In the video above you see examples of fuzzy search, a touch-screen UI, a tablet form factor, social search, a recommendation engine, and of course speech-to-text as the main user input paradigm.  It isn’t so interesting that someone as brilliant as Alan Kay had this vision in the first place, but what is amazing is the degree to which Apple has been focused on delivering this vision — a vision telegraphed by a company nearly 25 years ago that was itself less than half that age at the time.

Just as NASA engineers and designers have accredited a great deal of their vision to the work of Arthur C. Clarke and Stanley Kubrick (via his visual adaptation of 2001) so Apple has slavishly pursued this vision of pervasive and hugely interactive computing with acquisitions like Siri and innovations like the iPad.  Sure, there are many reasons for Apple’s market success in this post-PC era — but I would heap disproportionate credit toward building a corporate culture that cultivates, communicates, and ultimately has pursued that vision over the course of the past 30 years.

The tough nut to crack has always been the speech recognition part.  We are perhaps 25 years into a 50 year cycle in helping computers to understand most nuances of human communication.  Humans have ways to convey context, via body language etc., that computers cannot yet pick up.  Speech is not effectively used without all of these cues and there are many ships on the rocks of this technology frontier.  As such I and most of the consumer marketplace have never taken it very seriously, and I don’t expect this to change with Apple’s emphasis on speech reco this morning.

The question is:  When we’ve checked off all of the boxes from this video what’s next?  What’s the vision for 30 years hence?

Falling Apart?

This just in:  Vancouver has been ranked fourth on the world’s list of least affordable cities.  This is well ahead of cities like Manhattan, San Francisco, London, Paris, and Hong Kong.  As most rational people know, the city’s thundering real estate market has been bolstered by rampant speculation and constant construction of new condominiums.. but salaries, and the city’s economic development, have not kept pace.

The survey quoted in the article cites research indicating that the cost of housing in Vancouver is massively disproportionate to median salaries earned by its residents, specifically when compared to other cities around the world.  The median house price in Vancouver as of the time of the survey is 8.4 times the median income — 8.4 years’ average income to purchase a house, compared to the average median in Canada: 3.5.

What this tells you is that the fundamentals that support high real-estate prices are simply not there in Vancouver.  People just don’t earn enough income to sustain this market at such lofty prices whereas in cities like New York and San Francisco, where real estate prices are indeed higher, median incomes are substantially higher and thus can support high prices.

Vancouver is plagued by a number of problems that keep the salaries of its citizens low:

1. Affordable commerical real estate is hard to come by in the city — leading in some cases to a perverse reverse-commute where urbanites must schlep out to the suburbs to their workplaces — but more importantly this discourages companies from locating here.
2. Most large cities with expensive downtown cores operate as financial centres — the aforementioned London, Hong Kong, and New York spring to mind.  Vancouver does not, except for our storied love affair with ponzi schemes.  Without the sustaining flow of capital through our city there is highly limited opportunity for local investment.
3. We’re still a bunch of tree-cutting, pickaxe-wielding hicks.  And BC’s resource industries, the bread and butter of Vancouver for more than 150 years, are weak thanks to everything from the US softwood lumber tarriffs to Kyoto to a number of key mining company collapses.  Our province has failed to diversify its economic base substantially away from resource businesses.
4. The advanced industries like software and aerospace that keep California sizzlin’ have failed to grow in scale in this city.  Investment in this area is weak, with very little private investment and weak government support (nearly all of the Venture Capital in Vancouver is government-derived).  We did however blow >$500 million on a handful of useless fast ferries, though.  Two notable exceptions are alternative energy and biotech.  For now, at least, they are humming along.
5. The film industry, which we in BC have courted for decades, is a fickle bride.  Since productions are built for each project and torn down when completed with little long-term planning, unfavourable economic winds mean that producers can pull up stakes and shoot in South Carolina, Mexico, or wherever they can cost-optimize.  In any case, the profits are retained in New York and LA… like a Mumbai call centre, we’re just an outsourcer.
6. Drugs, and by “drugs” I mean the cultivation and distribution of marijuana, constitutes probably the largest industry in BC and it flies completely under the regulatory / taxation radar.  Conservative estimates peg this at between $5Bn and $7Bn per year.  These people have a hard time getting mortgages.  They also tend to be undesireable tenants, since they tend to get arrested/shot at/sent into hiding — that is if they don’t blow up their penthouse with a meth lab.
7. Our transportation infrastructure is pathetic, particularly when compared with major metropolitan areas (of which Vancouver is now one) such as Boston, Montreal, Toronto, New York, London, Tokyo, and others.  If we wish to become a center of commerce then we need to be able to move people around better.  Skytrain is a laughing stock and the West Coast Express, which goes to a handful of proximate suburbs from the downtown core twice a day each way, doesn’t even merit comparison with the British Urban Railway system.  Our highways (such as they are) subject people to multi-hour commutes to travel 20km.  We have failed, failed, FAILED to build infrastructure and it will continue to haunt the city for decades to come.

For those of us in the technology industry, certainly during this housing price spike, Vancouver seems an illogical place to locate our startups or ply our trades in information technology.  While the average condo price can be as high as 2x-2.5x the price of a comparable condo in Toronto or Montreal, our salary variance is just 103.5% the national average, versus 104.2% for Toronto and 103.9% for Montreal (this according to the 2009 Robert Half Salary Guide for Technology Professionals).  While we spend more to live here in Lotus Land, we sure don’t make up for it in income.

Comparing Income to Housing Prices

So how high is too high?  Right now we are finding out.

If you were blindsided by the Vancouver Real Estate crash then you were clearly in a profound state of self-delusion.  Evidently that list of deluded fools includes our civic leaders who played russian roulette with the city’s finances, underwriting the now disastrous Olympic Village project in which the taxpayers stand to lose as much as $750 Million.  Still, even amid the free-falling values, Realtors and Developers are outright lying to you… inviting you to join in their deathmatch with catch phrases like “don’t wait too long” and “strong fundamentals“.  Where have we heard that before?  Oh right, it was John McCain, about the US Economy in September – days before it collapsed.  Oops.

UPDATE: In a passionate article, former mayor Sam Sullivan says the Olympic Village is not a clusterf*ck.

Speculators and developers will beg to differ (they’re invested in fostering positive vibes) but remember:  they’re betting with your money, not their own.  Condos down the street from ours were forced into liquidation at 40% off, and there have been stories of other developers dumping their inventory at similar price cuts.  This is the beginning of a trend, not a sign of the bottom, so if you’re foolishly lining up to jump in at this point, you get what you deserve.

Not until a software engineer making $60K-$70K per year can buy a 1-Bedroom apartment in the city will the fundamentals be aligned and the market be stabilized.  This means mortgage + maintenance of less than $1500 per month using the 30% rule.  On a 25-year mortgage that probably means this 1BR apartment has to be less than $200K.  If the research that started this article can be believed, we should expect an adjustment of as much as 60% across the board to bring Vancouver back to the Canadian mean.

So in other words, wait ’til the bottom really drops out, Vancouverites..

And then we can start figuring out why no one in this city (not even the property developers, after 2007) makes any real money.

I experienced some catharsis last night reading Kevin Curry’s (is he a real person?) comments on the Vancouver startup scene over at TechVibes. You should really follow the link and participate in the discussion @ TechVibes, but I have pasted my thoughts and response below as well, for posterity:

I, too, had the opportunity to both work and raise capital in Silicon Valley. While I think every city has its fair share of bad, mediocre ideas (the Valley has lots too — see MC Hammer’s latest enterprise) I believe that the far more common theme here is ideas that are derivative, in which the best hope for success is a bunt, not a home-run.

Startups are supposed to swing for the fences, but there are too many startups here who fail to understand market limitations and try to boil the ocean. I spoke to a pair of entrepreneurs who honestly believed that they could replicate craigslist, zagat’s, epicurious, citysearch, and about half-a-dozen other best-in-class sites with a few hundred thousand dollars and no technical skills between them. I was embarassed for them.

The opposite problem is also true here: people looking at a technology sector and deciding they want to be in that space, without a clear idea of what the product will look like. That too is the wrong approach.

The best services and products solve problems. I’m not suggesting that RosterBot is the end-all be-all of web services, but it’s as successful as it is because it addresses a need, and I as an entrepreneur and athlete happened to experience that need so I was well-qualified to figure out how to solve it. It solves an obvious problem with some effectiveness, and it was built within the parameters, opportunities, and limitations that govern it.

Is it the next Google? Obviously not… but it was built entirely without outside funding and without defocusing me from other career obligations and objectives — and it’s beating other “Social gaming” sites because it is laser-focused on addressing the real needs that teams have.

I too have experienced major frustration with investors in Vancouver. I have always been comfortable saying “I don’t know” when, in fact, I don’t know something. This always played well south-of-the-border, when used in good measure, but here investors are looking for any sign of weakness to exploit in an entrepreneur and immediately go for the jugular.

There is a lack of respect between entrepreneurs and investors in this city. For the most part, I think that disgust is earned by both parties. To fix it, you’ve got to start from the top.

Vancouver has no successful mid-size (in U.S. terms) venture-backed technology startups. You can’t expect someone to go from junior individual contributor at a tiny aenemic startup to CEO of another aenemic startup in one step. With respect to many of the smart engineers I’ve met who are running small companies here, this is too often the case — and because they’ve never managed others or driven strategy and marketing, the results are predictable.

The lack of an informal apprenticeship system for information technology, such as exists within the medium to large technology companies in Silicon Valley, means there is little opportunity for workers to gracefully climb the ladder from junior engineer or marketer to senior management or company founder. Lots of folks have skipped this, and with some success — but I would submit that this is more due to happy accident and raw talent than anything else. So the catch-22 is that we need successful startups — who can stand on their own two feet, and not flip to the lowest bidder — in order to create more successful startups.

In the meantime, consider the following: we don’t need capital sources that are Canadian in order to nurture executives and companies on the Vancouver technology scene… and in fact doing so is putting the cart before the horse.

The Film and Video Game industries in this city are examples of technology-centric businesses that have developed and flourished within Vancouver, creating tens of thousands of jobs each, with capital from outside the city.

What we need to do is nurture programs that make it advantageous to invest, and remove the red tape from investing, in Canadian (and BC) venture startups for foreign VCs, and work to lure them to our city and province. This will attract capital from south-of-the-border, where investors are more seasoned and better-connected — and can bring more capital and greater exit opportunities to bear. These more seasoned investors will also act as a natural weeding mechanism to separate the wheat from the chaff in the local community, and they’ll force local investors to be more competitive and to bring more value to the table if they wish to participate in the upside opportunities. Honestly I think local VCs would appreciate and welcome the help and wisdom of their bigger cousins.

Solve the capital problem, and the other problems will fall into line over time. You’ll get mature, free-standing, profitable technology companies with seasoned entrepreneurs and middle management running them. We will all benefit.

