade position.

Cheng: We are tired of this claim. If we do not purchase sufficient dollar denominated financial assets to offset foreign exchange, the yuan will appreciate against the U.S. dollar.

The euro as a viable alternative to the dollar, and we are increasing our euro position.

But getting back to the purpose of this meeting, as I told your predecessor two years ago, we value assets such as raw materials that allow us build our economy. We want to buy resources companies in the US as we do in Australia, but we understand the political difficulties. We have rules on foreign ownership here, as well. But there are philosophical differences that we can work on. Your government’s decision to acquire a 70% stake in your nation’s largest automobile manufacturer is a step in the right direction. Here 32 of our largest 33 companies are majority owned by government. Over time, we see America becoming more like China and welcome this development. When more US companies are majority government owned, our governments can arrange for transfers without the current difficulties. Our concern is that the dollar does not sustain value through that process.

Geithner: The dollar...

Cheng: We also welcome American companies to China to build plants here. Not only do these plants supply products for export earnings but our managers learn important skills, such as how to design and build high technology products. For example, telecommunications. As you know it is not toys and clothes sold at Walmart that make up the bulk of China’s exports to the U.S. but industrial goods, by dollar volume.

I’ve brought charts to show you to make my points.

We learn from Americans, Germans, Japanese, Taiwanese and others how to make these high value goods. Over time we become more independent and able to compete in the global market for high value goods and labor. This is a well-worn path to development that other nations have taken, such as Japan. But in the case of China your dysfunctional political bubble economy has sped up the transfer process. Your bubble economy booms and busts have been a boon to us.

I will provide you an example. After your reckless early 2000s technology market bubble, U.S. companies such as Cisco Systems cast off their U.S. based technology manufacturing to improve profits and today China manufactures and exports far more telecomms equipment than the U.S.

After the U.S. crash, many of your major manufacturing companies, particularly in computer hardware technology, outsourced production to China. Many, such as Dell and Cisco, are now R&D and marketing companies. We manufacture high tech products for export but we make our own high tech equipment for domestic use. We use different standards and protocols, as Japan did, for networking and wireless, so our market is not “interesting” to your technology equipment companies. Remember 3Com?

Geithner: I’m sorry, you’ve lost me.

Cheng: Well, your latest difficulties with your political bubble economy present a new opportunity for us. We’d like to import the most important of all U.S. assets: human capital. After 2001, America trained our engineers in the U.S.—at MIT and Stanford—then sent them home to us for “security” reasons! Today, with U.S. economy in shambles but China still growing robustly, they no longer wait to be shipped off by your immigration services. They come here for better job opportunities and a high standard of living. They earn less than in America but live like kings by American standards.

We like to say that America does not have the most engineers but has the best. Ten years after this latest blow up of your economy, China will have both the most and the best human capital.

Geithner: I’d like to get back to...

Cheng: What does this have to do with our discussion today, of America’s debt to China? I’m getting to that. You see, as long as the Chinese economy performs better than the U.S. economy, without the baggage of empire it is a matter of time before China acquires most of the advantages that the U.S. has enjoyed for over a century. We do not have an overextended military with hundreds of bases and millions of troops stationed around the world. We do not labor under the political liabilities of special interests as you have in your finance, insurance, real estate, weapons, tobacco, agriculture, oil, and pharmaceuticals industries. Our social programs are modest. And not only do we have no foreign debt, we are creditors to so-called “rich” western states.

Geithner: I’d like to assure you that the U.S. government has no intention of allowing the U.S. to lose its sterling credit rating...

Cheng: A curious choice of words, considering that the pound sterling was once a reserve currency, before the United Kingdom committed itself to projects that it could not afford, much as the United States has. Perhaps if I recount recent history I may orient you to our perspective.

You will recall that your nation’s stock market bubble popped in 2000 and deflated well into 2003. A recession in 2001 hit incomes hard. Corporate and individual tax receipts declined with incomes and profits. Taxes on capital gains fell with stock prices. Private foreign investors in U.S. agency and Treasury debt exited the market as they have during each recession since the early 1980s, but this time the United States government could not take the loss. Your government was in need, both money to fill the tax gap to fund government operations and also money to finance economic stimulus programs—focused on housing—to restart growth. Central banks stepped in to fill the gap left open by private investors.

