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If not affected directly by outsourcing you will be indirectly by the
economy.
what exactly is Outsourcing, how did it get started, and how are you affected? I guarantee that if you are not
affected directly by outsourcing, you are affected indirectly by a staggering economy. Here is how
outsourcing can affect you.
The Defending American Jobs Act of 2004 (See Bills To Limit Outsourcing) is being introduced by Rep.
Bernard Sanders (Ind.-Vt.) with 50 co-sponsors from both the Republican or Democratic parties. Why does
this seem necessary?
The state level: Legislatures considering bills to limit outsourcing
1.
Alabama
(HB
358;
SB
2.
Arizona
(HB
3.
California
(AB
1829;
AB
1845;
SB
4.
Colorado
(SB
169;
SB
5.
Connecticut
(SB
430,
SB
6.
Georgia
(HB
7.
Hawaii
(HB
8.
Illinois
(HB
4550;
SB
9.
Indiana
(SB
4;
HB
1275;
HB
1381;
HB
10.
Iowa
(HF
2400;
SB
11.
Kansas
(HB
12.
Kentucky
(SB
13.
Maryland
(HB
183;
HB
14.
Michigan
(HB
15.
Minnesota
(HF
1816;
SF
16.
Mississippi
(HB
464;
HB
17.
Missouri
(HB
1474;
HB
1497;
SB
18.
Nebraska
(LB
19.
New
Jersey
(SB
494;
AB
20.
New
Mexico
(SB
21.
New
York
(AB
1092;
SB
22.
North
Carolina
(SB
23.
Rhode
Island
(HB
24.
South
Carolina
(HB
25.
South
Dakota
(HB
26.
Tennessee
(HB
3235;
SB
2344;
SB
27.
Vermont
(HB
647;
HB
28.
Virginia
(HB
1010;
HB
243;
HB
315;
SB
29.
Washington
(HB
2405;
HB
2768;
HB
3187;
HB
30.
West
Virginia
(HB
4644;
HB
4645;
SCR
31. Wisconsin (AB 761; SB 389)
300)
2581)
1452)
170)
577)
1281)
1922)
2375)
1101)
2063)
2524)
278)
1458)
4940)
1792)
1293)
1029)
1223)
2133)
416)
6040)
991)
5678)
4434)
1116)
2822)
702)
151)
2459)
76)
The federal level: Congressional bills under consideration
‘Jobs
for
America
Act
of
2004’
(Senate
S
2090)
Introduced 2/12/2004, by Senate Minority Leader Tom Daschle, with co-sponsors Senators Edward Kennedy,
Hillary Rodham Clinton and Tom Harkin. The bill would amend the Worker Adjustment and Retraining Notification
(WARN) Act. It would require companies to give employees and communities at least three months notice before
outsourcing jobs. Companies would also be compelled to report outsourced jobs to the Department of Labor, which
would be required to report outsourcing statistics to Congress annually. Last action on this bill: It was referred to
the Committee on Health, Education, Labor, and Pensions on February 12, 2004.
‘Dodd
Amendment’
(Senate
SA
2660)
Amends the ‘Jumpstart Our Business Strength (JOBS) Act’ (S 1637). Proposed 3/3/2004 by Christopher Dodd,
with Edward Kennedy and Russ Feingold among the 5 co-sponsors. This amendment forbids the overseas
performance of any part of a federal contract. It would also withhold federal funds from states that contract to
locations outside the US. Last action on this amendment: It passed 70 – 26. Last action on the bill to which this
amendment is attached: 3/24/2004 Senate floor actions. Status: Motion by Senator Frist to reconsider vote by
which cloture was not invoked on the motion to recommit entered in Senate.
‘Defending American Jobs Act” (House HR 3888)
Introduced 3/3/2004 by Bernard Sanders; the bill has 66 co-sponsors, including Barney Frank and Dennis
Kucinich. This bill would forbids the government from providing federal funds to companies that lay off a larger
percentage of their American workers than of their foreign workers. It would affect organizations like the US
Export-Import Bank and the Overseas Private Investment Corporation. Last action on this bill: It was referred to the
House Committee on Government Reform on 3/3/2004.
‘Commission
on
American
Jobs
Act’
(House
HR
3878)
Introduced 3/4/2004 by Maxine Waters; no co-sponsors. The measure would create the Commission on American
Jobs, which would collect data on outsourcing and propose measures to limit it. Last action on this bill: It was
referred to the House Committee on Education and the Workforce on 3/2/2004.
[no
short
title]
(House
HR
3191)
Introduced 3/4/2004 by Maxine Waters; no co-sponsors. The measure would prohibit any company that has
outsourced jobs in the previous 5 years from receiving any federal grants, contracts, loan guarantees, or other
funding. Last action on this bill: It was referred to the House Committee on Government Reform on 3/4/2004.
The federal level, part 2: Presidential candidates’ proposals
Bush:
George Bush has not specifically stated his policy position toward outsourcing. But with both N. Gregory Mankiw
and John Snow—Bush’s Chief Economic Advisor and Treasury Secretary, respectively—coming out publicly in
favor of outsourcing, it is likely that Bush will employ a hands-off strategy towards outsourcing companies
Kerry:
John Kerry’s proposal focuses on taxing overseas business income at the same rate as money made at home.
This proposal would apply to businesses who outsource, but not those who have foreign locations to sell to
foreigners. Under the current tax code, he said, companies get $8 billion a year in tax breaks by shifting operations
overseas.
The global level: The World Trade Organization
Any domestic measures targeting outsourcing may be challenged at the WTO if they are seen to be in breach of
our agreements there. Even if prohibiting outsourcing is technically legal under WTO rules—experts are debating
this—it is widely perceived as ‘anti-free-trade” behavior on the part of the US. If US anti-outsourcing laws are found
to be in violation of WTO rules, the WTO has the power to impose penalties.
Government
Procurement
Agreement
The Indian government recently criticized the ‘Dodd amendment’ (passed March 4 as an amendment to the ‘JOBS’
Act), which forbids outsourcing on the part of the federal or state governments. In response, the US Trade
Representative, Robert Zoellick, noted that India has not signed onto the WTO Government Procurement
Agreement. This voluntary plurilateral agreement (all agreements at the WTO are voluntary) specifically forbids
discrimination against signatories in the area of government contracts. There are 28 signatories to this agreement,
almost all of whom are developed countries.
Policy Inventory Collected by Monika Francois
was on gwcsg.gwu.edu
Why does this seem necessary?
In his press statement, Rep Sanders said: "In my view, it is an insult to the middle class of this country that
American taxpayer dollars are being used to provide loans, loan guarantees, grants, tax breaks and
subsidies to huge and profitable corporations who then say to the American people: 'Thanks for the welfare,
chumps. But we're closing your plant and taking your job to China,'"
What is Outsourcing and how did it begin?
Information Technology (IT) (otherwise known as computer and internet technology) is the initial culprit.
Beginning in the late 80's, IT workers were needed to work on hardware and/or software. When the Internet
exploded, IT positions swelled and commanded exceptionally high paying jobs to fill the need. Soon
"everyone" had some sort of technical certification. Eventually businesses wanted a return on their IT
investment and IT budgets were cut. Then economy went south and business began seeking a less
expensive IT worker resource. Thus seeking a less expensive labor force outside of the U.S., (Outsourcing)
began. As other departments saw a cheap labor force offering corporate savings, positions other than IT
were considered for outsourcing. (See below for article called Outsourcing, IT jobs, and DBA's)
Outsourcing, IT Jobs, & DBAs
Congratulations, we worked ourselves out of our jobs. Now what do we do?
by Buck Woody
Posted May 11, 2004
I built my first computer in 1979. It had 1K of RAM, used a cassette tape as nonvolatile storage,
had a black and white TV for a monitor, and the keyboard was mounted in a wooden box. I coded
everything (in assembly) from the operating system through a word processor. I had a lot of fun
on that little Frankenstein system. I wasn't alone—in those days many people interested in hightech carried both a soldering iron and an assembly manual.
Most high-tech employees back then worked on mainframe systems. When PCs hit the market in
1981, there were only a few IT workers who were familiar with them, and they did it all—from
hardware to software, from training to administration.
Few understood or cared what IT did or how it did it. The computer was just a black box, and the
IT department was expected to keep it running. Business schools hadn't ramped up to teaching
computer science disciplines yet, so having a background in the business side was essential for
IT workers who needed to bridge the gap.
As LANs became more popular in the workplace, more and more IT workers were needed.
Specialization began to take hold, and IT workers either worked on hardware or software—rarely
both.
Then came the Internet. If you could spell IT, you could get a job. You could name your pay, and
if you lived anywhere near Silicon Valley, signing bonuses and on-the-job perks were
commonplace. Specialization became even more focused, not only between hardware and
software, but even down to the distinctions between routers and servers, and programming and
applications.
But then several major events came together to form the perfect storm. IT overheated and
couldn't keep up with its promises. It seemed that everyone had some sort of technical
certification, and more entered the workforce every day. Eventually businesses had enough
technology; they wanted a return on their technology investment. Spending slowed, and IT
budgets were cut. The U.S. economy took a nosedive, and cost pressures caused business to
look for cheaper IT labor. Outsourcing, and more recently, offshoring, began.
Many have been quick to blame offshoring as the major cause for job losses in the past three
years, and in fact 300,000 IT jobs have been sent to companies outside the United States. But
The Wall Street Journal recently reported that a much greater percentage of jobs (more than five
times as many) lost in the United States were lost to better productivity—and a lot of that is due to
you and me. We created and enhanced most of the productivity gains the economy enjoyed with
the application of high technology. As technology improves, more tasks can be automated, and
jobs that are automated don't need to be staffed by humans.
Congratulations, we worked ourselves out of our jobs.
We can't blame our employers. A computer with an initial cost of $2,000 is cheap when compared
to a person making $80,000 a year with benefits, rising health costs, and other liabilities.
Companies (especially those that are publicly traded) are constantly pressured to lower costs.
Add to this the fact that current U.S. tax laws reward companies for investing in machinery and
not for hiring, and the recent hiring trends become understandable. We who created the
productivity gains became its victims.
Like it or not, the IT employment landscape changed. Business Week recently featured an article
that stated that high tech will ship overseas to cheaper workers and "high touch" will stay here.
What this means is that if your job can be quantified into repeatable steps, it is a target for
outsourcing. This shouldn't surprise us; many IT jobs are at companies who provide an
outsourcing service themselves, such as payroll processing or Internet service hosting. It
basically comes down to this: If you can write down what you do everyday in just a few pages, it
can be outsourced. Even worse, it can be sent offshore if you don't need to be in a particular
place to do it.
To keep your job and progress in it, you need to make it more high touch. That means that the
jobs that will stay local are jobs that have close cultural ties to the business. In these jobs the
technology worker has a keen understanding of the business functions at hand and understands
how to communicate the benefits of their technology to those function principles.
Oddly enough, this data seems to be holding true for all countries, not just the United States.
Recently, I've seen articles on a few Indian firms that are moving some IT work to China. Even
then, however, familiarity with Indian business culture can keep an Indian job in India. It seems
that the high-tech jobs that stay close to home are the ones that have a close affinity to the
business.
And Then There Were Three
One such job is the database administrator, or DBA. DBAs have always had a business focus
because they are often called on to model the data businesses need.
In this column you'll learn the various jobs of the DBA. You'll learn how to maintain a database,
tune the server, and create new databases. Along the way we'll develop a real application using
that database. Most of these tasks are difficult to do remotely, and all are enhanced if you
understand the business.
Even if you're not interested in pursuing a career as a DBA, it helps to know how SQL Server
runs because it's become so integral to all things Microsoft. So much technology cries out for a
database—from Active Directory to Certificate Services right on to mail processing. Even the file
system needs the advantages a good database offers. You're miles (or kilometers) ahead if you
have a sound understanding of how a database system works. Besides, any knowledge is good if
it keeps your job close to home.
You might be surprised to learn that DBA isn't a single title. There are several roles involved in
the DBA world, each of which can be highly specialized. While these roles include many job titles,
the DBA position normally falls into three main camps: administrative DBAs, development DBAs,
and data architects.
Before we take a look at the roles the DBAs fill, it's important to understand the basics of how any
standard IT system works. Whether the system is large or small, clustered or individual, there are
four main layer involved: hardware, operating system, platform, and applications.
The hardware layer consists of all the equipment required to run the system. This isn't limited to
the computers; it includes the routers, cabling, and the like that connect the system to the outside
world. To adequately manage this layer, technical professionals need to understand packets, I/O,
how a CPU works, clustering, host bus adaptors, and hard disk spin rates. They also need to be
familiar with fiber optics, memory architecture, and more.
The operating system layer contains all the code that runs on the hardware layer. To manage this
layer the IT worker needs to be familiar with more than one software vendor because most large
shops run a mixture of miniframes, Windows Server, and Unix flavors. Having a comfort level with
how these operating systems interact is crucial.
Because most database engines integrate with the operating system security model, knowing the
security options on various operating systems is a must. Keeping up to date with patches, virus
protection, and other safety tools is also a must, as is knowledge of the monitoring and tuning
aspects of the operating system.
Next in line comes the platform layer. This is the reason for the system—mail, file and print,
Internet services, or in our case, SQL Server. Skills required to manage this system are dictated
by the platform software, but all include operations, tuning, maintenance, and disaster recovery.
At the top lives the application layer. The application layer is where the users interface to the
system. This layer might involve a simple client-server architecture; it might include a middle tier;
or it might even utilize an n-tier technology. In any case, the expertise required to manage this
layer includes a technical background in the application as well as good communications skills.
Administrative DBAs
Administrative DBAs (sometimes just called admins) handle the day-to-day operations of the
server. Their world normally revolves anywhere from the hardware layer up through the platform.
The administrative DBAs are responsible for managing the databases on the servers. That
means they are in charge of the security aspects of the databases and their objects such as
tables and views. This security goes beyond the controls normally found in places like network
access and operating system files, and this aspect of the job is normally the toughest.
The administrative DBAs also handle the maintenance of the system. This includes the periodic
reorganization of the database objects. Maintenance also includes determining the best strategy
for backing up the databases and the hierarchical archiving methodology. Note that the
administrative DBA implements this methodology but doesn't always have the responsibility for
developing the archival strategy.
The administrative DBA is also responsible for disaster recovery on the system. This includes
developing the tactics to recover from any foreseeable problem—a difficult task. Disaster
recovery goes further than just database backups; it includes off-site tape rotations and periodic
recovery tests. The mark of a good administrative DBA is a well-tested disaster recovery plan.
The task that requires the highest level of expertise for the administrative DBA is the monitoring
and implementation of performance tuning. Most operating systems and all Relational Database
Management System (RDBMS) engines include several metrics and tools that can spotlight
exactly where a performance issue lives.
Leaning more toward the application layer are the development DBAs. Many times a
development DBA comes up through the ranks as a developer and then takes over the
development system. These DBAs might begin by writing general code, and then move on to
specializing in tuning queries by rewriting them.
Development DBAs
Development DBAs are also familiar with indexes—which types to use and when to use them,
how to keep them up to date, and how to check their efficacy. They are versed in stored
procedures, which are small SQL programs that run on the server. They know when to tweak a
recordset to bring the fastest results.
You might be wondering what the difference is between a development DBA and a general
developer. Don't most developers have good Transact-SQL skills?
The answer is that many of them do. But some developers don't have to interact with databases
often (like game programmers) or specialize in another area such as user interface design,
algorithms, or some other programming discipline.
The primary difference between a developer and a development DBA is the serverwide focus of a
DBA. Whereas a program might run properly in a single-use environment, that often isn't the case
in an enterprise system. To save on hardware, licensing, and disaster recovery costs, many
companies abstract the database system to a single server or set of servers. When SQL code is
running in an environment where other SQL code is running potentially conflicting statements, it
takes a professional DBA to evaluate the interactions.
Locking and blocking management, performance tuning, and general server settings become
vastly more complex in a multi-use environment. Development DBAs pay less attention to user
interface and other client-specific development disciplines than a general developer.
Data Architects
Data architects are normally the most experienced DBAs, and are the closest to the business
side of the system.
The data architect is often called on by the business leaders to decide general policies about how
data is collected and used. It is often surprising to the company that collecting vast amounts of
data isn't really that difficult. The more important decisions that the data architect is called on to
make involve the data that should be collected, and most importantly, how it will be used. It is the
job of the data architect to explain the cost of data.
In addition to deciding the data that should be collected, there's the matter of how it is presented.
There are several transactional and reporting options to be considered. In large organizations,
information gained from the data becomes critical. With multiple sources and large stores of data,
the task of changing data to information moves into the worlds of analysis, statistics, cubes,
decision trees, and more. Most often you'll see a data architect come from the business side of
technology, and years of college-level math courses are de rigueur.
In this series, I'll guide you through the nuts and bolts of the various DBA roles. We'll move
together from the entry-level administrative tasks through the best programming practices for
Transact-SQL code. We'll take the output of that code and learn to do analysis and reporting.
Each article will spotlight a new area on the DBA development path. See you next month.
About the Author
Buck Woody is a technology consultant at Jabil Circuit in St. Petersburg, Fla. He has been
working with technology since he built his first Ziglog-Z80 computer in the late 1970s. Buck has
authored two books and serves as the SQL Server guide for InformIT. This article on
www.ftponline.com (Fawcette Technical publications) in Windows Server System Magazine.
Who is affected?
According to Who's Outsourcing?, In the year 2000 over 100,000 jobs were
outsourced. In 2005 over 1/2 million jobs will be affected and within 10 years
another 3.3 million will be outsourced. These jobs come from all walks of life:
management, business, computer, architecture, life sciences, legal, art design,
sales, and office. www.whosoutsourcing.com seems to be a np which says We
have added contact links to all American companies mentioned as
engaged in the practice of offshore outsourcing as reported in
news articles referenced by our site. You can find the composite
list of companies in the Outsourcing News section, and each
article provides a summary of the companies mentioned in the
article. {They take numbers from Source: U.S. Department of Labor and
Forrester Research, Inc. All numbers have been rounded. To say} According to these
figures, we stand to lose over THREE MILLION jobs in the next
12 years. As of 2003 we have lost over 400,000 jobs to
outsourcing. Think about our economy right now, and picture it
with another three million jobs gone. As bad as things look
today, the figures in the above table tell the tale: the real
exodus has yet to even begin!!
In light of these facts, "Should I worry?" seems an inadequate
question. Perhaps you should consider this instead:
"Can I afford to ignore the dangers of offshore outsourcing
any longer?"
The cost of inaction today could prove devastating to your way of
life in just a few short years!! As workers, we tend to feel
isolated and powerless. We must remember there is strength in
numbers and the American workforce has, can and will always
move mountains if mountains need be moved. We can help; we
provide information and the tools of action. Spend five minutes
with us today; make your voice heard!!
Bill Moyer in The Outsourcing Debate says: "It's no surprise that jobs are a huge issue in Campaign 2004. The debate
is hottest around the issue of American jobs heading overseas — or offshoring. Loaded terms such as "protectionism,"
and "Benedict Arnold CEOs" have made it into the discourse. And both candidates are attempting to come across as the
man who best knows how to secure and create American jobs."
The Outsourcing debate (www.pbs.org/now [with Bill Moyers]
It’s no surprise that jobs are a huge issue in Campaign 2004. The debate is hottest around the issue of American jobs
heading overseas – or offshoring. Loaded terms such as “protectionism”, and “Benedict Arnold CEOs” have made it to
the disourse. And both candidates are attempting to come across as the man who best knows how to secure and create
American jobs.
In February, President Bush faced harsh questioning from both sides of the aisle when N. Gregory Mankiw, the
chairman of the White House Council of Economic Advisers and a prominent Harvard University ecomomist, released
a report which spoke favorably of some aspects of the offshoring of jobs. “When a good or service is produced more
cheaply abroad, it makes more sense to import it than makes or provide it domestically.” The President quickly
countered by pointing to job retraining programs and a new bill forbidding the outsourcing of federal jobs overseas. In
recent speeches, President Bush has defended his administration’s policy while balancing it against concern for
domestic jobs. In May, the President spoke to this point in Dayton, Ohio:
We care about outsourcing in America. We want people working here. But the wrong policy would have
been, let’s go through ecomomic isolationist policy, let’s wall us off from the world. Instead the right policy was to
stimulate growth at home…. My point is, let us be confident about ourselves. Let’s put the right policies in place that
encourage growth at home.
John Kerry has made headlines with his contention that companies who move their operations overseas, should face
special taxes. In a speech entitled, “A Jobs-First Ecomomic Plan” given in Detroit, Michigan las March, Kerry
remarket:
We now have a tax code that does more to reward companies for moving overseas than it does to reward
them for creating jobs here in America. So if I am elected President, I will fight for the most sweeping international tax
law reform in forty years – a plan to replace tax incentives to take jobs offshore with new incentives for job creation on
our own shores.
The debate is complex. It’s not just manufacturing jobs that are headed overseas but also technology and service jobs,
bringing new life to ecomomies in India and the former Eastern bloc. The British financial publication The
Ecomomist recently outraged some readers by labeling outsourcing fears, The Great Hollowing-out Myth” and
maintaining that “contrary to what John Kerry and George Bush seem to think, outsourcing actually sustains American
jobs.”
A recent CNET News.com and Harris Interactive poll found that more than 40 percent of US technology executives
would be willing to pay higher taxes to compensate for jobs they send offshore.
Pro-Outsourcing: “The fact that foreign competition now impinges on services as well as manufacturing raises no new
issues of principle whatever. If a car can be made more cheaply in Mexico, it should be. If a telephone enquiry cam be
processed more cheaply in India, it should be. All such transactions raise real incomes on both sides, as resoures are
advantageously redeployed, with added investment and growth in exporting country, and lower prices in the importing
country. Yes, trade is a positive-sum game.: “The great hollowing-out myth,: THE ECONOMIST, February 19, 2004
“An historical restitution appears to be taking place, as hundreds of thousands of jobs, many of them good ones, flee to
the economy of thousands of jobs, many of them good ones, flee to the ecomomy we reuined. Low as the wages for
these positions are by comparison to our own, they are generally much higher than those offered by domestic
employers. A new middle class is developing in cities previously dominated by caste. Its spending will stimulate the
economy, which in turn may lead to higher wages and improved conditions of employment.” --George Monbiot, “The
fight to India”
“Calls for new trade restrictions to preserve current jobs are misguided. There is no significant difference between jobs
lost because of trade and those lost because of technologies or work processes. All of those job losses are a painful but
necessary part of the larger process of innovation and productivity increases that is the source of new wealth and rising
living standards.” --Brink Lindsey, “Job Losses and Trade A Reality Check,” The Cato’s Center for Trade Policy
Studies.
Anti-Outsourcing
“Millions of jobs in manufacturing and technology are shipped overseas to countries where companies can pay
employees far less money. There are a number of companies that have continued to get federal funding while at the
same time outsourcing jobs overseas…The Defendind American Jobs Act of 2004, sponsored by more than 50
legislators, proposes to cut federal funding from companies that lay off workers at higher rates in the U.S. than abroad.
The legislation would also require companies that apply for federal grants and loans to declare the salaries of
employees in the U.S. and abroad.” --Joel Barkin, spokesman for Rep. Bernie Sanders, I-VT H.R 3888 ‘s principle
sponsor.
“The argument that we will create new jobs in highly paying fields simply is not true. We have no comparative
advantage or superiority in innovation. To assume that we are inherently more creative than our foreign competititors
is both arrogant, and naïve. We are currently empowering our competition with the resources to innovate equally as
well as we…The costs of the decision to outsource are not borne by the decision maker. Loss of jobs reduces the tax
base, creates high unemployment benefit costs, and raises the cost of government retraining programs.” --Rory L.
Terry, “ Answers on Outsourcing for The Dobbs Report,” CNNFN
“Some have suggested that the jobs lost to outsourcing are offset by the millions of
American workers hired by foreign companies to produce new goods and services.
However, the vast majority of employment, associated with new investments by foreign
companies has taken the form of acquisitions of ongoing U.S. companies, such as
Daimler’s takeover of Chrysler. As a result of insourcing, 2.78 million U.S. jobs were
lost in foreign-owned firms between 1991 and 2001.” -- “Insourcing Myths: Jobs and
Insourcing,” Economic Policy Insitute Snapshot, April 6, 2004
More on outsourcing [third bottom of the page
http://www.pbs.org/now/politics/outsourcedebate.html ]