December 12, 2002 The Wi-Fi Boom By ADAM BAER

ON a brisk autumn day in Portland, Ore., Paul van Veen was soaking up some sun as he logged on to the Internet – from a spot in bustling Pioneer Courthouse Square. Mr. van Veen was looking for a job, and he was surfing the Web over a free wireless connection.

These days, Pioneer Courthouse Square is but one of some 140 public spots across Portland with free Internet access using a high-speed wireless technology known as Wi-Fi. The network of such Wi-Fi “hot spots” throughout the city was developed by Personal Telco, a grass-roots, nonprofit group devoted to blanketing the city with free access points.

Portland and Personal Telco are just part of a growing national trend. There are community groups promoting public Wi-Fi access in nearly every large American city, from NYCwireless, which “unwired” Bryant Park and Tompkins Square Park in Manhattan, to KC Wireless in the Kansas City area. They have been joined by independent cafes and restaurants, apartment houses and community centers across the country that view free, easy access to the Internet as a draw for customers.

At the same time, subscription services and pay-as-you-go Wi-Fi hot spots are springing up in cafes, bookstores, hotels and airports, put in by companies like T-Mobile and smaller, start-up competitors like Boingo Wireless and Wayport. Last week, Cometa Networks, a new company backed by Intel, AT&T and I.B.M., said it planned to put a network of thousands of wireless access points across a huge swath of the nation by 2004. The result is a growing array of options for Wi-Fi users and the emergence of a mobile wireless culture that spans business travelers, teachers and students, people relaxing in coffee shops and even moviegoers waiting for the show.

All that is needed for laptop users to wander with Wi-Fi (the name is short for “wireless fidelity”) is a piece of hardware called a Wi-Fi card – perhaps a $100 investment – and where the access is not free, a one-time or longer-term service provider. Anecdotal evidence suggests that most users are male, under 40 and comfortable with technology.

The technology is, however, becoming more accessible. People who use paid hot spots like those offered by Wise Zone, Wayport and T-Mobile simply open their browsers to log on. Users of free city networks like NYCwireless are asked to agree to the network’s “acceptable use” policy, and if they do, they are on the Internet for six free hours until they have to sign on again.

Wi-Fi is also changing the way that people – at least some young, technologically adept people – go about their work. In Philadelphia, Yvonne Jones, a 33-year-old freelance copywriter, moved her base of operations to a Starbucks about a month ago and said she quickly became “a thousand times” more productive than she was when working at home. “It’s not your house, and you are there for a specific purpose, so the ‘distractions’ aren’t that distracting,” she said.

Frank Bonomo, who is between apartments and living with his parents on Long Island after losing his job at a dot-com, spends nearly every workday at a Starbucks in Greenwich Village. Mr. Bonomo, 24, is building a freelance practice as a Web producer, managing online advertising and message boards for design firms. He uses an account with T-Mobile to stay in touch with his clients by e-mail and instant messaging. “I commute here from the Island so I can be close to the offices of my three to four regular clients,” he said.

Mr. van Veen, who is looking for work as a wireless systems engineering manager, said he was using the public Wi-Fi hot spot in Portland to research a “hot job lead” because the connection was so much faster than his home connection. “At home, you generally use a standard phone line,” he said. “This downloads at 200 kilobytes a second, which is just lightning quick.”

Actually, under ideal conditions, Wi-Fi offers even greater speeds – 11 megabits per second, exceeding those typically achieved by high-speed home connections through cable modems or digital subscriber lines. Connection speeds slow, however, as a user gets farther from the source of the signal, which has a range of about 300 feet.

Ryan Palmer, a Portland-based consultant who studies human-computer interactions, said public wireless access had allowed him to be more efficient and enjoy himself at the same time. Mr. Palmer, 27, was on a business trip to Austin and wanted to sample the authentic Texas barbecue that he kept hearing about, but he also had some work to finish. He was able to do both at Green Mesquite BBQ, a restaurant with a recently installed free Wi-Fi access point.

“It’s nice to surf the Web and enjoy some good food,” he said, adding that the Internet connection at his hotel was so slow it was “painful.” He said: “I feel empowered. I’m not a stranger in a strange land anymore.”

It took Mr. Palmer 15 minutes of fiddling with the settings on his laptop to get a connection at the restaurant. “I had to play around a little bit,” he said. “I’m still not confident that someone could walk in off the street and do it.”

Not everyone can. Jodi Avant, 41, who is studying for teacher certification at the University of Texas at Austin, uses wireless frequently on campus, where it is widely available. As part of her program, she had to buy an Apple iBook with a wireless card to do schoolwork and communicate with teachers and other students.

She tried and failed to log on to the free Wi-Fi hot spot at a Schlotzsky’s Deli near the campus. “I brought it here, set it up and played around with it for half an hour,” she said. But she did not know what settings she needed and there was no help available in the restaurant.

Ms. Avant, who lives near Schlotzsky’s, visits the restaurant with her children every Saturday. They stay about an hour and use the wireless Internet terminals provided by the restaurant. She checks her e-mail while her 7- and 11-year-old sons play games and her 8-year-old daughter visits sites like www.funjail.com. Ms. Avant said she planned to keep trying to get through to the Schlotzsky’s network on her own computer. “It’s a lot better than my dial-up at home,” she said. “The only downside is I can’t print anything.”

People who use public Wi-Fi networks have another option: they can use the same setup to connect to wireless networks at home, at the office and at school. Running a Wi-Fi network in an office is only slightly more involved. Janine Kurnoff, who runs a Portland company that trains sales and marketing professionals, has maintained her Wi-Fi network for a year and a half. “There’s a little bit of setup involved, but less than an hour of work,” she said. “You don’t have to configure anything. The computer sees your network and picks it up.”

Forest Ridge School of the Sacred Heart, a girls’ school in Bellevue, Wash., was part of Microsoft’s Pioneer School program on incorporating technology into the curriculum in 1996. Now each student’s tuition buys a Wi-Fi-ready laptop.

“There’s a lot of instant messaging going on,” said Diane Burgess, 39, the school’s information technology manager. Ms. Burgess said classes were no longer disrupted by cellphones, parents message their children to arrange pickup times, and students regularly share files for collaborative projects. “Wi-Fi lets them do group work from anywhere on campus,” Ms. Burgess said. “It’s a really freeing experience.”

Beyond the hardware and software difficulties that users like Ms. Avant have encountered at public Wi-Fi spots, there are traffic considerations: connection speeds can slow if the number of users on a network picks up. And some home Wi-Fi users have reported that the systems, which operate on the 2.4-gigahertz frequency, are subject to interference from cordless telephones and microwave ovens. Ms. Burgess said that water, which absorbs the wireless signal’s energy much like food in a microwave oven, can interfere with a home network and that glasses, clothes and other clutter can obstruct the signal. “It actually helps me keep my home cleaner,” she said. “My kids keep their rooms absolutely streamlined now.”

Security is also a concern for open networks. Mark Malewski of NexTech Wireless, a Chicago-based nonprofit group that is trying to organize grass-roots Wi-Fi networks, said there were steps the hot spot operators could take to help. “We have an authentication server that tracks usage,” he said. “Without that, a lot of people could plug in an access point and share it with those who could conduct fraudulent activity.”

Security concerns will become more important as public Wi-Fi networks spread and more people use them. Statistics on use of the technology are elusive, but according to Gartner, a consulting company in Stamford, Conn., the number of Wi-Fi cards sold in North America this year is on track to jump 75 percent over 2001, with another 57 percent gain over this year expected in 2003. William Clark, research director at Gartner, said that the number of frequent Wi-Fi users was expected to grow to 1.9 million next year from 700,000 in 2002, with the number of public hot spots in North America likely to nearly triple by the end of next year from about 3,300 now.

In fact, this growth is responsible for casual Wi-Fi use beyond the high-tech vanguard. Sherry Bough, 56, and her husband, Bob, 59, live at the Austin Lone Star RV Resort, a gated park with a heated pool, a playground and a Wi-Fi network, for six months a year to be near their children. The Boughs used to order a phone line whenever they stayed in one place for more than a month so that they could use their dial-up Internet connection to track their investments, check e-mail and search the Web. Now they use the park’s Wi-Fi network.

“It’s amazing how fast it downloads,” Mrs. Bough said of the network, which was installed earlier this fall and offers fee-based service by the day, week or month. Still, she said, it took her a couple of hours to connect the first time. “It was a little bit confusing,” she said. “To me, that’s where they’re failing right now.” To use the wireless network, the Boughs had to buy a U.S.B. card for their computer and they updated to Windows 98; Mrs. Bough said they also needed to install more memory.

James Westberry, 55, is another part-time resident at Austin Lone Star. He works in Austin, the state capital, when the Legislature is in session, advising lobbyists for small telephone companies like the Eastex Telephone Cooperative, where he works. He goes home to Tyler, Tex., on the weekends.

“I have to have high-speed Internet wherever I’m at,” he said. “Otherwise I’d be at a hotel or have an apartment.” He uses it to download bills, attend committee meetings online and to check e-mail.

Public Wi-Fi has also begun to change the way people play. Jack Swayze, a 27-year-old technical-support worker in Vienna, Va., gathers with laptop-equipped friends at Wise Zone hot spots around Washington to team up for live-action shooting games like Unreal Tournament 2003 and Medal of Honor, which they play against other Web “posses.” “The connection is as reliable and fast as my connection at home,” he said.

At the Alamo Drafthouse North, a movie theater in Austin, wireless access is available in the four screening halls. Tim League, the theater’s 32-year-old owner, installed the Wi-Fi access in concert with Austin Wireless, which set up the system after he agreed to offer it to viewers free.

Mr. League uses the network to offer Internet-based activities to entertain viewers before movies. He is testing interactive trivia programs and audience polling contests and expects to have one running soon. “I’ve always thought it strange that the slides you see before movies still exist,” he said. “That the practice hadn’t changed in 30 years just seemed silly.” He shows animated videos that are downloaded from the Web using a Wi-Fi-equipped computer in his projection room. “Viewers also use the Web to research movie facts or catch up on their work or e-mail, though we ask them to close their laptops when the show begins,” he said.

Entertainment is the main motivation behind Shane Nixon’s experiments with public Wi-Fi. Mr. Nixon, 34, was trying to log on to a Wayport hot spot at the Austin airport last week while he waited for a flight to Bowling Green, Ky., where he lives.

A construction and maintenance coordinator who travels three weeks a month, Mr. Nixon had been using dial-up connections while on the road to chat with his wife by instant messaging and to play card games with her on sites like www .mysticisland.net. He had just installed a wireless network at home so that he, his wife and two sons could go online at once, and he was trying to connect wirelessly on the road for the first time. When he could not log on, he used his cellphone to call Wayport’s technical-support number, but his cellphone battery died. Despite the technical problems he encountered, Mr. Nixon said he would probably stick with Wi-Fi. “I’m gone all the time, so that’s a way to keep in touch and do something together,” he said.

Mr. Nixon noted another virtue of high-speed chatting. “You can talk all night long,” he said, “and you don’t have a large phone bill.”

