OPINION - Wall Street Journal

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Dec 11, 2013 ... Chrysler bailout, Fiat Chairman ... Fiat, which owns a majority stake in Chrysler ..... sic techniques to establish that the skull belonged to a.

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THE WALL STREET JOURNAL.

Wednesday, December 11, 2013 | A19

OPINION T

hings are going well for Chrysler. Ipso facto, they aren’t going so well for President Obama’s fuel-economy schemes or his partner in the Chrysler bailout, Fiat Chairman Sergio Marchionne. Chrysler has now reported nine straight quarters of profits on the strength of strong selling pickups and SUVs, not exactly the fuel-sipping cars Mr. Obama envisioned. This performance, moreover, comes despite the late of the BUSINESS arrival new Jeep CheroWORLD kee. The vehicle By Holman W. is getting rave Jenkins, Jr. reviews, but why was its rollout stalled? Chrysler needed time to fine-tune the software driving its ninespeed transmission. Why a nine-speed transmission? Because of fuel-mileage overkill driven by Mr. Obama’s new rules, which require Chrysler steadily to increase its fleet average to 54.5 miles per gallon by 2025 from 20.6 last year. Why do we say overkill? Because the technology adds more in cost than it does in value for consumers, given the declining price of gas. At $3.25, the price of gasoline today per mile traveled, in real terms, is lower than it was in the 1950s. By one academic estimate, gas would have to reach $5 before consumers would voluntarily buy the 35.5 mpg cars Mr. Obama requires carmakers to sell in 2016. Now multiply this value shortfall by, oh, the $157 billion that even the Obama administration estimates the auto industry will have to spend to meet the mileage

The 2014 Jeep Cherokee at the Los Angeles Auto Show, Nov. 21. mandates just between 2017 and 2025. The tension is modest now, as exemplified by the Cherokee’s nine-speed gambit. But in the years ahead it will drive the industry off a regulatory cliff as America’s domestic energy resurgence (which Mr. Obama failed to notice) likely keeps real gasoline prices well within their historical range. Let’s turn to Mr. Marchionne. Fiat, which owns a majority stake in Chrysler, received its original 20% share free from the Obama administration in return for a promise to build Chrysler the teensy eurocars Mr. Obama wants Americans to buy. Another bailout beneficiary was a United Auto Workers health fund, which holds a 41.5% stake. Mr. Marchionne wants to buy this stake to complete a merger of the two companies, but he and the UAW are at loggerheads over price. And with every surge in Chrysler’s financial results due to surging demand for highly profitable pickups and SUVs, the price gets more out of reach for Fiat,

whose fortunes have been blighted in Europe’s debt crisis. Chrysler’s profits are keeping Fiat in the black nowadays, yet Fiat’s own credit rating and turnaround efforts would be jeopardized at any price approaching the $5 billion the UAW fund is reportedly asking and that Chrysler increasingly appears to be worth. Chrysler’s own advisers recently valued the company at $10 billion, implying a lower earnings multiple than Ford or GM. After all, Chrysler is a small regional player, though its Jeep brand has global potential. Chrysler’s valuation is also diminished by the fact that it’s shackled to a flailing European car maker. Its value is further diminished by the fact that it lacks the electric cars that Obama mandates will eventually require it to build and sell even at a loss. Even so, investors are saying Chrysler is worth three times what Fiat is worth once Fiat’s stake in Chrysler is subtracted. This is why, despite his confident talk, Mr. Marchionne’s impasse with the UAW health fund

BOOKSHELF | By Mike Jay

may prove intractable. He would undoubtedly say our valuation comparisons are unfair: Chrysler would not be doing so well if not for Fiat’s contribution; Chrysler would be doomed under the Obama mileage mandates without Fiat. But these assumptions are questionable, especially since the Obama mandates are likely to be rolled back after Mr. Obama leaves office so his successor won’t face a new round of auto bankruptcies. Meanwhile, the UAW health fund has every reason to complain that it’s being offered a bum deal for its minority stake in Chrysler, whose implicit value is diminished with every suggestion that its profits and cash would be pillaged to fund a Hail Mary makeover of Fiat. Chrysler is a tragedy in the full Greek sense. The 1990s and early 2000s, when America’s fuel-economy rules were allowed to lapse into irrelevance, were actually an era of vast improvement in automotive reliability, quality and, yes, fuel efficiency—though the gains were deployed mostly to give consumers more power, safety and comfort for a given level of gas mileage. Then, George W. Bush, grasping vainly for political juju to exorcise his Iraq demons, and Barack Obama, posing as planet savior, took turns upping the ante on fueleconomy mandates that require car makers to begin making economically insane trade-offs. Follow the chain of consequences and you have today’s bizarre Chrysler situation, in which Chrysler’s taxpayer-financed rebound is in danger of being hijacked by Fiat using our own fuel-economy rules as a club.