Private investors nearly stopped buying US treasury debt in 2003

Private investors stopped buying US Agency debt in 2006

America’s political and economic ally Japan took the lead role in the bailout of the United States economy and government that time. By the end of 2006, Japan held $650 billion of a total of $2.2 trillion in U.S. treasury debt held outside the U.S. while China held $320 billion, half as much as Japan.

We made most of our purchases of U.S. debt after 2006. As I mentioned before, between October 2007 and October 2008 we increased our holdings from $450 billion to $650 billion.

China took decades to purchase $320 billion. We doubled our holdings in only two years! We had our reasons for buying so many bonds at that time. We were more dependent on the U.S. for export income. In 2006, we earned 31% of our export income from the U.S. and Canada.

Today our dependence is less than 20%. If U.S. demand for our exports falls by 50% our exports will fall by 10%, a tolerable loss.

Then in 2008 the U.S. suffered an even greater financial and economic crisis than in 2001 as your country’s financial system collapsed, then your economy, then much of the global economy, but not all of it.

At the end of 2008 only China stood by the United States as a significant net buyer of U.S. Treasury bonds. Other U.S. allies made token contributions to the effort.

Curiously, the largest net sellers were America’s former traditional tax havens, Caribbean banking centers and Luxemburg. Cracking down on savers with more stringent tax laws did not quite have the net benefit expected, did it? The United Kingdom from which, it is widely known, Middle East Oil money flows also reduced holdings.

But I digress.

China is now far and away the largest holder of U.S. Treasury debt, with more than twice the holdings of Japan, and one third of the total.

The chart shows only Treasury debt. We as well hold a considerable amount of agency debt, the bonds that back your housing market that is collapsing despite your government’s best efforts to support it through your nationalized government sponsored enterprises Fannie Mae and Freddie Mac. We agree with those who predict that the price of the collateral on those mortgage loans—housing—will continue to decline for more than a decade as occurred in Japan after a similar property bubble collapsed in 1992, where prices fell for 18 years. We are more optimistic about the U.S., however, and agree with forecasts that prices will not bottom until 2015 or so.

No, no. We are certainly not interested in buying more agency bonds.

Again, our interest is only in purchasing as many short term Treasury bonds as necessary to maintain the purchasing power of our current dollar holdings and to manage our exchange rate as we see fit. We will use our long duration US securities holdings as collateral to buy assets such as oil and metals in Latin America, Africa, Australia, and Canada that we need here in China, to improve the living standards of our people. These are, after all, their savings. In return, the United States will reduce its foreign lending requirements by cutting wasteful spending, starting with your bloated military. The U.S. will cease to meddle in our internal affairs. Your Congress will stop berating us for "manipulating" our currency. We will diversify into other currencies and implement foreign exchange programs with our trade partners, providing convertibility of the yuan directly into currencies other than the dollar. The U.S. dollar will over time cease to be the major global reserve currency but will become equal to the euro, yen, and yuan.

That is, as you say in your country, “how we roll.”

Thank you for coming.

Part II: Economic M.A.D. Revisited: Turning point ($ubscription)

The global economic crisis has given China even more leverage over the US, but the question remains, if the US does not give China what China wants, what can China do about it?

“China and the US are running inter-dependent bubble economies, relying on the economic equivalent of Mutually Assured Destruction (M.A.D.) to keep one from blowing up the other’s economy. Whether by intent or accident, sooner or later market forces will assert themselves and both economies will go through tough transitions. How will the world look after that?”

- “Economic Mutually Assured Destruction” Janszen, iTulip.com, April 19, 2006

James Fallows authored the December 2008 Atlantic Monthly cover article, Be Nice to the Countries That Lend You Money, an interview with Gao Xiqing, the president of resident of the China Investment Corporation, a sovereign wealth fund that oversees $200 billion of China’s $2 trillion in dollar holdings. Gao Xiqing makes a number of assertions that will not challenge established iTulip views:

• The dollar will weaken
• The overall financial situation in the US will change fundamentally
• Americans can’t live on other people’s savings forever
• US households will have less access to credit in the future
• Financial wizards were paid too much and will be paid less from now on
• There will be more “real” economy in the US and less finance-based economic growth
• The world needs a new global monetary system
• There are hard line factions within the Chinese Communist party that want to see less Chinese support for the US
• The US remains a safe haven for capital because it is still the most politically predictable

Hard to argue with that assessment. more... ($ubscription)

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[Roughneck]

The chinese have been around for a LONG time. They don't think in terms of 4 year political cycles. That is their big advantage. Their disadvantage has always been that you don't get much out of the box or creative thinking(innovation) in a totolitarian country, They could COPY anything you made but they lacked the creativity for product development. that too is changing.