———–

Its testosterone-fuelled traders were fixtures in Houston’s strip clubs. One division of the company spent $2m a year on flowers alone. And its executives used the firm’s corporate jets as taxis. In the first extract from his remarkable new book on the rise and fall of Enron, Robert Bryce describes the heady mix of greed, sex and arrogance that produced America’s most spectacular financial scandal

Monday November 4, 2002 The Guardian

J R Ewing never talked about pipelines. Jett Rink was interested in drilling for oil, not shipping it through a maze of unseen steel tubes. Real men – particularly fictional ones like Ewing and Rink – find oil and gas. Lesser mortals navigate the maze of engineering, metallurgical and legal wrangles that are needed to get those hydrocarbons delivered to the nearest refinery or storage terminal. Face it, there’s no sex in laying pipe.

Yet pipelines are the conduit for the American Dream. Every year, pipelines carry some 550 billion gallons of crude and petroleum products to refineries, airports, rail yards and other locations. Trillions of cubic feet of natural gas are moved through some 2 million miles of interstate, intrastate and local pipelines. Pipelines are the largely invisible, sometimes dangerous, infrastructure that allows America to consume more energy than any country on earth. By the early 1990s, when Jeff Skilling, a former McKinsey consultant, began his rise to power within Enron, the company and its leaders were, says one veteran gas man, “the kings of the American pipeline business”. Enron owned the greatest collection of tubular steel infrastructure ever assembled in one company. It was transporting or selling 17.5% of all the gas consumed in the United States.

Those pipelines were profitable but they were, and still are, heavily regulated by federal authorities. With all of the federal regulations on pricing, the pipeline business is more akin to the utility business than the energy business. Pipelines carry a product from one spot to another, and the owner of the pipe gets paid a fee for the service. It’s a straightforward, profitable business. As one former Houston Natural Gas executive said of pipelines: “All they do is make money. It’s boring, but it’s dependable.”

Perhaps that’s why Skilling hated them so much. Skilling’s brain was too big for pipelines. He was always thinking big thoughts. And big thoughts have no place in the pipeline business. Pipeline companies demand solid managerial skills from people who show up every day and stick to their business. Skilling was not a manager, he was a deal-maker. Exotic financing schemes and the deals that came with them excited Skilling. Collecting nickels, dimes and quarters from what was essentially a new-fangled toll road that no one could even see, did not. The only thing that mattered to Skilling about Enron’s pipelines was that they kept providing him with cash that he could use elsewhere.

For Skilling, elsewhere meant only one place: the trading business. Skilling may have disliked pipelines, but he was an absolute genius at figuring out how to trade the precious commodity that moved inside them.

As soon as Skilling moved on to the 50th floor, he began a hiring binge that didn’t stop until the company went bankrupt. But give him credit: he attracted the best and the brightest. Harvard, West Point, Rice, University of Chicago – every prestigious school in the country began feeding their best MBAs, engineers and maths wonks to Enron. At the same time, Skilling began raiding Wall Street, stealing traders, investment bankers, information technology whizz kids, programmers and every other skill-set that Enron needed.

The fleet of newly hired hotshots were never short of confidence or the belief that they were working at the best, smartest, fastest-moving company in the world. One longtime Enron employee (who held a PhD from the University of Maryland) said: “There’s no question that Enron people arrogantly thought they were smarter than everybody else. There’s no excuse for that. But they were smarter than everybody else.”

By mid-2000, Skilling had achieved his goal: almost all vestiges of the old Enron, the stodgy, slow-growing pipeline-based entity that transported gas and generated a bit of electricity, were gone. In its place, Enron had become a trading company. And with that change came a rock-’em, sock-’em, fast-paced trading culture in which deals and “deal flow” became the driving forces behind everything Enron did.

Traders ran the place. All of the company’s top executives – particularly those close to Skilling – were either traders or had helped run trading operations. And all of them believed in Skilling’s vision of Enron as a trading company. Chief financial officer Andy Fastow (who was last week charged with 78 counts of fraud and money-laundering) had learned the trading business while in Skilling’s group in the early 90s. Greg Whalley, the president of Enron Wholesale Services, the entity that ran the company’s trading operations, had worked in Europe as one of Enron’s chief power marketers. Mark Frevert, the chairman and CEO of Enron Europe, had overseen the company’s European trading operations. Other top execs, such as Lou Pai, had been involved in trading for years.

Pai, who owned a 14,000ft mountain in Colorado, had two passions in life: money and watching young women take their clothes off – but not necessarily in that order. At Enron, he was able to gorge on both. Stories of Pai’s fascination with strippers were legion. One executive recalled getting an expense report from Pai in 1990, shortly after Pai began working for him. “It was $757 [£484] for one lunch. He and two or three co-workers had gone to Rick’s [a Houston strip club]. I said, ‘I’m not approving this. You are going to have to take care of this yourself.’ You just don’t do that in business.”

But Pai’s attitude to women and sex was far from exceptional at Enron. Several women who worked at Enron said that Skilling and the young traders who dominated the company viewed women as a commodity that could be bought and sold just like gas, electricity, or any of the other products Enron was trading. And since Houston’s strip clubs are among the best in the country, it was only natural that Enron’s boy geniuses visited them regularly.

Sex and extramarital affairs are not, by themselves, a problem for companies. But at Enron, the sexual misconduct happened at such high levels that it became a part of the company’s culture. The sex, said one executive, “set the tone for the rest of the company. And you couldn’t get away from it. It was like a humidifier. It was in the air.”

Enron’s massive new edifice to itself, a 40-storey, 1.2 million sq ft building was going to be a monument to trading. The building, designed by acclaimed architect Cesar Pelli, would have four trading floors – each big enough for 500 “transaction desks” – with state-of-the-art communications systems. Chairman Ken Lay and Skilling would move their offices from the 50th floor of the old building down to the seventh floor of the new one. Instead of overlooking all of Houston, their new offices would be on a balcony overlooking the new trading floors. And they wouldn’t have to take elevators to get to the traders: two snazzy, curved stairways were going to connect their floor with the trading area.

The new tower had been under construction for nearly a year and was costing Enron a fortune. Pelli’s design, which would mimic the glass-sheathed oval tower Enron already occupied, was going to give Enron the most expensive building in downtown Houston. The final bill would be about $300m.

Enron was wasting even more money in Europe. The company’s European trading operations were located in an impressive new building named Enron House, located at 40 Grosvenor Place, in the heart of London, on land owned by the Duke of Westminster. Although the building cost $74m to construct, Enron spent another $30m in bringing it up to the company’s lofty standards. When it moved into Enron House in November 1999, the top executives, including Frevert, could sit in their top-floor offices and look down on rear gardens of Buckingham Palace. The rent for the new digs? A bargain at a mere £8m a year.

And if the Pelli-designed building was going to make a statement, it had to be decorated. It needed art. Expensive, trendy art. And Andy Fastow and his wife Lea – modern-day de Medicis – were just the ones to make sure Enron made the right decisions. Beginning in the summer of 2000 and continuing right through until the autumn of 2001, as Enron began to spiral downward, the Fastows were the driving force behind an amazing art-buying binge. They spent $575,000 on a soft sculpture by Claes Oldenburg. They paid $690,000 for a wooden sculpture by Martin Puryear, a record amount for his work sold at auction. The committee also bought works by the sculptor Donald Judd, the painter-printmaker Vic Muniz, the video artist Nam June Paik, the photographer Julie Moos and the painter Bridget Riley. By August and September 2001, the company had spent about $4m on 20 different pieces.

Extravagantly appointed offices were far from the company’s only indulgence. In 1997, Skilling’s gas and power trading group, Enron Capital and Trade, spent about $2m on flowers, according to an auditor who worked for the division. “Oh yeah, we had secretaries sending their bosses flowers, bosses sending their secretaries flowers. For a while, we were the biggest customer for about five florists all over Houston,” said the auditor. “We found out some secretaries were sending flowers to their friends so that the secretaries could get the pretty vases the flowers came in.”

Flowers, first-class airfares, first-class hotels, limousines, new computers, new Palm Pilots, new desks – Enron employees began to expect the best of everything, all the time.

But cost-control was never a consideration for Skilling and Lay. After all, EnronOnline, the company’s new website, was the toast of cyberspace. In the few months since it had been launched in November 1999, it had quickly become the biggest e-commerce site the internet had ever seen. The trading site had been the brainchild of a trader, of course, named Louise Kitchen, a brash young Brit who had been Enron’s head natural gas trader in Europe. Cocky and impatient, Kitchen was emblematic of Skilling’s new version of Enron. At just 31 years old, she was young, rich (in 2001, her total pay from Enron was $3.47m), and she believed that there was no end to what she – and Enron – might do.

While she and her team were developing the site, Kitchen said: “I didn’t need a pat on the back from Ken Lay or Jeff Skilling. It was obvious that we should have been doing this ages ago.”

Kitchen’s attitude was typical among the traders. They were the über-Enroners, the ultimate masters of the universe. Kitchen, along with another thirtysomething trader, a Canadian named John Lavorato, was rapidly consolidating her power within Enron. And within a few months of EnronOnline’s debut, the pair were heading all of Enron’s North American trading operations. There were hundreds of traders, lined up with banks of computer screens, keyboards, telephones – and adrenaline. In the first five months of 2000 alone, the website did 110,000 transactions with a total value exceeding $45bn. Deals could be done in seconds, rather than minutes or hours.

Electricity, natural gas, coal, oil, refined products, bandwidth, paper, plastics, petrochemicals, and even clean-air credits were for sale on Enron’s website. Within a few weeks of its launch in November 1999, EnronOnline was the biggest e-commerce entity in the world. In all, the company was selling over 800 different products.

EnronOnline was the logical outgrowth of Enron’s gas trading business. What had been done by phone and fax was now being done on the web. The company’s trading business surged, in large part, because of tremendous increases in gas consumption in the United States. Between 1983 and 2000, demand for natural gas in America rose by nearly 30%, to 22.5 trillion cubic ft per year.

Enron transferred what it learned in gas to the electricity business. Once confined to trading among utilities, Enron elbowed its way into electricity trading in the mid-1990s. It was selling gas and power, but all the while it was collecting still more information that provided a constant feedback loop. Enron owned pipelines and power plants, and with EnronOnline, it could instantly tell in which direction the market was going. It could also tell who was buying, who was selling, and where it should be placing its own bets in the marketplace.

In a very short time, Enron had remade itself from pipeline company to the largest energy marketer in the country. But Skilling wasn’t satisfied. He wanted more. So in May 2000, Enron announced that it would buy the London-based MG plc, one of the biggest metals traders in the world, for $446m. Lay said that the deal would allow Enron to claim a major role in the $120bn-per-year metals market. “Our business model, which we have proven in the natural gas and electricity markets, will give us a tremendous advantage in an industry that is undergoing fundamental change.”

There it was again: Enron knew how to trade gas; it knew how to trade electricity; now it would apply those lessons to the metals business.