An Economic Uptick Hides Grim Truths

he noted economist Robert J. Gordon published a paper last year arguing that U.S. economic growth was in the process of falling from its historical average—2.17% per capita annually between 1929 and 2007—to half that level or less in coming decades. He cited six “headwinds” that tend to retard growth: demography, education, inequality, globalization, coping with the effects of energy consumption on the environment, and POLITICS the overhang of & IDEAS consumer and By William government debt. A. Galston Whatever the merit of Mr. Gordon’s broad prediction, his concern about the impact of demographic change on economic growth is hard to ignore. November’s employment report was good news. But a one-month snapshot obscures as much as it reveals. Consider the following: During the past 12 months, the Bureau of Labor Statistics reports, the civilian non-institutional population— the pool from which the labor force is drawn—rose by about 1%, from 244.2 million to 246.6 million. But the actual labor force didn’t budge. It was 155.3 million in November 2012 and 155.3 million in November 2013. The explanation: The labor-force-participation rate fell by 0.6 points (1%) during the past year, counterbalancing population growth. This decline is nothing new.

annually between 2023 and 2038—one quarter of the rate between 1970 and 2000—and will increase at roughly the same rate in later years as well. These developments, Mr. Gordon argues, foreshadow a fundamental change in the U.S. economy’s performance. Between 1970 and 2000, America enjoyed a “demographic dividend.” Because

An aging population means slower growth, but it’s not too late to spur productivity. the labor force was rising faster than the adult population, raising hours of work per capita and allowing per capita GDP to rise faster than productivity. But now the dividend is turning into a tax. Because the share of workers in the population is declining, output per capita will grow more slowly than productivity. All other things being equal, this trend augurs much slower growth in Americans’ income and wealth. Demography shapes destiny but does not determine it. There are national strategies we could adopt to mitigate, if not reverse, the impact of dramatically slowed labor-force growth. We could, for example, increase the rate of population growth by adopting pronatalist policies (as France has done) and expanding immigration. We could also do more to en-

courage labor-force participation. We could institute policies to ensure that young adults who don’t attend college receive meaningful training for skilled trades, many of which now face labor shortages. We could offer more people over age 55 the opportunity to work, full or part-time. We could reform the tax code to reduce the sky-high marginal rates on second earners in lower-middle-class families. We could—and should—do more to lower the odds that today’s longterm unemployed will drop out of the labor force permanently. Discouraging employers from discriminating against these workers would help, as would an aggressive effort to move them into part-time work while continuing a portion of their unemployment benefits. Finally, we could give a high priority to boosting the rate of productivity growth. Between 1891 and 1972, Mr. Gordon tells us, U.S. labor productivity rose at an annual rate of 2.33%. Since then, with the exception of a brief upward bounce between 1996 and 2004, it has averaged only 1.36%. Mr. Gordon is pessimistic that we can do much about this, and he is not alone. But we should do what we can—for example, by addressing the decline in innovation and entrepreneurial startups that the Kauffman Foundation has diagnosed. One thing is clear: If we don’t try, productivity will likely languish, further depressing per capita economic growth. And when the pie is barely expanding, a protracted period of zero-sum politics is the likely, ugly result.

We’re Not Easing Sanctions on Iran

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he intense pressure of international sanctions, led by the United States, brought the Iranian government to the negotiating table in Geneva, where, on Nov. 24, the six major powers and Iran agreed to a Joint Plan of Action on Iran’s nuclear program. As the principal U.S. official charged with crafting and enforcing our sanctions program, I am confident that the sanctions pressure on Iran will continue to mount. Iran will be even deeper in the hole six months from now, when the deal expires, than it is today. Here’s why. To begin with, the relief package in this interim deal is economically insignificant to Iran. The lion’s share of the relief comes from granting Iran access, in installments, to $4.2 billion of its own revenues currently trapped outside Iran. In addition, U.S. sanctions on Iran’s petrochemical exports and its auto industry will be temporarily suspended. We estimate that this additional trade could generate about $1.5 billion in revenue over the next six months—but only if Iran is able to find customers to buy its cars and petrochemical products. This will be difficult: There are long-standing problems with Iran’s auto sector, and petrochemical importers prefer long-term contracts, which aren’t possible given the six-month

duration of the deal. The Joint Plan also suspends sanctions on Iran’s ability to buy and sell gold. But because remaining prohibitions preclude Iran from using either its foreign reserves or its own currency to buy gold, this provision is of limited value. Any gold Iran purchases would be offset by the hard currency it would spend to buy it.