[metalman]

The chinese have been around for a LONG time. They don't think in terms of 4 year political cycles. That is their big advantage. Their disadvantage has always been that you don't get much out of the box or creative thinking(innovation) in a totolitarian country, They could COPY anything you made but they lacked the creativity for product development. that too is changing.

when it comes to executing on 20 year plans it helps to not have elections.

on the other hand...

Chinese Farmers Riot | Viral/Other | SPIKE.com

farmers riot


tibet riot

[audrey_girl]

after reading this USA Fire Sale, 2nd Meeting....

hmm

guess Peter Schiff was really right after all

[Mn_Mark]

We also welcome American companies to China to build plants here. Not only do these plants supply products for export earnings but our managers learn important skills, such as how to design and build high technology products.

I don't understand the logic of allowing foreign students to attend our engineering, business, or other schools where they can learn the distinctive knowledges that have given us our competitive advantage in the past. I can understand a "goodwill" argument, where we welcome foreign students for some sort of experience here so they develop a favorable impression of us and some personal ties. But they can do that by coming here for cultural events, or by perhaps studying American history or Western philosophy or literature for a couple of semesters.

But allow them to study at MIT? For God's sake, why? Our society has invested, collectively, a tremendous amount of money and human energy in developing the science and technology that gave us such fantastic competitive (and military!) advantages over the rest of the world. We paid for that knowledge. Now we let the children of our toughest competitors, many of whom come from political traditions that are quite hostile to ours, come and sit in our classrooms to be efficiently taught for the price of a semester's tuition all the knowledge we spent billions or trillions to develop? It's crazy on the face of it. I can only assume it's based on the "kumbaya" kind of thinking that's been in control in the universities for the last 50 or 75 years that says the most important thing is being liked by the rest of the world, and they'll like us if we teach them the stuff that gives us a competitive advantage over them. Just crazy.

[metalman]

We also welcome American companies to China to build plants here. Not only do these plants supply products for export earnings but our managers learn important skills, such as how to design and build high technology products.

I don't understand the logic of allowing foreign students to attend our engineering, business, or other schools where they can learn the distinctive knowledges that have given us our competitive advantage in the past. I can understand a "goodwill" argument, where we welcome foreign students for some sort of experience here so they develop a favorable impression of us and some personal ties. But they can do that by coming here for cultural events, or by perhaps studying American history or Western philosophy or literature for a couple of semesters.

But allow them to study at MIT? For God's sake, why? Our society has invested, collectively, a tremendous amount of money and human energy in developing the science and technology that gave us such fantastic competitive (and military!) advantages over the rest of the world. We paid for that knowledge. Now we let the children of our toughest competitors, many of whom come from political traditions that are quite hostile to ours, come and sit in our classrooms to be efficiently taught for the price of a semester's tuition all the knowledge we spent billions or trillions to develop? It's crazy on the face of it. I can only assume it's based on the "kumbaya" kind of thinking that's been in control in the universities for the last 50 or 75 years that says the most important thing is being liked by the rest of the world, and they'll like us if we teach them the stuff that gives us a competitive advantage over them. Just crazy.

worse than that! they come here. we make them into the best engineers in the world. they fall in love with the usa... their college town, whatever... and want to stay, to start the next great high tech company. do we let them? no! we make them go home.

nuts!!!

[goadam1]

worse than that! they come here. we make them into the best engineers in the world. they fall in love with the usa... their college town, whatever... and want to stay, to start the next great high tech company. do we let them? no! we make them go home.

nuts!!!

If you want to fix nearly every economic ail America is in right now, allow a proper wave of immigration. Hell, give incentive to allow the best and the brightest to come. It would be better than the FIRE economy policy of looking the other way on illegal (cheap) labor.