Surely, Enron would succeed. The company owned pipelines and power plants, valuable assets that gave it visibility in the gas and electricity markets in North America, South America, Europe and Asia. It had a big trading operation in Europe. EnronOnline was becoming the de facto standard for traders all over the world. Commodity traders on Wall Street relied on EnronOnline for pricing on dozens of different products and invariably had one of their computer screens tuned to the website. And Enron had one of the most sophisticated trading platforms ever developed. The company’s traders could assess the risk on any deal almost instantaneously. Any deal they made was instantly processed and accounted for in the company’s massive data centre. Almost any position Enron took in the commodities market was quickly hedged with a countervailing position. Furthermore, it had a battalion of traders who were among the sharpest in the business. They made more money, had bigger egos, and drove faster cars than just about anybody.

Skilling became convinced that Enron simply couldn’t lose. In the lingo of his predecessor, Rich Kinder, Skilling began “smoking his own dope”. Skilling had made Enron into the trading company that everyone was talking about. Enron had become the 900lb gorilla in the marketplace. It didn’t just own the casino. On any given deal, Enron could be the house, the dealer, the oddsmaker and the guy across the table you’re trying to beat in diesel-fuel futures, gas futures, or the California electricity market. With all of those advantages, Enron’s trading business must have been a cash machine. Right?

Wrong.

Like every business Skilling created while he was piloting Enron, the trading business was a loser. Sure, trading was glamorous and sexy, but it generated virtually no cash for Enron. And that was a problem. Instead, Enron’s trading operation had an insatiable appetite for cash. Unlike other online energy marketplaces such as Altra or the consumer-goods auction site, eBay – which matches buyers and sellers for a fee – EnronOnline was the principal in every transaction. That’s a very expensive place to be.

If a seller agreed on Enron’s posted price for, say, natural gas to be delivered on a certain date, that seller could sell it immediately to Enron. The company would then take title to the gas and try to sell it to another party. That may not sound like a big deal, but by mid-2000, Enron was doing several billion dollars’ worth of trades every day. And because it was in the middle of every transaction, Enron would have to hold some of those commodities for days or even weeks before it could get the price that it wanted on its trades. That meant Enron had to have billions of dollars in cash at the ready. The sort of ready cash needed to clear and fund each sale and purchase – often called a company’s “float” – can be enormously expensive. And the bigger the float, the bigger the expense.

Every day that Enron held on to a big position in a commodity, it had to pay interest on the money it borrowed to take that position. For instance, one of Enron’s gas traders might be betting that gas prices would rise and therefore go “long” on gas contracts in the amount of 500 million cubic feet of gas. At $3 per 1,000 cubic feet, the gas could be worth $1.5m. That might not sound like much. But Enron had hundreds of traders, some going long, others going short in gas and dozens of other commodities. Supporting all of those positions required huge amounts of capital. And as the number of transactions handled by Enron-Online grew, so did its appetite for capital. The new operation had to have enough cash to keep a liquid market in 800 different products, each of which was seeing a big surge in volume.

In the first six months of 2000, Enron borrowed more than $3.4bn to finance its operations. The company’s cash flow from operations was a negative $547m. Enron was losing money – real money, cash money – hand over fist by just being in business. Interest expenses were surging.

By the end of June 2000, Enron was paying about $2m per day in interest to banks and other lenders. The $376m in interest charges for the first half of 2000 was more than it paid in all of 1996. Despite EnronOnline’s voracious appetite for capital, Skilling was able to convince a nearly constant parade of reporters that Enron’s trading business was the golden goose. Other companies were going to explode as Enron figured out how to buy and sell every part of an individual company’s traditional business. Enron was going to intermediate everything, commoditise everything. Just as the Ford Motor Company didn’t have to own the steel mill to build cars, Enron was going to speed the breakup of every business in the world into its individual parts.

“We believe that markets are the best way to order or organise an industrial enterprise,” Skilling told the Financial Times in June 2000. “You are going to see the deintegration of the business systems we have all grown up with.”

If Enron was going to help that “deintegration”, its trading business was going to keep growing. And that meant Enron would need more capital, lots more capital. But there was a problem: Enron could not raise capital by adding more debt. More debt on its balance sheet might lower the company’s credit rating, which would further increase the company’s already high interest costs. Skilling needed more cash but no more debt. Some smart “financial engineering” was required.

———–

I contend that there is something fundamentally wrong with a society where Jack Welch (a smart and fair guy, by any measure, and an exceptionally good leader) makes $123 million per year in total compensation and tens of millions of people in America live in abject poverty. How can we continue trying to build a functional society until we start to connect these two examples?

I was particularly struck when I saw Kenneth Lay, nearly a year ago, leaving a parkade in his brand new G-Class Mercedes. I thought: “that prick has devastated the retirement incomes of hundreds of thousands, maybe millions, of people, forced others into financial ruin, and here he is rolling around in a $100,000.00 truck wearing immaculately-tailored suits.” What’s more despicable is that he, and people like him, are not even conscious that this is wrong, or of why we should be offended.

But speaking from an economic perspective, a nation is built on the backs of the middle class. It was the participation of the Middle Class, which for the first time began to invest directly in securities as their major investment plan, that made the economic boom of the late 90s happen, and it is the Middle Class that provides the tax basis that sustains a nation. Many of the top US-Headquartered multinationals either don’t pay ANY income tax or receive subsidies from the government. And many of their CEOs are able to shelter most of their income and keep one step ahead of the IRS.

Pats on the back to the NY Times for taking this stand. It is NOT an Envy Politic. It IS Class Warfare. It is the sustainability of the world economic system that is at stake, for we are in danger of sliding towards a sort of global Corporate Feudalism that will ultimately be our ruin.

As America is effectively taking over the world, their society shows a test case for Bush Sr.’s “New World Order”, which we will all someday be living under.

I urge you to read this in full..

-Ian.

——– http://www.nytimes.com/2002/10/20/magazine/20INEQUALITY.html

October 20, 2002 For Richer By PAUL KRUGMAN

I. The Disappearing Middle When I was a teenager growing up on Long Island, one of my favorite excursions was a trip to see the great Gilded Age mansions of the North Shore. Those mansions weren’t just pieces of architectural history. They were monuments to a bygone social era, one in which the rich could afford the armies of servants needed to maintain a house the size of a European palace. By the time I saw them, of course, that era was long past. Almost none of the Long Island mansions were still private residences. Those that hadn’t been turned into museums were occupied by nursing homes or private schools.

For the America I grew up in — the America of the 1950’s and 1960’s — was a middle-class society, both in reality and in feel. The vast income and wealth inequalities of the Gilded Age had disappeared. Yes, of course, there was the poverty of the underclass — but the conventional wisdom of the time viewed that as a social rather than an economic problem. Yes, of course, some wealthy businessmen and heirs to large fortunes lived far better than the average American. But they weren’t rich the way the robber barons who built the mansions had been rich, and there weren’t that many of them. The days when plutocrats were a force to be reckoned with in American society, economically or politically, seemed long past.

Daily experience confirmed the sense of a fairly equal society. The economic disparities you were conscious of were quite muted. Highly educated professionals — middle managers, college teachers, even lawyers — often claimed that they earned less than unionized blue-collar workers. Those considered very well off lived in split-levels, had a housecleaner come in once a week and took summer vacations in Europe. But they sent their kids to public schools and drove themselves to work, just like everyone else.

But that was long ago. The middle-class America of my youth was another country.

We are now living in a new Gilded Age, as extravagant as the original. Mansions have made a comeback. Back in 1999 this magazine profiled Thierry Despont, the ”eminence of excess,” an architect who specializes in designing houses for the superrich. His creations typically range from 20,000 to 60,000 square feet; houses at the upper end of his range are not much smaller than the White House. Needless to say, the armies of servants are back, too. So are the yachts. Still, even J.P. Morgan didn’t have a Gulfstream.

As the story about Despont suggests, it’s not fair to say that the fact of widening inequality in America has gone unreported. Yet glimpses of the lifestyles of the rich and tasteless don’t necessarily add up in people’s minds to a clear picture of the tectonic shifts that have taken place in the distribution of income and wealth in this country. My sense is that few people are aware of just how much the gap between the very rich and the rest has widened over a relatively short period of time. In fact, even bringing up the subject exposes you to charges of ”class warfare,” the ”politics of envy” and so on. And very few people indeed are willing to talk about the profound effects — economic, social and political — of that widening gap.

Yet you can’t understand what’s happening in America today without understanding the extent, causes and consequences of the vast increase in inequality that has taken place over the last three decades, and in particular the astonishing concentration of income and wealth in just a few hands. To make sense of the current wave of corporate scandal, you need to understand how the man in the gray flannel suit has been replaced by the imperial C.E.O. The concentration of income at the top is a key reason that the United States, for all its economic achievements, has more poverty and lower life expectancy than any other major advanced nation. Above all, the growing concentration of wealth has reshaped our political system: it is at the root both of a general shift to the right and of an extreme polarization of our politics.

But before we get to all that, let’s take a look at who gets what.

II. The New Gilded Age The Securities and Exchange Commission hath no fury like a woman scorned. The messy divorce proceedings of Jack Welch, the legendary former C.E.O. of General Electric, have had one unintended benefit: they have given us a peek at the perks of the corporate elite, which are normally hidden from public view. For it turns out that when Welch retired, he was granted for life the use of a Manhattan apartment (including food, wine and laundry), access to corporate jets and a variety of other in-kind benefits, worth at least $2 million a year. The perks were revealing: they illustrated the extent to which corporate leaders now expect to be treated like ancien regime royalty. In monetary terms, however, the perks must have meant little to Welch. In 2000, his last full year running G.E., Welch was paid $123 million, mainly in stock and stock options.

Is it news that C.E.O.’s of large American corporations make a lot of money? Actually, it is. They were always well paid compared with the average worker, but there is simply no comparison between what executives got a generation ago and what they are paid today.

Over the past 30 years most people have seen only modest salary increases: the average annual salary in America, expressed in 1998 dollars (that is, adjusted for inflation), rose from $32,522 in 1970 to $35,864 in 1999. That’s about a 10 percent increase over 29 years — progress, but not much. Over the same period, however, according to Fortune magazine, the average real annual compensation of the top 100 C.E.O.’s went from $1.3 million — 39 times the pay of an average worker — to $37.5 million, more than 1,000 times the pay of ordinary workers.

The explosion in C.E.O. pay over the past 30 years is an amazing story in its own right, and an important one. But it is only the most spectacular indicator of a broader story, the reconcentration of income and wealth in the U.S. The rich have always been different from you and me, but they are far more different now than they were not long ago — indeed, they are as different now as they were when F. Scott Fitzgerald made his famous remark.