Tehran will be deeper in the hole six months from now. Here’s why. Under strict guidelines, the deal also allows Iran to transfer $400 million of restricted Iranian funds to defray tuition costs for Iranian students studying abroad. If the Iranians comply with their obligations under the Joint Plan, over the next six months they will stand to receive $6 billion to $7 billion in relief, mostly by gaining access to their own money. Not $1 comes from U.S. taxpayers. Viewed in light of Iran’s struggling economy, this sum is inconsequential. Iran is in a deep recession—its economy contracted last year by more than 5%, and it is on pace to contract again this year. Its annual inflation rate now stands at about 40%. Iran’s currency, the rial, has lost around 60% of its value against the dollar since 2011. The total relief is a small frac-

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By David Cohen

Between 1970 and 2000, the share of adult Americans in the workforce grew substantially, as baby boomers reached adulthood and women surged into employment outside the home. Yet these trends, which fueled economic growth and dynamism, peaked around 2000. Since then, women of all ages have slowly retreated from the workforce. By 2020, the Labor Department projects, women’s laborforce participation will be lower than in 1990. The picture for boomers is even more dramatic. In 2000, that entire huge cohort was in the prime working age (25 to 54 years) when workforce-participation rates are at their peak. Every year since, more boomers have moved into the 55-and-over cohort in which participation declines significantly. By 2020, every boomer will be older than 54, and the baby-bust generation that follows won’t come close to filling the gap. The bottom line is this: The U.S. labor force is in the process of shifting from an era of rapid expansion to much slower growth. After 1970, the labor force grew at an annual rate of 1.6%, slowing to 1.3% by 2000 as women’s laborforce participation neared its peak. From 2000 to 2010, growth slowed to 0.8%, and the Labor Department projects a further decline to 0.7% during the current decade. Beyond 2020, the downward trend continues. The Congressional Budget Office projects that the labor force will grow by only 0.4%

tion of the roughly $80 billion Iran has lost since early 2012 because of U.S. and European Union oil sanctions, and of the nearly $100 billion in Iran’s foreign-exchange holdings that are mostly restricted or inaccessible due to U.S. financial and banking sanctions. Iran’s economy will also continue to suffer because the core architecture of U.S. sanctions—especially our potent oil, financial and banking sanctions—remains firmly in place. The oil sanctions alone cost Iran about $5 billion a month in lost sales, meaning that over the six-month duration of the Joint Plan, Iran will lose about $30 billion in oil revenue. Iran’s access to whatever oil revenue it earns, moreover, won’t be available for transfer or repatriation. All of our sanctions against major Iranian financial institutions also remain in place, which means that Iran will remain largely cut off from the international banking system, curbing its ability to move or spend its cash. The sanctions that forbid investment in Iran’s energy sector, including helping to develop Iran’s oil and natural gas resources, remain in place, as does the long-standing comprehensive ban on U.S. business with Iran. As President Obama said when he announced the Joint Plan, we are fully committed to vigorous enforcement of these sanctions. We know that sanctions do not implement themselves. To disrupt

and disable those facilitating Iran’s nuclear and missile programs, we will identify front companies, evaders and malefactors and sanction them. Along with our partners across the U.S. government, my team at Treasury has done so more than 600 times in the last several years. This will continue unabated. To maintain pressure on Iran’s economy, we will continue to present foreign banks with a stark choice: They can either do business with designated Iranian banks and businesses, or they can do business with the U.S.—not both. To keep Iran’s oil revenues depressed, we will ensure that Iran will not be able to export one additional barrel beyond the current low levels. And to hold back latent interest in trade with Iran, we will communicate a blunt message to every foreign official, businessperson and banker who thinks now might be a good time to test the waters: We are watching, and we are poised to act against anyone, anywhere, who violates our sanctions. Sanctions gave Iran a powerful incentive to accept this first-step deal, and they will be key to negotiating the comprehensive resolution that ensures Iran cannot obtain a nuclear weapon. Now is no time to let up—and we won’t. Mr. Cohen is the undersecretary for terrorism and financial intelligence at the Treasury Department.