Facts and Figures on Outsourcing
Employment Resource Map
Changing Face of Unemployment
Debating Globalization
The Brookings Institution, "Offshoring" Service Jobs: Bane or Boon and What to Do?"
Center for Trade Policy Studies
The Dobbs Report: Exporting America
Economic Policy Institute: Trade and Globalization
H. R. 3888
NASSCOM: National Association of Software and Service Companies
Offshoring and the 2004 elections
WALL STREET WEEK WITH FORTUNE
Washington Alliance of Technology Workers
White House Council of Economic Advisors (CEA)
http://brookings.edu/printme.wbs?page=/comm/policybriefs/pb132.htm in its Global section has this article
"Offshoring" Service Jobs: Bane or Boon and What to
Do?
Policy Brief # 132 -- 2004
by Lael Brainard and Robert E. Litan
ABSTRACT:
Americans worry the economy is permanently shedding jobs and compressing wages, not only in
manufacturing but also now in services once assumed immune to foreign competition. The
digitization of information and expanded bandwidth abroad are enabling companies to outsource
to low-wage countries services ranging from routine call center work to higher-value software
programming, medical diagnosis, and research and analytical activities.
The offshoring debate comes during a recovery with unusually low job creation, causing anxiety
about employment and trade. Concern runs across political and demographic lines, prompting
calls for measures to slow down or even halt offshoring.
The nation still has a lot to learn about offshoring because existing data are incomplete or
contradictory. Economic theory and past performance suggest that although offshoring provides
overall economic gains, it also is redistributive, with affected workers facing possible job loss and
wage pressures. The challenges are to ensure that American workers have the critical skills to
compete successfully in the global economy, that America remains the most attractive location for
high value services and manufacturing, and that the playing field does not artificially induce U.S.
firms to go abroad. Most immediately, lawmakers must address the serious challenges faced by
permanently displaced workers.
Services Offshoring: How Much, How Fast?
Despite the headlines, we know surprisingly little about how many jobs have moved offshore in
the recent past, let alone how many are likely to do so in the future. Goldman Sachs estimates
that offshoring has accounted for roughly half a million layoffs in the past three years. Looking
forward, perhaps the best-known projection is by Forrester, an information technology consulting
firm, which expects the number of U.S. jobs outsourced to grow from about 400,000 in 2004 to
3.3 million by 2015. If this estimate turns out to be accurate, then offshoring could result in
roughly 250,000 layoffs a year.
How should we think about that number? It is small relative to total U.S. employment of 137
million, and accounts for less than 2 percent of the roughly 15 million Americans who involuntarily
lose their jobs each year. But to workers who lose their jobs, and to the far larger number of
workers who worry that they will lose theirs, the foreign outsourcing total, whatever it is, resonates
powerfully. Indeed, a recent study by Ashok Deo Bardhan and Cynthia A. Kroll at the University of
California, Berkeley, suggests that up to 14 million Americans now work in occupations—
including financial analysts, medical technicians, paralegals, and computer and math
professionals—that could reasonably be considered "at risk."
Gathering more accurate official data about the extent of offshoring may be difficult. The data on
services collected by the Bureau of Economic Analysis, for example, do not show any noticeable
upticks in net imports in the services where outsourcing is believed to be prevalent—a finding that
raises questions about the accuracy of those numbers.
Meanwhile, the Labor Department surveys employers regularly, asking if they have had
significant layoffs attributable to moving offshore. But firms are reluctant to offer such information,
and without extensive (and expensive) verification of their survey responses, Washington is
unlikely to get a good handle on the real numbers any time soon.
The Economic Theory of Offshoring
Economic theory points to two quite robust conclusions about the likely economic impact of
offshoring. Overall, offshoring will offer economic gains. But some American workers, companies,
and possibly communities will just as surely lose out in the process.
Offshoring is closely related to technological advance: both are driven by competitive pressures
to reduce costs and both result in displacement of existing jobs. Productivity gains and the
displacement of existing jobs associated with technological advance have been features of the
U.S. economy since its inception. Indeed, manufacturing productivity has been increasing roughly
3.5 percent per year over the last two decades, which helps explain why the share of U.S.
workers engaged in producing "things" has declined significantly, although the pace has been
very uneven.
International trade works much the same way. Economists such as Catherine Mann of the
Institute for International Economics and, more recently, the President's Council of Economic
Advisers point to the overall benefits of offshoring to the U.S. economy. They typically argue that
it helps lower costs and prices. A recent study by the consulting firm McKinsey and Company
estimates that the net cost savings of moving some jobs offshore is about 50 percent. This is far
lower than the wage differential between U.S. and foreign workers, which sometimes runs from
80 percent to 90 percent because of costs incurred for coordination and telecommunications.
Nonetheless, it is still sizable. In turn, lower inflation and higher productivity allow the Federal
Reserve to run a more accommodative monetary policy, meaning that overall and over time the
economy will grow faster, creating the conditions for higher overall employment. Catherine Mann
has estimated that GDP growth would have been lower by 0.3 percent a year between 1995 and
2002 without foreign outsourcing of jobs in information technology.
Foreign outsourcing may also accelerate the formation of innovative products and services—an
effect that has thus far been unmeasured but may be important. Some new and young firms,
especially those that rely on information technology, are using highly trained foreign technicians
(principally in India and China) to build prototypes of new products and services. In this way,
U.S.-based firms that ultimately employ highly trained U.S. employees to bring new products and
services to market can develop those products and services at far lower cost, and often more
quickly, than if the activities that took place at the "proof of concept" stage were conducted solely
in the United States.
But if fewer people are needed in existing jobs and occupations, then won't total employment fall
over time? Historically, the number of jobs has closely followed the growth of the labor force,
despite major increases in foreign trade and the advent of a host of new job-displacing
technologies, such as voicemail, word processors, and optical scanners. Indeed, despite a surge
in openness, the U.S. economy since 1985 has added 30 million workers to its payrolls, even
taking into account the recent recession and the unusually low job creation during the recovery.
At the same time, median family income has jumped 20 percent. Structural changes, including
trade and technology, influence where the jobs are, not the total number of jobs.
The policy challenge arises from the second sure bet from economic theory and practice.
Offshoring, like trade and technology, is a process of creative destruction whereby workers in
affected industries face the very real possibility of losing not only their jobs but also their health
care. Even worse, some workers fall down the economic ladder when they have no choice but to
take new jobs at lower pay and thus face the prospect of lower lifetime earnings.
This concern is particularly acute because it comes at a moment when anxieties about jobs and
wages are running high. Against the backdrop of a breathtaking acceleration in manufacturing job
losses over the past few years, the jobs picture remains murky two years into recovery. Stephen
Roach of Morgan Stanley estimates that the current "jobless" recovery is short 2.4 million jobs
compared with the previous "jobless" recovery of the early 1990s, and Laura Tyson, dean of the
London Business School, estimates that even
those Americans who have jobs are short
about $350 billion in "missing income."
In this kind of economic climate, it is easy to
understand why many Americans lack interest in
parsing out how much dislocation is due to offshoring and how much to other causes and instead
simply want to put on the brakes.
Just how redistributive is off-shoring likely to be? Here, both the theory and the evidence only give partial
answers. As an example, the McKinsey study estimates that for every dollar of U.S. services activity that is
offshored, there is a global gain of $1.47, suggesting a net gain of 47 cents. In their analysis, India captures
33 cents of the total, leaving the United States with the remaining $1.14. How is this $1.14 distributed?
"Reemployed" workers get 47 cents (a substantial reduction), additional exports account for a relatively
modest 5 cents, and shareholders and consumers of the firms doing the offshoring gain the other 62 cents.
U.S. shareholders and consumers win while U.S. workers lose.
Indeed, this plays into a broader set of distributive trends that have been quite negative for workers since
the end of the 2001 recession, although current data are not adequate to determine how big a role offshoring
has played. The administration's tax policies have exacerbated rather than offset these developments. Figure
1 (page 4) shows that on a pre-tax basis, the profit share has grown much more strongly in the current
recovery than in the recovery of 1992-93, while worker compensation has suffered a more pronounced
decline than in any previous recovery in the last four decades, a point also highlighted by Jared Bernstein of
the Economic Policy Institute.
This new allocation may be only temporary. Over the longer run, competition among firms should drive
down profits, and consumers should benefit from lower prices. Historically, as shown in figure 2, there
does not appear to be a long-term trend in the share of income going to profits relative to labor
compensation.
Even so, longer term averages often conceal what is happening to individual workers. Economic
research has established that the wages of low-skilled workers—those in the bottom of the
income distribution—were pushed down in the 1980s and early 1990s by a combination of foreign
trade, immigration, and a drop in demand caused by changes in technology that favor greater
skills. This downward pressure increased income inequality during this period until the mid-1990s,
when the rising tide of the overall economy lifted all boats. Now that college-educated, whitecollar American workers will increasingly be in competition with highly qualified workers in the
developing world whose wages are a fraction of their own, won't they be subject to the same
pressures?
In a forthcoming book, Business Week's chief economist, Michael Mandel, worries that the
answer to this question is "yes," and he may well be right. If Mandel's assumption is correct, the
"skills premium" that educated workers earned in the past may be pushed down in the future,
thus reversing a decades-long trend. At the same time, however, wages within sectors may
diverge. In services, for example, some workers whose jobs are vulnerable to offshoring could
suffer erosion of their wages while others in supervisory positions may see compensation gains.
With all these possible changes, it is no wonder that fears about foreign outsourcing resonate
across a broad spectrum of society.
Policy Agenda
One thing is clear. Unless policymakers get out ahead of the offshoring debate, they will find
themselves reacting to a host of band-aid proposals that do more harm than good. They should
be proactive and take five important steps:
Improve the data that the government collects. Despite the challenges associated with gathering
accurate, official data on offshoring, policymakers must make it a priority to greatly improve the
statistics on this phenomenon so that policymakers, education and training experts, companies,
and workers can make informed decisions sooner rather than later. Data collection on services
must be expanded to include smaller transactions and be conducted on a more regular basis.
Both the Bureau of Economic Analysis and the Bureau of Labor Statistics should look at
developing additional survey questions to better measure the extent of services activity moving
offshore and the concomitant changes to domestic employment, wages, and productivity.
Because of the importance of this challenge, the Brookings Institution is organizing a data
workshop to explore gaps between the key policy questions and the existing data available to
address them.
Ensure that America remains the most attractive location in the world for high-value services and
manufacturing. Policymakers should take a hard look at distortions in the tax code that may
artificially encourage offshoring, such as the current corporate tax system that permits deferral of
taxation on foreign earnings but not on domestic earnings, and that results in the highest
corporate tax burden among industrialized countries. Recent proposals that would end the
preferential tax treatment of foreign earnings and lower the corporate tax on domestic earnings
merit special attention. A second critical priority is to strengthen support for research and
development—the key to creating jobs of the future. Instead, recent budgets have cut federal
support for R&D in engineering and the physical sciences relative to the size of the economy.
Another policy long advocated by economists is to make permanent the federal tax credit for
R&D. Finally, it is important to reduce reliance on an employer-based system of health insurance
that adds to costs of U.S. firms and to the overall insecurity of displaced workers.
Give American workers the knowledge and skills they need to compete in the global economy.
Cultivating a competitive, highly skilled workforce means strengthening the kindergarten through
twelfth-grade curriculum, investing in science and engineering higher education, and restoring
funding to community colleges and retraining programs that have suffered large cuts in recent
years. America will not be able to hold onto the highest paying jobs in the world if the number of
college graduates with degrees in physical sciences, math, and engineering continue on a
downward trend.
Designing policies to strengthen the skills of the American workforce is particularly critical
because the American economy is likely to confront a rapidly increasing skill shortage on the
heels of the offshoring debate. In separate reports, Anthony Carnevale and Donna M. Derochers
of Educational Testing Service and David Ellwood of Harvard University have written about a
looming "skilled-worker gap." Carnevale and Derochers forecast a gap of 5.3 million skilled
workers by 2010 and 14 million by 2020. This is attributable both to the aging American workforce
and to the expectation that increases in average educational attainment achieved over the past
two decades will level off over the next two decades. Meanwhile, the demand for skills will
continue growing at a rapid pace.
Do more on trade, not less. Policymakers must make sure trade agreements are being enforced
and must also regain the market-opening momentum that has disappeared in recent years.
Ultimately, it will not be feasible to sustain political support for the relative openness of U.S.
services markets while countries such as India maintain high barriers on entry into their own
services markets.
Pay attention to legitimate regulatory issues. While policymakers should refrain from blunt,
potentially counterproductive approaches, they must address oversight of consumer privacy,
cyber security, and consumer protection when services—especially those dealing with sensitive
medical and financial information—are produced in other countries with different laws,
regulations, and professional credentials. Moreover, consumers have a right to know in services,
no less than in manufacturing, where country of origin labeling is mandated by law.
Address the dislocation faced by workers in the services sector through wage insurance,
adjustment assistance, and training. This is the most urgent priority. Although Congress made
far-reaching reforms to the Trade Adjustment Assistance program in 2002—including adding a
health care benefit—it ultimately rejected efforts by Democratic Senators Max Baucus of
Montana, Jeff Bingaman of New Mexico, Minority Leader Tom Daschle of South Dakota, and
others to extend its reach to services workers. Software programmers are now suing the
Department of Labor to gain access to the same extended unemployment insurance and
retraining benefits long guaranteed to trade-impacted manufacturing workers. Congress could
make the suit moot by making clear that service workers are covered by TAA.
Wage insurance should be a central part of the safety net for displaced services workers. In 2002,
Congress amended the Trade Promotional Authority Act (TPA) to include a program providing
wage insurance to workers older than fifty who can prove that trade is a "major cause" of their
displacement. The goals of the wage insurance program were not only to ease the economic
dislocations associated with trade-induced displacement, but also to encourage affected workers
to search for and accept new jobs quickly. Payments start when workers take new jobs and stop
two years from the date they were laid off. Workers who qualify receive, temporarily, half the
earnings they lose when taking a new job, up to an annual ceiling of $10,000.
One easy way to address worker displacement by offshoring, then, would be to make such
workers eligible for wage insurance, albeit with some qualifications: lowering or eliminating the
age requirement and possibly raising the compensation limit to reflect the likely higher income of
many dislocated services workers.
Limiting the kinds of benefits available under the Trade Adjustment Assistance law to workers
displaced by trade and offshoring more generally raises fundamental questions of fairness—in
addition to the difficulties of identifying the cause of displacement. Why should those protections
not also be available to workers who are permanently displaced for other reasons, notably
improvements in technology and shifts in consumer demand?
Because there is no satisfactory answer to this question—other than one of cost to the federal
government—one author of this brief (Litan) proposed three years ago, with Professor Lori
Kletzer of the University of California at Santa Cruz, to offer wage insurance to all permanently
displaced workers, regardless of age. The proposed insurance would be identical to that in the
TPA program except that it would also provide a federal subsidy for up to six months of health
insurance coverage. Had both programs been in place in 1997, for example, when the national
unemployment rate was 4.9 percent, the annual total cost would have been $3.6 billion. With
today's 5.6 percent unemployment rate, and the likelihood that average wage losses suffered by
displaced workers have increased since 1997, a reasonable estimate is that the two programs
would now cost roughly $4.5 to $5 billion. Over ten years, a program costing about $50 billion
could easily be refunded out of just a small portion of the revenues from repealing the 2001 tax
cut for those few in the top bracket.
The authors are grateful to Gary Burtless, Bill Dickens, Isabel Sawhill, and Charles Schultze of
the Brookings Institution and Catherine Mann of the Institute for International Economics for
helpful comments.
© Copyright 2004, The Brookings Institution
Telephone: (202) 797-6004
The Brookings Institution, 1775 Massachusetts Ave NW, Washington DC 20036
Note: The views expressed in this piece are those of the authors and should not be attributed to the staff, officers or trustees of the Brookings
Institution.
The Brookings Institution is an indeptendent, nonpartisan organization devoted to research, analysis, education, and publication
focused on public policy issues in the areas of economics, foreign policy, and governance. This paper looks at the ‘incomplete or
contradictory’ evidence surrounding offshoring.
Center for Trade Policy Studies
This CATO Insititute Center of Trade Policy Studies ‘ mission is “to increase public
understanding of the benefits of free trade and the costs of protectionism.” The site features a wealth of reports and opinion
pieces supporting free trade as a crucial element of economic efficiency.
PBS’s NOW link leads to http://www.freetrade.org/index.html where ther are various pieces with links.
CNNMONEY is from the editors of CNN and MONEY Magazine, following is from
http://money.cnn.com/2004/03/09/commentary/dobbs/dobbs/index.htm
Exporting America: false choices
In none of the attacks on my position on outsourcing has a news
organization addressed the facts.
March 10, 2004: 11:12 AM EST
By Lou Dobbs, Lou Dobbs Tonight
NEW YORK (CNN) - You may have noticed recently that I'm being attacked
for my views on the exporting of American jobs and my calls for a balanced
U.S. trade policy.
Gerard Baker of the Financial Times called me the "high priest of demotic
sensationalism."
An editorial in the Economist magazine accused me of embarking "on a rabidly
anti-trade editorial agenda" and "greeting every announcement of lost jobs as
akin to a terrorist assault."
Daniel Henninger of the Wall Street Journal excoriated me, I must say, in high
style for my troglodyte views on outsourcing by saying, "It's as if whatever made
Linda Blair's head spin around in 'The Exorcist' had invaded the body of Lou
Dobbs and left him with the brain of Dennis Kucinich."
Washington Post columnist James Glassman has simply accused me of being a
"table-thumping protectionist."
Those quotes are from some of the most respected news organizations, and
there have been dozens of other articles critical of my view that outsourcing
American jobs is neither sound, smart, humane nor in the national interest.
Makes a fellow think
I will tell you it does make a fellow think when attacked so energetically and so
personally. But in none of the attacks on my position on outsourcing has a single
columnist or news organization seen fit to deal with the facts.
Number one: We're not creating jobs in the private sector, and that's never
happened before in our history. Our economists and politicians need to be
coming up with answers, not dogma.
Number two: We haven't had a trade surplus in this country in more than two
decades, and our trade deficit continues to soar.
Number three: We've lost three million jobs in this country over the last three
years, and millions more American jobs are at risk of being outsourced to cheap
overseas labor markets.
That seems to me, at least, to be more than sufficient evidence for all of us,
Republicans and Democrats alike, to question critically the policies of both
parties that have led us to this critical juncture in our economy and our history.
Frankly, I would love to be proved wrong in my views, and I would gladly change
my position, if only my critics would answer a few questions factually, empirically
and straightforwardly.
One: How many more jobs must we lose before they become concerned about
our middle class and our strength as a consumer market? Two: When will the
U.S. have to quit borrowing foreign capital to buy foreign goods that support
European and Asian economies while driving us deeper into debt? Three: What
jobs will our currently 15 million unemployed workers fill, where and when?
My critics and proponents of free trade and outsourcing suggest I'm a
protectionist because I want to curtail the export of American jobs to cheap
foreign labor markets just to reduce wage levels, and to eliminate our trade deficit
and to pursue balanced trade policies.
Our principal trading partners, Canada, China, Japan and the European Union,
all typically maintain annual trade surpluses and pursue balanced trade. Why
don't my critics call them protectionists? Why not call them economic
isolationists?
My critics, and proponents of the status quo, are offering false choices. They say
we must decide between protectionism, or economic isolationism as the
president said today, and free trade. I'm sure they believe those choices are the
only ones available.
But maybe they also fear our policymakers may discover a middle ground for a
desperately needed new U.S. trade policy: a balanced trade policy in the national
interest.
Lou Dobbs is the anchor and managing editor of CNN's Lou Dobbs Tonight.
PBS NOW recommended this article saying, CNN’s financial news show Lou Dobbs Tonight host Lou Dobbs has been
hosting an extended series on the issue of outsourcing. His position, wich he calls “balanced trade” has earned him the
ire of many financial publications.
PBS Now recom The Economic Policy Instittute: Trade and Globalization page is on
http://www.epinet.org/subjectpages/trade.cfm?CFID=1824491&CFTOKEN=13903292 for the many articles.. This is
a nonprofit, nonpartisan think tank that seeks to broaden the public debate about strategies to achieve a prosperous and
fair economy. The EPI web site includes such web features as analyses of key government data; a weekly presentation
of downloadable charts and short anyalyses; issue guides providing data, charts, facts, sheets, and links to relevant
publications; opinion pieces and speeches; and tables on historical labor market, earnings, and income data.
The Josh Bivens, “Shifting Blame for manufacturing job loss, Effect of rising trade deficit shouldn’t be ignored April 8,
2001 Briefing paper #149” Economic Policy Institute Briefing Paper, April 8, 2004 is 12-pgs on
http://www.epinet.org/briefingpapers/149/bp149.pdf or on the web site as
http://www.epinet.org/content.cfm/briefingpapers_bp149 [non-pdf]
H. R. 3888 is the bill currently under construction in the House o Representatives titled, “To prohibit business
enterprises that lay-off a greater percentage of their United States workers than workers in other countries from
receiving any Federal assistance, and for other purposes.” 4-pgs from http://frwebgate.access.gpo.gov/cgibin/getdoc.cgi?dbname=108_cong_bills&docid=f:h3888ih.txt.pdf is as follows
108TH CONGRESS
2D SESSION
H. R. 3888
To prohibit business enterprises that lay-off a greater percentage of their
United States workers than workers in other countries from receiving
any Federal assistance, and for other purposes.
IN THE HOUSE OF REPRESENTATIVES
MARCH 3, 2004
Mr. SANDERS (for himself, Mr. MICA, Mr. TAYLOR of Mississippi, Mr. PAUL,
Ms. KAPTUR, Mr. GOODE, Mr. DEFAZIO, Mr. MICHAUD, Mr. OWENS,
Mr. SERRANO, Mr. GRIJALVA, Ms. KILPATRICK, Ms. WOOLSEY, Mr.
HOLDEN, Mr. BOUCHER, Mr. KUCINICH, Mr. STUPAK, Ms. SLAUGHTER,
Mr. MCINTYRE, Mr. BROWN of Ohio, Mr. OLVER, Mr. STARK, Mr.
PALLONE, Mr. BRADY of Pennsylvania, Ms. CARSON of Indiana, Mr.
NADLER, Mr. EVANS, Mr. WEXLER, Mr. GREEN of Texas, Ms.
MILLENDER-MCDONALD, Ms. CORRINE BROWN of Florida, Ms. NORTON,
Mr. LIPINSKI, Mr. PETERSON of Minnesota, Mr. ABERCROMBIE, Mr.
KILDEE, Mr. CONYERS, Mr. PAYNE, Ms. SCHAKOWSKY, Mr. GUTIERREZ,
Mr. RYAN of Ohio, Mr. MCGOVERN, Mr. BISHOP of Georgia, Mr. STRICKLAND,
Mr. W YNN, Mr. TIERNEY, Mr. HASTINGS of Florida, Ms. LEE,
Ms. SOLIS, Mr. UDALL of New Mexico, Mr. VISCLOSKY, and Mr.
PASCRELL) introduced the following bill; which was referred to the Committee
on Government Reform
A BILL
To prohibit business enterprises that lay-off a greater percentage
of their United States workers than workers in other countries from
receiving any Federal assistance, and for other purposes.
Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled,SECTION 1. GENERAL
REPORTING REQUIREMENTS FOR RECEIPT OF FEDERAL ASSISTANCE BY BUSINESS
ENTERPRISES.
(a) INITIAL REQUIREMENT.—Each Federal department or agency that
provides grants, loans, or loan guarantees to business enterprises
after the date of the enactment of this Act shall require that, as
condition of receipt of a grant, loan, or loan guarantee, a business
enterprise shall provide to the department or agency on an annual
basis for the duration of the grant, loan, or loan guarantee the
following information:
(1) The number of individuals employed by the business enterprise in
the United States and its territories.
(2) The number of individuals employed by the business enterprise
outside the United States and its territories.
(3) A description of the wages and benefits being provided to the
employees of the business enterprise in the United States and its
territories.
(b) SUBSEQUENT REQUIREMENT.—Beginning 1 year 21 after the date on
which a Federal department or agency provides a grant, loan, or loan
guarantee to a business enterprise after the date of the enactment of
this Act, the department or agency shall require the business
enterprise to provide to the department or agency on an annual basis
for the duration of the grant, loan, or loan guarantee a written
certification that contains the following information:
(1) The percentage of the workforce of the business enterprise
employed in the United States or its territories that has been laid off
or induced to resign from the business enterprise during the
preceding year.
(2) The percentage of the total workforce of the business enterprise
that has been laid off or induced to resign from the business
enterprise during the preceding year.
SEC. 2. PROHIBITION ON FEDERAL ASSISTANCE TO BUSI-NESS ENTERPRISES THAT
LAY OFF A GREATER PERCENTAGE OF WORKERS IN THE UNITED STATES THAN IN
OTHER COUNTRIES.
Notwithstanding any other provision of law, if, in a 17 written
certification provided to a Federal department or agency by a
business enterprise under section 1(b), the percentage described in
section 1(b)(1) is greater than the percentage described in section
1(b)(2), then the business enterprise shall be ineligible for further
assistance from the department or agency, and shall be ineligible for
assistance from any other Federal department or agency, unless and
until the business enterprise provides to the department or agency
involved a new written certification which provides that the
percentage of the workforce of the business enterprise employed in
the United States or its territories is equal to or greater than such
percentage for the year preceding the year for which the written
certification under section 1(b) was provided.
NASSCOM: National Assn of Software and Service Companies
A position paper by the Indian Industry group which “makes an attempt to demysthologize the
pandemonium of ‘Outsourcing’. It argues that regulatory efforts to stop worldwide sourcing
represents a retreat to economic isolationism that would raise prices for consumers and
taxpayers in US. Location http://www.nasscom.org/artdisplay.asp?Art_id=2564 this 34-pg pdf
file has a seal from U.S. Chamber of Commerce
1615 H Street, N.W.
Washington, D.C. 20062-2000
Copyright © 2004 by the U.S. Chamber of Commerce
Principal Author: James W. Robinson
Outsourcing: The best kept secrets!
By Keith Koffler
The debate of 'To do' or 'Not to do' has become a global concern on outsourcing. This is also backed up by
various misleading data published in recent months. This report makes an attempt to demythologize the
pandemonium of 'Outsourcing'. It deals with issues of demographics, education, entitlements, regulatory
reforms etc., in order to bring a clear perspective on this matter, supported by data and analysis by various
economic experts. Also, there are ample evidences that regulatory efforts to stop worldwide sourcing
represents a retreat to economic isolationism that would raise prices for consumers and taxpayers in US.
Facts at a Glance:





More Americans are on the job than ever in the history.
House-hold wealth is at a record level.
Among workers with a four-year college degree, the unemployment rate is just 2.9percent.
Technology based jobs are slated to increase in the coming decade.
Every dollar of costs the US moves offshore brings American a net benefit of $1.12 to $1.14.
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not be accepted after the deadline and only a limited number of credentials will be granted. Please
complete this application, which must be accompanied by a letter on company stationery and
signed by
your supervisor requesting credentials.
FULL NAME:
TITLE:
COMPANY:
CITY: STATE: ZIP:
PHONE: FAX:
EMAIL:
Circle one:
Print Daily Weekly Magazine
TV Broadcast Local Network Cable
Radio Broadcast _______________________Format _______________________
New Media/Other:__________________________________________
Circle the day(s) you would like to cover the convention:
US Hispanic Chamber of Commerce
International Trade
The USHCC is committed to building business relationships with its counterparts in Latin
America. As a part of those efforts, the USHCC hosts a Trade Mission with U.S.-based Hispanic
businesses in order to help them better understand the feasibility of expanding beyond our borders
into a country where a thriving economy and other incentives have attracted many U.S. based
corporations and businesses. To date, the USHCC has led trade missions to Costa Rica and
Mexico. I WANT TO DO TO AMSTERDAM
Chamber Training Seminars
“Maximizing Performance for Economic Success” is the name of
the USHCC’s regional chamber training initiative specifically
designed for chamber executives and chamber presidents. The
seminars are held for three days with a focus on the areas of
leadership and management training, institutional organizational
development, and growth and management. The trainings are
conducted by the Institute for Organizational Training and
Development, and Career, Growth and Management Consultants.
Create a PAC like The Houston Hispanic Chamber of Commerce Policy Committee, a political action
committee representing Hispanic businesses, & Political Advertising paid for by
The Houston Hispanic Chamber of Commerce Policy Committee (PAC)
(Edgardo E. Colón, Treasurer; P.O. Box 1569, Bellaire, TX 77402-1569)
The Houston Hispanic Chamber of Commerce
Policy Committee (PAC)
The political action committee of the Hispanic business community
proudly announces its endorsement of the following candidates
The HHCC Policy Committee subscribes to the Code of Fair Campaign Practices.
PUFF PPASTRIES
Cream puffs have been causing a sensation on the Upper West Side since the opening of Beard
Papa's Sweets Caf‚ (2167 Broadway at 76th Street, [212] 799-3770), where a perpetual line of
patient pastry lovers come for the Japanese chain's specialty, the secret of which is a two-layered
shell consisting of a soft, choux pastry interior surrounded by pie crust.
The light, crispy puffs are filled to order on a mini assembly line with a mixture of whipped cream
and vanilla custard, then dusted with confectioners' sugar. They cost $1.25 apiece, or $1.45 for
daily specials such as green tea filling. pastry lovers line up for the light, crispy cream-filled puffs
pastry lovers line up for the light, crispy cream-filled puffs
Buying Media
Buying Advertising: Resources and Characteristics
Paid media resources vary from place to place, but most communities are served by major media
resources emanating from a metropolitan area in addition to those originating locally.
The information offered here presents guidelines on the strengths and weaknesses of various categories
of media. Professional strategists evaluate a medium for its ability to reach a specific or Target audience
as defined by its Reach and Frequency .
Reach is measured by the medium's ability to deliver the advertiser's message to the greatest number of
people in the Target Audience. Frequency defines how many timesthe message will be seen/heard by
that same audience.
Professionals will further evaluate each medium on a cost per thousand (CPM) listeners or readers or
viewers. It's a way to compare the various media being considered for purchase on an apples-to-apples
basis. Other contributing factors include cost of producing the advertising message, ease of changing
messages and, of course, the suitability of the message to the medium.
Look for professional media buying assistance in your congregation or among friends and acquaintances.
Ask a local advertising agency for help. Making good buys is tricky business.
Television
TV's strength is its Reach . But its primary drawback is cost, particularly if network programs are being
considered since those attract the largest viewership. Cable TV, while attracting fewer numbers of
viewers, can be very efficient as well as accessible and affordable.
Radio
Radio's strength is in frequency . The message is heard many times at a reasonable cost per thousand
listeners. There are many more radio stations than TV or cable systems in your market so buying the right
one(s) can be complicated.
Outdoor
The UUA test campaign in Kansas City and environs relied heavily on outdoor advertising for it ability to
deliver both Reach and Frequency at reasonable cost.
Billboards, whether printed paper or vinyl bulletins, provide a big, short message 24/7 and can be bought
on a monthly basis. Production is relatively inexpensive.
Other forms of outdoor advertising include bus and train station or subway posters; even taxi displays, all
effective buys in large cities.
Print
Newspapers are problematic because the cost of frequency is very high. Community and alternative
papers offer lower cost per advertisement placed but they deliver it to much smaller audiences. Most
newspapers today can provide color in ads but the premium is substantial.
Color advertising looks great in magazines but frequency is even more expensive than in newspapers
and ad production costs are high.
The UUA's Kansas City test employed very limited print advertising because of the expense as compared
with frequency .
Cyber
There is no way as yet to compare website advertising with classic media resources. Most major
advertisers use traditional advertising methods to drive audiences to their own web site for more
information, registration or actual purchase. The UUA campaign does this as well with its emphasis on
resources offered on www.uua.org .
Using multiple media to deliver a consistent message over time
Due to the growing number of marketing possibilities available today, a sound marketing approach must
include a multiple media plan. (This was true in the UUA marketing campaign test in Kansas City. The
test plan used outdoor, TV, radio and some print. We were able to deliver the same idea in more than one
medium in an integrated format) The plan is based on identifying all cost-effective channels that will
clearly communicate your message to your most targeted audience. Above all, the plan must be
integrated and carefully timed amongst all media to ensure your message is delivered and consistent.
Developing a systematic multiple media marketing approach will provide the biggest impact in the
community.
The Right to Counsel
Gideon at 40 go to www.nacdl.org/Gideon
The Sixth Amendment provides, "In all criminal prosecutions, the accused shall enjoy the right…to have
Assistance of Counsel for his defense."
The year was 1961 and the place was Panama City, Florida. Clarence Earl Gideon, a drifter and ex-convict, was arrested
for breaking into the Bay Harbor Poolroom. At his trial, Gideon asked that a lawyer be appointed to represent him. The
Florida court denied his request on the grounds that he wasn’t entitled by state law to a lawyer because his crime was not
a capital offense.
Mr. Gideon represented himself in court and did about as well as could be expected. He made an opening statement to the
jury, cross-examined the State’s witnesses, presented witnesses in his own defense, declined to testify himself and made a
short argument emphasizing his innocence. Gideon was found guilty and sentenced to five years in prison. This case,
however, was far from over.
Mr. Gideon filed a petition in the Florida Supreme Court attacking his conviction and sentence on the ground that the trial
court’s refusal to appoint counsel for him denied him rights "guaranteed by the Constitution and the Bill of Rights by the
United States Government." He then wrote a petition to the Supreme Court of the United States asking them to hear his
case and overrule his conviction.
The U.S. Supreme Court agreed to hear his case and on March 18, 1963 the court handed down its decision in Gideon v.
Wainwright. Writing for the majority, Justice Hugo Black wrote:
"That government hires lawyers to prosecute and defendants who have the money hire lawyers to defend are
the strongest indications of the wide–spread belief that lawyers in criminal courts are necessities, not
luxuries. The right of one charged with a crime may not be deemed fundamental and essential to fair trials in
some countries, but it is in ours."
The U.S. Supreme Court reversed the judgment and remanded Mr. Gideon’s case to the Supreme Court of Florida "for
further action not inconsistent with this opinion."
Mr. Gideon’s case was retried and he was found not guilty. Having a lawyer represent him obviously made a difference at
his second trial.
It has been 40 years since the landmark decision in Gideon v. Wainwright. The quality and fairness of the U.S. justice
system, and its ability to guard against conviction of the innocent, have been vastly improved. Yet today, in 2003, in many
places, including Virginia, court-appointed lawyers do not have the resources necessary to provide competent
representation, so injustices still occur.
Understanding the Right to Counsel
THE SIXTH AMENDMENT PROVIDES
“In all criminal prosecutions, the accused shall enjoy the right…
to have Assistance of Counsel for his defense.”
The year was 1961 and the
place was Panama City, Florida.
Clarence Earl Gideon, a drifter and
ex-convict, was arrested for breaking
into the Bay Harbor Poolroom.
At his trial, Gideon asked that a
lawyer be appointed to represent
him. The Florida court denied his
request on the grounds that he
wasn’t entitled by state law to a
lawyer because his crime was not
a capital offense.
Mr. Gideon represented himself
in court and did about as well
as could be expected. He made
an opening statement to the jury,
cross-examined the state’s witnesses,
presented witnesses in his
own defense, declined to testify
himself and made a short argument
emphasizing his innocence.
Gideon was found guilty and sentenced
to five years in prison. This
case, however, was far from over.
Mr. Gideon filed a petition in
the Florida Supreme Court attacking
his conviction and sentence on the
ground that the trial court’s refusal
to appoint counsel for him denied
him rights “guaranteed by the
Constitution and the Bill of Rights
by the United States Government.”
He then wrote a petition to the
Supreme Court of the United States
asking them to hear his case and
overrule his conviction.
The U.S. Supreme Court
agreed to hear his case and on
March 18, 1963 the court handed
down its decision in Gideon v.
Wainwright. Writing for the majority,
Justice Hugo Black wrote:
“That government hires lawyers
to prosecute and defendants who
have the money hire lawyers to
defend are the strongest indications
of the wide–spread belief that
lawyers in criminal courts are
necessities, not luxuries. The right
of one charged with a crime may
not be deemed fundamental and
essential to fair trials in some countries,
but it is in ours.”
The U.S. Supreme Court
reversed the judgment and
remanded Mr. Gideon’s case to the
Supreme Court of Florida “for further
action not inconsistent with
this opinion.”
Mr. Gideon’s case was retried
and he was found not guilty.
Having a lawyer represent him obviously
made a difference at his second
trial.
It has been 40 years since the
landmark decision in Gideon v.
Wainwright. The quality and
fairness of the U.S. justice
system, and its ability to
guard against conviction
of the innocent, have
been vastly
improved. Yet
today, in 2003, in
many places,
including Virginia,
court appointed lawyers do not
have the resources necessary to
provide competent representation,
so injustices still occur.
For more information about
Gideon v. Wainwright or to find
out how you can make the ideal
of Gideon a reality for all citizens
The U.S. Supreme Court Decision
GIDEON v. WAINWRIGHT, 372 U.S. 335 (1963)
372 U.S. 335
GIDEON v. WAINWRIGHT, CORRECTIONS DIRECTOR.
CERTIORARI TO THE SUPREME COURT OF FLORIDA.
No. 155.
Argued January 15, 1963.
Decided March 18, 1963.
Charged in a Florida State Court with a noncapital felony, petitioner appeared without funds and without counsel and asked
the Court to appoint counsel for him; but this was denied on the ground that the state law permitted appointment of
counsel for indigent defendants in capital cases only. Petitioner conducted his own defense about as well as could be
expected of a layman; but he was convicted and sentenced to imprisonment. Subsequently, he applied to the State
Supreme Court for a writ of habeas corpus, on the ground that his conviction violated his rights under the Federal
Constitution. The State Supreme Court denied all relief. Held: The right of an indigent defendant in a criminal trial to have
the assistance of counsel is a fundamental right essential to a fair trial, and petitioner's trial and conviction without the
assistance of counsel violated the Fourteenth Amendment. Betts v. Brady, 316 U.S. 455 , overruled. Pp. 336-345.
Reversed and cause remanded.
Abe Fortas, by appointment of the Court, 370 U.S. 932 , argued the cause for petitioner. With him on the brief were Abe
Krash and Ralph Temple.
Bruce R. Jacob, Assistant Attorney General of Florida, argued the cause for respondent. With him on the brief were Richard
W. Ervin, Attorney General, and A. G. Spicola, Jr., Assistant Attorney General.
J. Lee Rankin, by special leave of Court, argued the cause for the American Civil Liberties Union et al., as amici curiae,
urging reversal. With him on the brief were Norman Dorsen, John Dwight Evans, Jr., Melvin L. Wulf, Richard J. Medalie,
Howard W. Dixon and Richard Yale Feder.
George D. Mentz, Assistant Attorney General of Alabama, argued the cause for the State of Alabama, as [372 U.S. 335,
336] amicus curiae, urging affirmance. With him on the brief were MacDonald Gallion, Attorney General of Alabama, T. W.
Bruton, Attorney General of North Carolina, and Ralph Moody, Assistant Attorney General of North Carolina.
A brief for the state governments of twenty-two States and Commonwealths, as amici curiae, urging reversal, was filed by
Edward J. McCormack, Jr., Attorney General of Massachusetts, Walter F. Mondale, Attorney General of Minnesota, Duke W.
Dunbar, Attorney General of Colorado, Albert L. Coles, Attorney General of Connecticut, Eugene Cook, Attorney General of
Georgia, Shiro Kashiwa, Attorney General of Hawaii, Frank Benson, Attorney General of Idaho, William G. Clark, Attorney
General of Illinois, Evan L. Hultman, Attorney General of Iowa, John B. Breckinridge, Attorney General of Kentucky, Frank
E. Hancock, Attorney General of Maine, Frank J. Kelley, Attorney General of Michigan, Thomas F. Eagleton, Attorney
General of Missouri, Charles E. Springer, Attorney General of Nevada, Mark McElroy, Attorney General of Ohio, Leslie R.
Burgum, Attorney General of North Dakota, Robert Y. Thornton, Attorney General of Oregon, J. Joseph Nugent, Attorney
General of Rhode Island, A. C. Miller, Attorney General of South Dakota, John J. O'Connell, Attorney General of
Washington, C. Donald Robertson, Attorney General of West Virginia, and George N. Hayes, Attorney General of Alaska.
Robert Y. Thornton, Attorney General of Oregon, and Harold W. Adams, Assistant Attorney General, filed a separate brief
for the State of Oregon, as amicus curiae.
MR. JUSTICE BLACK delivered the opinion of the Court.
Petitioner was charged in a Florida state court with having broken and entered a poolroom with intent to commit a
misdemeanor. This offense is a felony under [372 U.S. 335, 337] Florida law. Appearing in court without funds and without
a lawyer, petitioner asked the court to appoint counsel for him, whereupon the following colloquy took place:
"The COURT: Mr. Gideon, I am sorry, but I cannot appoint Counsel to represent you in this case. Under the laws of the
State of Florida, the only time the Court can appoint Counsel to represent a Defendant is when that person is charged with
a capital offense. I am sorry, but I will have to deny your request to appoint Counsel to defend you in this case.
"The DEFENDANT: The United States Supreme Court says I am entitled to be represented by Counsel."
Put to trial before a jury, Gideon conducted his defense about as well as could be expected from a layman. He made an
opening statement to the jury, cross-examined the State's witnesses, presented witnesses in his own defense, declined to
testify himself, and made a short argument "emphasizing his innocence to the charge contained in the Information filed in
this case." The jury returned a verdict of guilty, and petitioner was sentenced to serve five years in the state prison. Later,
petitioner filed in the Florida Supreme Court this habeas corpus petition attacking his conviction and sentence on the
ground that the trial court's refusal to appoint counsel for him denied him rights "guaranteed by the Constitution and the
Bill of Rights by the United States Government." 1 Treating the petition for habeas corpus as properly before it, the State
Supreme Court, "upon consideration thereof" but without an opinion, denied all relief. Since 1942, when Betts v. Brady,
316 U.S. 455 , was decided by a divided [372 U.S. 335, 338] Court, the problem of a defendant's federal constitutional
right to counsel in a state court has been a continuing source of controversy and litigation in both state and federal courts.
2 To give this problem another review here, we granted certiorari. 370 U.S. 908 . Since Gideon was proceeding in forma
pauperis, we appointed counsel to represent him and requested both sides to discuss in their briefs and oral arguments the
following: "Should this Court's holding in Betts v. Brady, 316 U.S. 455 , be reconsidered?"
I.
The facts upon which Betts claimed that he had been unconstitutionally denied the right to have counsel appointed to
assist him are strikingly like the facts upon which Gideon here bases his federal constitutional claim. Betts was indicated
for robbery in a Maryland state court. On arraignment, he told the trial judge of his lack of funds to hire a lawyer and
asked the court to appoint one for him. Betts was advised that it was not the practice in that county to appoint counsel for
indigent defendants except in murder and rape cases. He then pleaded not guilty, had witnesses summoned, crossexamined the State's witnesses, examined his own, and chose not to testify himself. He was found guilty by the judge,
sitting without a jury, and sentenced to eight years in prison. [372 U.S. 335, 339] Like Gideon, Betts sought release by
habeas corpus, alleging that he had been denied the right to assistance of counsel in violation of the Fourteenth
Amendment. Betts was denied any relief, and on review this Court affirmed. It was held that a refusal to appoint counsel
for an indigent defendant charged with a felony did not necessarily violate the Due Process Clause of the Fourteenth
Amendment, which for reasons given the Court deemed to be the only applicable federal constitutional provision. The
Court said:
"Asserted denial [of due process] is to be tested by an appraisal of the totality of facts in a given case. That which may, in
one setting, constitute a denial of fundamental fairness, shocking to the universal sense of justice, may, in other
circumstances, and in the light of other considerations, fall short of such denial." 316 U.S., at 462 .
Treating due process as "a concept less rigid and more fluid than those envisaged in other specific and particular provisions
of the Bill of Rights," the Court held that refusal to appoint counsel under the particular facts and circumstances in the
Betts case was not so "offensive to the common and fundamental ideas of fairness" as to amount to a denial of due
process. Since the facts and circumstances of the two cases are so nearly indistinguishable, we think the Betts v. Brady
holding if left standing would require us to reject Gideon's claim that the Constitution guarantees him the assistance of
counsel. Upon full reconsideration we conclude that Betts v. Brady should be overruled.
II.
The Sixth Amendment provides, "In all criminal prosecutions, the accused shall enjoy the right . . . to have the Assistance
of Counsel for his defence." We have construed [372 U.S. 335, 340] this to mean that in federal courts counsel must be
provided for defendants unable to employ counsel unless the right is competently and intelligently waived. 3 Betts argued
that this right is extended to indigent defendants in state courts by the Fourteenth Amendment. In response the Court
stated that, while the Sixth Amendment laid down "no rule for the conduct of the States, the question recurs whether the
constraint laid by the Amendment upon the national courts expresses a rule so fundamental and essential to a fair trial,
and so, to due process of law, that it is made obligatory upon the States by the Fourteenth Amendment." 316 U.S., at 465
. In order to decide whether the Sixth Amendment's guarantee of counsel is of this fundamental nature, the Court in Betts
set out and considered "[r]elevant data on the subject . . . afforded by constitutional and statutory provisions subsisting in
the colonies and the States prior to the inclusion of the Bill of Rights in the national Constitution, and in the constitutional,
legislative, and judicial history of the States to the present date." 316 U.S., at 465 . On the basis of this historical data the
Court concluded that "appointment of counsel is not a fundamental right, essential to a fair trial." 316 U.S., at 471 . It was
for this reason the Betts Court refused to accept the contention that the Sixth Amendment's guarantee of counsel for
indigent federal defendants was extended to or, in the words of that Court, "made obligatory upon the States by the
Fourteenth Amendment." Plainly, had the Court concluded that appointment of counsel for an indigent criminal defendant
was "a fundamental right, essential to a fair trial." it would have held that the Fourteenth Amendment requires
appointment of counsel in a state court, just as the Sixth Amendment requires in a federal court. [372 U.S. 335, 341]
We think the Court in Betts had ample precedent for acknowledging that those guarantees of the Bill of Rights which are
fundamental safeguards of liberty immune from federal abridgment are equally protected against state invasion by the Due
Process Clause of the Fourteenth Amendment. This same principle was recognized, explained, and applied in Powell v.
Alabama, 287 U.S. 45 (1932), a case upholding the right of counsel, where the Court held that despite sweeping language
to the contrary in Hurtado v. California, 110 U.S. 516 (1884), the Fourteenth Amendment "embraced" those
"`fundamental principles of liberty and justice which lie at the base of all our civil and political institutions,'" even though
they had been "specifically dealt with in another part of the federal Constitution." 287 U.S., at 67 . In many cases other
than Powell and Betts, this Court has looked to the fundamental nature of original Bill of Rights guarantees to decide
whether the Fourteenth Amendment makes them obligatory on the States. Explicitly recognized to be of this "fundamental
nature" and therefore made immune from state invasion by the Fourteenth, or some part of it, are the First Amendment's
freedoms of speech, press, religion, assembly, association, and petition for redress of grievances. 4 For the same reason,
though not always in precisely the same terminology, the Court has made obligatory on the States the Fifth Amendment's
command that [372 U.S. 335, 342] private property shall not be taken for public use without just compensation, 5 the
Fourth Amendment's prohibition of unreasonable searches and seizures, 6 and the Eighth's ban on cruel and unusual
punishment. 7 On the other hand, this Court in Palko v. Connecticut, 302 U.S. 319 (1937), refused to hold that the
Fourteenth Amendment made the double jeopardy provision of the Fifth Amendment obligatory on the States. In so
refusing, however, the Court, speaking through Mr. Justice Cardozo, was careful to emphasize that "immunities that are
valid as against the federal government by force of the specific pledges of particular amendments have been found to be
implicit in the concept of ordered liberty, and thus, through the Fourteenth Amendment, become valid as against the
states" and that guarantees "in their origin . . . effective against the federal government alone" had by prior cases "been
taken over from the earlier articles of the federal bill of rights and brought within the Fourteenth Amendment by a process
of absorption." 302 U.S., at 324 -325, 326.
We accept Betts v. Brady's assumption, based as it was on our prior cases, that a provision of the Bill of Rights which is
"fundamental and essential to a fair trial" is made obligatory upon the States by the Fourteenth Amendment. We think the
Court in Betts was wrong, however, in concluding that the Sixth Amendment's guarantee of counsel is not one of these
fundamental rights. Ten years before Betts v. Brady, this Court, after full consideration of all the historical data examined
in Betts, had unequivocally declared that "the right to the aid of [372 U.S. 335, 343] counsel is of this fundamental
character." Powell v. Alabama, 287 U.S. 45, 68 (1932). While the Court at the close of its Powell opinion did by its
language, as this Court frequently does, limit its holding to the particular facts and circumstances of that case, its
conclusions about the fundamental nature of the right to counsel are unmistakable. Several years later, in 1936, the Court
reemphasized what it had said about the fundamental nature of the right to counsel in this language:
"We concluded that certain fundamental rights, safeguarded by the first eight amendments against federal action, were
also safeguarded against state action by the due process of law clause of the Fourteenth Amendment, and among them
the fundamental right of the accused to the aid of counsel in a criminal prosecution." Grosjean v. American Press Co., 297
U.S. 233, 243 -244 (1936).
And again in 1938 this Court said:
"[The assistance of counsel] is one of the safeguards of the Sixth Amendment deemed necessary to insure fundamental
human rights of life and liberty. . . . The Sixth Amendment stands as a constant admonition that if the constitutional
safeguards it provides be lost, justice will not `still be done.'" Johnson v. Zerbst, 304 U.S. 458, 462 (1938). To the same
effect, see Avery v. Alabama, 308 U.S. 444 (1940), and Smith v. O'Grady, 312 U.S. 329 (1941).
In light of these and many other prior decisions of this Court, it is not surprising that the Betts Court, when faced with the
contention that "one charged with crime, who is unable to obtain counsel, must be furnished counsel by the State,"
conceded that "[e]xpressions in the opinions of this court lend color to the argument . . . ." 316 U.S., at 462 -463. The fact
is that in deciding as it did - that "appointment of counsel is not a fundamental right, [372 U.S. 335, 344] essential to a
fair trial" - the Court in Betts v. Brady made an abrupt break with its own well-considered precedents. In returning to these
old precedents, sounder we believe than the new, we but restore constitutional principles established to achieve a fair
system of justice. Not only these precedents but also reason and reflection require us to recognize that in our adversary
system of criminal justice, any person haled into court, who is too poor to hire a lawyer, cannot be assured a fair trial
unless counsel is provided for him. This seems to us to be an obvious truth. Governments, both state and federal, quite
properly spend vast sums of money to establish machinery to try defendants accused of crime. Lawyers to prosecute are
everywhere deemed essential to protect the public's interest in an orderly society. Similarly, there are few defendants
charged with crime, few indeed, who fail to hire the best lawyers they can get to prepare and present their defenses. That
government hires lawyers to prosecute and defendants who have the money hire lawyers to defend are the strongest
indications of the widespread belief that lawyers in criminal courts are necessities, not luxuries. The right of one charged
with crime to counsel may not be deemed fundamental and essential to fair trials in some countries, but it is in ours. From
the very beginning, our state and national constitutions and laws have laid great emphasis on procedural and substantive
safeguards designed to assure fair trials before impartial tribunals in which every defendant stands equal before the law.
This noble ideal cannot be realized if the poor man charged with crime has to face his accusers without a lawyer to assist
him. A defendant's need for a lawyer is nowhere better stated than in the moving words of Mr. Justice Sutherland in Powell
v. Alabama:
"The right to be heard would be, in many cases, of little avail if it did not comprehend the right to be [372 U.S. 335, 345]
heard by counsel. Even the intelligent and educated layman has small and sometimes no skill in the science of law. If
charged with crime, he is incapable, generally, of determining for himself whether the indictment is good or bad. He is
unfamiliar with the rules of evidence. Left without the aid of counsel he may be put on trial without a proper charge, and
convicted upon incompetent evidence, or evidence irrelevant to the issue or otherwise inadmissible. He lacks both the skill
and knowledge adequately to prepare his defense, even though he have a perfect one. He requires the guiding hand of
counsel at every step in the proceedings against him. Without it, though he be not guilty, he faces the danger of conviction
because he does not know how to establish his innocence." 287 U.S., at 68 -69.
The Court in Betts v. Brady departed from the sound wisdom upon which the Court's holding in Powell v. Alabama rested.
Florida, supported by two other States, has asked that Betts v. Brady be left intact. Twenty-two States, as friends of the
Court, argue that Betts was "an anachronism when handed down" and that it should now be overruled. We agree.
The judgment is reversed and the cause is remanded to the Supreme Court of Florida for further action not inconsistent
with this opinion.
Reversed.
Footnotes
[ Footnote 1 ] Later in the petition for habeas corpus, signed and apparently prepared by petitioner himself, he stated, "I,
Clarence Earl Gideon, claim that I was denied the rights of the 4th, 5th and 14th amendments of the Bill of Rights."
[ Footnote 2 ] Of the many such cases to reach this Court, recent examples are Carnley v. Cochran, 369 U.S. 506 (1962);
Hudson v. North Carolina, 363 U.S. 697 (1960); Moore v. Michigan, 355 U.S. 155 (1957). Illustrative cases in the state
courts are Artrip v. State, 136 So.2d 574 (Ct. App. Ala. 1962); Shaffer v. Warden, 211 Md. 635, 126 A. 2d 573 (1956). For
examples of commentary, see Allen, The Supreme Court, Federalism, and State Systems of Criminal Justice, 8 De Paul L.
Rev. 213 (1959); Kamisar, The Right to Counsel and the Fourteenth Amendment: A Dialogue on "The Most Pervasive
Right" of an Accused, 30 U. of Chi. L. Rev. 1 (1962); The Right to Counsel, 45 Minn. L. Rev. 693 (1961).
[ Footnote 3 ] Johnson v. Zerbst, 304 U.S. 458 (1938).
[ Footnote 4 ] E. g., Gitlow v. New York, 268 U.S. 652, 666 (1925) (speech and press); Lovell v. City of Griffin, 303 U.S.
444, 450 (1938) (speech and press); Staub v. City of Baxley, 355 U.S. 313, 321 (1958) (speech); Grosjean v. American
Press Co., 297 U.S. 233, 244 (1936) (press); Cantwell v. Connecticut, 310 U.S. 296, 303 (1940) (religion); De Jonge v.
Oregon, 299 U.S. 353, 364 (1937) (assembly); Shelton v. Tucker, 364 U.S. 479, 486 , 488 (1960) (association); Louisiana
ex rel. Gremillion v. NAACP, 366 U.S. 293, 296 (1961) (association); Edwards v. South Carolina, 372 U.S. 229 (1963)
(speech, assembly, petition for redress of grievances).
[ Footnote 5 ] E. g., Chicago, B. & Q. R. Co. v. Chicago, 166 U.S. 226, 235 -241 (1897); Smyth v. Ames, 169 U.S. 466,
522 -526 (1898).
[ Footnote 6 ] E. g., Wolf v. Colorado, 338 U.S. 25, 27 -28 (1949); Elkins v. United States, 364 U.S. 206, 213 (1960);
Mapp v. Ohio, 367 U.S. 643, 655 (1961).
[ Footnote 7 ] Robinson v. California, 370 U.S. 660, 666 (1962).
MR. JUSTICE DOUGLAS.
While I join the opinion of the Court, a brief historical resume of the relation between the Bill of Rights and the first section
of the Fourteenth Amendment seems pertinent. Since the adoption of that Amendment, ten Justices have felt that it
protects from infringement by the States the privileges, protections, and safeguards granted by the Bill of Rights. [372
U.S. 335, 346]
Justice Field, the first Justice Harlan, and probably Justice Brewer, took that position in O'Neil v. Vermont, 144 U.S. 323,
362 -363, 370-371, as did Justices BLACK, DOUGLAS, Murphy and Rutledge in Adamson v. California, 332 U.S. 46, 71 -72,
124. And see Poe v. Ullman, 367 U.S. 497, 515 -522 (dissenting opinion). That view was also expressed by Justice Bradley
and Swayne in the Slaughter-House Cases, 16 Wall. 36, 118-119, 122, and seemingly was accepted by Justice Clifford
when he dissented with Justice Field in Walker v. Sauvinet, 92 U.S. 90, 92 . 1 Unfortunately it has never commanded a
Court. Yet, happily, all constitutional questions are always open. Erie R. Co. v. Tompkins, 304 U.S. 64 . And what we do
today does not foreclose the matter.
My Brother HARLAN is of the view that a guarantee of the Bill of Rights that is made applicable to the States by reason of
the Fourteenth Amendment is a lesser version of that same guarantee as applied to the Federal Government. 2 Mr. Justice
Jackson shared that view. 3 [372 U.S. 335, 347] But that view has not prevailed 4 and rights protected against state
invasion by the Due Process Clause of the Fourteenth Amendment are not watered-down versions of what the Bill of Rights
guarantees.
[ Footnote 1 ] Justices Bradley, Swayne and Field emphasized that the first eight Amendments granted citizens of the
United States certain privileges and immunities that were protected from abridgment by the States by the Fourteenth
Amendment. See Slaughter-House Cases, supra, at 118-119; O'Neil v. Vermont, supra, at 363. Justices Harlan and Brewer
accepted the same theory in the O'Neil case (see id., at 370-371), though Justice Harlan indicated that all "persons," not
merely "citizens," were given this protection. Ibid. In Twining v. New Jersey, 211 U.S. 78, 117 , Justice Harlan's position
was made clear:
"In my judgment, immunity from self-incrimination is protected against hostile state action, not only by . . . [the Privileges
and Immunities Clause], but [also] by . . . [the Due Process Clause]."
Justice Brewer, in joining the opinion of the Court, abandoned the view that the entire Bill of Rights applies to the States in
Maxwell v. Dow, 176 U.S. 581 .
[ Footnote 2 ] See Roth v. United States, 354 U.S. 476, 501 , 506; Smith v. California, 361 U.S. 147, 169 .
[ Footnote 3 ] Beauharnais v. Illinois, 343 U.S. 250, 288 . Cf. the opinions of Justices Holmes and Brandeis in Gitlow v.
New York, 268 U.S. 652, 672 , and Whitney v. California, 274 U.S. 357, 372 .
[ Footnote 4 ] The cases are collected by MR. JUSTICE BLACK in Speiser v. Randall, 357 U.S. 513, 530 . And see, Eaton v.
Price, 364 U.S. 263, 274 -276.
MR. JUSTICE CLARK, concurring in the result.
In Bute v. Illinois, 333 U.S. 640 (1948), this Court found no special circumstances requiring the appointment of counsel
but stated that "if these charges had been capital charges, the court would have been required, both by the state statute
and the decisions of this Court interpreting the Fourteenth Amendment, to take some such steps." Id., at 674. Prior to that
case I find no language in any cases in this Court indicating that appointment of counsel in all capital cases was required
by the Fourteenth Amendment. 1 At the next Term of the Court Mr. Justice Reed revealed that the Court was divided as to
noncapital cases but that "the due process clause . . . requires counsel for all persons charged with serious crimes . . . ."
Uveges v. Pennsylvania, 335 U.S. 437, 441 (1948). Finally, in Hamilton v. Alabama, 368 U.S. 52 (1961), we said that
"[w]hen one pleads to a capital charge without benefit of counsel, we do not stop to determine whether prejudice
resulted." Id., at 55. [372 U.S. 335, 348]
That the Sixth Amendment requires appointment of counsel in "all criminal prosecutions" is clear, both from the language
of the Amendment and from this Court's interpretation. See Johnson v. Zerbst, 304 U.S. 458 (1938). It is equally clear
from the above cases, all decided after Betts v. Brady, 316 U.S. 455 (1942), that the Fourteenth Amendment requires
such appointment in all prosecutions for capital crimes. The Court's decision today, then, does no more than erase a
distinction which has no basis in logic and an increasingly eroded basis in authority. In Kinsella v. United States ex rel.
Singleton, 361 U.S. 234 (1960), we specifically rejected any constitutional distinction between capital and noncapital
offenses as regards congressional power to provide for court-martial trials of civilian dependents of armed forces
personnel. Having previously held that civilian dependents could not constitutionally be deprived of the protections of
Article III and the Fifth and Sixth Amendments in capital cases, Reid v. Covert, 354 U.S. 1 (1957), we held that the same
result must follow in noncapital cases. Indeed, our opinion there foreshadowed the decision today, 2 as we noted that:
"Obviously Fourteenth Amendment cases dealing with state action have no application here, but if [372 U.S. 335, 349]
they did, we believe that to deprive civilian dependents of the safeguards of a jury trial here . . . would be as invalid under
those cases as it would be in cases of a capital nature." 361 U.S., at 246 -247.
I must conclude here, as in Kinsella, supra, that the Constitution makes no distinction between capital and noncapital
cases. The Fourteenth Amendment requires due process of law for the deprival of "liberty" just as for deprival of "life," and
there cannot constitutionally be a difference in the quality of the process based merely upon a supposed difference in the
sanction involved. How can the Fourteenth Amendment tolerate a procedure which it condemns in capital cases on the
ground that deprival of liberty may be less onerous than deprival of life - a value judgment not universally accepted 3 - or
that only the latter deprival is irrevocable? I can find no acceptable rationalization for such a result, and I therefore concur
in the judgment of the Court.
[ Footnote 1 ] It might, however, be said that there is such an implication in Avery v. Alabama, 308 U.S. 444 (1940), a
capital case in which counsel had been appointed but in which the petitioner claimed a denial of "effective" assistance. The
Court in affirming noted that "[h]ad petitioner been denied any representation of counsel at all, such a clear violation of
the Fourteenth Amendment's guarantee of assistance of counsel would have required reversal of his conviction." Id., at
445. No "special circumstances" were recited by the Court, but in citing Powell v. Alabama, 287 U.S. 45 (1932), as
authority for its dictum it appears that the Court did not rely solely on the capital nature of the offense.
[ Footnote 2 ] Portents of today's decision may be found as well in Griffin v. Illinois, 351 U.S. 12 (1956), and Ferguson v.
Georgia, 365 U.S. 570 (1961). In Griffin, a noncapital case, we held that the petitioner's constitutional rights were violated
by the State's procedure, which provided free transcripts for indigent defendants only in capital cases. In Ferguson we
struck down a state practice denying the appellant the effective assistance of counsel, cautioning that "[o]ur decision does
not turn on the facts that the appellant was tried for a capital offense and was represented by employed counsel. The
command of the Fourteenth Amendment also applies in the case of an accused tried for a noncapital offense, or
represented by appointed counsel." 365 U.S., at 596 .
[ Footnote 3 ] See, e. g., Barzun, In Favor of Capital Punishment, 31 American Scholar 181, 188-189 (1962).
MR. JUSTICE HARLAN, concurring.
I agree that Betts v. Brady should be overruled, but consider it entitled to a more respectful burial than has been
accorded, at least on the part of those of us who were not on the Court when that case was decided.
I cannot subscribe to the view that Betts v. Brady represented "an abrupt break with its own well-considered precedents."
Ante, p. 344. In 1932, in Powell v. Alabama, 287 U.S. 45 , a capital case, this Court declared that under the particular
facts there presented - "the ignorance and illiteracy of the defendants, their youth, the circumstances of public hostility . . .
and above all that they stood in deadly peril of their lives" ( 287 U.S., at 71 ) - the state court had a duty to assign counsel
for [372 U.S. 335, 350] the trial as a necessary requisite of due process of law. It is evident that these limiting facts were
not added to the opinion as an afterthought; they were repeatedly emphasized, see 287 U.S., at 52 , 57-58, 71, and were
clearly regarded as important to the result.
Thus when this Court, a decade later, decided Betts v. Brady, it did no more than to admit of the possible existence of
special circumstances in noncapital as well as capital trials, while at the same time insisting that such circumstances be
shown in order to establish a denial of due process. The right to appointed counsel had been recognized as being
considerably broader in federal prosecutions, see Johnson v. Zerbst, 304 U.S. 458 , but to have imposed these
requirements on the States would indeed have been "an abrupt break" with the almost immediate past. The declaration
that the right to appointed counsel in state prosecutions, as established in Powell v. Alabama, was not limited to capital
cases was in truth not a departure from, but an extension of, existing precedent.
The principles declared in Powell and in Betts, however, have had a troubled journey throughout the years that have
followed first the one case and then the other. Even by the time of the Betts decision, dictum in at least one of the Court's
opinions had indicated that there was an absolute right to the services of counsel in the trial of state capital cases. 1 Such
dicta continued to appear in subsequent decisions, 2 and any lingering doubts were finally eliminated by the holding of
Hamilton v. Alabama, 368 U.S. 52 .
In noncapital cases, the "special circumstances" rule has continued to exist in form while its substance has been
substantially and steadily eroded. In the first decade after Betts, there were cases in which the Court [372 U.S. 335, 351]
found special circumstances to be lacking, but usually by a sharply divided vote. 3 However, no such decision has been
cited to us, and I have found none, after Quicksall v. Michigan, 339 U.S. 660 , decided in 1950. At the same time, there
have been not a few cases in which special circumstances were found in little or nothing more than the "complexity" of the
legal questions presented, although those questions were often of only routine difficulty. 4 The Court has come to
recognize, in other words, that the mere existence of a serious criminal charge constituted in itself special circumstances
requiring the services of counsel at trial. In truth the Betts v. Brady rule is no longer a reality.
This evolution, however, appears not to have been fully recognized by many state courts, in this instance charged with the
front-line responsibility for the enforcement of constitutional rights. 5 To continue a rule which is honored by this Court
only with lip service is not a healthy thing and in the long run will do disservice to the federal system.
The special circumstances rule has been formally abandoned in capital cases, and the time has now come when it should
be similarly abandoned in noncapital cases, at least as to offenses which, as the one involved here, carry the possibility of
a substantial prison sentence. (Whether the rule should extend to all criminal cases need not now be decided.) This indeed
does no more than to make explicit something that has long since been foreshadowed in our decisions. [372 U.S. 335,
352]
In agreeing with the Court that the right to counsel in a case such as this should now be expressly recognized as a
fundamental right embraced in the Fourteenth Amendment, I wish to make a further observation. When we hold a right or
immunity, valid against the Federal Government, to be "implicit in the concept of ordered liberty" 6 and thus valid against
the States, I do not read our past decisions to suggest that by so holding, we automatically carry over an entire body of
federal law and apply it in full sweep to the States. Any such concept would disregard the frequently wide disparity
between the legitimate interests of the States and of the Federal Government, the divergent problems that they face, and
the significantly different consequences of their actions. Cf. Roth v. United States, 354 U.S. 476, 496 -508 (separate
opinion of this writer). In what is done today I do not understand the Court to depart from the principles laid down in Palko
v. Connecticut, 302 U.S. 319 , or to embrace the concept that the Fourteenth Amendment "incorporates" the Sixth
Amendment as such.
On these premises I join in the judgment of the Court.
[ Footnote 1 ] Avery v. Alabama, 308 U.S. 444, 445 .
[ Footnote 2 ] E. g., Bute v. Illinois, 333 U.S. 640, 674 ; Uveges v. Pennsylvania, 335 U.S. 437, 441 .
[ Footnote 3 ] E. g., Foster v. Illinois, 332 U.S. 134 ; Bute v. Illinois, 333 U.S. 640 ; Gryger v. Burke, 334 U.S. 728 .
[ Footnote 4 ] E. g., Williams v. Kaiser, 323 U.S. 471 ; Hudson v. North Carolina, 363 U.S. 697 ; Chewning v. Cunningham,
368 U.S. 443 .
[ Footnote 5 ] See, e. g., Common wealth ex rel. Simon v. Maroney, 405 Pa. 562, 176 A. 2d 94 (1961); Shaffer v. Warden,
211 Md. 635, 126 A. 2d 573 (1956); Henderson v. Bannan, 256 F.2d 363 (C. A. 6th Cir. 1958).
[ Footnote 6 ] Palko v. Connecticut, 302 U.S. 319, 325 . [372 U.S. 335, 353]
STANDARDS OF JUSTICE
Virginia's Public Defense System - November 2003
To ensure for all Virginians the reliability and fairness of our criminal justice system, Virginia should adopt the following
Standards of Justice as the minimum criteria for the provision of indigent defense. These standards were developed based
on the American Bar Association’s Ten Principles of a Public Defense Delivery System.
1 - Independence
Standards: The public defense function, like the prosecution and the judiciary, should be independent. To safeguard
independence and to promote efficiency, accountability, and quality of services, Virginia should constitute a single
nonpartisan board to oversee public defender and assigned counsel systems. The oversight board should not include
judges, prosecutors, or law enforcement, and appointments to the board should be divided among all branches of
government.
2 - Statewide Funding and Accountability
Standards: The responsibility to provide defense services for those who cannot afford an attorney rests with the
Commonwealth, which should provide adequate state funding and a statewide administrative
structure responsible for ensuring uniform quality and accountability. The Commonwealth should eliminate inflexible
compensation limits that discourage court appointed counsel from rendering quality legal services. Courts should appoint