That’s a controversial statement, though it shouldn’t be. For at least the past 15 years it has been hard to deny the evidence for growing inequality in the United States. Census data clearly show a rising share of income going to the top 20 percent of families, and within that top 20 percent to the top 5 percent, with a declining share going to families in the middle. Nonetheless, denial of that evidence is a sizable, well-financed industry. Conservative think tanks have produced scores of studies that try to discredit the data, the methodology and, not least, the motives of those who report the obvious. Studies that appear to refute claims of increasing inequality receive prominent endorsements on editorial pages and are eagerly cited by right-leaning government officials. Four years ago Alan Greenspan (why did anyone ever think that he was nonpartisan?) gave a keynote speech at the Federal Reserve’s annual Jackson Hole conference that amounted to an attempt to deny that there has been any real increase in inequality in America.

The concerted effort to deny that inequality is increasing is itself a symptom of the growing influence of our emerging plutocracy (more on this later). So is the fierce defense of the backup position, that inequality doesn’t matter — or maybe even that, to use Martha Stewart’s signature phrase, it’s a good thing. Meanwhile, politically motivated smoke screens aside, the reality of increasing inequality is not in doubt. In fact, the census data understate the case, because for technical reasons those data tend to undercount very high incomes — for example, it’s unlikely that they reflect the explosion in C.E.O. compensation. And other evidence makes it clear not only that inequality is increasing but that the action gets bigger the closer you get to the top. That is, it’s not simply that the top 20 percent of families have had bigger percentage gains than families near the middle: the top 5 percent have done better than the next 15, the top 1 percent better than the next 4, and so on up to Bill Gates.

Studies that try to do a better job of tracking high incomes have found startling results. For example, a recent study by the nonpartisan Congressional Budget Office used income tax data and other sources to improve on the census estimates. The C.B.O. study found that between 1979 and 1997, the after-tax incomes of the top 1 percent of families rose 157 percent, compared with only a 10 percent gain for families near the middle of the income distribution. Even more startling results come from a new study by Thomas Piketty, at the French research institute Cepremap, and Emmanuel Saez, who is now at the University of California at Berkeley. Using income tax data, Piketty and Saez have produced estimates of the incomes of the well-to-do, the rich and the very rich back to 1913.

The first point you learn from these new estimates is that the middle-class America of my youth is best thought of not as the normal state of our society, but as an interregnum between Gilded Ages. America before 1930 was a society in which a small number of very rich people controlled a large share of the nation’s wealth. We became a middle-class society only after the concentration of income at the top dropped sharply during the New Deal, and especially during World War II. The economic historians Claudia Goldin and Robert Margo have dubbed the narrowing of income gaps during those years the Great Compression. Incomes then stayed fairly equally distributed until the 1970’s: the rapid rise in incomes during the first postwar generation was very evenly spread across the population.

Since the 1970’s, however, income gaps have been rapidly widening. Piketty and Saez confirm what I suspected: by most measures we are, in fact, back to the days of ”The Great Gatsby.” After 30 years in which the income shares of the top 10 percent of taxpayers, the top 1 percent and so on were far below their levels in the 1920’s, all are very nearly back where they were.

And the big winners are the very, very rich. One ploy often used to play down growing inequality is to rely on rather coarse statistical breakdowns — dividing the population into five ”quintiles,” each containing 20 percent of families, or at most 10 ”deciles.” Indeed, Greenspan’s speech at Jackson Hole relied mainly on decile data. From there it’s a short step to denying that we’re really talking about the rich at all. For example, a conservative commentator might concede, grudgingly, that there has been some increase in the share of national income going to the top 10 percent of taxpayers, but then point out that anyone with an income over $81,000 is in that top 10 percent. So we’re just talking about shifts within the middle class, right?

Wrong: the top 10 percent contains a lot of people whom we would still consider middle class, but they weren’t the big winners. Most of the gains in the share of the top 10 percent of taxpayers over the past 30 years were actually gains to the top 1 percent, rather than the next 9 percent. In 1998 the top 1 percent started at $230,000. In turn, 60 percent of the gains of that top 1 percent went to the top 0.1 percent, those with incomes of more than $790,000. And almost half of those gains went to a mere 13,000 taxpayers, the top 0.01 percent, who had an income of at least $3.6 million and an average income of $17 million.

A stickler for detail might point out that the Piketty-Saez estimates end in 1998 and that the C.B.O. numbers end a year earlier. Have the trends shown in the data reversed? Almost surely not. In fact, all indications are that the explosion of incomes at the top continued through 2000. Since then the plunge in stock prices must have put some crimp in high incomes — but census data show inequality continuing to increase in 2001, mainly because of the severe effects of the recession on the working poor and near poor. When the recession ends, we can be sure that we will find ourselves a society in which income inequality is even higher than it was in the late 90’s.

So claims that we’ve entered a second Gilded Age aren’t exaggerated. In America’s middle-class era, the mansion-building, yacht-owning classes had pretty much disappeared. According to Piketty and Saez, in 1970 the top 0.01 percent of taxpayers had 0.7 percent of total income — that is, they earned ”only” 70 times as much as the average, not enough to buy or maintain a mega-residence. But in 1998 the top 0.01 percent received more than 3 percent of all income. That meant that the 13,000 richest families in America had almost as much income as the 20 million poorest households; those 13,000 families had incomes 300 times that of average families.

And let me repeat: this transformation has happened very quickly, and it is still going on. You might think that 1987, the year Tom Wolfe published his novel ”The Bonfire of the Vanities” and Oliver Stone released his movie ”Wall Street,” marked the high tide of America’s new money culture. But in 1987 the top 0.01 percent earned only about 40 percent of what they do today, and top executives less than a fifth as much. The America of ”Wall Street” and ”The Bonfire of the Vanities” was positively egalitarian compared with the country we live in today.

III. Undoing the New Deal In the middle of the 1980’s, as economists became aware that something important was happening to the distribution of income in America, they formulated three main hypotheses about its causes.

The ”globalization” hypothesis tied America’s changing income distribution to the growth of world trade, and especially the growing imports of manufactured goods from the third world. Its basic message was that blue-collar workers — the sort of people who in my youth often made as much money as college-educated middle managers — were losing ground in the face of competition from low-wage workers in Asia. A result was stagnation or decline in the wages of ordinary people, with a growing share of national income going to the highly educated.

A second hypothesis, ”skill-biased technological change,” situated the cause of growing inequality not in foreign trade but in domestic innovation. The torrid pace of progress in information technology, so the story went, had increased the demand for the highly skilled and educated. And so the income distribution increasingly favored brains rather than brawn.

Finally, the ”superstar” hypothesis — named by the Chicago economist Sherwin Rosen — offered a variant on the technological story. It argued that modern technologies of communication often turn competition into a tournament in which the winner is richly rewarded, while the runners-up get far less. The classic example — which gives the theory its name — is the entertainment business. As Rosen pointed out, in bygone days there were hundreds of comedians making a modest living at live shows in the borscht belt and other places. Now they are mostly gone; what is left is a handful of superstar TV comedians.

The debates among these hypotheses — particularly the debate between those who attributed growing inequality to globalization and those who attributed it to technology — were many and bitter. I was a participant in those debates myself. But I won’t dwell on them, because in the last few years there has been a growing sense among economists that none of these hypotheses work.

I don’t mean to say that there was nothing to these stories. Yet as more evidence has accumulated, each of the hypotheses has seemed increasingly inadequate. Globalization can explain part of the relative decline in blue-collar wages, but it can’t explain the 2,500 percent rise in C.E.O. incomes. Technology may explain why the salary premium associated with a college education has risen, but it’s hard to match up with the huge increase in inequality among the college-educated, with little progress for many but gigantic gains at the top. The superstar theory works for Jay Leno, but not for the thousands of people who have become awesomely rich without going on TV.

The Great Compression — the substantial reduction in inequality during the New Deal and the Second World War — also seems hard to understand in terms of the usual theories. During World War II Franklin Roosevelt used government control over wages to compress wage gaps. But if the middle-class society that emerged from the war was an artificial creation, why did it persist for another 30 years?

Some — by no means all — economists trying to understand growing inequality have begun to take seriously a hypothesis that would have been considered irredeemably fuzzy-minded not long ago. This view stresses the role of social norms in setting limits to inequality. According to this view, the New Deal had a more profound impact on American society than even its most ardent admirers have suggested: it imposed norms of relative equality in pay that persisted for more than 30 years, creating the broadly middle-class society we came to take for granted. But those norms began to unravel in the 1970’s and have done so at an accelerating pace.

Exhibit A for this view is the story of executive compensation. In the 1960’s, America’s great corporations behaved more like socialist republics than like cutthroat capitalist enterprises, and top executives behaved more like public-spirited bureaucrats than like captains of industry. I’m not exaggerating. Consider the description of executive behavior offered by John Kenneth Galbraith in his 1967 book, ”The New Industrial State”: ”Management does not go out ruthlessly to reward itself — a sound management is expected to exercise restraint.” Managerial self-dealing was a thing of the past: ”With the power of decision goes opportunity for making money. . . . Were everyone to seek to do so . . . the corporation would be a chaos of competitive avarice. But these are not the sort of thing that a good company man does; a remarkably effective code bans such behavior. Group decision-making insures, moreover, that almost everyone’s actions and even thoughts are known to others. This acts to enforce the code and, more than incidentally, a high standard of personal honesty as well.”

Thirty-five years on, a cover article in Fortune is titled ”You Bought. They Sold.” ”All over corporate America,” reads the blurb, ”top execs were cashing in stocks even as their companies were tanking. Who was left holding the bag? You.” As I said, we’ve become a different country.

Let’s leave actual malfeasance on one side for a moment, and ask how the relatively modest salaries of top executives 30 years ago became the gigantic pay packages of today. There are two main stories, both of which emphasize changing norms rather than pure economics. The more optimistic story draws an analogy between the explosion of C.E.O. pay and the explosion of baseball salaries with the introduction of free agency. According to this story, highly paid C.E.O.’s really are worth it, because having the right man in that job makes a huge difference. The more pessimistic view — which I find more plausible — is that competition for talent is a minor factor. Yes, a great executive can make a big difference — but those huge pay packages have been going as often as not to executives whose performance is mediocre at best. The key reason executives are paid so much now is that they appoint the members of the corporate board that determines their compensation and control many of the perks that board members count on. So it’s not the invisible hand of the market that leads to those monumental executive incomes; it’s the invisible handshake in the boardroom.

But then why weren’t executives paid lavishly 30 years ago? Again, it’s a matter of corporate culture. For a generation after World War II, fear of outrage kept executive salaries in check. Now the outrage is gone. That is, the explosion of executive pay represents a social change rather than the purely economic forces of supply and demand. We should think of it not as a market trend like the rising value of waterfront property, but as something more like the sexual revolution of the 1960’s — a relaxation of old strictures, a new permissiveness, but in this case the permissiveness is financial rather than sexual. Sure enough, John Kenneth Galbraith described the honest executive of 1967 as being one who ”eschews the lovely, available and even naked woman by whom he is intimately surrounded.” By the end of the 1990’s, the executive motto might as well have been ”If it feels good, do it.”