Hawkeye Confidential Skull in the Ashes By Peter Kaufman (Iowa, 284 pages, $19.95)

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n a freezing February night in Iowa in 1897, a fire razed the general store in the small settlement of Walford. The following morning, a charred skeleton was discovered in the ashes and assumed to be that of the store owner, Frank Novak, who was known to sleep on the premises. But the county attorney, a sharp young Irishman named M.J. Tobin, used the latest forensic techniques to establish that the skull belonged to a local farm laborer. Novak, who had recently taken out the huge sum of $27,000 in life insurance from five different companies, had disappeared. In the Novak case, Peter Kaufman, the author of “Skull in the Ashes,” has found a compelling entry point into a world on the cusp of modernity, far from the bright lights of Chicago or New York but nonetheless illuminated by new technologies, social reforms and burgeoning national mass media. More specifically, Mr. Kaufman argues that the case helped transform the American public’s perception of detectives: Previously stereotyped as lowlife peepers or thugs, they were increasingly seen, from this point on, as brave and public-spirited, with a keen intelligence and can-do spirit that local sheriffs often lacked. This was the moment that detectives began to populate dime novels and truecrime magazines, whose laconic and hard-boiled style Mr. Kaufman neatly mirrors. Mr. Kaufman, a journalist and novelist, spent six years researching the story. He has found a wealth of primary sources on which to draw, allowing him to reconstruct the many twists and turns of the narrative from multiple points of view. From its incendiary opening to its eventual courtroom dramas, the case proved irresistible to Iowa newspapers, which competed with one another for details of the investigation and exclusive interviews with eyewitnesses, lawyers, detectives, and relatives of the accused and deceased. In addition to noting the lurid gossip, leaks and speculations of the “yellow journalism” that tracked the story on a daily basis, the author draws on detective reports, witness testimonies and court transcripts. The story’s obvious villain is Novak, an outwardly plausible businessman with a sociopathic double life. Born into a family of Bohemian immigrants who populated the area—the great Bohemian composer Antonin Dvorak had recently spent a summer with his compatriots in Iowa after completing his New World Symphony—Novak embarked on a series of ventures, like the general store, that seemingly capitalized on his father’s hardscrabble life of farming and turned him into a prominent and ambitious local figure of whom great things were expected.

An 1897 murder in Iowa captivated America’s mass media and catapulted private detectives into the pantheon of national heroes. But the investigation into the fire exposed another side of Novak’s character, which had been artfully concealed from public view: He was massively in debt, with a serious gambling habit and a history littered with suspicious incidents, including a previous general store that had burned down and a former partner who had died after falling from a train in 1893 while traveling with Novak to the Chicago World’s Fair. The Thiel Detective Agency, an offshoot of the Pinkertons, was called in by the insurance companies who were obliged to pay out in the event of Novak’s death. It succeeded in picking up his trail. Novak had been traveling under a series of assumed names up to the remote outpost of Juneau, Alaska, a jumping-off point for the trail down the Yukon River to the Klondike gold fields. The agency called up its most hardened tracker, an Arizonan veteran of the Apache Wars named Red Perrin, to bring in its man. “Like a knight on a chessboard,” Mr. Kaufman writes, “Perrin had moved forward into position. Now it was time for him to follow the red tip of the compass needle.” Perrin’s journey down the Yukon is a tale of deathdefying adventure in the mold of Jack London, who traveled the same route a few weeks later. After building his own boat, running the notorious white-water rapids and being swarmed by mosquitoes, Perrin reached Dawson City, an anarchic settlement dominated by saloons, brothels and gambling dens where wealth and debauchery rubbed shoulders with treachery and despair: Gold dust could be panned from the sawdust on barroom floors, but most prospectors left penniless and broken. Here he apprehended Novak, clamped him in irons and escorted him back to civilization, where the pair was met by ever-larger scrums of reporters and “Kodak fiends” attempting to carve out their own stories and careers. When the case was finally brought to court, a very different challenge presented itself: convicting Novak on the basis of circumstantial evidence alone. There were no witnesses to the alleged murder and no traces of his presence at the crime scene. In previous cases, juries had proved reluctant to accept a charge of first-degree murder without direct evidence of the crime. It was Tobin’s job to create a chain of facts so robust that only a deliberate homicide by Novak could account for them; it was the job of Novak’s lawyer—a brash, attentionseeking character named Thomas Milner who advertised himself in the local newspapers as “seldom licked, never surrender”—to break the chain by introducing elements of doubt into Tobin’s narrative by any means possible. Milner’s hardball tactics included leaks to the newspapers that would set them speculating on alternative explanations and a vicious challenge to the character and testimony of Perrin, the outcome of which would prove decisive to the verdict. By the end of the trial, the New York Times and Chicago Tribune were reporting events as enthusiastically as the Iowa press. The telltale forensic details and striking photographic portraits of the protagonists had captured America’s imagination and were setting the template for the 20th century’s golden age of the crime story. Mr. Jay is the author of “A Visionary Madness” and “The Atmosphere of Heaven.”

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The U.S. Bailout of Fiat

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