[dummass]

If you want to fix nearly every economic ail America is in right now, allow a proper wave of immigration. Hell, give incentive to allow the best and the brightest to come. It would be better than the FIRE economy policy of looking the other way on illegal (cheap) labor.

How about this program: Serve in the US military for three years and become naturalized. Assuming you make it back from ...

http://www.hooyou.com/naturalization/class.html

[goadam1]

Service Guarantees Citzenship!

http://www.youtube.com/watch?v=SMTz9nIUkGc

[dummass]

If you see it on TV, it must be real. Another reinforced conditioned response.

http://allpsych.com/psychology101/conditioning.html

[ocelotl]

worse than that! they come here. we make them into the best engineers in the world. they fall in love with the usa... their college town, whatever... and want to stay, to start the next great high tech company. do we let them? no! we make them go home.

nuts!!!

Worse. Many are invited via head hunter based scholarships to outstanding foreign students. I know, I rejected two invitations offered in my last university year.

[flintlock]

We also welcome American companies to China to build plants here. Not only do these plants supply products for export earnings but our managers learn important skills, such as how to design and build high technology products.

I don't understand the logic of allowing foreign students to attend our engineering, business, or other schools where they can learn the distinctive knowledges that have given us our competitive advantage in the past. I can understand a "goodwill" argument, where we welcome foreign students for some sort of experience here so they develop a favorable impression of us and some personal ties. But they can do that by coming here for cultural events, or by perhaps studying American history or Western philosophy or literature for a couple of semesters.

But allow them to study at MIT? For God's sake, why? Our society has invested, collectively, a tremendous amount of money and human energy in developing the science and technology that gave us such fantastic competitive (and military!) advantages over the rest of the world. We paid for that knowledge. Now we let the children of our toughest competitors, many of whom come from political traditions that are quite hostile to ours, come and sit in our classrooms to be efficiently taught for the price of a semester's tuition all the knowledge we spent billions or trillions to develop? It's crazy on the face of it. I can only assume it's based on the "kumbaya" kind of thinking that's been in control in the universities for the last 50 or 75 years that says the most important thing is being liked by the rest of the world, and they'll like us if we teach them the stuff that gives us a competitive advantage over them. Just crazy.

Thats the whole catch with "Globalism". Without going into the pros and cons of Globalism, its obvious that there is a natural leveling of the playing field. The strongest will, relatively speaking, lose ground to weaker nations. The weaker nations have the most to gain. The Strongest, most to lose.

What we had is a system where taxpayers fund research and knowledge, and then private individuals take that knowledge and make money off it . Often to the benefit of many in that country. But now we have the benefits being sent overseas, with only perhaps a few living in the country that develped the knowledge actually benefiting.

Bottom line, workers in more developed countries are going to continue to become more irrelevant. Its just the natural progression.

[*T*]

We also welcome American companies to China to build plants here. Not only do these plants supply products for export earnings but our managers learn important skills, such as how to design and build high technology products.

I don't understand the logic of allowing foreign students to attend our engineering, business, or other schools where they can learn the distinctive knowledges that have given us our competitive advantage in the past. I can understand a "goodwill" argument, where we welcome foreign students for some sort of experience here so they develop a favorable impression of us and some personal ties. But they can do that by coming here for cultural events, or by perhaps studying American history or Western philosophy or literature for a couple of semesters.

But allow them to study at MIT? For God's sake, why? Our society has invested, collectively, a tremendous amount of money and human energy in developing the science and technology that gave us such fantastic competitive (and military!) advantages over the rest of the world. We paid for that knowledge. Now we let the children of our toughest competitors, many of whom come from political traditions that are quite hostile to ours, come and sit in our classrooms to be efficiently taught for the price of a semester's tuition all the knowledge we spent billions or trillions to develop? It's crazy on the face of it. I can only assume it's based on the "kumbaya" kind of thinking that's been in control in the universities for the last 50 or 75 years that says the most important thing is being liked by the rest of the world, and they'll like us if we teach them the stuff that gives us a competitive advantage over them. Just crazy.

Without foreign students bringing funding, top universities would not be viable financially.

You get what you pay for.

[ASH]

I don't understand the logic of allowing foreign students to attend our engineering, business, or other schools where they can learn the distinctive knowledges that have given us our competitive advantage in the past.