How did this change in corporate culture happen? Economists and management theorists are only beginning to explore that question, but it’s easy to suggest a few factors. One was the changing structure of financial markets. In his new book, ”Searching for a Corporate Savior,” Rakesh Khurana of Harvard Business School suggests that during the 1980’s and 1990’s, ”managerial capitalism” — the world of the man in the gray flannel suit — was replaced by ”investor capitalism.” Institutional investors weren’t willing to let a C.E.O. choose his own successor from inside the corporation; they wanted heroic leaders, often outsiders, and were willing to pay immense sums to get them. The subtitle of Khurana’s book, by the way, is ”The Irrational Quest for Charismatic C.E.O.’s.”

But fashionable management theorists didn’t think it was irrational. Since the 1980’s there has been ever more emphasis on the importance of ”leadership” — meaning personal, charismatic leadership. When Lee Iacocca of Chrysler became a business celebrity in the early 1980’s, he was practically alone: Khurana reports that in 1980 only one issue of Business Week featured a C.E.O. on its cover. By 1999 the number was up to 19. And once it was considered normal, even necessary, for a C.E.O. to be famous, it also became easier to make him rich.

Economists also did their bit to legitimize previously unthinkable levels of executive pay. During the 1980’s and 1990’s a torrent of academic papers — popularized in business magazines and incorporated into consultants’ recommendations — argued that Gordon Gekko was right: greed is good; greed works. In order to get the best performance out of executives, these papers argued, it was necessary to align their interests with those of stockholders. And the way to do that was with large grants of stock or stock options.

It’s hard to escape the suspicion that these new intellectual justifications for soaring executive pay were as much effect as cause. I’m not suggesting that management theorists and economists were personally corrupt. It would have been a subtle, unconscious process: the ideas that were taken up by business schools, that led to nice speaking and consulting fees, tended to be the ones that ratified an existing trend, and thereby gave it legitimacy.

What economists like Piketty and Saez are now suggesting is that the story of executive compensation is representative of a broader story. Much more than economists and free-market advocates like to imagine, wages — particularly at the top — are determined by social norms. What happened during the 1930’s and 1940’s was that new norms of equality were established, largely through the political process. What happened in the 1980’s and 1990’s was that those norms unraveled, replaced by an ethos of ”anything goes.” And a result was an explosion of income at the top of the scale.

IV. The Price of Inequality It was one of those revealing moments. Responding to an e-mail message from a Canadian viewer, Robert Novak of ”Crossfire” delivered a little speech: ”Marg, like most Canadians, you’re ill informed and wrong. The U.S. has the longest standard of living — longest life expectancy of any country in the world, including Canada. That’s the truth.”

But it was Novak who had his facts wrong. Canadians can expect to live about two years longer than Americans. In fact, life expectancy in the U.S. is well below that in Canada, Japan and every major nation in Western Europe. On average, we can expect lives a bit shorter than those of Greeks, a bit longer than those of Portuguese. Male life expectancy is lower in the U.S. than it is in Costa Rica.

Still, you can understand why Novak assumed that we were No. 1. After all, we really are the richest major nation, with real G.D.P. per capita about 20 percent higher than Canada’s. And it has been an article of faith in this country that a rising tide lifts all boats. Doesn’t our high and rising national wealth translate into a high standard of living — including good medical care — for all Americans?

Well, no. Although America has higher per capita income than other advanced countries, it turns out that that’s mainly because our rich are much richer. And here’s a radical thought: if the rich get more, that leaves less for everyone else.

That statement — which is simply a matter of arithmetic — is guaranteed to bring accusations of ”class warfare.” If the accuser gets more specific, he’ll probably offer two reasons that it’s foolish to make a fuss over the high incomes of a few people at the top of the income distribution. First, he’ll tell you that what the elite get may look like a lot of money, but it’s still a small share of the total — that is, when all is said and done the rich aren’t getting that big a piece of the pie. Second, he’ll tell you that trying to do anything to reduce incomes at the top will hurt, not help, people further down the distribution, because attempts to redistribute income damage incentives.

These arguments for lack of concern are plausible. And they were entirely correct, once upon a time — namely, back when we had a middle-class society. But there’s a lot less truth to them now.

First, the share of the rich in total income is no longer trivial. These days 1 percent of families receive about 16 percent of total pretax income, and have about 14 percent of after-tax income. That share has roughly doubled over the past 30 years, and is now about as large as the share of the bottom 40 percent of the population. That’s a big shift of income to the top; as a matter of pure arithmetic, it must mean that the incomes of less well off families grew considerably more slowly than average income. And they did. Adjusting for inflation, average family income — total income divided by the number of families — grew 28 percent from 1979 to 1997. But median family income — the income of a family in the middle of the distribution, a better indicator of how typical American families are doing — grew only 10 percent. And the incomes of the bottom fifth of families actually fell slightly.

Let me belabor this point for a bit. We pride ourselves, with considerable justification, on our record of economic growth. But over the last few decades it’s remarkable how little of that growth has trickled down to ordinary families. Median family income has risen only about 0.5 percent per year — and as far as we can tell from somewhat unreliable data, just about all of that increase was due to wives working longer hours, with little or no gain in real wages. Furthermore, numbers about income don’t reflect the growing riskiness of life for ordinary workers. In the days when General Motors was known in-house as Generous Motors, many workers felt that they had considerable job security — the company wouldn’t fire them except in extremis. Many had contracts that guaranteed health insurance, even if they were laid off; they had pension benefits that did not depend on the stock market. Now mass firings from long-established companies are commonplace; losing your job means losing your insurance; and as millions of people have been learning, a 401(k) plan is no guarantee of a comfortable retirement.

Still, many people will say that while the U.S. economic system may generate a lot of inequality, it also generates much higher incomes than any alternative, so that everyone is better off. That was the moral Business Week tried to convey in its recent special issue with ”25 Ideas for a Changing World.” One of those ideas was ”the rich get richer, and that’s O.K.” High incomes at the top, the conventional wisdom declares, are the result of a free-market system that provides huge incentives for performance. And the system delivers that performance, which means that wealth at the top doesn’t come at the expense of the rest of us.

A skeptic might point out that the explosion in executive compensation seems at best loosely related to actual performance. Jack Welch was one of the 10 highest-paid executives in the United States in 2000, and you could argue that he earned it. But did Dennis Kozlowski of Tyco, or Gerald Levin of Time Warner, who were also in the top 10? A skeptic might also point out that even during the economic boom of the late 1990’s, U.S. productivity growth was no better than it was during the great postwar expansion, which corresponds to the era when America was truly middle class and C.E.O.’s were modestly paid technocrats.

But can we produce any direct evidence about the effects of inequality? We can’t rerun our own history and ask what would have happened if the social norms of middle-class America had continued to limit incomes at the top, and if government policy had leaned against rising inequality instead of reinforcing it, which is what actually happened. But we can compare ourselves with other advanced countries. And the results are somewhat surprising.

Many Americans assume that because we are the richest country in the world, with real G.D.P. per capita higher than that of other major advanced countries, Americans must be better off across the board — that it’s not just our rich who are richer than their counterparts abroad, but that the typical American family is much better off than the typical family elsewhere, and that even our poor are well off by foreign standards.

But it’s not true. Let me use the example of Sweden, that great conservative bete noire.

A few months ago the conservative cyberpundit Glenn Reynolds made a splash when he pointed out that Sweden’s G.D.P. per capita is roughly comparable with that of Mississippi — see, those foolish believers in the welfare state have impoverished themselves! Presumably he assumed that this means that the typical Swede is as poor as the typical resident of Mississippi, and therefore much worse off than the typical American.

But life expectancy in Sweden is about three years higher than that of the U.S. Infant mortality is half the U.S. level, and less than a third the rate in Mississippi. Functional illiteracy is much less common than in the U.S.

How is this possible? One answer is that G.D.P. per capita is in some ways a misleading measure. Swedes take longer vacations than Americans, so they work fewer hours per year. That’s a choice, not a failure of economic performance. Real G.D.P. per hour worked is 16 percent lower than in the United States, which makes Swedish productivity about the same as Canada’s.

But the main point is that though Sweden may have lower average income than the United States, that’s mainly because our rich are so much richer. The median Swedish family has a standard of living roughly comparable with that of the median U.S. family: wages are if anything higher in Sweden, and a higher tax burden is offset by public provision of health care and generally better public services. And as you move further down the income distribution, Swedish living standards are way ahead of those in the U.S. Swedish families with children that are at the 10th percentile — poorer than 90 percent of the population — have incomes 60 percent higher than their U.S. counterparts. And very few people in Sweden experience the deep poverty that is all too common in the United States. One measure: in 1994 only 6 percent of Swedes lived on less than $11 per day, compared with 14 percent in the U.S.

The moral of this comparison is that even if you think that America’s high levels of inequality are the price of our high level of national income, it’s not at all clear that this price is worth paying. The reason conservatives engage in bouts of Sweden-bashing is that they want to convince us that there is no tradeoff between economic efficiency and equity — that if you try to take from the rich and give to the poor, you actually make everyone worse off. But the comparison between the U.S. and other advanced countries doesn’t support this conclusion at all. Yes, we are the richest major nation. But because so much of our national income is concentrated in relatively few hands, large numbers of Americans are worse off economically than their counterparts in other advanced countries.

And we might even offer a challenge from the other side: inequality in the United States has arguably reached levels where it is counterproductive. That is, you can make a case that our society would be richer if its richest members didn’t get quite so much.

I could make this argument on historical grounds. The most impressive economic growth in U.S. history coincided with the middle-class interregnum, the post-World War II generation, when incomes were most evenly distributed. But let’s focus on a specific case, the extraordinary pay packages of today’s top executives. Are these good for the economy?

Until recently it was almost unchallenged conventional wisdom that, whatever else you might say, the new imperial C.E.O.’s had delivered results that dwarfed the expense of their compensation. But now that the stock bubble has burst, it has become increasingly clear that there was a price to those big pay packages, after all. In fact, the price paid by shareholders and society at large may have been many times larger than the amount actually paid to the executives.

It’s easy to get boggled by the details of corporate scandal — insider loans, stock options, special-purpose entities, mark-to-market, round-tripping. But there’s a simple reason that the details are so complicated. All of these schemes were designed to benefit corporate insiders — to inflate the pay of the C.E.O. and his inner circle. That is, they were all about the ”chaos of competitive avarice” that, according to John Kenneth Galbraith, had been ruled out in the corporation of the 1960’s. But while all restraint has vanished within the American corporation, the outside world — including stockholders — is still prudish, and open looting by executives is still not acceptable. So the looting has to be camouflaged, taking place through complicated schemes that can be rationalized to outsiders as clever corporate strategies.

Economists who study crime tell us that crime is inefficient — that is, the costs of crime to the economy are much larger than the amount stolen. Crime, and the fear of crime, divert resources away from productive uses: criminals spend their time stealing rather than producing, and potential victims spend time and money trying to protect their property. Also, the things people do to avoid becoming victims — like avoiding dangerous districts — have a cost even if they succeed in averting an actual crime.