counsel, according to a coordinated plan directed by the Commonwealth’s oversight board, and the appointment process
should not be 'ad hoc'.
3 - Prompt Appointment of Counsel
Standards: The Commonwealth should furnish counsel to the indigent accused upon request, after determining the
accused is eligible. Except in extraordinary circumstances, counsel should be appointed
within 24 hours after arrest or detention, or 48 hours, should the arrest or detention occur on a weekend or state holiday.
4 - Communication with Clients
Standards: The Commonwealth’s coordinated plan for oversight of the public defense function should require counsel to
interview clients as soon as possible following appointment and to maintain regular
client contact through every stage of the case to ensure the full exchange of legal, procedural and factual information. To
ensure confidential communications, jails, prisons, and courthouses should provide adequate private meeting spaces for
counsel to confer with clients in a timely manner.
5 - Manageable Caseloads
Standards: The Commonwealth, through its oversight board, should set maximum caseload limits for public defenders
and assigned counsel. Neither public defenders nor court appointed lawyers should be expected or required to accept
caseloads that interfere with the rendering of quality representation or lead to the breach of professional standards.
6 - Minimum Qualifications
Standards: The Commonwealth should adopt minimum training and experience requirements that counsel must satisfy
before initially qualifying for appointment and before being appointed to cases of increasing complexity and seriousness.
The Commonwealth’s oversight board should determine whether individual counsel has satisfied these requirements and
should be responsible for ensuring uniformly high quality of counsel throughout the Commonwealth.
7 - Continuous Representation
Standards: The Commonwealth’s public defender and court appointed systems are currently structured to allow for
continuous representation of clients from initial assignment through direct appeal. Courts
should refuse to substitute counsel except in extraordinary circumstances for good cause shown.
8 - Parity
Standards: The Commonwealth should ensure that the prosecution and public defense functions have parity of workload,
salaries and benefits, and other resources such as technology, facilities, legal research, administrative staff, paralegals,
investigators, and access to forensic services and experts. Court appointed counsel should be paid a reasonable fee in
addition to actual overhead and expenses. State law should require every locality that provides resources or financial
support to its Commonwealth’s Attorney’s office to provide comparable local funding for any public defender office in the
same jurisdiction.
9 - Continuing Legal Education and Training
Standards: The Commonwealth’s oversight board should establish standards requiring continuing legal education for all
public defender attorneys and assigned counsel and should encourage attorneys to attend national training programs that
have relevance to the development of trial advocacy skills. This training should include criminal law, criminal procedure,
evidence, appellate practice, ethics, and the forensic sciences. The oversight board should provide intensive entry- level
training for all new attorneys, and local
public defender offices should orient new attorneys to local practice. Staff who assist attorneys in providing defense
services should have systematic and comprehensive training appropriate to their specialties.
10 - Performance Standards and Evaluation
Standards: The Commonwealth’s oversight board should establish quality and efficiency standards and regularly evaluate
public defender offices and the assigned counsel system according to those standards as well as national standards. The
oversight board should also undertake periodic quality and efficiency review of its program by outside, independent
evaluators.
The Virginia Indigent Defense Coalition (VIDC) seeks to improve the quality of defense services for the
poor by enhancing standards of representation and increasing resources and funding available to
counsel for poor defendants in the juvenile and criminal justice systems in Virginia. The coalition’s goal
is to develop and implement a comprehensive public-awareness and education campaign that
will highlight the problems in Virginia’s indigent defense system and bring about reform to that system.
The Standards of Justice were made possible by the generous support of
The Gideon Project of the Open Society Institute and the Public Welfare Foundation.
To ensure for all Virginians the reliability and fairness of our criminal justice system,
Virginia should adopt the following Standards of Justice as the minimum criteria
for the provision of indigent defense. These standards were developed based on
the American Bar Association’s Ten Principles of a Public Defense Delivery System.
This report is based on the American Bar Association’s Ten Principles of a Public Defense Delivery System. As follows:
American Bar Association's Ten Principles
of a Public Defense Delivery System
Black Letter
1.
The public defense function, including the selection, funding, and payment of defense counsel is independent.
2.
Where the caseload is sufficiently high, the public defense delivery system consists of both a defender office and
the active participation of the private bar.
3.
Clients are screened for eligibility, and defense counsel is assigned and notified of appointment, as soon as
feasible after clients’ arrest, detention, or request for counsel.
4.
Defense counsel is provided sufficient time and a confidential space within which to meet with the client.
5.
Defense counsel’s workload is controlled to permit the rendering of quality representation.
6.
Defense counsel’s ability, training, and experience match the complexity of the case.
7.
The same attorney continuously represents the client until completion of the case.
8.
There is parity between the defense counsel and the prosecution with respect to resources and defense counsel is
included as an equal partner in the justice system.
9.
Defense counsel is provided with and required to attend continuing legal education.
10. Defense counsel is supervised and systematically reviewed for quality and efficiency according to nationally and
locally adopted standards.
*The ABA Ten Principles of a Public Defense Delivery System were approved by the ABA House of Delegates in February 2002.
1. The public defense function including the selection, funding and payment of defense counsel is
independent.
There are two parts to Virginia’s public defense delivery system. 1) Public Defender offices serve about half of Virginia’s
population in 21 locations and 2) a court appointed system (using private attorneys) serves the remainder of the state.
Court appointed attorneys depend on local judges to appoint them and approve their fees. The appointment system
compromises independence and gives the appearance that a lawyer’s zealous advocacy on behalf of a client could result in
a private lawyer’s removal from the court appointed list. Public defender offices are managed by the Virginia Public
Defender Commission, an independent state agency within the judicial branch. The commission sets policy for the hiring of
all public defenders, including those involved in capital cases. Grade: D
2. Where the caseload is sufficiently high, the public defense delivery system consists of both a defender
office and the active participation of the private bar.
This principle requires the establishment of a statewide system for ensuring uniform quality. Virginia has no such structure.
In Public Defender jurisdictions there is a full-time administrator, but in court appointed jurisdictions administration is left
up to localities. A full-time statewide administrator covering all indigent defense would improve the system and help
ensure uniform quality. Grade: D
3. Clients are screened for eligibility, and defense counsel is assigned and notified of appointment, as soon as
feasible after client’s arrest, detention, or request for counsel.
In Virginia, the court appoints a lawyer during the defendant’s initial court appearance after arrest, but the client may not
be able to meet with his lawyer until after the hearing. An improved system would allow for appointment of a lawyer and
attorney-client contact before the initial hearing. Grade: B
4. Defense counsel is provided sufficient time and a confidential space within which to meet with the client.
Virginia’s high caseloads and low fee caps may discourage court-appointed lawyers from spending sufficient time with
clients to prepare their cases. Similarly, in many public defender offices, high caseloads prevent lawyers from spending
sufficient time with clients to prepare cases. In some Virginia jails and courthouses, there is no private place for lawyers to
meet with their clients. Grade: D
5. Defense counsel's workload is controlled to permit the rendering of quality representation.
In 1990, the Virginia Department of Planning and Budget approved statewide caseload standards for Public Defender
offices. Public defender caseloads remain unreasonably high because the Virginia General Assembly has never funded
enough staff to meet those standards. For many court appointed lawyers, caseloads are similarly high, hampering their
ability to provide quality representation. To improve under this principle, Virginia should implement a statewide plan for
managing caseloads. Grade: D
6. Defense counsel’s ability, training, and experience match the complexity of the case.
The Public Defender within each office is responsible for ensuring that the assistant public defender assigned to the case
has the necessary ability, training and experience. However, because of high caseloads, sometimes attorneys lack
sufficient training and experience for particular cases. Court appointed lawyers are appointed by individual trial judges who
are responsible for ensuring that they assign lawyers who are qualified to handle the charges. However, often there is no
attempt to match a case with a qualified lawyer. Grade: C
7. The same attorney continuously represents the client until completion of the case.
Most public defender offices assign a single attorney from intake through disposition. In some offices, special appellate
attorneys take all cases on appeal. Virginia’s Supreme Court requires all court appointed lawyers and public defenders to
represent a defendant through completion of the case. Grade: A
8. There is parity between defense counsel and the prosecution with respect to resources and defense counsel
is included as an equal partner in the justice system.
There is no parity of resources in Virginia. Virginia’s current maximum hourly rate for court appointed counsel ($90/hour)
is subject to the lowest unwaivable salary cap in the country. For example, in a complicated case involving three or more
appearances in a District Court, a court appointed lawyer would receive a maximum of $112 (or 1.25 hours of pay) for
representing the client. Unlike prosecutors, neither Public Defenders nor court appointed lawyers have access to expert
assistance, except by demonstration of need, which is made in open court. Public defender salaries are set by the state to
be comparable to Commonwealth’s Attorneys’ state salaries, but unlike Commonwealth’s Attorneys, there is no flexibility
as to hiring level, no local salary supplements, no Career Defender Program, and no law school loan forgiveness. Grade: F
9. Defense counsel is provided with and required to attend continuing legal education.
Public defender offices provide their lawyers with the minimum general training to meet state-mandated attorney
continuing legal education (CLE) requirements of 12 hours per year, including two hours of ethics. Most training is in
criminal defense. Court appointed lawyers must pay for their continuing legal education and are required only to complete
state-mandated general training. There is no requirement for court appointed lawyers to undergo criminal defense training.
Grade: C
10. Defense counsel is supervised and systematically reviewed for quality and efficiency according to
nationally and locally adopted standards.
Public defenders receive yearly performance evaluations based on statewide standards provided by the Public Defender
Commission. Virginia’s evaluation criteria do not encompass nationally recognized standards. Court appointed lawyers are
not required to meet any statewide qualifications or standards, nor is their performance evaluated. Attorneys who wish to
represent defendants in capital cases must meet minimum statewide standards set by the Virginia Public Defender
Commission, the Virginia State Bar, and the Supreme Court of Virginia. Grade: D
Progress Report
Virginia’s Public Defense System
March 2003
Supplementary Information
1 The public defense function including the selection, funding and payment of defense counsel is independent.
The Public Defender Commission sets policy for the public defender offices and is charged with hiring the public defender
for each jurisdiction and the capital defender for each region. In addition, the commission sets the salaries of all
commission employees. Virginia Code § 19.2-163.2. Pursuant to ABA and NLADA national standards, the primary function
of a Defender Commission is to support and protect the independence of the defense services program. Both sets of
standards prohibit judges or prosecutors from membership on a Defender Commission. In addition, the NLADA standards
specify that no single branch of government should have a majority of votes on the Commission. Measured by these
standards, Virginia’s Public Defender Commission falls short.
All Public Defender Commission members are appointed by a single branch of government, indeed a single person: the
Speaker of the House of Delegates, after consultation with the chairs of the House and Senate Courts of Justice
Committees. Virginia Code § 19.2-163.1. In addition, a third of the commission members are judges. Id. Pursuant to the
standards, the independence of the commission would be enhanced by a statutory expansion of the appointing authority
beyond a single branch of government and to include representatives from various statewide bar associations or other
justice system stake-holders. Legislation should also eliminate the judicial members of the commission.
Court appointed lawyers are totally dependent upon local judges for their appointments and for approving their fee
requests. Thus, there is an incentive for attorneys to litigate in a fashion that does not upset or offend the trial bench.
Additionally, payment for appellate work is at the complete discretion of the court. House Document No. 32 (2002) at 8.
2 Where the caseload is sufficiently high, the public defense delivery system consists of both a defender office
and the active participation of the private bar.
Prior to 1972, all of the state’s indigent defense responsibilities were carried out by the private bar through court
appointments. Virginia Code § 19.2-163. In 1972, legislation established the Public Defender Commission and authorized
the creation of three pilot offices. Since the establishment of those offices, the Public Defender system has grown office by
office through the efforts of individual legislators mostly responding to the desires of the local bench and bar, with no
objective criteria to guide their decisions. House Document No. 15/Senate Document No.11 (1986) at 4 ("In 1978, the
General Assembly authorized the creation of up to five pilot programs . . . The [Public Defender] Commission expressed
interest in establishing the fifth program in Alexandria or Richmond. However, because of local opposition to the program
in each of these jurisdictions, a fifth office has not yet been funded.").
Numerous reports to the legislature have found the Public Defender Commission to be an agency that provides cost
effective, high quality services to the people of Virginia. However, after thirty years, the Public Defender System consists
of twenty-one offices covering forty-eight jurisdictions containing about half of Virginia’s population, as well as four
regional capital defender offices. Virginia Code § 19.2-163.2
3 Clients are screened for eligibility, and defense counsel is assigned and notified of appointment, as soon as
feasible after client’s arrest, detention, or request for counsel.
An indigent is defined as a person who requests legal counsel but is unable to provide for full payment of a lawyer’s fee
without causing undue financial hardship to himself or his family . In Virginia, to be eligible for appointed counsel either
through the Public Defender’s Office or the court appointed system the adult must be charged with an offense, which may
be punishable by incarceration, or may be subject to the loss of parental rights, indicate to the court that s/he is indigent,
wants a court appointed attorney and does not want to waive his/her right to counsel. The defendant must then fill out a
form requesting counsel and a financial statement and submit it to the court. The court then determines whether or not
the defendant is eligible for public defense services.
In Virginia there are three ways to determine whether a defendant is eligible for appointment of counsel: presumption of
indigence; financial resources calculation; and exceptional circumstances calculation. An adult is presumed eligible if s/he
receives state or federally administered public assistance such as food stamps, Medicaid and Supplementary Security
Income. If the defendant is not receiving public assistance the court will examine the defendant’s financial resources with
consideration given to net income, assets, and exceptional expenses. The court may also in exceptional circumstances and
where the ends of justice so require, appoint an attorney to represent the defendant.
For juveniles the indigency determination applies to the child’s parents. Virginia does not presume indigency for a child
although studies indicate that in practice, the courts routinely find juveniles indigent almost without exception when
considering their financial resources apart from those of their parents or guardians.
The Virginia Crime Commission recently reported that the number of indigent clients served by Court Appointed Counsel
has increased by 40% and that caseload for public defenders has also increased.
A direct consequence of the late appointment of counsel in delinquency cases is the loss of time and time restrictions
imposed on defense counsel. Many days pass following arrest before defense counsel is even permitted to visit with a client
in detention and many months may pass before counsel can meet with a client who is not detained. Interviews with youth
in detention as well as detention personnel revealed that defense counsel rarely contact clients. Geographical limitations
further complicate client contact for juvenile defenders in rural areas. Court appointed counsel are often expected to have
a trial on the day they are appointed meeting with a client in a crowded hallway in the courthouse. Court appointed
counsel has little incentive to meet with a client when paid only $112.00 for the entire case. Court personnel felt that
public defenders have crushing caseloads, late appointments only a few days before trial and do not have the time to
prepare a child’s case. Overall, interviewees reported that lawyers have little client contact.
4 Defense counsel is provided sufficient time and a confidential space within which to meet with the client.
A direct result of high caseloads and low mandatory fee caps is that defense attorneys are often unable to meet with
clients in a timely fashion. Virginia Assessment (2002) at 24-26. Although the Public Defender Commission has adopted an
internal regulation requiring that counsel meet with incarcerated clients within 48 hours of appointment, the ability of
attorneys to abide by this rule is not consistent across the state. Because the Commonwealth lacks a statewide
administrative structure to oversee court appointed attorneys, there is no requirement that they meet with incarcerated
clients in a timely fashion. In addition to timing issues, both public defenders and court appointed attorneys have difficulty
meeting clients with the frequency required to develop the attorney-client relationship and prepare their cases adequately.
Virginia Assessment (2002) at 25.
Adding to difficulties in meeting with incarcerated clients is the lack of adequate facilities for attorneys to meet with their
clients in an expeditious fashion in many jails, detention centers, and courthouses.
5 Defense counsel's workload is controlled to permit the rendering of quality representation.
There are no fixed policies in place at the Public Defender Commission as to the number of cases that an Assistant Public
Defender can be expected to handle at any given time. House Document No. 32, (2002) at. 4-5 & 11-12; House Document
No. 44 (1990) at ii-iv.
High juvenile caseloads prevent juvenile defenders in Virginia from meeting with clients and preparing cases. Juvenile
public defenders are unable to effectively protect the rights of children and youth in Virginia. Virginia Assessment (2002) at
20-21
Court appointed counsel is not required to report total caseload to anyone. They only report the number of court appointed
cases they handle, House Document 32, (2002) at 18, i.e. if 25% of caseload is court appointed work -- how much other
retained work takes time away from representing indigents?
However, the high yearly fees paid to some court-appointed lawyers, combined with the very low caps on individual cases,
indicate that they must be handling huge numbers of cases. Generally, all juvenile defenders close cases after a disposition
hearing and do not file appeals in juvenile cases. One reason given for lack of appeals from the J&DR Court to the Circuit
Court is "overwhelming caseloads." Virginia Assessment (2002) at 28.
6 Defense counsel’s ability, training, and experience match the complexity of the case.
The Public Defender within each office is responsible for assuring that the assistant assigned to the case has the necessary
ability, training, and experience. House Document 32 (2002) at 11. Some public defenders, however, whether responding
to staff shortages or an office culture that dictates that every attorney should be able to handle any case, assign attorneys
lacking in training and experience to serious felonies.
Court appointed lawyers are assigned by individual trial judges who are responsible for assuring that they assign attorneys
that are qualified to handle the charges. House Document 32 (2002) at 11.
7 The same attorney continuously represents the client until completion of the case.
Most public defender offices practice vertical representation, assigning a single attorney from intake through disposition. In
some offices, special appellate attorneys take all cases on appeal. Virginia's payment schedule creates a disincentive for a
trial attorney who is also qualified to perform appellate counsel to accept appointments to continue representation through
appeal. The ad hoc nature of how payment is authorized by the appellate court can result in statewide inequities for the
fees awarded. House Document No. 32 (2002) at 8. Thus, in public defender jurisdictions it is not uncommon private
counsel to seek to withdraw at the end of the trial phase of a case and seek to have the public defender office appointed
on appeal.
8 There is parity between defense counsel and the prosecution with respect to resources and defense counsel
is included as an equal partner in the justice system.
Compensation:
Commonwealth’s Attorneys: State salaries are supplemented by the locality in many jurisdictions. In FY02, localities
supplemented state salaries by more than $5.2 million. In addition, localities and grants provided over $8.8 million to
Commonwealth’s Attorneys’ offices to create additional positions above and beyond those positions funded by the
Commonwealth. The executive branch and the General Assembly created the "Career Prosecutor" program with enhanced
salaries in order to retain experienced prosecutors. Additionally, federal loans such as the Perkins student loans can be
forgiven for Commonwealth’s Attorneys.
Public Defenders: Salaries are set by the state to be comparable to Commonwealth’s Attorneys’ state salaries, but with no
local supplements or grants, no Career Defender Program, and no loan forgiveness. As a result, there are significant
differences in the salaries of Commonwealth’s Attorneys and Public Defenders with comparable experience.
Court Appointed Lawyers: While Virginia’s current maximum hourly rate for court-appointed counsel arguably is reasonable
($90/hour), it is subject to the lowest unwaivable salary caps in the country. "Even when an attorney in a particular case
performs an exceptional service, the court cannot exceed the statutory limit allowed for that type of case. If the court
allows more than the statutory limit then the Supreme Court is mandated to reduce the voucher to the statutory limit."
Virginia Supreme Court, Court-Appointed Counsel – Public Defender Procedure and Guidelines Manual (2002) at 24.
Because the caps cannot be exceeded under any circumstances, court appointed counsel may work beyond the hours that
will be paid under the caps. Court appointed lawyers may be forced to work for "free" and actually lose money by
continuing to have to pay office overhead without adequate income. House Document 32 (2002) at 7-9; House Document
46 (1997) at 4; Senate Document 19 (1995) at 14; ABA Assessment (2002) at 19-20; House Document 48 (1991) at 910.
The Virginia Code sets the caps for court appointed fees. Virginia Code § 19.2-163. However, even those incredibly low
caps are not fully funded by the General Assembly resulting in even lower caps in reality. House Documents 32 (2002) p.
7-8; Virginia Code § 19.2-163 (Editor’s Note); Compare Virginia Code §19.2-163 with Virginia Supreme Court, CourtAppointed Counsel – Public Defender Procedure and Guidelines Manual (2002) p. 48 (Supreme Court’s Chart of Allowances
setting lower maximum fees for court-appointed counsel than those found in the Code).
Resources:
The resources available to Commonwealth’s Attorneys include the local police, FBI, and state crime labs. All of these
resources are available without notice to defense counsel or permission from the court.
All Public Defenders and PD offices have access to an in-house investigator and some offices have an in-house sentencing
advocate. However, they must rely on the trial court to approve funds for all expert assistance (for ex., psychologists) and
forensic testing.
Court appointed lawyers must rely on the trial court to approve funds for any investigative resources, expert witnesses and
forensic testing.
For both Public Defenders and Court appointed lawyers they have no right to choose their own expert witness or other
resource, but must accept the court’s appointment. Funk v. Commonwealth, 8 Va. App. 91 (1989)
In order to receive expert assistance, an Public Defender or court appointed lawyer (on behalf of an indigent defendant)
must demonstrate a "particularized need" to the trial court. Husske v. Commonwealth, 252 Va. 203 (1996); Barnebei v.
Commonwealth, 252 Va. 161 (1996). This request or showing must occur in open court, with the Commonwealth’s
Attorney being given an opportunity to hear the evidence and argue against the request. No right to an ex-parte
proceeding, Ramdass v. Commonwealth, 246 Va. 413 (1993)
Expansion:
Commonwealth’s Attorneys/Law Enforcement: Over the years, police and prosecutor’s offices have expanded through
grants, and locally funded positions. The State Compensation Board uses staffing standards to determine how many
positions the state will fund, ignoring any additional positions that are funded by localities or grants.
Public Defenders: There are minimal, intermittent and arbitrary increases in office staffing without regard to national
staffing standards or the Commonwealth’s own standards developed by Virginia Department of Planning and Budget.
House Document 44 (1990). In its FY’02 budget request, the Public Defender Commission identified a staffing shortage of
50 position needed to meet the Department of Planning and Budget standards. The shortage is even greater, because it
does not include an allowance for appellate attorneys. Public defenders handle their own appeals, while the Attorney
General handles appeals for prosecutors that the appellate courts accept for briefing and argument. Funding for these
additional positions (not including appellate attorneys) amounted to nearly $3 million in FY’02. The Virginia General
Assembly provided no funding for FY’02 or FY’03 to fill this funding gap and adequately staff Virginia public defender
offices.
9 Defense counsel is provided with and required to attend continuing legal education.
The Commonwealth’s Attorneys Services Council funds five multi-day trainings per year: including the Homicide Training
Program, Annual Conference, Executive Program, Spring Institute, TOPGUN Training Program, Trial Advocacy Institute. All
of these training sessions are specially tailored to the needs of Commonwealth’s Attorneys. In addition, CA’s are eligible for
free trial advocacy skills training through federally-funded National District Attorney Institute in South Carolina
The Public Defender Commission (PDC) provides funding for Public Defender training that includes minimum general
training to meet state-mandated attorney continuing legal education requirements (12 hour per year, including 2 hours of
ethics). The PDC also holds a one-day CLE seminar per year specially tailored to Public Defenders. Occasionally funds are
available through individual office budget savings to pay for Public Defenders to attend 3rd - party defender-specific
training.
Court-Appointed are required only to complete general training to meet state-mandated continuing legal education
requirements. There is no requirement for specialized criminal defense training for court appointed lawyers.
10 Defense counsel is supervised and systematically reviewed for quality and efficiency according to
nationally and locally adopted standards.
Public defenders receive yearly performance evaluations. Not based on standards, other than those set by local Public
Defenders. For court appointed lawyers there are no qualifications, standards or performance reviews. Local judges set any
requirements for court-appointments. House Documents 32 (2002) at 11-14, 17.
Capital defense counsel must qualify under standards promulgated jointly by Virginia Public Defender Commission, Virginia
State Bar, and Virginia Supreme Court. Virginia Code § 19.1-163.8. Qualifications are objective and self-reported, based
on attorney’s previous trial experience and attendance at specialized CLE training. There is no mechanism or resources for
examination of the quality of a lawyer’s capital defense skills. There is also no way to evaluate performance, or to remove
poor quality lawyers from the list of qualified attorneys, so long as they meet the objective, experiential and training
criteria.
_____________________________________
Indigent Defense, Report of the Virginia State Crime Commission (House Document No. 32 2002)
Cost Effectiveness of Public Defender Offices, Report of the Virginia State Crime Commission (House Document No. 46
1997)
An Examination of the Current System of Compensating Court Appinted Counsel and Alternative Methods of Providing
Adequate Represenation at a Reasonable Cost , Report of the Committee on District Courts (Senate Document No. 19
1995)
Alternative Indigent Defense Systems, Final Report of GA Joint Subcommittee (House Document No. 48 1991)
Indigent Defense Systems in Virginia, Report of the Department of Planning and Budget (House Document No. 44 1990)
Virginia’s Public Defender Progarm and Alternative Indigent Defense Systems, Joint Report of Two GA Joint Subcommittees
(House Document No. 15/Senate Document No. 11 (1986). Numerous other reports on indigent defense and the public
defender system were undertaken during the 1980s by the General Assembly, The Supreme Court of Virginia’s Office of
the Executive Secretary, the Virginia Bar Association, and the Spangenburg Group, a private consulting firm specializing in
indigent defense issues. For a more complete listing of these reports, see An Examination of the Current System of
Compensating Court Appinted Counsel and Alternative Methods of Providing Adequate Represenation at a Reasonable Cost,
Report of the Committee on District Courts at 20-21 (Senate Document No. 19 1995).
In 1983, the Judicial Council of Virginia published its 1983-1986 Comprehensive Judicial Plan. Goal 1 of the plan was: "To
improve the ability of the courts to provide a prompt and fair resolution in all legal disputes." Within that Goal, the Counsel
included the following Task: "Task 1.3.3 Support legislation to establish that, as a matter of public policy, Virginia will
proceed toward a state-wide implementation of a mixed defender system (primary responsibility for handling indigent
cases going to salaried public defenders with the private bar handling conflict and overflow cases)." The recently retired
Chief Justice of Virginia echoed the earlier report in his final State of the Judiciary Message. "I believe that indigent
representation should be provided by appropriately staffed and funded public defender offices throughout the state. Courtappointed counsel would continue to handle those cases in which the public defender’s office has a conflict of interest or
when workloads preclude the office from accepting assignments." 2001 State of the Judiciary Report at xvi (2002).
An Examination of the Current System of Compensating Court Appointed Counsel and Alternative Methods of Providing
Adequate Representation at a Reasonable Cost, Report of the Committee on District Courts at 6 (Senate Document No. 19
1995)
An Examination of the Current System of Compensating Court Appointed Counsel and Alternative Methods of Providing
Adequate Representation at a Reasonable Cost, Report of the Committee on District Courts at 6-8 (Senate Document No.
19 1995); Cost Effectiveness of Public Defender Offices, Report of the Virginia State Crime Commission at 4 (House
Document No. 46 1997)
Cost Effectiveness of Public Defender Offices, Report of the Virginia State Crime Commission at 8 (House Document No. 46
1997)
An Examination of the Current System of Compensating Court Appointed Counsel and Alternative Methods of Providing
Adequate Representation at a Reasonable Cost, Report of the Committee on District Courts at 9 (Senate Document No. 19
1995)
An Examination of the Current System of Compensating Court Appointed Counsel and Alternative Methods of Providing
Adequate Representation at a Reasonable Cost, Report of the Committee on District Courts at 7-10 (Senate Document No.
19 1995)
Indigent Defense, Report of the Virginia State Crime Commission at 14 (House Document No. 32 2002)
A Comprehensive Review of Indigent Defense in Virginia
Executive Summary
January 2004
Supported by a grant from the Gideon Project of the Open Society Institute and contributions
from the American Bar Association’s Standing Committee on Legal Aid and Indigent
Defendants, Covington & Burling, and the National Association of Criminal Defense Lawyers.
Copyright © 2004 American Bar Association.
This publication has been prepared by The Spangenberg Group on behalf of the American Bar
Association's Standing Committee on Legal Aid and Indigent Defendants. The views expressed
herein, unless otherwise noted, have not been approved by the House of Delegates or the Board
of Governors of the American Bar Association and, accordingly, should not be construed as
representing the policy of the American Bar Association.
While numerous reports criticizing Virginia’s indigent defense system have been
produced over the past 30 years, very little has been done over that period to remedy the
problems identified. This report is perhaps the most comprehensive review produced to date.
The chief conclusion of the review is that Virginia’s indigent defense system is deeply flawed
and fails to provide indigent defendants the guarantees of effective assistance of counsel required
by federal and state law. The report discusses in detail the individual shortcomings of the system
that produce this overall failure to assure that the rights of poor people accused of crimes are
protected.
Formed in 1985, The Spangenberg Group (TSG) has conducted research in all 50 states
and provides consultative services to developing and developed countries that are reforming their
legal aid delivery programs. For over 18 years, TSG has been under contract with the American
Bar Association's Standing Committee on Legal Aid and Indigent Defendants to provide support
and technical assistance to individuals and organizations working to improve their jurisdictions'
indigent defense systems. Including Virginia, TSG has conducted comprehensive statewide
studies of indigent defense systems in 36 states.
The methodology for this study included: review of reports and data on Virginia’s
indigent defense system from numerous sources; on-site assessments of the indigent defense
systems in 13 Virginia judicial circuits; analysis of the Supreme Court of Virginia
Administrative Office database on assigned counsel; analysis of budget, caseload and other data
provided by the Virginia Public Defender Commission; and collection and analysis of
comparison information from other states' indigent defense systems.
The 13 circuits studied are representative of Virginia’s 31 judicial circuits/districts,
geography and population, and reflect a diversity of system types (three jurisdictions were served
solely by court-appointed counsel while the other 10 used a public defender office and assigned
counsel). In each of the 13 circuits/districts visited, we met with people who are involved with
indigent defense services, including: circuit court judges, district court judges, juvenile and
domestic relations court judges, court clerks, the Commonwealth’s attorney and/or staff, Public
Defender Commission staff and members, public defender and court-appointed attorneys, and
the sheriff or a jailer familiar with indigent defense procedures. In addition to conducting
professional interviews, we observed criminal court sessions in most sites and juvenile court
sessions in a few sites. Site work was conduced between June and September 2003. In total, we
spent 79 days in Virginia, conducting interviews with 370 individuals who work in more than 60
courts, observing sessions in 27 courts and visiting five jails.
Findings
Chapter 9 of this report includes The Spangenberg Group’s overall findings of Virginia’s
indigent defense system. The black letter findings appear below: the full findings with
explanation appear in Chapter 9. The findings are based on our review of indigent defense in
Virginia and are also based on the perspective and experience The Spangenberg Group has
gained studying the indigent defense systems of other states over the years.
OVERALL FINDINGS
1. Virginia’s indigent defense system fails to adequately protect the rights of poor
people who are accused of committing crimes.
2. Two primary factors - inadequate resources and an absence of an oversight
structure – form the basis of an indigent defense system that fails to provide lawyers
with the tools, time and incentive to provide adequate representation to indigent
defendants.
3. In the past 30 years, numerous studies and reports have been conducted on
Virginia’s indigent defense system, most pointing out similar problems and calling
for similar solutions.
4. The deeply flawed system puts lawyers at substantial risk of violating professional
rules of conduct when representing indigent defendants.
5. There is no official state entity that effectively advocates for indigent defense needs
in Virginia. No governmental entity serves as a voice for indigent defense: not the
Public Defender Commission, not the State Bar, not the Supreme Court, not the
Executive Branch and not the General Assembly.
6. Because of a lack of response by elected officials, there has proven to be no
meaningful way to seek redress for the problems with Virginia’s indigent defense
system.
7. Court-appointed attorneys and public defenders make very limited use of expert
witnesses and court-appointed lawyers make very little use of investigators, services
that are essential to proper representation of clients in many cases.
8. Substandard practice has become the accepted norm in Virginia’s indigent defense
system.
9. Virginia ranks last in average indigent defendant cost per case among a group of 11
states for which such data was collected for FY 2002 (the states are Alabama,
Colorado, Georgia, Iowa, Maryland, Massachusetts, Missouri, North Carolina,
Ohio, Virginia and West Virginia).
SPECIFIC FINDINGS PERTAINING TO VIRGINIA’S ASSIGNED COUNSEL SYSTEM
10. The unwaiveable statutory fee caps for court-appointed counsel in Virginia are the
lowest in the country.
11. The unreasonably low statutory fee caps act as a disincentive to many assigned
counsel from doing the work necessary to provide meaningful and effective
representation to their indigent clients.
12. In addition to the problems stemming from low pay, there are numerous systemic
deficiencies with the assigned counsel system in Virginia that result in the failure of
court-appointed lawyers to provide adequate representation to indigent defendants.
13. The lack of oversight and administration permits a small number of attorneys to
receive a disproportionate number of appointed cases, raising serious concerns over
the quality of representation provided to their clients.
14. The disparity in pay for court-appointed counsel representing parents in abuse and
neglect cases and GALs who represent the best interests of children in these cases is
unfair and illogical.
SPECIFIC FINDINGS PERTAINING TO VIRGINIA’S PUBLIC DEFENDER SYSTEM
15. The Virginia public defender system is greatly over-burdened and substantially
under-resourced.
16. The entity that should be the advocate for adequate resources for public defender
offices -- the Public Defender Commission -- has been more concerned with assuring
the public and elected officials that public defenders can handle cases as cheaply as
or cheaper than appointed counsel.
17. There is great disparity in resources afforded to public defenders and
Commonwealth’s attorneys.
Recommendations
Chapter 10 of this report contains several major systemic changes that The Spangenberg
Group recommends that Virginia undertake forthwith. These recommendations are as follows:
(1) The Virginia General Assembly should fund indigent criminal defense services in
cases requiring appointment of counsel at a level that assures that all indigent
defendants receive effective and meaningful representation.
(2) The state should establish a professionally independent statewide indigent defense
commission to organize, supervise and assume overall responsibility of Virginia’s
indigent defense system.
(3) The newly created commission on indigent defense should have broad power and
responsibility for the delivery of indigent criminal defense services.
(4) The indigent defense commission should adopt performance and qualification
standards for both private assigned counsel and public defenders. The standards
should address workload limits, training requirements, professional independence and
other areas to ensure effective and meaningful representation.
(5) A comprehensive data collection system designed to provide an accurate picture of
the provision of indigent criminal services in Virginia should be established and
implemented by the statewide commission.
The task ahead to reform the indigent defense system in Virginia is a daunting one.
Much needs to be done, and these five recommendations should not be considered an exhaustive
road map outlining all areas of needed improvement. However, we believe that the starting point
to begin these efforts is creation of a new indigent defense commission and appropriation of
substantial additional state funds during the 2004 legislative session of the General Assembly.
More on http://www.vidcoalition.org/pdf/VA%20%20Full%20Rpt%20%20Embargoed%202.pdf already put on favs list as it is 124 pgs
Virginians Say a Strong Defense Matters
July 14, 2004
RICHMOND, VA — A majority of Virginians favor providing legal representation to people who cannot afford a lawyer and
believe it is important to have fair courts and a fair and efficient criminal justice system, according to the results of a
recent statewide public opinion poll.
The Commonwealth Poll, which was conducted in April by Virginia Commonwealth University’s Center for Public Policy,
found that Virginians strongly believe that the amount of money spent for legal representation makes a great deal of
difference in the quality of representation. Those polled also believe that the quality of legal representation influences the
outcome of the case.
"Virginians clearly want a fair judicial system that treats the poor and the rich the same," said Matthew Geary, an attorney
in private practice in Richmond who accepts court-appointed cases and the president of the Virginia Indigent Defense
Coalition (VIDC), which commissioned the poll. "The problem is that Virginians also believe you get what you pay for and
in the
Commonwealth we pay court-appointed lawyers less than in any other state in the country. That certainly raises the
question – are Virginia’s indigent defendants adequately and fairly represented?"
VIDC Commonwealth Poll News Release The poll also revealed that a majority of Virginians consider issues related to the
courts and the criminal justice system to be near the top of their priorities. "Those of us who are involved in or affected by
the indigent defense system know that improving the system is a top priority," said Geary. "This poll shows most
Virginians agree with us."
In January, the American Bar Association conducted a comprehensive statewide study of Virginia’s indigent defense system
that found, "Virginia’s indigent defense system fails to adequately protect the rights of poor people accused of committing
crimes." The study also found that the two primary factors for the failure are … "inadequate resources and an absence of
an oversight structure…"
"The Commonwealth Poll results show that Virginians support a quality indigent defense system. I think that encompasses
not only quality defense for indigent defendants, but also greater fairness and reliability for everyone in the criminal justice
system," said James Hingeley, vice president of VIDC and the public defender for Charlottesville and Albemarle County. "It
is
time to make Virginia’s indigent defense system the best in the country and one that is fair for all Virginians regardless of
their income."
The Commonwealth Poll’s telephone survey was conducted by the VCU Center for Public Policy between March 31 and April
7, 2004. The survey interviewed 812 respondents across the state. The margin of sampling error is plus or minus 4
percentage points.
For more information about the Commonwealth Poll contact Cary Funk, Virginia Commonwealth University School of
Government and Public Affairs at 804-827-1430.
Virginia Indigent Defense Coalition
Public Opinion in Virginia on Indigent Defense
Prepared by:
Dr. Carolyn L. Funk, Director of the Commonwealth Poll
Associate Professor, School of Government and Public Affairs
VCU Center for Public Policy
Virginia Commonwealth University
Richmond, VA 23284-3061
April 20, 2004
Study Background
The Virginia Indigent Defense Coalition (VIDC) contracted with the VCU Center for Public Policy to conduct a telephone
survey with a representative sample of adults living in Virginia. This survey was conducted March 31- April 7, 2004.
Interviews were completed with 812 respondents across the state. The margin of sampling error is plus or minus four
percentage points.
Overview of Findings
Support for Indigent Defense and a Fair Criminal Justice System