...

But allow them to study at MIT? For God's sake, why?

Without foreign students bringing funding, top universities would not be viable financially.

You get what you pay for.

I think it matters what level of education we're talking about. At the graduate level, attracting tuition is not the issue. In a good program, a science or engineering graduate student has a free ride, and even gets paid a small stipend to live off of. The funding angle is about talent and grants. The money comes from grants; to win grants, you need to produce results; to produce results, you need the best talent working for you. The bottom line is that America doesn't produce enough domestic technical talent to staff either its high tech industry or its academic labs. We seek out foreign graduate students because we have to, even though they cost more to support.

Have you ever watched the cartoon Futurama? This negotiation between Professor Wernstrom and Mayor Poopenmeyer is funny because it's true:

POOPENMEYER: Dr. Wernstrom, can you save my city?
WERNSTROM: Of course. But it'll cost you. First I'll need tenure.
POOPENMEYER: Done.
WERNSTROM: And a big research grant.
POOPENMEYER: You got it.
WERNSTROM: Also, access to a lab and five graduate students, at least three of them Chinese.

For my part, I'm pretty sure that our shortage of domestic science and engineering talent is cultural. It's more about our values than the resources we bring to bear on education.

[*T*]

I think it matters what level of education we're talking about. At the graduate level, attracting tuition is not the issue. In a good program, a science or engineering graduate student has a free ride, and even gets paid a small stipend to live off of. The funding angle is about talent and grants. The money comes from grants; to win grants, you need to produce results; to produce results, you need the best talent working for you. The bottom line is that America doesn't produce enough domestic technical talent to staff either its high tech industry or its academic labs. We seek out foreign graduate students because we have to, even though they cost more to support.

Have you ever watched the cartoon Futurama? This negotiation between Professor Wernstrom and Mayor Poopenmeyer is funny because it's true:

POOPENMEYER: Dr. Wernstrom, can you save my city?
WERNSTROM: Of course. But it'll cost you. First I'll need tenure.
POOPENMEYER: Done.
WERNSTROM: And a big research grant.
POOPENMEYER: You got it.
WERNSTROM: Also, access to a lab and five graduate students, at least three of them Chinese.

For my part, I'm pretty sure that our shortage of domestic science and engineering talent is cultural. It's more about our values than the resources we bring to bear on education.

I think it's both. In the UK at least, research council grad student funding is usually restricted to home (EU) students. Foreign students often have to bring their own funding via a bursary from industry or their govt.

Further, I would add that security clearance is a problem. In my field, I have a colleague (a professor at a top US university) who is applying for US citizenship because "it's hard to get funding otherwise" since in the US the funding in Eng is often defence related.

The UK produces lots of good engineering graduates, so it's not about talent or interest (at least here). However they are not able to find engineering jobs so they go (went) into finance, accounting, management consultancy etc -- where the pay and the prestige is. Despite many of them wanting to be engineers as kids. I could name a dozen of them right now.

[Munger]

I think it matters what level of education we're talking about. At the graduate level, attracting tuition is not the issue. In a good program, a science or engineering graduate student has a free ride, and even gets paid a small stipend to live off of. The funding angle is about talent and grants. The money comes from grants; to win grants, you need to produce results; to produce results, you need the best talent working for you. The bottom line is that America doesn't produce enough domestic technical talent to staff either its high tech industry or its academic labs. We seek out foreign graduate students because we have to, even though they cost more to support.

Have you ever watched the cartoon Futurama? This negotiation between Professor Wernstrom and Mayor Poopenmeyer is funny because it's true:

POOPENMEYER: Dr. Wernstrom, can you save my city?
WERNSTROM: Of course. But it'll cost you. First I'll need tenure.
POOPENMEYER: Done.
WERNSTROM: And a big research grant.
POOPENMEYER: You got it.
WERNSTROM: Also, access to a lab and five graduate students, at least three of them Chinese.

For my part, I'm pretty sure that our shortage of domestic science and engineering talent is cultural. It's more about our values than the resources we bring to bear on education.

Professor Katz is more than half crazy, but also completely brilliant. He had this to say on the topic:

Don't Become a Scientist!