The same holds true of corporate malfeasance, whether or not it actually involves breaking the law. Executives who devote their time to creating innovative ways to divert shareholder money into their own pockets probably aren’t running the real business very well (think Enron, WorldCom, Tyco, Global Crossing, Adelphia . . . ). Investments chosen because they create the illusion of profitability while insiders cash in their stock options are a waste of scarce resources. And if the supply of funds from lenders and shareholders dries up because of a lack of trust, the economy as a whole suffers. Just ask Indonesia.

The argument for a system in which some people get very rich has always been that the lure of wealth provides powerful incentives. But the question is, incentives to do what? As we learn more about what has actually been going on in corporate America, it’s becoming less and less clear whether those incentives have actually made executives work on behalf of the rest of us.

V. Inequality and Politics In September the Senate debated a proposed measure that would impose a one-time capital gains tax on Americans who renounce their citizenship in order to avoid paying U.S. taxes. Senator Phil Gramm was not pleased, declaring that the proposal was ”right out of Nazi Germany.” Pretty strong language, but no stronger than the metaphor Daniel Mitchell of the Heritage Foundation used, in an op-ed article in The Washington Times, to describe a bill designed to prevent corporations from rechartering abroad for tax purposes: Mitchell described this legislation as the ”Dred Scott tax bill,” referring to the infamous 1857 Supreme Court ruling that required free states to return escaped slaves.

Twenty years ago, would a prominent senator have likened those who want wealthy people to pay taxes to Nazis? Would a member of a think tank with close ties to the administration have drawn a parallel between corporate taxation and slavery? I don’t think so. The remarks by Gramm and Mitchell, while stronger than usual, were indicators of two huge changes in American politics. One is the growing polarization of our politics — our politicians are less and less inclined to offer even the appearance of moderation. The other is the growing tendency of policy and policy makers to cater to the interests of the wealthy. And I mean the wealthy, not the merely well-off: only someone with a net worth of at least several million dollars is likely to find it worthwhile to become a tax exile.

You don’t need a political scientist to tell you that modern American politics is bitterly polarized. But wasn’t it always thus? No, it wasn’t. From World War II until the 1970’s — the same era during which income inequality was historically low — political partisanship was much more muted than it is today. That’s not just a subjective assessment. My Princeton political science colleagues Nolan McCarty and Howard Rosenthal, together with Keith Poole at the University of Houston, have done a statistical analysis showing that the voting behavior of a congressman is much better predicted by his party affiliation today than it was 25 years ago. In fact, the division between the parties is sharper now than it has been since the 1920’s.

What are the parties divided about? The answer is simple: economics. McCarty, Rosenthal and Poole write that ”voting in Congress is highly ideological — one-dimensional left/right, liberal versus conservative.” It may sound simplistic to describe Democrats as the party that wants to tax the rich and help the poor, and Republicans as the party that wants to keep taxes and social spending as low as possible. And during the era of middle-class America that would indeed have been simplistic: politics wasn’t defined by economic issues. But that was a different country; as McCarty, Rosenthal and Poole put it, ”If income and wealth are distributed in a fairly equitable way, little is to be gained for politicians to organize politics around nonexistent conflicts.” Now the conflicts are real, and our politics is organized around them. In other words, the growing inequality of our incomes probably lies behind the growing divisiveness of our politics.

But the politics of rich and poor hasn’t played out the way you might think. Since the incomes of America’s wealthy have soared while ordinary families have seen at best small gains, you might have expected politicians to seek votes by proposing to soak the rich. In fact, however, the polarization of politics has occurred because the Republicans have moved to the right, not because the Democrats have moved to the left. And actual economic policy has moved steadily in favor of the wealthy. The major tax cuts of the past 25 years, the Reagan cuts in the 1980’s and the recent Bush cuts, were both heavily tilted toward the very well off. (Despite obfuscations, it remains true that more than half the Bush tax cut will eventually go to the top 1 percent of families.) The major tax increase over that period, the increase in payroll taxes in the 1980’s, fell most heavily on working-class families.

The most remarkable example of how politics has shifted in favor of the wealthy — an example that helps us understand why economic policy has reinforced, not countered, the movement toward greater inequality — is the drive to repeal the estate tax. The estate tax is, overwhelmingly, a tax on the wealthy. In 1999, only the top 2 percent of estates paid any tax at all, and half the estate tax was paid by only 3,300 estates, 0.16 percent of the total, with a minimum value of $5 million and an average value of $17 million. A quarter of the tax was paid by just 467 estates worth more than $20 million. Tales of family farms and businesses broken up to pay the estate tax are basically rural legends; hardly any real examples have been found, despite diligent searching.

You might have thought that a tax that falls on so few people yet yields a significant amount of revenue would be politically popular; you certainly wouldn’t expect widespread opposition. Moreover, there has long been an argument that the estate tax promotes democratic values, precisely because it limits the ability of the wealthy to form dynasties. So why has there been a powerful political drive to repeal the estate tax, and why was such a repeal a centerpiece of the Bush tax cut?

There is an economic argument for repealing the estate tax, but it’s hard to believe that many people take it seriously. More significant for members of Congress, surely, is the question of who would benefit from repeal: while those who will actually benefit from estate tax repeal are few in number, they have a lot of money and control even more (corporate C.E.O.’s can now count on leaving taxable estates behind). That is, they are the sort of people who command the attention of politicians in search of campaign funds.

But it’s not just about campaign contributions: much of the general public has been convinced that the estate tax is a bad thing. If you try talking about the tax to a group of moderately prosperous retirees, you get some interesting reactions. They refer to it as the ”death tax”; many of them believe that their estates will face punitive taxation, even though most of them will pay little or nothing; they are convinced that small businesses and family farms bear the brunt of the tax.

These misconceptions don’t arise by accident. They have, instead, been deliberately promoted. For example, a Heritage Foundation document titled ”Time to Repeal Federal Death Taxes: The Nightmare of the American Dream” emphasizes stories that rarely, if ever, happen in real life: ”Small-business owners, particularly minority owners, suffer anxious moments wondering whether the businesses they hope to hand down to their children will be destroyed by the death tax bill, . . . Women whose children are grown struggle to find ways to re-enter the work force without upsetting the family’s estate tax avoidance plan.” And who finances the Heritage Foundation? Why, foundations created by wealthy families, of course.

The point is that it is no accident that strongly conservative views, views that militate against taxes on the rich, have spread even as the rich get richer compared with the rest of us: in addition to directly buying influence, money can be used to shape public perceptions. The liberal group People for the American Way’s report on how conservative foundations have deployed vast sums to support think tanks, friendly media and other institutions that promote right-wing causes is titled ”Buying a Movement.”

Not to put too fine a point on it: as the rich get richer, they can buy a lot of things besides goods and services. Money buys political influence; used cleverly, it also buys intellectual influence. A result is that growing income disparities in the United States, far from leading to demands to soak the rich, have been accompanied by a growing movement to let them keep more of their earnings and to pass their wealth on to their children.

This obviously raises the possibility of a self-reinforcing process. As the gap between the rich and the rest of the population grows, economic policy increasingly caters to the interests of the elite, while public services for the population at large — above all, public education — are starved of resources. As policy increasingly favors the interests of the rich and neglects the interests of the general population, income disparities grow even wider.

VI. Plutocracy? In 1924, the mansions of Long Island’s North Shore were still in their full glory, as was the political power of the class that owned them. When Gov. Al Smith of New York proposed building a system of parks on Long Island, the mansion owners were bitterly opposed. One baron — Horace Havemeyer, the ”sultan of sugar” — warned that North Shore towns would be ”overrun with rabble from the city.” ”Rabble?” Smith said. ”That’s me you’re talking about.” In the end New Yorkers got their parks, but it was close: the interests of a few hundred wealthy families nearly prevailed over those of New York City’s middle class.

America in the 1920’s wasn’t a feudal society. But it was a nation in which vast privilege — often inherited privilege — stood in contrast to vast misery. It was also a nation in which the government, more often than not, served the interests of the privileged and ignored the aspirations of ordinary people.

Those days are past — or are they? Income inequality in America has now returned to the levels of the 1920’s. Inherited wealth doesn’t yet play a big part in our society, but given time — and the repeal of the estate tax — we will grow ourselves a hereditary elite just as set apart from the concerns of ordinary Americans as old Horace Havemeyer. And the new elite, like the old, will have enormous political power.

Kevin Phillips concludes his book ”Wealth and Democracy” with a grim warning: ”Either democracy must be renewed, with politics brought back to life, or wealth is likely to cement a new and less democratic regime — plutocracy by some other name.” It’s a pretty extreme line, but we live in extreme times. Even if the forms of democracy remain, they may become meaningless. It’s all too easy to see how we may become a country in which the big rewards are reserved for people with the right connections; in which ordinary people see little hope of advancement; in which political involvement seems pointless, because in the end the interests of the elite always get served.

Am I being too pessimistic? Even my liberal friends tell me not to worry, that our system has great resilience, that the center will hold. I hope they’re right, but they may be looking in the rearview mirror. Our optimism about America, our belief that in the end our nation always finds its way, comes from the past — a past in which we were a middle-class society. But that was another country.

Paul Krugman is a Times columnist and a professor at Princeton.

———–

-Ian.

—– http://money.cnn.com/2002/07/30/technology/ibm_pwc/index.htm IBM to buy PwC Consulting Big Blue agrees to pay roughly $3.5B for accounting firm’s consulting arm. July 31, 2002: 8:06 AM EDT By Richard Richtmyer, CNN/Money Staff Writer

NEW YORK (CNN/Money) – Scrapping its previous plan to rename the unit and spin it off, PricewaterhouseCoopers has agreed to sell its consulting arm to IBM for roughly $3.5 billion in cash and stock.

The two companies said late Tuesday that they have signed a definitive agreement that was approved by each of their boards of directors. The transaction is subject to regulatory approvals as well as the approval of local PwC firms through votes of their partners.

The deal is expected to be completed near the end of the third quarter and result in a charge of roughly 30 cents per share in the fourth quarter of this year, according to IBM’s chief financial officer, John Joyce.

By the fourth quarter of 2003, the deal is expected to be accretive to earnings, Joyce said.

Under the terms of their agreement, PwC Consulting, with roughly $4.9 billion in revenue and some 30,000 employees, will be combined with the Business Innovation Services unit of IBM Global Services, bringing IBM’s total services work force to roughly 180,000.

By taking PwC Consulting into its fold, IBM (IBM: Research, Estimates), which already is the world’s largest supplier of information technology (IT) services, would substantially bolster its position in that area.

“This is very significant because this is one of the final steps in IBM transforming itself from a hardware-and-software company to a consulting-and-services company,” said Sam Albert, an independent IT industry analyst and management consultant.

Although it remains the world’s largest supplier of computer hardware, IBM over the last decade has transformed the company from its traditional role as a “box-builder” into a provider of technology, services and software.