Seven in ten Virginians favor the idea of providing legal representation to people who cannot afford a lawyer.
Twenty-three percent oppose this idea. Support for the concept of indigent defense is a bit stronger in Virginia
compared to the nation as a whole. The 2001 national survey conducted by Belden Russonello & Stewart found
64% in favor and 32% opposed when using the exact same question wording.

Sixty-eight percent of Virginians consider it extremely important to have a fair courts and criminal justice system.
Twenty-two percent think this is very important, nine percent say it is important. Less than one percent
considered it not important.

Issues related to the courts and criminal justice system are considered a top priority by less than two in ten
Virginians (17%). A plurality, however, consider these issues to be near the top (46%). Twenty-eight percent
place these issues in the middle and 4% consider them to be near or at the bottom of priorities.
Evaluation of Virginia’s Indigent Defense

When asked to rate how well the current system provides fair access to legal representation, 26% chose to make
no rating. This likely reflects limited information about the system among the general public. Among those who
rated, the most common response was the middle option of "well".

The ratings of how well the system provides fair access to legal representation have a similar pattern, however,
even among those respondents who have heard a lot about the courts and criminal justice system in Virginia.
Among this group of more informed respondents, 36% said well, 30% said extremely or very well, while 23%
said not too or not at all well and12% made no rating.

A general question on whether state spending was enough or not enough to meet the public defense system
needs found the public split in rough thirds between enough (30%), not enough (31%), and don’t know (36%).
This pattern of results suggests that the limited information held about the indigent defense system makes it
difficult to evaluate financial needs. A similar pattern was found among those respondents who know a lot about
the criminal justice system in the state; 31% thought state funding was enough, 46% said it was not enough,
and 24% did not make a judgment.
Public Perceptions of the Quality of Legal Representation

Respondents rated the quality of legal representation from excellent to poor for court-appointed attorneys, public
defenders, and private attorneys. The results show that overall evaluations of "private lawyers you pay for" are
more positive than for either of the other two kinds of attorneys. Forty-two percent rated private lawyers as
providing excellent or very good legal representation. This compares with15% and 17% who did the same for
court-appointed lawyers and public defenders, respectively. Ratings of court-appointed lawyers did not differ
statistically from those for public defenders.

A majority of Virginians (51%) believes that the amount of money spent for legal representation makes a great
deal of difference in the quality of representation. Thirty-one percent think it has some effect and 11% say it has
not much or almost no effect on the quality of representation.

The quality of legal representation is also widely believed to influence the outcome of a case. Sixty-three percent
say it has a great deal of effect on the outcome, 29% think it has some effect, and just 5% say it has not much
or almost no effect. Public views are quite divided over whether or not the quality of legal representation should
matter in the outcome of the case. Forty-five percent think it should while fifty percent think it should not.
Marginal frequencies from the VCU Commonwealth Poll
March 31-April 7, 2004
812 Respondents
Margin of sampling error =/- 4 percentage points
Questions asked on behalf of the Virginia Indigent Defense Coalition
METHOD OF THE COMMONWEALTH POLL
The Commonwealth Poll is an omnibus public opinion survey of Virginia residents. Each survey covers a variety of topics.
The survey is conducted by telephone with a randomly-selected sample of adult Virginians.
Interviewing was conducted by telephone from the facilities of the Survey and Evaluation Research Laboratory at Virginia
Commonwealth University in Richmond. The interviewing is conducted by a staff of professionally trained, paid interviewers
using computer-assisted telephone interviewing software.
The sample of telephone numbers was prepared by Genesys Sampling Systems of Ft. Washington, Pennsylvania, and was
designed so that all residential telephones, including new and unlisted numbers, had a known chance of inclusion. The
cooperation rate for the survey was 36% percent. Using the Council of American Survey Research Organization (CASRO)
response rate calculations, interviews were obtained with respondents in 30% percent of the known or assumed residential
households in the sample.
The data were weighted to adjust for unequal probabilities of selection due to multiple telephone lines and multiple adults
living in the household. In addition, the data were weighted on sex, race, age, and region of residence to reflect the
demographic composition of the Virginia adult population. Percentages reported in the text and tables are weighted, while
the number of cases shown in the tables for various subgroups is the actual number of respondents.
Questions answered by the full sample of adults are subject to a sampling error of plus or minus approximately 4
percentage points at the 95 percent level of confidence. This means that in 95 out of 100 samples like the one used here,
the results obtained should be no more than 4 percentage points above or below the figure that would be obtained by
interviewing all adult Virginians with telephones. Where the answers of subgroups are reported, the sampling error would
be higher. Because of nonresponse (refusals to participate, etc.), standard calculations of sampling error are apt to
understate the actual extent to which survey results are at variance with the true population values. Surveys are also
subject to errors from sources other than sampling. While every effort is made to identify such errors, they are often
difficult or impossible to measure. Readers making use of the results are urged to be mindful of the limitations inherent in
survey research.
A SYSTEM IN CRISIS
Indigent Defense in Virginia
Access to counsel and quality of representation for poor Virginians is in a state of crisis. Countless reports and news
articles reveal that Virginia’s indigent defense system is seriously deficient. There is no statewide oversight of assigned
counsel and no enforceable standards to ensure effective representation. When a poor person is given a court-appointed
lawyer, the lawyer assigned may not have the knowledge, experience, or training to handle the case. If an attorney
performs below acceptable standards in a given case, no mechanism exists to ensure that the attorney cannot be
reappointed again and again.
In addition, Virginia provides the lowest compensation for court-appointed attorneys in the country. A court
appointed attorney in Circuit Court is paid a maximum of $132 for a misdemeanor punishable by confinement, $1096 for a
felony punishable by more than 20 years confinement, and $395 for all other felonies. In General District Court and
juvenile cases, attorneys receive up to a maximum fee of $112 per charge. The system’s effects on juveniles, who are not
only represented by attorneys paid at the bottom of the scale but also require more comprehensive services, is particularly
severe. The maximum caps on fees cannot be waived under any circumstances.
These low fees do not cover an attorney’s overhead expenses after a few hours of work, which means that the system
creates an incentive for lawyers to encourage early guilty pleas. Certainly, there is no incentive for a lawyer to do thorough
investigation, hire experts, or conduct legal research, and no one is accountable when lawyers fail to complete these basic
tasks. As a result, the representation for poor defendants in the Commonwealth of Virginia falls well short of the Sixth
Amendment guarantee of effective assistance of counsel. Ultimately, the consequences are devastating: innocent people
end up behind bars, leaving the truly guilty out on the streets and undermining the public’s confidence in the integrity of
the system.
The VIDC is most concerned with introducing statewide oversight and accountability to Virginia’s system; implementing
qualification and performance standards for appointed defense counsel, including caseload limits; increasing the availability
of resources for appointed defense counsel; and improving compensation for private assigned counsel and public
defenders. Above all, the VIDC seeks to ensure that all Virginians receive competent and committed
representation, regardless of their ability to afford counsel. Through intensive community outreach and
development and implementation of a strategic public education campaign, the VIDC will be able to achieve significant
reform in a state that has thus far been intractable and create a strong, broad-based, and unified voice for indigent
defense reform in Virginia.
PRINCIPLES AND PURPOSE
The Virginia Indigent Defense Coalition (VIDC) believes that all people, whatever their financial circumstances, are
entitled to fair trials and equal justice. VIDC also believes that the public interest is best served by a criminal justice
system that operates reliably to convict the guilty and protect the innocent. VIDC’s mission is to realize these ideals by
improving the quality of defense for Virginia citizens unable to afford a lawyer.
VIDC will conduct a comprehensive public awareness campaign to highlight the problems in Virginia’s indigent defense
system. Working with diverse community groups and individual citizens, VIDC will propose sensible remedies to these
problems, such as enhancing standards and establishing accountability for appointed counsel and increasing resources
available to poor defendants in the juvenile and criminal justice systems in Virginia. VIDC will become a major force in
moving Virginia to fulfill the unkept promises of Gideon v. Wainwright* and the Sixth Amendment to the U.S. Constitution.
How VIDC Got Started
In 2001, members of Virginia’s defense bar, including representatives from each of the major statewide bar associations,
along with the National Association of Criminal Defense Lawyers (NACDL), began meeting in response to Virginia’s indigent
defense system crisis. In late 2001, the Virginia State Crime Commission’s proposed a study on indigent defense and the
members of the coalition decided to find ways to work with the Crime Commission on indigent defense issues. The coalition
had some early success in educating the Crime Commission and advancing legislation, they quickly recognized the need for
a broader reform campaign that would be developed in partnership with a diverse group of community-based organizations
and leaders.
The Virginia Indigent Defense Coalition (VIDC) has since been strengthened through the expertise and leadership of
several statewide community organizations. The VIDC conducts intensive community outreach to build on this foundation
and continue the momentum of reform. In particular, the VIDC seeks to involve members of low-income and minority
communities that are most affected by the lack of quality public defense services.
The VIDC has met monthly since August 2001. Its members have identified areas of consensus, met with state
policymakers and judges, submitted a report to the Virginia Crime Commission, drafted and secured passage of Senate
Joint Resolution 43 (establishing a study committee to examine whether Virginia should have a statewide indigent defense
commission), and developed a long-range plan for a reform campaign. In order to support continuing and future activities
of the coalition, five "sponsoring organizations" of the VIDC have agreed to partner with the Virginia Trial Lawyers
Foundation. These five sponsoring organizations bring diverse strengths and perspectives to the coalition and have
committed to leading the VIDC’s outreach efforts.
Sponsoring Organizations
The Virginia Trial Lawyers Foundation (VTLF), in partnership with the Virginia Trial Lawyers Association (VTLA), Virginia
Association of Criminal Defense Lawyers (VACDL), Virginia Citizens United for the Rehabilitation of Errants (Virginia CURE),
Virginia Interfaith Center for Public Policy (VICPP), and Mid-Atlantic Juvenile Defender Center (MAJDC), have joined
together to build a broad-based Virginia Indigent Defense Coalition. The VIDC is composed of members of the following
organizations and other community, criminal and juvenile justice system stakeholders.
Virginia CURE
www.vacure.org
VA CURE advocates for prevention and intervention programs in Virginia communities and prisons. Its members and board
of directors include prisoners, ex-offenders, families of incarcerated individuals, prison chaplains, and concerned citizens.
The organization publishes a quarterly newsletter, InsideOut that is mailed to members, policymakers, and the press;
tracks legislation in the Virginia General Assembly affecting prisoners and their loved ones; and organizes advocacy days
for families and supporters to meet their state representatives.
CURE members support and strengthen each other throughout incarceration. Virginia CURE is governed by an elevenmember board of directors and additional area coordinators. One board member is an ex-offender, and three have a loved
one who is incarcerated. Six board members work or volunteer in prisons, including one prison chaplain. Two board
members and two area coordinators are African-American.
Virginia Interfaith Center for Public Policy
www.vicpp.org
VICPP is the only statewide, interfaith partnership focused on faith-based citizenship and advocacy in Virginia. VICPP
includes nineteen Christian judicatories, three Jewish federations, the Islamic Center of Virginia, the Virginia Council of
Churches, Chaplain Services of the Churches of Virginia, a number of congregations, and many individuals. VICPP has been
successful in advocating for income tax credit for low-income persons, increase in benefits for TANF recipients, funding for
childcare, and continuity in the provision of housing services. One of VICPP’s highest priorities is abolition of the death
penalty. VICPP is governed by a 40-person board of directors, including nineteen women, two Arab-Americans, five
African-Americans, and one Hispanic.
Mid-Atlantic Juvenile Defender Center
[email protected]
The MAJDC is a multifaceted juvenile defense resource center and works with juvenile defenders and communities to
create an environment in which children are treated with respect, dignity, and fairness. The center is guided in policy
decisions by a regional advisory board comprised of juvenile defenders, community-based nonprofits, minority advocates,
private counsel, and law school professors. It recently completed an investigation of access to counsel and quality
representation for indigent juveniles in Virginia and is preparing a report that it hopes will educate all Virginians about the
critical need for indigent defense reform. MAJDC’s board includes nine women, three African-Americans, and one Hispanic.
Virginia Association of Criminal Defense Lawyers
www.vacdl.org
The VACDL is a statewide organization whose mission is "to protect and ensure by rule of law those individual rights
guaranteed by the Virginia and federal constitutions in criminal cases; to resist efforts to curtail such rights; to encourage
cooperation among lawyers through education programs and other assistance; and through such cooperation, education
and assistance to promote justice in the common good." VCCDA’s members and leaders include public defenders, courtappointed attorneys, and private defense lawyers. One director recently prosecuted an appeal to the United States
Supreme Court challenging Virginia’s inadequate compensation of assigned counsel. Two directors are African-American
and six are women.
Virginia Trial Lawyers Association
www.vtla.com
The VTLA has 2,700 members statewide, including both criminal and civil trial attorneys. Its Criminal Law Section has been
an active voice on criminal justice issues in the general assembly and throughout the state. VTLA has significant
experience in developing and implementing educational programs, including a campaign for bicycle safety, which involved
community outreach by volunteer teams, and a teaching video, "The Road to Virginia Justice," which educates students on
the dual civil and criminal legal systems. VTLA’s Board of Governors includes six racial minorities and seven women.
A number of other organizations are invaluable members and supporters of the coalition and continue to take leadership
roles in its initiatives, including the:









Richmond Catholic Diocese
Virginia Project for Social Policy and Law
Virginia Mitigation Project
Virginia Organizing Project
American Bar Association Juvenile Justice Center
Virginia Public Defender Commission
Hispanic Bar Association of Virginia
Old Dominion Bar Association (African-American bar)
Alexandria Bar Association
VIDC Funding Sources
The VIDC receives funding from the following organizations:







Criminal Justice Initiative of the Open Society Institute – www.soros.org
American Bar Association Gideon Initiative – www.abanet.org
Public Welfare Foundation – www.publicwelfare.org
National Association of Criminal Defense Lawyers – www.nacdl.org
Virginia Trial Lawyers Association – www.vtla.com
Virginia Association of Criminal Defense Lawyers – www.vccda.org
Virginia Interfaith Center for Public Policy – www.vicpp.org
MISSION STATEMENT
The Virginia Indigent Defense
Coalition (VIDC) seeks to improve
the quality of defense services for
the poor by enhancing standards of
representation and increasing
resources and funding available to
counsel for poor defendants in the
juvenile and criminal justice systems
in Virginia. The coalition’s goal is to
develop and implement a comprehensive
public-awareness and education
campaign that will highlight the
problems in Virginia’s indigent
defense system and bring about
reform to that system.
Virginia: An Assessment of
Access to Counsel and Quality of Representation in Delinquency Proceedings
http://www.abanet.org/crimjust/juvjus/vareport.htm has the complete
Summary
September 2002
This assessment of access to counsel and quality of representation that children receive in delinquency proceedings in the
Commonwealth of Virginia was conducted by the American Bar Association’s Juvenile Justice Center and the Mid-Atlantic
Juvenile Defender Center. It is part of a nationwide effort to address deficiencies and identify strengths in juvenile indigent
defense practices. The purpose of the assessment is to take a closer look at juvenile defense practices in Virginia, identify
the systematic and institutional barriers that impede the development of an improved legal service delivery system,
highlight innovative practices and offer recommendations for change.
To conduct this assessment the investigative team used a variety of modes of data collection. A team of national and
state-based experts was assembled to conduct extensive interviews and meetings with judges, prosecutors, defense
attorneys, probation officers, detention center staff and administrators, children and families, policymakers, and bar
association leaders across the commonwealth. In addition, the teams observed juvenile court proceedings in selected
counties and conducted an extensive literature review.
Key Findings

Timing of Appointment of Counsel - Under Virginia law, counsel need not be appointed until after the initial
hearing, referred to as the advisement hearing. For detained youth the advisement hearing is combined with the
detention hearing. Children have the right to a detention review hearing after the appointment of counsel has
been made, when a lawyer may request a reconsideration of the detention decision. However, detention review
hearings are rarely conducted. Most children are detained without benefit of counsel and detention is a pathway
to subsequent incarceration.

Waiver of Counsel - A related outcome to absence of counsel is the high incidence of children waiving their
right to counsel without prior consultation with a lawyer or trained advocate. This study uncovered disturbing
numbers of children waiving counsel who do not appear to understand the gravity or consequences of their
actions. No verifiable data exists to show how many children waived their right to counsel and traveled the
system unguided, but one jurisdiction estimated that 50 percent of the youth charged with misdemeanors waived
counsel.

Public Defender Offices - The delivery of indigent defense services in Virginia is varied and unequal. Public
defenders represent less than half of the population. The lack of a statewide public defender system is by far one
of the greatest barriers to access to counsel and quality representation for children. Investigators found that
public defender offices represented children more effectively than their counterparts in appointed counsel
systems.

Untrained and Inexperienced Counsel – In both appointed counsel and public defender office jurisdictions
there is a lack of required juvenile specific training and experience. Investigators observed numerous deficiencies
in basic defense practices (from open-ended cross examinations to belated motions) that proper training would
correct.

Inadequate Ancillary Resources – A lack of ancillary resources, including support staff, investigators,
paralegals and social workers is present throughout the system. The entire juvenile justice system in Virginia is
under funded and overburdened. However, resources are more likely to be available to judges, Commonwealth’s
Attorneys and court service units than they are to defense counsel.

Inappropriate Referrals – The assessment uncovered that the juvenile justice system is being loaded down
with inappropriate referrals - particularly mental health and school-related cases. One of the busiest juvenile
courts in the state devotes several court dockets to school conduct cases. Statistics show that 50 to 85 percent of
youth in detention are in need of medication. There was unanimous agreement among those interviewed that
children with disabilities are over represented in the justice system and the juvenile court is often the mental
health service provider for poor children in the Commonwealth.

Second-Rate Status - Many people view juvenile court as "kiddy court" and the overall practice of delinquency
law as unimportant. The indigent defense system uses juvenile court as a training ground for lawyers seeking to
gain courtroom experience. Commonwealth’s Attorneys allow probation officers to prosecute cases, court
proceedings lack formality and decorum, hearings are not recorded, and children and families are treated with
contempt. The notion that juvenile court is a second rate judicial forum is pervasive throughout the state.