Are you thinking of becoming a scientist? Do you want to uncover the mysteries of nature, perform experiments or carry out calculations to learn how the world works? Forget it!

Science is fun and exciting. The thrill of discovery is unique. If you are smart, ambitious and hard working you should major in science as an undergraduate. But that is as far as you should take it. After graduation, you will have to deal with the real world. That means that you should not even consider going to graduate school in science. Do something else instead: medical school, law school, computers or engineering, or something else which appeals to you.

Why am I (a tenured professor of physics) trying to discourage you from following a career path which was successful for me? Because times have changed (I received my Ph.D. in 1973, and tenure in 1976). American science no longer offers a reasonable career path. If you go to graduate school in science it is in the expectation of spending your working life doing scientific research, using your ingenuity and curiosity to solve important and interesting problems. You will almost certainly be disappointed, probably when it is too late to choose another career.

American universities train roughly twice as many Ph.D.s as there are jobs for them. When something, or someone, is a glut on the market, the price drops. In the case of Ph.D. scientists, the reduction in price takes the form of many years spent in ``holding pattern'' postdoctoral jobs. Permanent jobs don't pay much less than they used to, but instead of obtaining a real job two years after the Ph.D. (as was typical 25 years ago) most young scientists spend five, ten, or more years as postdocs. They have no prospect of permanent employment and often must obtain a new postdoctoral position and move every two years. For many more details consult the Young Scientists' Network or read the account in the May, 2001 issue of the Washington Monthly.

As examples, consider two of the leading candidates for a recent Assistant Professorship in my department. One was 37, ten years out of graduate school (he didn't get the job). The leading candidate, whom everyone thinks is brilliant, was 35, seven years out of graduate school. Only then was he offered his first permanent job (that's not tenure, just the possibility of it six years later, and a step off the treadmill of looking for a new job every two years). The latest example is a 39 year old candidate for another Assistant Professorship; he has published 35 papers. In contrast, a doctor typically enters private practice at 29, a lawyer at 25 and makes partner at 31, and a computer scientist with a Ph.D. has a very good job at 27 (computer science and engineering are the few fields in which industrial demand makes it sensible to get a Ph.D.). Anyone with the intelligence, ambition and willingness to work hard to succeed in science can also succeed in any of these other professions.

Typical postdoctoral salaries begin at $27,000 annually in the biological sciences and about $35,000 in the physical sciences (graduate student stipends are less than half these figures). Can you support a family on that income? It suffices for a young couple in a small apartment, though I know of one physicist whose wife left him because she was tired of repeatedly moving with little prospect of settling down. When you are in your thirties you will need more: a house in a good school district and all the other necessities of ordinary middle class life. Science is a profession, not a religious vocation, and does not justify an oath of poverty or celibacy.

Of course, you don't go into science to get rich. So you choose not to go to medical or law school, even though a doctor or lawyer typically earns two to three times as much as a scientist (one lucky enough to have a good senior-level job). I made that choice too. I became a scientist in order to have the freedom to work on problems which interest me. But you probably won't get that freedom. As a postdoc you will work on someone else's ideas, and may be treated as a technician rather than as an independent collaborator. Eventually, you will probably be squeezed out of science entirely. You can get a fine job as a computer programmer, but why not do this at 22, rather than putting up with a decade of misery in the scientific job market first? The longer you spend in science the harder you will find it to leave, and the less attractive you will be to prospective employers in other fields.

Perhaps you are so talented that you can beat the postdoc trap; some university (there are hardly any industrial jobs in the physical sciences) will be so impressed with you that you will be hired into a tenure track position two years out of graduate school. Maybe. But the general cheapening of scientific labor means that even the most talented stay on the postdoctoral treadmill for a very long time; consider the job candidates described above. And many who appear to be very talented, with grades and recommendations to match, later find that the competition of research is more difficult, or at least different, and that they must struggle with the rest.

Suppose you do eventually obtain a permanent job, perhaps a tenured professorship. The struggle for a job is now replaced by a struggle for grant support, and again there is a glut of scientists. Now you spend your time writing proposals rather than doing research. Worse, because your proposals are judged by your competitors you cannot follow your curiosity, but must spend your effort and talents on anticipating and deflecting criticism rather than on solving the important scientific problems. They're not the same thing: you cannot put your past successes in a proposal, because they are finished work, and your new ideas, however original and clever, are still unproven. It is proverbial that original ideas are the kiss of death for a proposal; because they have not yet been proved to work (after all, that is what you are proposing to do) they can be, and will be, rated poorly. Having achieved the promised land, you find that it is not what you wanted after all.