“IBM’s strategy is to deliver superior business value through the fusion of business and technology,” Joyce said on a conference call Tuesday evening.

“The PwC Consulting acquisition underscores IBM’s commitment to this strategy and raises its capability to a new plateau,” Joyce said.

Growth at IBM’s Global Services unit has accelerated rapidly in recent years. In the second quarter of this year it was the company’s biggest revenue generator, taking in $8.7 billion, roughly 44 percent of IBM’s total revenue for the quarter.

Often IBM will assimilate a company’s entire IT department when it seals a big services contract. Among the most noteworthy of such arrangements recently was a seven-year, $4 billion deal with American Express which the company inked last February.

But IBM does not typically use acquisitions to boost its top line, and Joyce said the PwC Consulting deal does not represent a shift in the company’s thinking.

“This opportunity came along, and it just fit right in our strategy,” he said.

With PwC’s business-consulting muscle, IBM, whose Global Services unit was focused mostly on systems integration and IT consulting, substantially expands the scope of its offerings and would be the leading business consultant by a very wide margin, according to Albert.

“The hardware and software are becoming commoditized, and the only way that a company can produce a solution in this space is with services and the right skills,” said Albert, a 30-year IBM executive who left the company in 1989.

“And one of the fastest ways to ensure that that’s done is to do what IBM did with PwC, which Hewlett-Packard tried to do and was unsuccessful.”

HP (HPQ: Research, Estimates), which earlier this year bought out rival Compaq Computer, in November 2000 walked away from a deal to buy PwC Consulting after the two companies failed to reach an agreement on the price. At that time, company watchers were expecting a deal valued at as much as $18 billion.

For its part, PricewaterhouseCoopers has been anxious to get rid of its consulting business to avoid potential conflicts of interest where it serves as both the financial auditor and the consultant for a single company.

Earlier this summer, PwC Consulting unveiled plans to rename itself “Monday” to distinguish it from PricewaterhouseCoopers as the company prepared for an initial public offering.

Joyce said IBM had first considered buying PwC Consulting over two years ago, but could not justify the valuation at that time.

“However, the current market has created a unique opportunity for both parties to come to mutually acceptable terms,” he said.

The estimated $3.5 billion purchase price will be in the form of $2.7 billion dollars in cash, $400 million in a convertible note and $400 million in stock.

Greg Brenneman, president and CEO of PwC Consulting, said the company’s partners will receive their portion of the sale in equity, and most also are getting stock options as part of an incentive package to remain with the firm following the acquisition.

Additionally, he said the company has promised a “significant number of stock options” to select employees in an effort to stay on after the deal is done, although he did not provide specifics.

“It’s very attractive, I think, to the employees,” Brenneman said.  

   

  Find this article at: http://money.cnn.com/2002/07/30/technology/ibm_pwc/index.htm

———–

-Ian.

——- http://pulver.com/reports/vonews.html

Key3Media, the World’s Leading Producer of Technology Tradeshows and Events, Announced Its Strategic Acquisition of Networking Pioneer pulver.com’s VON and SIP Events

LOS ANGELES–Sept. 11, 2001–

Global Acquisition Completes Months of Planning that Places Key3Media at the Forefront of Networking Space

Key3Media Group, Inc. (NYSE: KME) today announced that one of its wholly-owned subsidiaries has acquired two major pulver.com event brands: Voice on the Net (VON) Conferences and Session Initiation Protocol (SIP) Summits. Pulver.com is considered one of the industry leaders in the Networking and IP communications space. As part of a long-term agreement, pulver.com President and CEO Jeff Pulver will continue to manage the VON and SIP tradeshows and conferences for Key3Media.

This acquisition culminates six months of strategic planning and analysis to position Key3Media as the industry leader for networking tradeshows and events. After months of research it became quite clear that pulver.com’s VON and SIP events were a perfect fit for Key3Media and a match that will quickly differentiate Key3Media networking events in the future.

“Ten years ago the PC defined the IT industry. Today the network is defining the industry and will continue to do so for the next decade. This acquisition strategically positions Key3Media to play a dominant role in the networking space,” said Fredric D. Rosen, Chairman and CEO of Key3Media Group, Inc. “Key3Media’s NetWorld+Interop brand has always been the definitive networking event in the industry. Now the synergies created with this new acquisition position Key3Media as the unparalleled leader, bringing together buyers and sellers in the networking and IP communications industries.”

Jeff Pulver, President and CEO of pulver.com, Inc., is a globally respected visionary with more than a decade of experience in Internet and IP communications and is a dynamic entrepreneur. He is the publisher of Internet technology related research such as The pulver Report, the founder of the VON and SIP events, and the producer of the Presence and Instant Messaging (PIM) trade show. Mr. Pulver is the co-founder of the VON Coalition, Free World Dialup, Vonage and WHP Wireless and is one of the true pioneers in Internet telephony whose expertise is widely utilized in the telecommunications industry.

There are six VON Conferences around the world each year. The VON Conferences focus on the convergence of the telecom and Internet industries. The next VON Conference, Fall 2001 VON, will be taking place October 15-18, 2001 at the Georgia International Convention Center in Atlanta, Georgia. Other upcoming VON Conferences will be held in Hong Kong in November, San Jose in January, Seattle in April, and Helsinki in June. There are currently two SIP Summits each year. Fall 2001 SIP Summit will be taking place September 10-13 in Austin, Texas. SIP Summit enables attendees to listen to the senior executives responsible for driving the international SIP industry forward and to meet with these players to take advantage of unique business and personal networking opportunities.

“As the world’s leading information technology event producer, Key3Media has set out to reinvent the tradeshow industry with customer-centric programs and community-focused content,” said Jeff Pulver, President and CEO of pulver.com, Inc. “I am pleased that pulver.com’s VON and SIP events will now have a unique opportunity to grow to the next level under the Key3Media umbrella.” Corporate Solutions of Fairfield, Connecticut was the exclusive representative for pulver.com in this transaction.

About pulver.com

pulver.com builds community for the IP Communications industry through conferences, newsletters, mailing lists, analysis, liaison roles, advise to start-ups, summits, test projects and its web site. This role started with the emerging VoIP industry and has expanded into the instant messaging, wireless internet and broadband home spaces, since such services provide an integral back end to the increased functionality of IP-based communications. The company’s founder, Jeff Pulver, has been involved with the technology since the beginning. For more information, visit www.pulver.com.

About Key3Media…

Key3Media Group, Inc., is the world’s leading producer of information technology tradeshows and conferences, serving more than 6,000 exhibiting companies and 1.5 million attendees through 60 events in 18 countries. Key3Media’s products range from the IT industry’s largest exhibitions such as COMDEX and NetWorld+Interop to highly focused events featuring renowned educational programs, custom seminars and specialized vendor marketing programs. For more information about Key3Media, visit www.key3media.com.

Certain matters discussed in this release are “forward-looking statements,” including statements about Key3Media’s future results, plans and goals and other events which have not yet occurred. These statements are to qualify for the safe harbors from liability provided by the Private Securities Litigation Reform Act of 1995. You can find many (but not all) of these statements by looking for words like “will”, “may”, “believes”, “expects”, “anticipates”, “plans” and “estimates” and for similar expressions. Because forward-looking statements involve risks and uncertainties, there are many factors that could cause Key3Media’s actual results to differ, materially from those expressed or implied in this release. These include, but are not limited to, economic conditions generally and in the information technology industry in particular; the timing of Key3Media’s events and their popularity with exhibitors, sponsors and attendees; technological changes and developments; intellectual property rights; competition; capital expenditures; and factors impacting Key3Media’s international operations. In addition, the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Prospectus Supplement dated June 22, 2001 filed by Key3Media with the SEC under Rule 424(b) relating to its high yield bond offering and the section entitled “Item 1.Business – Certain Factors That May Affect our Business” in the Annual Report on Form 10-K for the year ended December 31, 2001 filed by Key3Media with the SEC contain important cautionary statements and a discussion of many of the factors that could materially affect the accuracy of Key3Media’s forward-looking statements and/or adversely affect its business, results of operations and financial position. These statements and discussions are incorporated herein by reference. Key3Media does not plan to update any forward-looking statements.

Key3Media, COMDEX, NetWorld+Interop, Interop and associated design marks and logos are trademarks owned or used under license by Key3Media Events, Inc., and may be registered in the United States and other countries. NetWorld is a service mark of Novell, Inc., and is registered in certain jurisdictions. Other names mentioned may be trademarks of their respective owners.

U.S. paycheques are rising faster as skills shortage grows

Karyn Standen The Ottawa Citizen

The high-tech skills shortage in Canada and the U.S. is getting worse, and Canadian companies might be the biggest losers because U.S. firms can offer fatter salaries to attract the cream of the scarce technology talent, a new report says.

The study, Salary Increases, 1997-1999 – Informatics Occupational Skills Streams, was released yesterday by two Ottawa research firms, The Software Human Resource Council and Personnel Systems.

The report says employers in both countries paid technology professionals such as programmers and developers an average of 10 to 12 per cent more in the past two years, beating out average wage increases found in other industrial sectors.

That, the report goes on to say, shows “that both Canada and the U.S. are continuing to experience shortages of highly skilled professionals in the information technology sector É because above-average salaries can be attributed to employers’ needing to attract workers whose skills are in high demand.”

Canada might be at the greatest risk because “IT positions in the U.S. can be seen as becoming increasingly attractive to highly skilled Canadian IT workers, given higher U.S. salaries –paid in U.S. dollars — generous incentive packages, preferential tax treatment and the active promotion of challenging work environments by U.S. firms.”

“We have a problem,” Robyn Gordon, director of communications at the Software Human Resource Council, said of Canadian companies trying to compete with U.S. firms for highly trained technology workers.

While Canadian companies have in the past largely kept pace with high- tech salary increases offered by U.S. firms, U.S. wages for key skills, such as systems development and design, are beginning to outstrip those offered in Canada. That, she says, means “the potential … is there” that Canadian companies might reach a point where they can no longer keep up with U.S. wage increases.

When that might happen is “difficult to predict,” she added.

Even so, Canadian companies must assume the increased costs of trying to match U.S. wages, warned Paul Swinwood, president of the resource council.

“Canada is part of a global economy, and if we’re going to be competing globally, we’ll have to grow in step with the biggest user of these skills, the Americans.”

The study the council called “the first Canada-U.S. salary comparison of its kind,” looked at 24 high-tech occupations, such as systems analyst, developer and programmer.

Mr. Swinwood said more analysis is needed to determine ongoing skills shortage trends.

——– Original Message ——– Subject: Canada at risk as tech salaries soar Date: Thu, 03 Jun 1999 08:57:59 -0700 From: Lina Arseneault To: ex-pats-can [at] cisco [dot] com

Canada at risk as tech salaries soar, study says U.S. paycheques are rising faster as skills shortage grows http://www.ottawacitizen.com/ in Top Stories (Front Page Section)