What can be done? The first thing for any young person (which means anyone who does not have a permanent job in science) to do is to pursue another career. This will spare you the misery of disappointed expectations. Young Americans have generally woken up to the bad prospects and absence of a reasonable middle class career path in science and are deserting it. If you haven't yet, then join them. Leave graduate school to people from India and China, for whom the prospects at home are even worse. I have known more people whose lives have been ruined by getting a Ph.D. in physics than by drugs.

If you are in a position of leadership in science then you should try to persuade the funding agencies to train fewer Ph.D.s. The glut of scientists is entirely the consequence of funding policies (almost all graduate education is paid for by federal grants). The funding agencies are bemoaning the scarcity of young people interested in science when they themselves caused this scarcity by destroying science as a career. They could reverse this situation by matching the number trained to the demand, but they refuse to do so, or even to discuss the problem seriously (for many years the NSF propagated a dishonest prediction of a coming shortage of scientists, and most funding agencies still act as if this were true). The result is that the best young people, who should go into science, sensibly refuse to do so, and the graduate schools are filled with weak American students and with foreigners lured by the American student visa.

Sad but true.
http://wuphys.wustl.edu/~katz/scientist.html

[jk]

Again, our interest is only in purchasing as many short term Treasury bonds as necessary to maintain the purchasing power of our current dollar holdings and to manage our exchange rate as we see fit.

i don't think the chinese will continue to have this option for very long. as chinese exports to the u.s. are constrained by the u.s. recession, and as the u.s. need to borrow grows for the same reason, the chinese flow of new dollar income will become simply inadequate to the task.

[*T*]

Professor Katz is more than half crazy, but also completely brilliant. He had this to say on the topic:

...

Sad but true.
http://wuphys.wustl.edu/~katz/scientist.html

Very, very familiar. Unfortunately true in the UK too.

[moan] Science for me is a compulsion, not a career [/moan]

[Sapiens]

We also welcome American companies to China to build plants here. Not only do these plants supply products for export earnings but our managers learn important skills, such as how to design and build high technology products.

I don't understand the logic of allowing foreign students to attend our engineering, business, or other schools where they can learn the distinctive knowledges that have given us our competitive advantage in the past. I can understand a "goodwill" argument, where we welcome foreign students for some sort of experience here so they develop a favorable impression of us and some personal ties. But they can do that by coming here for cultural events, or by perhaps studying American history or Western philosophy or literature for a couple of semesters.

But allow them to study at MIT? For God's sake, why? Our society has invested, collectively, a tremendous amount of money and human energy in developing the science and technology that gave us such fantastic competitive (and military!) advantages over the rest of the world. We paid for that knowledge. Now we let the children of our toughest competitors, many of whom come from political traditions that are quite hostile to ours, come and sit in our classrooms to be efficiently taught for the price of a semester's tuition all the knowledge we spent billions or trillions to develop? It's crazy on the face of it. I can only assume it's based on the "kumbaya" kind of thinking that's been in control in the universities for the last 50 or 75 years that says the most important thing is being liked by the rest of the world, and they'll like us if we teach them the stuff that gives us a competitive advantage over them. Just crazy.

People tend to forget why they do things, the U.S. used to allow the best and brightest into their schools to gain "brains" as those students tended to stay put in the U.S., that is no longer true.

From time to time I like to recall the little story at the beginning of this sermon when I see someone doing something that does not make sense:

http://www.crossties.org/sermons/indiv/sermon19.pdf

[jiimbergin]

People tend to forget why they do things, the U.S. used to allow the best and brightest into their schools to gain "brains" as those students tended to stay put in the U.S., that is no longer true.

From time to time I like to recall the little story at the beginning of this sermon when I see someone doing something that does not make sense:

http://www.crossties.org/sermons/indiv/sermon19.pdf

Thanks for the link. I enjoyed the sermon. It certainly shows both the positives and negatives of traditionalism.

jim