Over Reliance on Court Service Units – Virginia’s Department of Juvenile Justice (DJJ) manages community
programs and services, community supervision and case management, and custody and care of committed
juveniles. The DJJ’s case management or court service unit bears enormous responsibility in juvenile court.
Juvenile defense counsel expressed frustration with the court’s total reliance on the DJJ’s court service unit
recommendations.

Prosecutorial Discretion – Defenders in several jurisdictions reported abuse of prosecutorial discretion by the
local Commonwealth’s Attorney in negotiations by threatening to transfer juvenile cases to circuit court. Youth
transferred to adult court wait in detention for extraordinarily long periods before the "clock begins" on their
sentences, resulting in youths not receiving rehabilitation services or credit for the real time they serve.

Over Representation and Disparate Treatment - This study uncovered disparate treatment of minority
youths. Despite demographic differences, there was agreement in every jurisdiction that children and youth of
color are over represented in Virginia’s juvenile justice system. Interviewees offered many reasons for the
disparate treatment including police bias, lack of parental empowerment and access to resources.

Attorney Compensation – The $112 maximum paid to defense counsel in Virginia to see a case through the
delinquency system is among the lowest in the country. This results in a premium placed on high volume and
dispensing with cases quickly, typically through a hurried plea process. Investigators found that appointed
counsel received little training in juvenile defense and were expected to pay for ancillary services out of the fee
they received on the case. Investigators found that low fees and caps drastically affected the quality of defense.
The judges, Commonwealth’s Attorneys and juvenile court personnel interviewed agree that low fees are a
disincentive to zealous advocacy for juvenile clients.
This is the full version, in case:
SEPTEMBER 2002
This assessment of access to
counsel and quality of representation
that children receive in delinquency
proceedings in the Commonwealth
of Virginia was conducted by the
American Bar Association’s Juvenile
Justice Center and the Mid-Atlantic
Juvenile Defender Center. It is part
of a nationwide effort to address
deficiencies and identify strengths in
juvenile indigent defense practices.
The purpose of the assessment is to
take a closer look at juvenile defense
practices in Virginia, identify the systematic
and institutional barriers that
impede the development of an
improved legal service delivery system,
highlight innovative practices
and offer recommendations for
change.
To conduct this assessment the
investigative team used a variety of
modes of data collection. A team of
national and state-based experts was
assembled to conduct extensive
interviews and meetings with judges,
prosecutors, defense attorneys, probation
officers, detention center staff
and administrators, children and families,
policymakers, and bar association
leaders across the commonwealth.
In addition, the teams
observed juvenile court proceedings
in selected counties and conducted
an extensive literature review.
KEY FINDINGS
Timing of Appointment of Counsel –
Under Virginia law, counsel need not
be appointed until after the initial
hearing, referred to as the advisement
hearing. For detained youth
the advisement hearing is combined
with the detention hearing. Children
have the right to a detention review
hearing after the appointment of
counsel has been made, when a
lawyer may request a reconsideration
of the detention decision.
However, detention review hearings
are rarely conducted. Most children
are detained without benefit of counsel
and detention is a pathway to
subsequent incarceration.
Waiver of Counsel – A related outcome
to absence of counsel is the
high incidence of children waiving
their right to counsel without prior
consultation with a lawyer or trained
advocate. This study uncovered disturbing
numbers of children waiving
counsel who do not appear to understand
the gravity or consequences of
their actions. No verifiable data
exists to show how many children
waived their right to counsel and
traveled the system unguided, but
one jurisdiction estimated that 50
percent of the youth charged with
misdemeanors waived counsel.
Public Defender Offices – The delivery
of indigent defense services in
Virginia is varied and unequal. Public
defenders represent less than half of
the population. The lack of a
statewide public defender system is
by far one of the greatest barriers
to access to counsel and quality
representation for children.
Investigators found
that public defender
offices represented children
more effectively
than their counterparts
in appointed
counsel systems.
Untrained and Inexperienced
Counsel – In both appointed counsel
and public defender office jurisdictions
there is a lack of required juvenile
specific training and experience.
Investigators observed numerous
deficiencies in basic defense practices
(from open-ended cross examinations
to belated motions) that
proper training would correct.
Inadequate Ancillary Resources –
A lack of ancillary resources, including
support staff, investigators, paralegals
and social workers is present
throughout the system. The entire
juvenile justice system in Virginia is
under funded and overburdened.
However, resources are more likely
to be available to judges,
Commonwealth’s Attorneys and
court service units than they are to
defense counsel.
Inappropriate Referrals – The
assessment uncovered that the juvenile
justice system is being loaded
down with inappropriate referrals particularly mental health and
schoolrelated cases. One of the busiest
juvenile courts in the state devotes
several court dockets to school
conduct cases. Statistics show
that 50 to 85 percent of youth in
detention are in need of medication.
There was unanimous agreement
among those interviewed
that children with disabilities are
over represented in the justice system
and the juvenile court is often
the mental health service provider
for poor children in the
Commonwealth.
Second-Rate Status – Many people
view juvenile court as “kiddy
court” and the overall practice of
delinquency law as unimportant.
The indigent defense system uses
juvenile court as a training ground
for lawyers seeking to gain courtroom
experience.
Commonwealth’s Attorneys allow
probation officers to prosecute
cases, court proceedings lack formality
and decorum, hearings are
not recorded, and children and
families are treated with contempt.
The notion that juvenile court is a
second rate judicial forum is pervasive
throughout the state.
Over Reliance on Court Service
Units – Virginia’s Department of
Juvenile Justice (DJJ) manages
community programs and services,
community supervision and case
management, and custody and care
of committed juveniles. The DJJ’s
case management or court service
unit bears enormous responsibility
in juvenile court. Juvenile defense
counsel expressed frustration with
the court’s total reliance on the
DJJ’s court service unit recommendations.
Prosecutorial Discretion –
Defenders in several jurisdictions
reported abuse of prosecutorial
discretion by the local
Commonwealth’s Attorney in
negotiations by threatening to
transfer juvenile cases to circuit
court. Youth transferred to adult
court wait in detention for extraordinarily
extraordinarily
long periods before the
“clock begins” on their sentences,
resulting in youths not receiving
rehabilitation services or credit for
the real time they serve.
Over Representation and
Disparate Treatment – This study
uncovered disparate treatment of
minority youths. Despite demographic
differences, there was
agreement in every jurisdiction
that children and youth of color are
over represented in Virginia’s juvenile
justice system. Interviewees
offered many reasons for the disparate
treatment including police
bias, lack of parental empowerment
and access to resources.
Attorney Compensation – The
$112 maximum paid to defense
counsel in Virginia to see a case
through the delinquency system is
among the lowest in the country.
This results in a premium placed
on high volume and dispensing
with cases quickly, typically
through a hurried plea process.
Investigators found that appointed
counsel received little training in
juvenile defense and were expected
to pay for ancillary services out
of the fee they received on the
case. Investigators found that low
fees and caps drastically affected
the quality of defense. The
judges, Commonwealth’s
Attorneys and juvenile court personnel
interviewed agree that low
fees are a disincentive to zealous
advocacy for juvenile clients.
SHOW ETIQUETTE ABUSES
The Board considered a clarification of the Misconduct Guidelines as they pertain to misconduct against a
judge. Following a motion by Mr. Merriam, seconded by Dr. Garvin, it was VOTED (unanimously; absent,
Dr. Mays) to adopt the following guidelines:
Offense Mitigated Standard Aggravated
I. Misconduct Against a Judge (Event Suspension) a. Physical abuse 3 mo/$300 1 yr/$1000 10yr/$5000
b. Verbal abuse (inappropriate, abusive or foul language) directed personally to a judge 2 mo/$100 6
mo/$500 1 yr/$1000
c. Inappropriate public criticism of a judge, not disruptive, but demonstrating a lack of sportsmanship
Rep/$50 1 mo/$200 3 mo/$300
d. Public criticism of a judge's decision that causes a disruption at an event Rep/$100 3 mo/$300 6
mo/$500
e. Unsportsmanlike conduct during an event Including but not limited to:
1. Refusal or throwing down of ribbon Rep/$100 3 mo/$300 6mo/$500
2. Leaving ring without permission Rep/$100 3 mo/$300 6mo/$500
3. Refusing to continue to compete Rep 3 mo/$300 6mo/$500
4. Failure to control an unruly dog Rep 45 d/$150 3 mo/$300
5. Failure to follow a judge's instructions Rep 45 d/$150 3 mo/$300
f. Attempting to influence a judge 6 mo/$200 18mo/$500 5 yr/$1000
Flag Etiquette
General Display
It is the universal custom to display the flag only from
sunrise to sunset on buildings and on stationary flagstaffs
in the open. However, when a patriotic effect is desired,
the flag may be displayed twenty-four hours a day if
illuminated during the hours of darkness.
1. When displayed either horizontally or vertically against
a wall, the union should be uppermost and to the flag's
own right, that is, to the observers left. When displayed in
a window, the flag should be displayed in the same way,
with the union or blue field to the left of the observer in
the street.
No other flag or pennant should be placed above, or, if
on the same level, to the right of the USA flag, except
during church services conducted by naval chaplains at
sea….for personnel of the Navy…when the church
pennant may be flown above the flag.
No person shall display the flag of the United Nations or
any other national or international flag equal, above, or in
a position of superior prominence or honor to, or in place
of, the flag of the United States at any place within the
United States or any Territory or possession thereof;
Provided, that nothing in this section shall make unlawful
the continuance of the practice heretofore followed of
displaying the flag of the United Nations in a position of
superior prominence or honor, with that of the flag of the
United States at the headquarters of the United Nations.
2. When the flags of States, cities, or localities, or
pennants of societies are flown on the same halyard with
the flag of the United States, the latter should always be
at the peak.
3. When the flags are flown from adjacent staffs, the flag of the United States should be hoisted
first and lowered last. No such flag or pennant may be placed above the flag of the United
States or to the United States flag's right.
4. The flag of the United States of America, when it is displayed with another flag against a wall
from crossed staffs, should be on the right, the flag's own right, and it's staff should be in front
of the staff of the other flag.
5. The flag of the United States of America should be at the center and at the highest point of
the group when a number of flags of states or localities or pennants of societies are grouped
and displayed from staffs.
6. When flags from two or more nations are displayed, they are to be flown from separate staffs
of the same height. The flags should be of approximately equal size. International usage forbids
the display of the flag of one nation above that of another nation in time of peace.
7. When displayed on a speakers platform, the flag, if displayed flat, should be displayed above
and behind the speaker. When displayed from a staff in a church or public auditorium, the flag
of the United States of America should hold the position of superior prominence, in advance of
the audience, and in the position of honor at the clergyman's or speakers right as he faces the
audience. Any other flag so displayed should be placed on the left of the clergyman or speaker
or to the right of the audience.
8. The flag, when flown at half-staff, should be first hoisted to the peak for an instant and then
lowered to the half-staff position. The flag should be again raised to the peak before it is
lowered for the day. On Memorial Day, the flag should be displayed at half-staff until noon only,
then raised to the top of the staff. By order of the President, the flag shall be flown at half-staff
upon the death of principle figures of the United States Government and the Governor of the
State, territory or possession, as a mark of respect to their memory. In the event of the death of
other officials or foreign dignitaries, the flag is to be displayed at half-staff according to
Presidential instructions or orders, or in accordance with recognized customs or practices not
inconsistent with the law.
In the event of the death of a present or former official of the government of any State, territory
or possession of the United States, the Governor of that State, territory or possession may
proclaim that the national flag shall be flown at half-staff.
Learn about the history and evolution of the U.S.A. Flag
Our resident flag expert, Tracy L. O’Brien, will come and give a free presentation to your club,
school or organization on this fascinating subject (with-in our general location in Connecticut).
Please contact us for the details.
Note: the U.S. flag should always be on its own right in relation to other flags on
adjacent staffs - to the left of the observer - except when displayed as in #5.
Exerpts from the Flag Code of the United States - Public Law 94-344, July 7, 1976
CONSUMER EVENTS
offers products and services to
make your event a success!
Pipe & Drape Booth Equipment
Floorplans Drawn & Customized for Your Event
Furniture Rentals -- Chairs, Tables, Etc.
Booth & Show Cleaning Services
Freight, Drayage & Forklift Services
Display Installation & Dismantling
Display Rentals
Registration Counters
Entrance Units
Display Panels
Illuminated Glass Display Cases
Staging
Signage
Plus:
Flags & Flag Poles
Flame-out II Fire Retardant
And as a full-service convention decorator, Exhibits, Inc. can also help you with
floral rentals, audio-visual & sound systems, special theme decoration, heavyequipment & rigging,
EXHIBITOR assists
you in obtaining access to our Exhibitor Badge Request Form.
Ensuring your customers/visitors -- and you, the vendor, -- have a
positive experience dealing with us.
FLOOR PLAN MUST INDICATE THE SHOW’S ENTRANCE & OR EXIT
Admission
Adults: $5
Ages 6- 16: $1
Ages 5 and under: Free!
making you look good, by doing something we do well -- and often.
After all, we provide decorating services for more than 500 events a
year. That's more than many meeting planners will see in a lifetime!
And since every conference or tradeshow presents its own set of
challenges, there's not a problem we haven't seen, or solution we
haven't considered.
And we do it all while having fun and maintaining a sense of humor.
Our employees actually enjoy coming to work -- it's true, just ask
them! Sure some days are harder than others, but at the end of each
day there's a satisfaction that comes from being a part of a firstclass operation.
Rates
Aisle space 10' x 10' - $550
Corner space 10' x 10' - $650
(Costs include 8 foot backdrop and 3 foot side rails)
RENTAL ORDER FORM
ALL ORDERS MUST BE PAID FOR IN ADVANCE
PLEASE COMPLETE THE ENCLOSED PAYMENT POLICY
FORM AND RETURN WITH YOUR ORDER
US FUNDS ONLY!
PLEASE RETURN ONE COPY TO EXHIBITS, INC.
AND RETAIN A COPY FOR YOUR FILES.
CANCELLATION POLICY:
Items cancelled after move-in begins will be charged at 50% of original price.
Orders must be received one week prior to show date in order to receive the advance price.
Rental of booth furnishings listed below are for use during the show and include delivery and removal from the booth.
CARPET
Qty.
SIZE
Advance Price
Show Price
Amount
9'x 10' Carpet
$94.00
$112.00
9'x 20' Carpet
$182.00
$224.00
9'x 30' Carpet
$273.00
$334.00
__ft. x _ft. Carpet $ 1.85/sq.ft.
$ 2.75/sq.ft.
__ft. x _ft. Green Turf
.95/sq.ft. 1.85/sq.ft.
Carpet Colors
Red Blue Hunter Green Gold Grey
Tea
Plum
TABLE WITH DRAPE
Qty.
SIZE
Advance Price
4'x 2' Standard 30" High
$53.00
6'x 2' Standard 30" High
$61.00
8'x 2' Standard 30' High
$68.00
4'x 2' Raised 42" High
$68.00
6'x 2' Raised 42" High $76.00 $95.00
8'x 2' Raised 42" High $84.00 $103.00
Show Price
$65.00
$74.00
$84.00
$85.00
Amount
Draped tables include vinyl top and pleated skirt on three sides
Red White Blue Hunter Green Plum Gold Black Grey Burgundy Teal
PICK UP FOR CLEANING AND CLEANING COSTS
UNDRAPED TABLES (same as above table format)
4'x 2' Standard 30" High $31.00 $37.00
6'x 2' Standard 30" High $36.00 $46.00
8'x 2' Standard 30' High $43.00 $53.00
4'x 2' Raised 42" High $43.00 $53.00
6'x 2' Raised 42" High $48.00 $61.00
8'x 2' Raised 42" High $55.00 $68.00
ROUND TABLES & LINENS (same as bove table format)
4' Round Table $37.00 $47.00
5' Round Table $46.00 $56.00
90" Round White Table Linen $23.00 $37.00
Round Tables do not come with a linen unless a linen is ordered
TABLE TOP RISERS & DRAPING
4'x 1'x 12" Table Top Riser $15.00 $20.00
4'x 1'x 12" Riser / Draped $31.00 $37.00
6'x 1'x 12" Table Top Riser $23.00 $29.00
6'x 1'x 12" Riser / Draped $37.00 $47.00
Drape Colors
Red White Blue Hunter Green
Gold Black Grey Burgundy
SEATING
Upholstered Lounge Chair $46.00 $56.00
Upholstered Arm Chair $37.00 $47.00
Upholstered Side Chair $35.00 $43.00
Molded Plastic Side Chair $31.00 $36.00
Molded Plastic Folding Chair $22.00 $24.00
High Stool $19.00 $25.00
ACCESSORIES
Waste Basket with Liner $15.00 $19.00
Floor Easel $22.00 $25.00
Chrome Stanchions $31.00 $37.00
8 Ft. Red Velour Ropes $24.00 $31.00
Corner Table-24"x24"x15"high $31.00 $37.00
Cocktail Table-round x 15" high $34.00 $43.00
22"x 28" Chrome Sign Holder $43.00 $55.00
PEGBOARD/DISPLAY PANELS
4'x 8' Vertical or Horizontal $76.00 $96.00
4'x 8' Grey Cloth Display Panel $98.00 $122.00
PIPE & DRAPE LF IS LINEAR FOOT
3' HIGH PIPE & DRAPE $5.75/LF $7.50/LF
8' HIGH PIPE & DRAPE $7.50/LF $9.75/LF
Red White Blue Hunter Green Plum Gold Black Grey Burgundy Teal
COLORS SHOULD BE VIBRANT, MUTED, PASTELS ETC.
will be the first choice of customers needing convention and
tradeshow services in our region.
To accomplish this
We will exceed the service expectations of our clients by maintaining
a force of loyal, customer-oriented employees who recognize and
take pride in the reputation Exhibits, Inc. has earned in our industry.
We will provide our clients a superior value by supplying the highest
quality equipment and services.
We will maintain the highest standards of integrity in our
relationships with event management, exhibitors, and the facilities
in which we work.
Please show the general location where you would like the pipe & drape placed in your booth. (Including footages.)
REAR
L
E
F
T
R
I
G
H
T
AISLE
BOTTOM OF FORM NEEDS THIS INFO
TOTAL YOUR ORDER HERE
Sub-Total______________ $ ________.___
5% Sales Tax (Required) ______________ $ ________.___
TOTAL DUE ______________ $ ________.___
Please print or type below:
Your Company ______________
Address _______________Telephone No.__________
City __________State _______Zip ______Fax ____
Authorized By (Print name) ________Title_______
Signature ___________
Name of Event ___________ DATE ________ ALL SHOW DATES YES__NO__
Booth No. _______ PREFERENCE
EXACT BOOTH NO NOT GUARANTEED
PAYMENT POLICY FORM
PLEASE COMPLETE AND RETURN TO EXHIBITS, INC.
PLEASE FAMILIARIZE YOURSELF WITH THIS POLICY BEFORE ORDERING ANY SERVICES!
NO SERVICES CAN BE RENDERED WITHOUT FULL PAYMENT IN ADVANCE
THE FOLLOWING TERMS APPLY TO ANY AND ALL SERVICES RENDERED BY EXHIBITS, INC. FOR THE EVENT LISTED ABOVE.
TERMS
DISCOUNT PRICES only apply to advance orders with payment in FULL, including 5% VA sales tax, that are received by Deadline Date,
after which Standard Rates will be charged. ALL CHARGES FOR SERVICE AND/OR EQUIPMENT MUST BE PAID IN ADVANCE. On site
orders must be paid BY EITHER CASH, CHECK, OR FOR YOUR CONVENIENCE by Visa, MasterCard or American Express. All prices
subject to 5% VA Tax
We have read, understand and agree to all terms as described above and have advised our show site
representative accordingly.
EXHIBITOR SIGNATURE: _________________PRINT NAME: ________________DATE: _______
PLEASE NOTE: ELECTRICAL AND/OR TELECOMMUNICATION ORDERS SHOULD BE MAILED AND PAID
TO THE FACILITY ON THE ORDER FORM FOR THAT SERVICE.
PAYMENT BY CHECK, PLEASE COMPLETE THE FOLLOWING:
YOUR CHECK NUMBER:________________ DATED: __________CHECK TOTAL: $__________
PAYMENT BY CREDIT CARD, PLEASE COMPLETE THE FOLLOWING:
CHARGE (CHECK ONE) MasterCard______-- Visa _______ American Express ________
ACCOUNT NUMBER (boxes follow for 16 digits)
EXPIRATION DATE Month_______Year ______
SIGNATURE: ______________________________
PLEASE PRINT CLEARLY: Cardholders
Name: _____________
Cardholders Billing Address: _______________STE OR APT.
______________________
___________________ZIP_____--_____
Your Company: ________Phone: _____________Fax:________
Address:Street __________________City _________________State ________________Zip___________
ELECTRICAL SERVICE ORDER
Event Name___________________________________________________________________Booth
#________________________
Exhibitor or Company
Name____________________________________________________________________________________
Company
Address_______________________________________________________________________________________
______
Company Telephone______________________________________Contact
Name_________________________________________
Signature_____________________________________________________________Date_____________________
______________
IN ORDER TO SECURE ADVANCE PRICE, PAYMENT MUST ACCOMPANY ORDER NO LATER
THAN TEN (10) DAYS
PRIOR TO FIRST EXHIBITOR MOVE-IN DATE. ALL OTHER ORDERS WILL BE CHARGED
AT “AT SHOW” PRICES.
PAYMENT MUST BE MADE BEFORE RECEIPT OF SERVICE.
ELECTRICAL SERVICES
ADVANCE
AT SHOW
QUANTITY
TOTAL
115V Single Phase
0-20 Amps
$ 35.00
$ 70.00
__________
_______
*ANY SINGLE LOAD OVER 30 AMPS WILL REQUIRE AN ADDITIONAL 115V DROP.
208V Single Phase
0-20 Amps
$ 55.00
$ 90.00
__________
_______
21-30 Amps
$ 80.00
$130.00 __________ _______
31-50 Amps
$105.00
$170.00 __________ _______
*Over 50 Amps
$205.00
$285.00 __________ _______
(only in designated areas)
208V Three Phase
0-20 Amps
$ 80.00
$125.00 __________ _______
21-30 Amps
$105.00
$150.00 __________ _______
31-50 Amps
$155.00
$235.00 __________ _______
*Over 50 Amps
$255.00
$335.00 __________ _______
(only in designated areas)
*Special hook-ups and disconnects will be charged labor in one hour increments, one hour minimum charge plus
costs shown above.
Hourly rate is $75.00. Special services paid upon receipt of invoice.
IMPORTANT CONDITIONS AND REGULATIONS
1. ADVANCE orders will be installed prior to or during set-up. AT SHOW orders will be handled on a first come,
first served basis.
Payment must be received before service in all cases. Richmond International Raceway reserves the right to
disconnect any service
from a booth for lack of payment. NO EXCEPTIONS.
2. Wall column and permanent building outlets are not part of booth space. All electrical service hook-ups must be
ordered. ONLY
house electricians are permitted to make hard wired connections.
3. All equipment and displays, regardless of power source, must comply with all federal, state, and local safety
codes.
4. All exhibitors’ extension cords must be of the heavy-duty 3-wire grounded type UL approved. All exposed non
current carrying
metal parts of fixed equipment which are liable to be energized must be grounded. All spotlights and electrical cords
must be UL
approved. Richmond International Raceway reserves the right to remove items that it deems unsafe or zone
hazardous.
5. Special equipment requiring company engineers or technicians for assembly, servicing, preparatory work, and
operation may be
executed without house electrician. However, house electrician must make all service connections and overload
protection to such
equipment. Special services paid upon receipt of invoice.
6. All equipment must be properly tagged and wired with complete information as to type of current, voltage, phase,
cycle, horsepower,
etc.
7. Materials and equipment furnished by Richmond International Raceway for service orders, and not purchased by
the exhibitor,
remain the property of Richmond International Raceway and are removed ONLY by house electrician.
8. RATES QUOTED FOR ALL CONNECTIONS COVER ONLY THE BRINGING OF SERVICE TO
THE BOOTH IN THE MOST CONVENIENT MANNER AND DO NOT INCLUDE SPECIAL WIRING OR
CONNECTIONS.
MAIL COMPLETED FORM WITH Credit Card info TO:
Credit Card # ___________________________Exp______
TELEPHONE SERVICE REQUEST
FEES SERVICE
$125.00
Basic installation (per line)
$175.00
Late Request Charge (if service is available at the late date)
$ 20.00
Wire Charge (applicable only if more than 60’ of wire is run to booth)
$ .25
Local calls and Toll Free numbers
$ .75
Operator Assisted calls, 411 Directory Assistance, and Credit Card calls
IN ORDER TO SECURE ADVANCE PRICE, CREDIT CARD PAYMENT MUST ACCOMPANY ORDER
NO LATER THAN TEN (10) DAYS PRIOR TO FIRST EXHIBITOR MOVE–IN DATE. ALL OTHER
REQUESTS WILL BE CHARGED THE LATE CHARGE, IF INSTALLATION CAN BE
ACCOMMODATED. TO ORDER, PLEASE COMPLETE THE FOLLOWING AND SUBMIT CREDIT
CARD INFORMATION, CREDIT CARDS ARE THE ONLY METHOD OF PAYMENT:
Show Name__________________________________________ Contact
Name________________________________
Total Lines Needed___________________Building____________________________________Booth
#_____________
Install Date/Time____________________________ Cut-off
Date/time_______________________________________
Circle Type of Service Needed: Intercom only Local Calls Local + Long Distance
Telephone(s) Needed? YES NO Note: Lost or stolen telephone will be billed at $100.00 ea.
Billing Address__________________________________________Company
Phone________________________________________
Company
Name__________________________________________Signature_______________________________________
______
Payment of $125.00 is required to place your order. RIR accepts VISA, MasterCard, and Discover.
Credit Card #_________________________________________________Expiration
Date__________________________________
Name on Card_________________________________________________________________________________
We must have ten (10) working days in order to process your telephone request.
If using phone for credit card authorization or computer modems, you must program them to dial “9” first.
*NOTE: CELL PHONES MAY NOT OERATE PROPERLY IN SOME OF OUR BUILDINGS*
Mail completed form with credit card payment to:
INTERNAL Use Only
Ext. #__________ Equip. #____________________ Telephone
#_______________________________________________________
Ext. #__________ Equip. #____________________ Telephone
#_______________________________________________________
Installer Instructions:__________________________________________________________________________
Charges
Install ( ) Lines $___________ ___________________________________________________________
$125.00 per line
Per call charges $__________ _____________________________________________________________
Other $_____________ __________________________________________________________________
Less Deposits $________ _________________________________________________________________
Subtotal $_____________ ________________________________________________________________
Tax $_______________
Amount Due $_______________
Date to SUPERVISOR__________________________
Date to Accounting __________________________
DATE ACCOUNT IS CLEARED ______________
DATE SERVICE IS UP ______________________
Exhibitors have come to depend on Royal Productions' shows to:
make sales
obtain face-to-face feedback on products and services
acquire leads for future sales
introduce new products
enhance their corporate images
identify new prospects
service existing customers
Sell to thousands of potential customers
In just two short days at the Fall Richmond Home Show you can interact with more
customers than may visit your place of business in many months. Experience gained
through more than 25 years of promotion allows Royal Productions to shape creative
and productive advertising and promotional packages for the Fall Richmond Home
Show. Royal Productions has a solid reputation for dedicating an extensive
advertising and promotion budget in such a way as to draw people from a wide
geographic area who might not normally visit your place of business. You benefit
from a larger advertising budget than you might be able to allocate over a year or
more.
An effective advertising program, experienced show management, and quality
companies are what make Royal Productions' Richmond Home Shows your most
effective means of increasing your company's market exposure and sales revenues.
Advertising
Print advertisements will be placed in the Richmond Times Dispatch, other central
Virginia daily and weekly newspapers, magazines, and direct mail pieces. Sixtysecond commercials and promotional spots will be aired on major radio stations and
ten- and thirty- second commercials and promotional spots will be place on network
and cable channel television.
Location
The Fall Richmond Home Show will be held at the Richmond Raceway Complex
(formerly the State Fairgrounds on Strawberry Hill) in the modern exhibition facilities.
With ample free parking, friendly staff, and easy highway access, the Complex is
host to more than 115 annual events and attracts nearly 1.5 million visitors a year.
For further information on space availability, call
The 17th Annual Fall Richmond Home Show will have over 125 companies offering
homeowners the convenience of comparative shopping for an array of products and
services to make their homes more valuable and attractive.
This show focuses on the latest remodeling trends in the industry. Whether it's
upgrading your home to a maintenance free exterior; increasing your home’s ‘energy
efficiency; designing an addition or redecorating your home’s interior, participating
companies will be offering show only incentives to ready your home for the winter and to
beautify it for the holidays.
New at the show this year . . .
register to win xxxxX
Contracts
valid contract requires two and sometimes three elements:



An agreement (meeting of the minds) between the parties.
"Consideration:" a legal term meaning the exchange of things of value.
Something in writing, if the contract covers certain matters, such as the sale of real estate and
tasks that can?t be completed in one year.
For example, suppose you're opening a new store. You meet with Joe, a sign maker, to discuss the
construction and installation of a five-foot by three-foot sign. Joe offers to do the work for $450 and to
have the sign ready for your grand opening on June 15. "It's a deal," you say. You now have a legally
binding contract, enforceable in court or by arbitration. All the necessary elements are present:



An Agreement. Joe offered to build and install the sign at a certain price by a certain date. You
accepted the offer by telling Joe, "It's a deal."
Consideration. The two of you are exchanging something of value. You're giving your promise to
pay $450. Joe is giving his promise to build and install the sign.
Written Agreement Not Required Here. Normal business contracts that can be performed in less
than a year don?t have to be in writing to be enforceable.
To understand why "consideration" is important, let's explore the difference between a contract and a gift.
Assume that Joe installs the sign on time and you pay him $450 as agreed. Impressed by the high quality
of his work, you say: "Joe, to thank you for the great job you did, I'm going to send you a $100 bonus next
week." Can Joe enforce your promise to pay the bonus? No. He got what he bargained for - the $450
payment. He didn't promise you anything (consideration) for the extra $100 payment. If you pay it, fine. If
not, Joe can't force you to.
PRESS RELEASE
Date Released: Tuesday, September 21, 2004
Source: Senate Appropriations Committee
Senate Appropriations Committee Approves Fiscal Year 2005 VA/HUD
Appropriations Bill
The Senate Appropriations Committee today approved FY 2005 Appropriations bill funding the
Department of Veterans Affairs, Department of Housing and Urban Development, the Environmental
Protection Agency and other independent agencies.
The bill totals $128 billion, of which $35.1 billion is mandatory and $92.930 is discretionary budget
authority. Highlights of the bill are listed below:
Department of Veterans Affairs: Overall, the bill recommends over $66 billion for the Department of
Veterans Affairs (VA). With collections, the bill provides almost $68.1 billion. Of this amount, $35.1 billion
is for mandatory programs and almost $33 billion (including collections) is for discretionary programs. -Medical Care - For medical care activities, the bill recommends $30 billion, with collections ($2 billion).
This level is $1.96 billion over the FY04 level and $1.22 billion over the Budget Request. The bill
designates $1.2 billion in medical services as an emergency. The bill does not include the proposed fees
included in the budget request. The bill also contains a new $20 million - Prosthetics and Integrative
Health Care Initiative - to treat returning soldiers from Iraq and Afghanistan who have lost limbs in
combat.
-- Construction - For construction programs, the bill recommends the budget request levels of $458.8
million for major construction and $230.8 million for minor construction. Of these funds, $370.7 million of
major construction and $182.1 million of minor construction are designated for the "Capital Asset
Realignment for Enhanced Services" or CARES.
-- Other highlights include: (1) $405.6 million for medical and prosthetic research (+$20.8 million over
budget request); (2) an additional $75 million for VBA operating expenses to prevent staff reductions in
processing disability claims benefits; and (3) the budget request level of $105 million for state home
construction. All other programs are at the budget request level.
Department of Housing and Urban Development (HUD): HUD is funded at $36.4 billion, an increase of $1
billion over the FY04 level and $700 million over the Budget Request.
-- Section 8 is funded at $20.707 billion, an increase of $2.24 billion over the Budget Request and $1.426
billion over the FY '04 level.
-- Public Housing Capital Fund. The bill includes $2.7 billion for the Public Housing Capital Fund for FY05,
an increase of $4 million over the FY04 level and $26 million over the Budget Request.
-- Public Housing Operating Fund. The bill includes $2.61 billion for the Public Housing Operating Fund, a
decrease of $969 million from the FY04 level and $963 million from the Budget Request. This reduction
reflects a requirement that PHAs convert to calendar year accounting which results in savings of a little
more than $1 billion. About $50 million in additional funds are included for transition costs.
-- Revitalization of Distressed Public Housing (HOPE VI). The bill includes $150 million for HOPE VI,
approximately the same as the FY04 level and an increase of $150 million over the budget request which
recommended elimination of the program.
-- Native American Housing Block Grant program (NAHASDA). The bill includes $650 million for
NAHASDA, the same as FY04 and some $3.2 million more than the budget request.
-- Community Development Block Grants (CDBG) - The bill includes $4.95 billion for CDBG, an increase
of $29 million over the FY04 level and some $332 million over the budget request.
-- HOME Program - The bill includes $2.05 billion for HOME, an increase of $44 million from the FY04
level and a decrease of $34 million from the Budget Request. The account includes $50 million for the
American Dream Downpayment program. The account also includes $45 million for housing counseling.
-- Homeless Assistance Grants - The bill includes $1.26 billion for homeless assistance which is $44
million more than the FY04 level and $34 million less than the budget request.
-- Housing Opportunities for Persons with AIDS (HOPWA) - The bill includes $295 million for HOPWA for
FY05, about the same as the FY04 level and the same as the budget request.
-- Housing for the Elderly (Section 202 Housing) - The bill includes $774 million (including $53 million for
service coordinators) for Section 202 Elderly Housing, approximately the same as FY04 level and the
budget request.
-- Section 811 Disabled Housing - The bill includes $250 million for Section 811 Disabled Housing, about
the same as the FY04 level and the budget request.
-- Office of Lead Hazard Control - The bill includes $175 million for the Office of Lead Hazard Control,
which is the same as the FY04 level and $36 million more than the budget request. The bill includes $50
million for the Bond-Mikulski Lead Hazard Elimination program which was proposed for elimination.
Corporation for National and Community Service: The bill recommends $590 million for the Corporation.
This level is about $52.2 million below the budget request and $9 million above the FY04 level.
-- AmeriCorps - The bill provides the budget request levels of $291.9 million for State and National grants
and $150.5 million for the National Service Trust. These funding levels will support 75,000 new
AmeriCorps members.
--Other highlights include - (1) $10 million for Points of Light; (2) $5 million for America's Promise; and (3)
$26 million for AmeriCorps NCCC.
American Battle Monuments Commission (AMBC): The bill recommends $46.1 million for ABMC, a $5
million increase above the Budget Request. The additional funds are provided to make up for the
Commission's operating funding shortfalls due to the unexpected drop in value of the U.S. dollar
compared to the euro ("foreign currency fluctuation"). The bill also provides the budget request level of
$9.1 million for the new Normandy Interpretative Center.
Environmental Protection Agency: The total funding level for the agency is $8.5 billion which is $134.6
million above the FY04 enacted level and $711 million above the budget request.
-- The Science and Technology (S&T) account is funded at $758 million which is $23.5 below the FY04
enacted level and $69 million above the budget request. An additional $36 million is available from the
Superfund account.
-- The Environmental Programs and Management (EPM) account is funded at $2.3 billion which is
$30.217 million above the FY04 enacted level and $6.7 million below the budget request.
-- The Superfund account is funded at $1.381 billion which is equal to the budget request and $123.9
million above the FY04 level.
-- The State and Tribal Assistance Grants (STAG) account is funded at $3.886 billion which is $8.8 million
above the FY04 level and $654.75 million above the budget request. The Clean Water SRF is funded at
$1.35 billion which is the same as the FY04 enacted level and $500 million above the budget request.
The Drinking Water SRF is funded at $850 million which is equal to both the budget request and the FY04
level.
-- The total funding level for Brownfields is $165 million. This program is comprised of two major parts in
the STAG account which are as follows: Categorical grants are funded at $50 million; Infrastructure
projects are funded at $90 million. $25 million is also included for the Brownfields program in the EPM
account.
National Science Foundation (NSF): is funded at $5.75 billion, the same level as the proposed budget by
the Administration. This is an increase of $169 million, or 3% over the FY04 level.
-- Plant genome is funded at $95 million, an increase of $5 million over FY04.
-- Additional funds are included for the following minority programs:
--- HBCU UP $27 million, a $7 million increase (minority undergraduate)
--- Lewis Stokes Alliances $36.3 million, a $2 million increase.
--- CREST/THRUST $20 million, a $9 million increase. -- Tech Talent: $26.21 million, an increase of $11
million
-- Informal Science: $65 million, an increase of $15million.
-- EPSCoR is increased in funding to reach the FY04 funding levels of $95million
National Aeronautics and Space Administration (NASA): is funded at $16.379 billion, an increase of $200
million over the FY04 enacted level, and a reduction of $665 million from the budget request. An
additional $800 million in emergency funding was added for NASA during the Committee's consideration
of the bill.
-- The return to flight activities for the Shuttle program are funded at $4.319 billion, the requested level
from the Administration.
-- The International Space Station is funded at $1.6 billion. The bill reduces ISS operations by $120
million due to the continued reduced capability of the ISS for at least half of FY05.
-- The Moon/Mars vision:
--- The Crew Exploration Vehicle (CEV) is funded at $268 million.
--- A lunar exploration mission is funded at $20 million.
--- $10 million is provided for Centennial Challenges. Neighborhood Reinvestment Corporation (NRC): is
funded at $115 million, the same as FY04 and the budget request
From Accountingnet.ie
AUDIT & ACCOUNTING
Organisations worldwide must improve sustainability reporting
By S Heaphy
Sep 14, 2004, 14:20
Businesses worldwide are failing to produce enough sustainability reports, while governments are doing little to
encourage such reporting - which would have a direct benefit for business and the environment, a global survey by
ACCA (the Association of Chartered Certified Accountants) and CorporateRegister.com has found.
The publication, Towards Transparency: progress on global sustainability reporting 2004, looks at the status of
sustainability reporting around the world and identifies a number of trends - with marked improvements in coverage,
standards and credibility needed in the next few years. It is split into four regional chapters - Europe, The Americas,
Africa and the Middle East and Asia and Australasia.
The publication shows that North America and Western Europe are the most active reporting regions. In contrast,
non-financial reporting is practically unknown in the Middle East and most of Latin America. In the Asia Pacific region
there is little reporting outside Australasia and Japan - and across Africa only South Africa is showing significant
reporting activity. The publication shows that:
- There are marked differences in the approach taken to external assurance in reports, both between regions and
within regions. This needs to be addressed in the interest of reporting credibility - greater external assurance of
reports is needed.
- There are marked differences in levels of support shown by governments through the production of voluntary
guidance or through mandatory reporting requirements.
- Improvements in quantity and quality of reports could be achieved through the use of globally applicable guidelines
such as the Global Reporting Initiative (GRI). A globally common framework would enable meaningful comparisons to
be made more easily.
- While there are major achievements in each region, there are still only 1,500 to 2,000 companies producing reports
worldwide. The majority of companies still have to recognise the business case for reporting and starting to engage
their stakeholders.
Rachel Jackson, Head of Social and Environmental Issues at ACCA, said: "This publication shows there are
significant regional differences in the proportion of organisations which report, as well as in the standards which have
been set. Given the increasingly global nature of business, we would hope to see the gulf between the leaders and
the laggards cut in the next few years. Sustainability reporting has an increasing importance in developed economies
and this must be recognised by organisations, governments and standard setters in regions where it is still virtually
unknown."
She added: "The continuing development and organisation of our sustainability reporting awards around the world,
along with an ongoing review of trends will enable us to track whether practices and standards improve over the next
few years. It is critical that they do - stakeholders are increasingly aware and alarmed by the impact which
organisations have on the environment and communities in which they operate and at present, too few organisations
and governments recognise that."
Paul Scott, Director of CorporateRegister.com and Next Step Consulting, said: "This is the first time a global overview
of reporting has been developed based on such a weight of statistics - nearly 5,000 reports. Publishing this
information will help stakeholders identify where best practice is being achieved, and where progress needs to be
made."
In its European chapter, the publication shows that the region has led the way in non-financial reporting, accounting
for just over half of all reports produced globally. In Europe, a fifth of reports are produced in Scandinavia, and over
three quarters come from the rest of Western Europe. Central and Eastern Europe reporters account for only around
2% of reports. Almost two thirds of reports have an environmental focus, with a fifth representing fuller sustainability
and corporate responsibility reports. Of the reports produced in Europe in 2003, just under half had external
assurance.
© Copyright 2004 by Accountingnet.ie
From Accountingnet.ie
AUDIT & ACCOUNTING
Whistleblowing legislation impacting on business relationships
By S Heaphy
Sep 28, 2004, 11:33
Extensive legislation introduced over the past number of years has resulted in Ireland’s accountancy practices making significant
changes to the way they manage clients and the day to day running of their businesses, according to a survey conducted by the
Institute of Certified Public Accountants in Ireland.
61 firms throughout Ireland completed the survey and the results were presented at the Ulster Bank sponsored CPA Residential
Practice Seminar "From Global Changes to Local Challenges, maximising the success of your Practice" in Mullingar today,
Friday 24th September 2004.
81% of respondents said that their working relationship with clients had changed as a result of the numerous pieces of
legislation introduced over the past few years. A number of whistleblowing provisions introduced over the last few years have
placed a duty on auditors, external accountants and tax advisors to report to state agencies (Gardai and Revenue Commissioners)
suspicions of money laundering and theft and fraud offences; and a duty on auditors to report indictable offences under the
Companies Acts to the Office of the Director of Corporate Enforcement.
While the majority of respondents welcomed the change for larger businesses, 56% of respondents felt that these changes were
restricting the services that could be offered to their small business clients. Research has shown that the external accountant /
auditor is the most trusted business advisor for SME’s. Many respondents had noted that small businesses were becoming more
guarded about disclosing certain information to their accountants, making it more difficult to provide these businesses with the
advice that they needed.
" Many small businesses fall into arrears with their taxation and legal requirements, primarily due to lack of management skills in
these areas. These businesses rely on the services of their accountant / auditor to bring their affairs up to date. In the current
business environment, the accountant / auditor, in the course of trying to assist clients to bring their affairs up to date, may find
themselves in the invidious position of having to report this client to a number of state agencies for relatively minor offences
committed inadvertently by an inexperienced client", said Daragh Solan, President, the Institute of Certified Public Accountants
in Ireland.
The results of the survey show a growing awareness among company directors of their increasing responsibilities under this new
legislation. 58% of respondents said that their clients were becoming more aware of their legal obligations.
However despite the availability of information from the Office of the Director of Corporate Enforcement and the Companies
Registration Office, the majority of SMEs rely on their accountant to provide them with information on changes in company law.
87% of practitioners surveyed said that their clients depended totally on them to keep them abreast of legislative changes.
"It is encouraging to see the growing awareness amongst company directors of their responsibilities" said Daragh Solan.
"However, whilst the survey showed that government agencies were making more information available to company directors,
there is still more work to be done in educating company directors on their responsibilities in this area".
© Copyright 2004 by Accountingnet.ie
The above came from http://appropriations.senate.gov/
which is the US Senate Committee on
Appropriations In the Latest News section of the right hand side where this appeared:
09/24/2004
Senate Passes Fiscal Year 2005 Foreign Operations Appropriations Bill
FIND OUT IS THE HOUSE HAS SAME.
Job Summary of Internal Revenue Officer (need bachelor’s & even grad)
Job Summary:
A Revenue Officer is a highly trained professional responsible for
protecting the interests of the Federal Government and the tax
paying public.
The primary job responsibilities involve collecting delinquent tax
accounts and securing delinquent tax returns. Work is performed on a
case-by-case basis, each case requiring a certain, and sometimes
different, course of action. The IRS training includes classes in
tax law, business law, investigative techniques and enforcement
procedures, all designed to prepare the Revenue Officer as rapidly as
possible for independent performance. For the Revenue Officer, no
two days will be alike.
Positions are located in the Small Business/Self-Employed Division
of the Internal Revenue Service. Revenue Officers work in IRS field
offices throughout the country.
Major Duties:
As a Revenue Officer you will:
-Conduct research, interviews and investigations.
-Analyze financial statements, and contact third parties for
information.
-Collect delinquent taxpayer accounts, (Balance Dues); secure
delinquent returns (Del Rets).
-File extensions to statutes of limitations for collection.
-Determine the accuracy of assessed liabilities and adjust or abate
erroneous liabilities.
-Take administrative and judicial actions.
-Participate in agency compliance programs.
-Have extensive face-to-face personal contacts with taxpayers,
attorneys, accountants, and other representatives, and spend a
major portion of your time performing fieldwork.
-Conducting preliminary analyses of cases, scheduling
appointments, consulting with group managers, preparing
administrative reports, and assembling files for closure.
MANDATORY TRAINING: During the first year, all applicants
selected for these positions will receive approximately 3 weeks of
orientation, 10 weeks of classroom training and 40 weeks of on-thejob training. Overnight travel may be required for both orientation
and classroom training, while on-the-job training is generally
provided in the employee's post of duty. The training program
consists of alternating periods of classroom and on-the-job training.
The field
Educl area of study may include, but is not limited to, majors in accounting,
auditing, taxation, business administration, finance, or law.
Job experience: 1) Knowledge of business
organization and commercial practices; 2) Knowledge of
investigative techniques and methods, and the ability to apply such
techniques to the analysis of business and financial matters; 3)
Practical knowledge of business law, including laws governing
fraudulent transfers, secured and unsecured debts, negotiable
instruments, business corporations and survivorship rights and
titling instruments; 4) Knowledge of delinquent loan collection
processes and techniques; 5) Working knowledge of accounting
principles and practices; 6) Knowledge of Internal Revenue Code
and related Federal tax regulations and procedures.
Examples of qualifying experience include: reviewing financial
documents to determine a business' financial condition and its
ability to pay debt; evaluating income assets, equity and credit to
collect delinquent payments; investigating or tracing financial
transactions such as a real estate broker or insurance broker;
establishing or operating a small business that included
administering a budget, defining operating procedures and
understanding tax consequences of business actions; counseling
taxpayers on tax filing and paying obligations, or dealing with the
effects of various legal instruments such as leases, wills, deeds
and trusts.
Job Summary: of IRS Tax Examiner
If you are interested in analyzing data consistent with tax laws and
regulations to resolve and process all types of issues related to tax
returns then employment with the Internal Revenue Service (IRS) as
a Tax Examiner is the position for you.
Major Duties:
Tax Examiners work in various functional areas within the IRS,
therefore your specific duties may vary according to assignments.
As a Tax Examiner you will:
*Review case files, prepare closing documents, and verify tax
liability on tax returns.
* Examine tax returns for accuracy and completeness and/or review
and code tax returns for computer processing, follow procedures to
resolve errors or correspond with taxpayers to obtain missing
information.
* Examine income tax returns covering a wide variety of tax liability
issues involving current and prior tax rules.
* Make contacts through correspondence and telephone with
taxpayers or their representatives.
* Initiate actions based on requests from other IRS offices.
* Correct or adjust taxpayer accounts to secure payment, financial
information, and levy sources.
Have one year (12 months), or more of specialized experience:
Specialized means experience that is in or related to this position
and provided you with the knowledge, skills and abilities to perform
successfully the duties of this position. Specialized experience may
have been gained in full-time bookkeeping or accounting experience,
or experience dealing with the public analyzing tax or accounting
problems and resolving high-conflict differences through use of
established guidelines or experience dealing with customers in
person, in writing or by telephone in a variety of situations that
require solicitation of information to identify concerns and offer
solutions. To be creditable, this experience must have been
equivalent to at least the GS-04 grade level in the federal service.
Examples of positions that may be qualifying include accounts
payable/receivable representative or bookkeeper.
OR
You must have completed at least 4 years of education above the
high school level (120 semester hours, 180 quarter hours or 2880
formal classroom hours) or a Bachelors or higher degree.
READ THIS STATEMENT OF COMMITMENT WHICH DOES NOT BEAR OUT
THE INTERNAL REVENUE SERVICE IS COMMITTED TO
ENSURING THAT ALL EMPLOYEES PERFORM IN A MANNER
WARRANTING THE HIGHEST DEGREE OF PUBLIC CONFIDENCE
AND DEMONSTRATES THE HIGHEST LEVEL OF ETHICS AND
INTEGRITY.
OPINION
Lessons in good bookkeeping
Not taking bookkeeping seriously can cost you more taxes in the end.
Debra Price
Inside Business
Monday August 27, 2001
One of the most common problems certified public accountants come across when conducting an audit for
an organization or doing their taxes is bookkeeping mistakes. Many companies don’t hire CPAs to do their
bookkeeping and often use an employee who is simply good at math, or the owners do it themselves. While
many professional bookkeepers do an excellent job and have training to prepare them for this job, others
simply keep the books as they “think it should be done.”
While their intentions may be perfectly honest, their mistakes can cost them extra money at tax time as
their CPAs work to reconcile the books in preparation for filling out the Internal Revenue Service and Virginia
Department of Taxation forms. The following are some of the more common mistakes that I, and some of
my associates, have seen bookkeepers make over the years.
One of the biggest mistakes is treating employees as subcontractors. In addition to improperly categorizing
the employees, the information needed for 1099 filings is not obtained prior to payment.
Also, paying employees a bonus as a cash payment and not running it through payroll, as well as improper
calculating and recording of payroll taxes for employees, are common bookkeeping mistakes.
Since the tax rules changed on deducting meal and entertainment expenses as compared to travel and
lodging, it seems that many businesses have difficulty doing a good job of separating travel and lodging
from meals and entertainment expenses for employees. The tax consequences can be substantial if a
business is audited with meals and entertainment deductions only allowed at a 50 percent level while travel
and lodging are still generally allowed at 100 percent.
Another of the most common bookkeeping mistakes is also one of the most fundamental: reconciling the
books with the bank statement each month. This mistake is often compounded when firms hold checks or
cash receipts for deposit that result in inaccurate reflections of income. The books need to balance at the
end of each month, and reconciling them with the bank statement is a great way to catch common mistakes
like failing to record a voided check.
Along the same lines of reconciling bank statements, some retail businesses have a tendency to include
sales taxes in their total sales figures, when the sales tax should be deducted to reduce the total sales figure
and hence lower your tax burden.
Many times, simply keeping accurate records of bank deposits and their nature, as well as accurate
descriptions of what checks are written for, can help avoid potential problems. It’s easy for someone to say,
“I’ll remember what that’s for,” when the entry is made, but at tax time when there are hundreds or
thousands of entries, the memory can become hazy. It’s better to take a few minutes at the time of the
entry to write a clear description than to rely on memory several months later.
Another common mistake is when bookkeepers try to expense large items that need to be capitalized. Even
though the capital expense deduction has increased to $24,000, many firms surpass that total with multiple
purchases and yet still try to expense items because no single purchase exceeded it. The limit is for the
total, not the individual purchases.
With regard to assets, they are not classified as income, and liabilities are not expenses. Confusing those
issues are also common bookkeeping mistakes. If not caught, this can cause you to be taxed on items that
you shouldn’t be taxed on and have deductions that are not allowed.
If you can’t hire a professional bookkeeper, then you at least owe it to yourself and your business to avoid
these common bookkeeping mistakes. In other words, taking the bookkeeper’s duties lightly could become
quite costly.
Debra Price is a CPA with Witt Mares & Co., a certified public accounting firm with offices throughout
Richmond and Hampton Roads.
On April 4, 2003, the Connecticut Banking Commissioner approved a request by First
International Bank to change its name to UPS Capital Business Credit.
This name change complements the launch of UPS's new branding strategy, which includes
a new UPS logo - the first change to the company logo in over forty years.
UPS Capital Business Credit is an integral part of the UPS Capital suite of financial products
and services, and we will continue to specialize in providing unique credit, trade, and
financial solutions for small and medium-sized companies. We also offer the value of the
entire UPS enterprise, including transportation, distribution, logistics, fulfillment and other
services that help synchronize the world of commerce.
All of us at UPS Capital Business Credit look forward to working with you further as you
continue to grow and develop your business.
You can now access our company information at www.upscapital.com UPS Capital • 35 Glenlake
Pkwy • Suite 500 • Atlanta, GA 30328 • 1-800-637-0620 All products subject ot credit approval. Products may not be
available in all areas. Loans made in California pursuant to a Dept of Corporations California Finance Lenders license.
Insurance products are offered through UPS Capital Insurance Agency, Inc. and its agency partners. Please read the Legal
Information and the Privacy Policy
Numeracy
This paper is essentially divided into three parts. First, we will look at the nature of
the adult learner who needs and seeks instruction in mathematics. Secondly, we will
examine the nature of mathematics learning and its role in interpreting the real world.
Finally, we will see what implications these two areas of study have for instruction of
adults in mathematics.
A Definition of Numeracy
Until now we have avoided a word that appears in the title of this paper. “Numeracy”,
as distinct from “arithmetic” or “mathematics”, is a relatively new word in the jargon
of adult education. Like literacy, there are many ways to look at numeracy, but as we
proceed through this research paper, its meaning should become more clear. For the
sake of a common starting point, however, let us adopt the definition of numeracy
given by Penny (1984): “the ability to understand and use mathematics as a means of
communication; to interpret a situation given in mathematical terms or to employ
mathematics to represent a situation and,if necessary, use mathematical symbols to
obtain further information.” (p. 24)
THE NATURE OF THE NUMERACY LEARNER
The Need for Numeracy Tuition
Is the ability to do mathematics necessary in everyday life? Although there may be
differing opinions about the degree to which we need mathematics, few will deny its
usefulness. To determine those needs, let us look at the self-expressed motivations of
those who seek numeracy tuition. From information gathered at the Adult Literacy
Centre in Nottingham, U.K. (Riley, 1984) and Friends' Centre Project in Brighton,
U.K. (Traxler Gabony, 1982), four clear areas of demand may be identified:
(1) coming to terms with the math that one encountered unsuccessfully at school
(feeling of having “missed out”) and thus improving one's self-image;
(2) vocational math for nonspecific reasons or for employment entrance exams;
(3) social or “survival” maths including the wish to help children with school work;
(4) math for enjoyment or for further study.
An important conclusion drawn from these observations is that people seek numeracy
tuition for reasons other than assistance with everyday problems and that success in
mathematics is as great a motivating factor for learning as relevance.
Past Experience with Mathematics
Mathematics seems to invoke the extremes in sentiment. Whenever I tell someone that
I was a math teacher, the response is either: “Oh, I never did good in math,” or “Oh, I
used to love doing math.” Those who seek tuition in numeracy usually fall into the
first category. From their public school experience, many express the sense of
confusion, frustration and boredom. The Cockroft Report (1982), Mathematics
Counts, makes it clear that schools have continued to be dominated by an examination
system which reinforces “feelings of inadequacy and failure.” (Marks, 1984) These
negative feelings about mathematics provide a poor foundation for the practical math
of adult life. These observations are further corroborated by the two studies that
follow.
The Use of Mathematics by Adults
In 1980, a two-stage study was completed in the Reading, Berkshire, U.K. area
concerning adults' use of mathematics. (Use of Mathematics by Adults in Daily Life,
ACACE) Among the conclusions reported by Warburton (1982) are the following:
(1) It is not easy to define everyday mathematical needs; they depend on the
mathematical skills possessed and, more importantly, on the positive personal
attitudes towards the use of mathematics.
(2) Many people, especially women and the less educated, are inhibited about using
mathematics and they try to avoid doing mathematical calculations.
(3) There are many reasons for these inhibitions, and these can include the
unsatisfactory experience of the formal learning of mathematics at school with its
apparent irrelevance to everyday life.
4) Since the mathematics used varied widely according to each adult's lifestyle, it
suggests that mathematics might be more usefully taught and learned through a
functional approach.
5) Many of those interviewed used very simple and rather clumsy methods,
suggesting that much of their school mathematics had been forgotten or its relevance
never perceived.
6) The most frequent difficulties were experienced dealing with percentages, ratios,
graphs and charts, timetables and metric units.
In order to assess adults mathematical ability and to validate the results of the
Reading, Berkshire study, a survey was taken in 1981 with 2890 people covering a
representative sample of England, Scotland and Wales over sixteen years of age.
(Adult Numeracy Study: Tabulated Results of a Survey, ACACE). The findings, cited
by Warburton (1982), showed that:
(1) One adult in ten cannot cope with simple addition.
(2) Three adults in ten cannot cope with simple subtraction.
(3) Three adults in ten cannot cope with simple multiplication.
(4) Three adults in ten cannot cope with simple division.
(5) Three adults in ten cannot cope with simple percentages.
(6) Four adults in ten cannot cope with a simple timetable.
(7) Six adults in ten do not understand the meaning of the rate of inflation.
The results of this survey are clear. In Canada, no similar study has ever been
undertaken. For the purpose of this paper, let us assume that the results of this study
may be generalized, and that the findings in Britain can be a beacon shedding light on
the numeracy needs in other developed countries. While the second study establishes
clearly the need for numeracy tuition, the first study gives some direction on how this
tuition may be best provided
THE NATURE OF MATHEMATICS LEARNING
The Learning of Mathematical Concepts
“For many, mathematics represents a series of random facts linked to calculation
performed at speed and comprehensible only to possessors of giant intellect and
incredible memory.” (Penny, 1984, p. 26) Unfortunately this represents a common
belief and there is a speck of truth in it. The power of mathematics lies in its abstract
nature; however, this is not the domain of only “giant intellects,” but abstract thinking
is something we all do. Abstracting is the activity that makes us aware of similarities
among our experiences. The product of this classification activity is called a concept.
For example, when we see a person with two arms, two legs, two eyes and two ears,
the concept of “two” is established. From primary concepts derived from our direct
sensory experience, we may abstract higher order concepts. Experience with many red
objects brings us to the concept of “red”; then experiencing “green”, “blue” and so on
establishes the second order concept of “colour”. In his extensive study of the subject,
Skemp (1986) presents two first principles of the learning of mathematics.
(1) Concepts of a higher order than those which people already have cannot be
communicated to them by a definition, but only by arranging for them to encounter a
suitable collection of examples.
(2) Since in mathematics these examples are almost invariably other concepts, it must
first be insured that these are already formed in the mind of the learner.
Though these principles may be known to the learner, it is the teacher or
communicator of mathematical concepts for whom they have much relevance. As a
consequence of the second principle, in building up the structure of successive
abstractions, if a particular level is imperfectly understood, the learning of any other
concept is in jeopardy. A conceptual structure, known as a schema, integrates our
existing knowledge and acts as a tool to assimilate future learning. In a study reported
by Skemp (1986) comparing schematic and rote learning, the differences were clear:
Percentage Recall
Immediate After one day After four weeks
Schematic 69
69
58
Rote
23
8
32
The schematically learned material was not only better learned but better retained.
After certain schemas have been learned, new experiences may be encountered that do
not fit these schemas. In this case, they need to be restructured. A person who
understands the multiplication of whole numbers as rapid addition, will need to
restructure that conceptual structure to understand the multiplication of fractions.
The Mathematical Code
In trying to understand the nature of mathematics, some say that it is a language,
while others say it is not; however, all will agree that it is an instrument of
communication. Moss (1984) refers to the mathematical code which, like a language,
needs to be standardized in order to be understood. Although a relevant concept may
be learned by encountering an example which draws it out intuitively and
involuntarily, the use of an associated symbol makes it possible to record and
communicate the concept. These associated symbols, including words and graphics,
make up the code. According to Skemp (1986), visual codes, which are intuitive and
integrative, represent more individual thinking and are harder to communicate than
verbalsymbolic codes, which are logical and analytical, and tend to represent more
socialized thinking. For instance, gathering together two pencils and three pencils to
make five pencils requires little discussion compared to “2 + 3=5.” This theory is
validated by mathematics and numeracy educators, such as Liedtke (1988) and Willis
(1984), who suggest that encouraging students to talk and listen to their responses will
give valuable insight about their level of understanding of a concept.
Mathematics as a Tool for Problem Solving
In the first part of this paper, we looked at the adult learner and the need for tuition in
numeracy. Although not every adult expressed the need to learn mathematics to solve
everyday problems, the learner lives in the real world and mathematics, if it is to be a
means of communication, also starts there. We have come to see that learning
mathematics involves acquiring conceptual structures using a mathematical code of
verbal and visual symbols. Skemp (1986) has developed a model which represents
how a real-life problem is solved using mathematics.
Using Mathematics to Interpret the Real World
Maintaining that numeracy, in practice, is concerned with numbers that have a direct
application in real life, Traxler and Gabony (1982) expand their definition of
numeracy to include four interrelated parts.
(1) Exact manipulation of abstract quantities. From basic arithmetic to algebra, this
implies no literacy or cultural context, but precise and definite facts.
(2) Approximating and estimating. This skill grows out of experience and
understanding of the number system, and emphasizes numbers as quantities and not
subjects of arbitrary arithmetic.
(3) A feel for numbers as part of the real world. This involves a sense of weight,
volume, distance, etc. and joins the world of number with the world of experience.
(4) Selecting the appropriate strategy to deal adequately with problems. Developing
this skill depends on literacy, social and cultural cues, as well as an insight into
personal background.
IMPLICATIONS FOR NUMERACY TUITION
A Balanced Approach
Having looked at the nature of the numeracy learner and the nature of learning
mathematics, we may now look at what are the implications for tuition or instruction.
Mortiboys (1984) warns against the two extremes: (1) teaching mathematical skills
without a context or (2) adopting a purely functional approach with myriads of
timetables, menus, advertisements, etc. “We need to adopt a balanced approach: one in
which mathematical rules are understood and practised, and where appropriate, used
in situations deemed to be relevant to the student by the student,” concludes Riley
(1984). The numeracy tutor, then, must establish an open relationship with the learner
in order to be aware of the individual's needs and at the same time must be familiar
with the learning of mathematical concepts and the structure of the hierarchy of skills
in order to determine an appropriate agenda of instruction.
Assessing the Learner's Needs
To provide any kind of tuition , the tutor must know about what the learner can do and
what the learner wants to do. Initial assessment, according to Penny (1984), should
include the following elements:






Motivation
Literacy and/or language assessment
Perceptual difficulties
Hand-eye coordination and spatial concepts
Discussion of feelings about learning
An initial math diagnosis to establish a starting point
Although such a procedure looks formidable, we should avoid any type of formal
testing session, because many adult learners, as we have studied earlier, have feelings
of failure and inadequacy from previous experiences with school exams. By good
communication, listening and observing, the tutor can gain much information.
Assessment is not a “one-shot deal,” but is an integral and continuous part of
instruction. In order to ensure that the programme is meeting the learner's needs, the
tutor should be continually monitoring his/her progress and encouraging the learner to
do self-assessment. In Numeracy Training (Austin et al, 1986), they use self selection
assessment cards, otherwise known as “can do” and “can't do” cards, to determine how
the learners perceive their own problem and how they actually deal with the material.
To deal with math anxiety, Taylor and Brooks (1986) suggest that students look at
their own personal math life history. No matter what form assessment takes, the tutor
should have up-to-date records of what work the group or individual has done, for
consultation with the learner and for use in future planning. In fact, assessment will
become automatic if a time for revision work and for a preview of the next lesson is
planned for every lesson.
Facilitating Learning in Numeracy
From what we have come to know about the adult numeracy student and how
mathematics is best learned, we may now develop some guidelines for the numeracy
tutor to help facilitate learning. Many of these ideas are outlined in the introduction to
Working With Numbers: Ideas and Examples for Numeracy Worksheets (Gabony and
Traxler, 1982).
(1) Because mathematics is based on conceptual structures, each small step in
teaching a skill must be consolidated before the next can be dealt with.
(2) If a student already knows a certain method (for example, long division), it is
always better to reinforce that method than introduce a new or “better” one.
(3) Since adult learners bring with them their past experience and particular needs, the
tutor must be flexible in programme planning in order to capitalize on those areas.
(4) Because attendance can be irregular for the adult student who has many
responsibilities, lessons and learning materials need to be autonomous and selfcontained.
(5) The tutor should be aware of the learners' reading ability and cultural background
that might affect their ability to learn the mathematical code.
(6) If the learner's past learning environment was academic and authoritarian, informal
learning, especially games and puzzles, must be introduced with sensitivity.
(7) The best way to clarify one's understanding of a concept is to explain it to
someone else; hence, we should encourage peer group collaboration.
(8) If the learning of basic skills is the main need of the learners, one can get bogged
down in abstract details. So these skills should be related as often as possible to
overall objectives and possible applications.
(9) Although we know that understanding concepts will produce better learning than
rote, many learners prefer to master a procedure first and then reflect afterwards on
the reason why it works.
(10) If mathematics represents the real world, we should be able to find, especially for
the most basic skills, a visual or concrete explanation.
(11) Whether to work individually or in groups depends on both the learner and the
skills being learned. In general, abstract skills are best learned on an individual basis
with a clear hierarchy of skill development, while group work provides a better
environment for social or applied math.
A Model for Numeracy Tuition
From all that we have studied about the adults learning mathematics in the real world
and numeracy tuition, to go out now and do it requires yet more thought and struggle.
It is still confusing to me the interplay of abstract concepts and symbolic codes and
real life applications. To get a grip on the implications for instruction, I developed a
model for tuition that may be helpful to others.
We start from the real world to give us motivation to learn a certain concept. Since
this concept is very abstract, we use a concrete example to explain it. Then we work to
assimilate the new concept through practice. Finally we go back to the real world to
apply what we have learned.
For example: learning percentages may be motivated by interest rates on a loan; the
idea of percent is then explained by a big pie cut up into one hundred equal slices;
after the skill has been acquired through discussion and practice, it is used to calculate
sales tax or something else depending on the learners' concerns. The main point here
is not to confuse “concrete” and “applications.” A concrete example may have nothing
to do with the real world, but may be a fabricated “pie” diagram that aides in
visualization of a concept; on the other hand, an application of
theory is hardly a concrete situation.
in electrical
CONCLUSION
We have seen that adults need numeracy tuition and want it for a variety of reasons.
Since the learning of mathematics has been a negative experience for many who seek
tuition, it is important that the numeracy tutor choose instructional strategies that
encourage positive learning. Having studied that mathematics is learned through
conceptual structures and symbolic codes, the tutor can then design a programme of
skills acquisition that is based on an appropriate developmental process. Therefore, by
starting with the needs of the learner and by following a sound but flexible
methodology, we can hope for much success in promoting numeracy among adults.
BIBLIOGRAPHY
1. AUSTIN, G., HAWKEN,P. and PURDEY,M., Numeracy Training, ALBSU and Dorset Local Education
Authority, London, 1986.
2. GABONY, B. and TRAXLER, J., Working with Numbers: Ideas and Examples for Numeracy Worksheets,
ALBSU and Friends' Centre, Brighton, 1982.
3. LIEDTKE, W., “Let's Talk about Talking Mathematics,” Arithmetic Teacher, March 1988.
4. LINDEMAN, E., The Meaning of Adult Education, Harvest House, Montreal, 1961.
5. MARKS, K., “Numeracy, Publicity and Outreach,” Viewpoints, no.1, ALBSU, London, 1984.
6. MORTIBOYS, A., “Numeracy: Linking skills to application,” ALBSU, London, 1984.
7. MOSS, M., “The Language of Numeracy,” Viewpoints, no.1, ALBSU, London, 1984.
8. PENNY, R., “Numeracy as a Communication and Coping Skill,” Viewpoints, no.1, ALBSU, London, 1984.
9. RILEY,T., “Functional Numeracy,” Viewpoints, no.1, ALBSU, London, 1984.
10. SKEMP, R.R., The Psychology of Learning Mathematics, Penguin Books, Harmondsworth, 1986.
11. TAYLOR, L. and BROOKS, K., “Building Math Confidence by Overcoming Math Anxiety,” Adult Literacy and
Basic Education, vol.10, no.1, 1986.
12. WARBURTON, M., “Mathematics A Divided Nation,” ALBSU, London, 1982.
13. WILLIS, J., "Who are these people with Numeracy Problems?" Viewpoints, no.1, ALBSU, London, 1984.
The Above is a 1988 resource manual by Tom Ciancone examines the nature of the numeracy learner,
the nature of mathematics learning, and the implications for numeracy teacher.
Book on ‘Service Learning and literacy w web address:
Voices of Hope melds literacy and service learning. The extraordinary Teacher's Guide,
based on the "Seven Neckbones" of both giraffes and humans (yes, both species have
the same number!) is a gem in itself, as a handbook for coaching Service Learning
Projects.
The seven steps are:
1. Choose the Problem.
2. Research the Problem.
3. Decide on a Project that Addresses the Problem.
4. Create a Vision of the Results You Want.
5. Make a Plan.
6. Take Action.
7. Reflect, Celebrate and Begin Again.
The stories in Voices of Hope stay with you -- they are touchstones of courage and caring. Using them in
your classroom, or with individual literacy learners, will enliven your teaching.
"In using these materials, you are a part of the magic that is inherent in the courage of the heroes whose
stories are read - and in the magic you do every day in your classroom," declares Dr. Martin Laster in the
Teacher's Guide.
"You and your students can change the world. Remember to have fun in the process!"
Go to www.giraffe.org./k12Voices.html to look inside the books and to order them. You can also order
from the distributor, Free Spirit, at 800-735-723. The student books are $12.95 and the Teacher's Guide
is $21.95.
Non-Profits
WHAT TO DO WITH BOARD MEMBERS WHO DON'T DO ANYTHING
"He never comes to meetings or does anything. Why does he even stay on the board?" "She always
says she'll take care of it and then she doesn't follow through. Aaagh!"
Whose responsibility is it to "do something" about a board member who is AWOL, deadwood,
undependable, a procrastinator, or worse? Answer: Yours. Every board member shares in the
responsibility to involve each board member in contributing to the well-being of the board and the
organization. If you're the board president or an officer, your responsibilities include monitoring non-
participation and intervening with board members when necessary. In some cases you may need to talk
with the executive director about improving the way he or she works with board members. If you're the
executive director, you may need to discuss the situation with board leadership.
There are two things you must do in the case of a board member who is not participating. First, you must
do something. The problem is likely only to get worse, and non-participating board members have a
demoralizing impact on even the best of boards. Second, be confident and hopeful. Many board
members just need a little reminder to be more conscientious, and others will be grateful that you've given
them a graceful way to relinquish tasks or even leave the board. Things will work out.
Short Term Strategies
* Check to be sure that expectations were made clear to the board member before he or she joined the
board. "I know you joined the board recently and I'm not sure that you realize that we ask all board
members to attend the annual dinner and, hopefully, to help sell tickets. Let me explain to you what most
board members do, so you can see whether you'll be able to work on this with us."
* Hold a board discussion at which expectations are reconsidered and re-affirmed. Agree on a list of
expectations for every board member.
* Be sensitive to possible health issues or personal reasons why a good board member isn't participating
as much as he or she has in the past.
* Transfer responsibilities to someone else. "I'm concerned about finishing the revision of the personnel
policies. Since you're so busy, maybe it would work out for the best if John took your notes on the policies
and developed a first draft."
* Together with the board member, explore whether he or she really has the time right now to be able to
be an active board member. "I'm calling to check in with you since you haven't been able to make a
meeting in the last several months. Are you just temporarily a lot busier than usual?
We really want to have your participation, but if it isn't realistic, perhaps we should see if there's a less
time- consuming way than board membership for you to be involved."
Longer Term Strategies
* Make it possible for individuals to take a "leave of absence" from the board if they have health, work, or
other reasons why they cannot participate fully for awhile. An individual can, for example, take a "6 month
maternity leave" or a "disability leave."
* Have a board discussion or a written board survey on what makes it difficult for people to participate
fully. "Are there things we can change about the frequency, day, time, or length of board meetings that
would make it easier for you to attend?" "Are there things about the way that board meetings are
conducted that would make it easier for you to attend or that would give you more reason to want to
attend?"
* Consider whether board participation is meaningful to board members. Have lunch with some of the
semi-active members and/or the executive director: "I'm sensing that board participation just isn't as
substantive or significant as some board members want it to be. What do you think are the reasons, and
what do you think we can do to make board membership more meaningful?"
* Revise what is expected of board members. Perhaps responsibilities have been given to a board
member that are unrealistic for any but the super-board-member. Reduce the number of committees and
utilize short-term task forces instead. Re-design jobs and responsibilities to fit the ability of a busy
achiever to accomplish them.
WHISTLEBLOWERS
September 23, 2004
Guest Viewpoint: Greatest whistleblower's message still
rings true
By George Beres
Whistleblowers have become a fact of life - a seeming necessity - in our democracy. The
most famous of them, Daniel Ellsberg, is touring Oregon this week to speak on behalf of
what he feels is a vital part of the democratic conscience.
Ellsberg gained fame, as well as criminal charges that could have placed him in prison for
115 years, for making public in 1971 the Pentagon Papers, which awakened the nation to
the illegality of the war in Vietnam. He speaks in Eugene on Saturday.
I've gained insights into the psyche and courage of whistleblowers through correspondence
with Ellsberg the past year. He and I have a tenuous link through John McNaughton, chief
assistant in the mid-1960s to Secretary of Defense Robert McNamara. Ellsberg was
McNaughton's right-hand man when the Gulf of Tonkin Resolution expanded the Vietnam
War. I was a young reporter on an Illinois newspaper, the Pekin Times, when McNaughton
was its managing editor a decade earlier.
Ellsberg's book on the Pentagon Papers, "Secrets," was published in 2002, and its 457
pages make fascinating reading. But its impact can't compare to that of the 7,000 pages of
secret documents he photocopied in 1969, then gave to The New York Times in 1971. From
them, the Times printed stories that described how a series of U.S. administrations illegally
extended the war, adding to the number of deaths it produced.
In 1973, Ellsberg went on trial for giving copies of the papers to the Times, The Washington
Post and 17 other newspapers. He had official access to them between 1964 and 1967,
when he held the highest civil service rating as assistant to McNaughton, one office away
from McNamara. Charges were dismissed because of criminal efforts by the Nixon White
House to silence him.
Some of the same agents of Nixon who broke into Democratic Party offices at the Watergate
Hotel also burglarized the office of Ellsberg's psychiatrist, seeking material that could be
used to blackmail Ellsberg. As Nixon's illegal forays collapsed around him, he exclaimed:
"The sonofabitching thief is made a national hero, and the Times gets a Pulitzer for stealing
documents!"
Startling as Ellsberg's actions were to those in power, they also energized public and private
employees to speak out for corrective action to cheating in government and big business.
The number of workers blowing the whistle on fraud, abuse or unfair practices has doubled
over the past seven years. Whistleblowers include:
• Jeffrey Weigand, vice-president of research and development for Brown & Williamson, who
revealed that executives of tobacco companies knew cigarettes were addictive, and added
carcinogenic ingredients to them.
• Three women were chosen by Time magazine as its Persons of the Year for 2002 because
of their whistleblowing: Sherron Watkins was an Enron vice-president who complained the
company's accounting methods were improper. Coleen Rowley was an FBI attorney who
said her early alerts about Zacarias Moussaoui, indicted Sept. 11 conspirator, had been
ignored. Cynthia Cooper blew the whistle about WorldCom covering up $3.8 billion in losses
with phony bookkeeping.
• Sibel Edmonds, a Turkish-American translator for the FBI, gave to the 9/11 Commission
information she said proves senior government officials knew of al-Qaeda's plans to attack
the U.S. with aircraft months before the airliners hit. She said National Security Adviser
Condoleezza Rice's denial of the data is "an outrageous lie."
The pattern went overseas when a technician at Israel's Dimona reactor, Mordechai Vanunu,
revealed that Israel had built atomic bombs it denied having. He was tried in a Jerusalem
Court in 1986, and served 18 years in prison before release this year.
Whistleblowing even emerged in Oregon this year when Circuit Court Judge Michael Marcus
in Hermiston ordered stronger whistleblower protections for workers who have safety
concerns at the army's Umatilla Chemical Agent Disposal Plant. He said workers should not
be punished for expressing their concerns.
Ellsberg alerted Americans to how the executive branch - in his experience, Lyndon Johnson
and Richard Nixon - compromises the truth in conducting foreign policy and military
strategy. It's a lesson that takes on new meaning as the fighting in Iraq escalates. Ellsberg's
impact on history, even if not on government, is best described by Daniel Schorr of National
Public Radio:
"Ellsberg single-handedly changed the course of history. His message of the menace of
secrets rings true today."
George Beres of Eugene formerly managed the University of Oregon Speakers Bureau.
Noise in the ocean is killing sea creatures
The world's oceans are getting noisier and it's killing the creatures that live there, scientists say. One
major culprit is oil and gas drilling, which involves low-frequency seismic pulses used to survey geologic
strata; military sonar and large shipping vessels also generate their share of racket. The U.K.'s Whale
and Dolphin Conservation Society, which recently launched an Oceans of Noise campaign, says there is
evidence that all the noise is causing hearing loss, injury, and even death in cetaceans (whales, dolphins,
and porpoises). In some cases, the animals can fail to hear predators approaching, or fail to hear each
other, causing mommy whales to lose their baby whales (Disney, are you listening?). Also threatened is
the mysterious giant squid, unusual numbers of which have been found beached in Spain recently, some
with their organs damaged almost beyond recognition. Researchers speculate that noise pollution drove
them to surface too quickly, causing air-pressure issues that we don't even want to think about.
straight to the source: BBC News, Alex Kirby, 22 Sep 2004
<http://www.grist.org/cgi-bin/forward.pl?forward_id=3157>
straight to the source: The New Scientist, Debora MacKenzie, 22 Sep 2004
<http://www.grist.org/cgi-bin/forward.pl?forward_id=3158>
WHISLTLEBLOWING
Originally published by New Times Broward-Palm Beach Sep 23, 2004
©2004 New Times, Inc. All rights reserved. newtimesbpb.com
Contra Campaign
BY BOB NORMAN
An Iran-Contra conspirator joins the Swift Boat crowd. It was bound to
happen.
The life of Felix I. Rodriguez provides a tour through the dark heart of America. From the Bay of Pigs
fiasco to Vietnam to the El Salvador death squads to the Iran-Contra scandal, the Cuban exile and selfdescribed "CIA hero" was there. His most famous assassination mission came in 1967, when he led the
Bolivian army group that captured and summarily executed leftist revolutionary Ernesto "Che" Guevara.
He's worked closely with right-wing terrorists, and some of his associates were involved in the Watergate
break-in. Given his background, it's not surprising his name has surfaced in numerous JFK conspiracy
theories as well.
Now retired in Miami, Rodriguez, who says his CIA career was always fueled by a hope to unseat Fidel
Castro, also has special relationships with both of this year's presidential candidates. George W. Bush
sends him a White House Christmas card each year. The president's father counts Rodriguez as an old
friend; Bush Sr. worked with him during the mid-1980s, when Rodriguez ran the operation to arm the
Contras for the Reagan administration.
Democratic nominee John Kerry, though, isn't so cozy with Rodriguez. In 1986, the then-rookie senator
formed a committee to investigate Iran-Contra. In 1987, the so-called Kerry Committee alleged that
Rodriguez had helped steer $10 million from the notorious Medellín cocaine cartel to the Contras. The
committee concluded that trafficking was rampant in the rebels' effort.
The Miami man squared off with Kerry during a closed congressional hearing. He told the Massachusetts
senator point-blank that the allegation was a damned lie and, for good measure, added that he had no
respect for him.
That was some 17 years ago, but Rodriguez's hatred for Kerry -- and his closeness to the Bush family -has driven Rodriguez from the CIA shadows onto the open political stage. He's railed against Kerry on
Cuban radio in South Florida and in the October edition of Soldier of Fortune magazine. He also jumped
at the chance to join the Vietnam Veterans for Truth, an anti-Kerry group that invited Rodriguez to speak
at a nationally televised September 12 rally at the Capitol.
At the sparsely attended event, the storied spook began with some words on Vietnam, where he flew
assassination and assault missions (and flights with CIA-backed Air America, which has been tied to the
heroin trade). He portrayed his time there as if he were dropping food and medicine from his combat
helicopter. "I never saw any atrocities that Senator Kerry claims we did in Vietnam," Rodriguez told the
crowd in his thick Cuban accent. "We helped the Vietnamese people."
Then he turned his attention to Central America, referring to Kerry's accusation and noting that his
nemesis ultimately backed off the allegation against him. "That was one more lie from Senator Kerry," he
triumphantly told the gathering.
But who, really, is lying? Rodriguez maintains that he saw no hint of drug trafficking while he was running
the Contra operation in El Salvador and Honduras. "I never saw any indication of that at all -- it was all a
great fabrication," he said during a telephone interview last week. "That all came from Senator Kerry's
committee. It came from those people that didn't want to help the Nicaraguan resistance, people like
Kerry, who wanted to hurt Vice President Bush, who was going to win the presidency."
It's a familiar -- and absolutely untenable -- refrain from the Reagan and Bush administrations that
continues to this day: The narcotics ties to the Contra operation were a politically motivated myth. Vice
President Dick Cheney, who was then a congressman, played a key role in the disinformation campaign.
He led the effort to squelch various Iran-Contra investigations, especially when it came to drug
allegations. And George W. Bush? Well, he seems to have no qualms about Iran-Contra, since he has
hired several of the scandal's central figures -- including Elliott Abrams, Otto Reich, and John Negroponte
-- to serve under him.
Though it has been largely ignored, this historic battle between Kerry and the Bush family not only
provides a revelatory subtext to this election but also indicates how much the two men running for
president dislike each other. (I can hear Dubya now: "That man tried to put my daddy in jail!").
History clearly favors Kerry's side -- and he may even have been right about that $10 million in cartel
money. Rodriguez, at the time, was the government's key man in El Salvador, where he was conducting
counterinsurgency missions against leftist rebels. But his main job was the Contra operation. He claims to
this day that he wasn't paid for his efforts, a contention about as shaky as H.W.'s famous excuse that he
was "out of the loop" on the Contra affair. Rodriguez also worked in Honduras, where the Contras trained
in the mountains, and at another shipping point in Costa Rica (which has been repeatedly tied to the drug
trade).
The allegation against Rodriguez came from Medellín cartel accountant and convicted money launderer
Ramon Milian-Rodriguez, who met with Felix Rodriguez in 1985 while he was out on bail on federal drug
charges in Miami. Milian told the Kerry Committee that Rodriguez solicited the cash from the cartel and
that it was later channeled to the Contras. The cartel, he said, hoped the contribution would bring it "good
will" from U.S. authorities. At the same time, he was implicating the CIA operative, Milian was adamant
that Felix Rodriguez had the American government's interest at heart and never took a dime of the
proceeds.
Rodriguez admits the meeting took place but insists it concerned only an offer from the money launderer
to help set up the Nicaraguan government in a cocaine sting. In 1988, Milian failed a lie detector test on
the subject, and Kerry retracted the allegation (yes, he flip-flopped).
Rodriguez then had every right to gloat, but in 1991, the accusation resurfaced. Medellín cartel cofounder
Carlos Lehder, while testifying for the U.S. government against deposed Panamanian President Manuel
Noriega, admitted that his organization had indeed given $10 million to the Contras. Lehder, then a
federal witness working with U.S. prosecutors, had no known motive to lie.
In light of that information, I asked Rodriguez if he was absolutely sure the Contra operation didn't receive
the drug money. "I don't think it did," he said, losing his resolute tone. "They always say the same shit.
Where did the money go to if they did? Every single penny that went into the Contras was accounted for."
While it's open to debate just how meticulously the Contras kept their checkbooks, there have been other
indications that Rodriguez's operation may have been involved in drug smuggling. In 1984, Rodriguez's
business partner, international arms dealer Gerald Latchinian, was arrested in a conspiracy to smuggle
$10 million in cocaine to finance a plot to assassinate Honduran President Roberto Suazo Cordova. (He
was later convicted.) While Rodriguez was never tied to the crime, Latchinian argued that it was
connected to the CIA.
Rodriguez's agency-trained compatriot, fellow Cuban exile Frank Castro, was deeply involved in both
drug smuggling and the Contra effort, according to the CIA. And in 1989, a drug pilot named Mike Tolliver
alleged on a CBS news show that he ran guns to Honduras for the Contras and that, while there, his
plane was loaded with marijuana for a return flight to Homestead Air Force Base. He identified Rodriguez
as his boss.
Perhaps the most damning allegation against Rodriguez comes from former DEA agent Celerino Castillo,
a decorated Vietnam vet who was stationed in Central America during Iran-Contra. While working for the
DEA, Castillo says he became aware of drug trafficking at San Salvador's Ilopango Air Base, where
Rodriguez was organizing the Contra supply effort. The DEA agent has testified in Congress and
recounted in his well-documented book, Powderburns, how the airport hangars controlled by Rodriguez
and other government operatives were used by drug traffickers. "The only reason Felix wasn't arrested is
because he knew where all the bodies were buried in the Iran-Contra operation," says Castillo, who is
now a substitute high school teacher living in Texas.
Castillo recounts that in 1986, he met then-Vice President Bush at an ambassador's party in Guatemala.
"I told him there was something funny going on at Ilopango," he says. "And he just smiled and walked
away."
While Bush Sr. avoided the truth about Iran-Contra, Castillo has worked for years to expose it and, in so
doing, has researched Rodriguez's life -- from Cuba to Vietnam to El Salvador. He's come to the
conclusion that the Cuban exile is no hero. "He's always been a terrorist, just like Osama bin Laden and
all the terrorists we've made in the past," he says.
Unflinching words, but Rodriguez has indeed been tied to known terrorists, most notably Luis Posada
Carriles, a CIA-trained operative who worked closely with Rodriguez after his 1985 escape from a
Venezuelan jail, where he served nine years for his role in the downing of a Cuban airliner that killed 73
civilians. Rodriguez admits he worked with Carriles on the Contra effort but says his friend wasn't
convicted of anything. He proffers that Fidel Castro may have blown up the jetliner to "get rid of" Cuban
military officials on board who were plotting against the dictator.
But that far-fetched theory doesn't explain the numerous hotel bombings that Carriles has acknowledged
committing or his recent incarceration in Panama for planning to blow up Castro at a political conference
(his recent pardon made international news).
"I don't endorse or support bombings," Rodriguez says. "I believe it kills innocent people, and that is not
the way to do it. That will backfire."
Rodriguez says he doesn't know why Castillo has made the allegations against him. He insists that he
watched every Contra supply plane land, refuel, and take off from Ilopango and that there were never any
drugs on board. "What I understand from the guys I asked at DEA was that they fired [Castillo] for making
all kinds of allegations about Ilopango," he says. "He was fired for incompetence. If any of his allegations
had a grain of truth, the Iran-Contra committee would have brought it up. They looked at everything with a
toothbrush."
(Castillo actually retired from the DEA -- under pressure from higher-ups regarding his whistleblowing -- in
1992. He collects a pension from the agency.)
The Iran-Contra Committee, which carried more weight than Kerry's subcommittee, was, in reality,
famously unconcerned with the narcotics allegations. Independent counsel Lawrence Walsh, who
conducted the criminal investigation, never even interviewed Castillo. Later, after reporter Gary Webb's
well-researched 1996 "Dark Alliance" series in the San Jose Mercury News showed clear ties between
the Contras and the Los Angeles crack trade, a Justice Department investigation indeed found the "seed
of truth" in Castillo's allegations but didn't bother to make a real case.
As for the media, they can only look back at the time with shame. The press -- led by the New York
Times, Washington Post, and Los Angeles Times -- tried to discredit Webb. Though the papers dutifully
reported many of the salient facts, they never conveyed the big picture (remind anyone of a certain
current war?) and, in the end, let the perpetrators of one of the greatest scandals in American history go
largely unpunished.
Other than Soldier of Fortune, only the conservative website NewsMax.com has brought up Iran-Contra in
the context of the presidential election. In a July article, the website portrayed Rodriguez as a "wholly
innocent... freedom loving patriot" who was blindsided by the unscrupulous, CIA-hating senator.
It may be just the beginning. Rodriguez says he'll vigorously oppose Kerry until Election Day, continuing
his work with the anti-Kerry veterans' group, which is ideologically aligned with the similarly named Swift
Boat Veterans for Truth, and exposing the terrible injustice done to him by the Democratic nominee. "He
will tell you one thing, then he will tell you another thing," Rodriguez says of Kerry. "He is a complete liar."
We all know that Rodriguez can fight with the best of them, but what about Kerry? His Florida campaign
communications director, Matt Miller, didn't respond to the question. Former DEA man Castillo, who
counts his vote for Ronald Reagan in 1980 as one of the worst mistakes of his life, isn't sure. And he
believes Bush II -- who has already led the country into a nightmarish war using false pretenses -- will
cook scandals to make Iran-Contra pale in comparison if elected to a second term.
"They say Kerry is a liar, that he lied about Felix Rodriguez, who is a hero and patriot," Castillo says.
"Bush and Cheney know how to fight. Cheney says, 'Go fuck yourself.' I am so upset because Kerry won't
take the gloves off. It's like he's idling. If he doesn't fight now, will he ever fight for us?"
RESUME:
Here are five quick tips to help you write a resume that gets noticed.
1. Remove sentences that begin “Responsibilities included…” That works for a job description, but not a resume. Instead,
list accomplishments. People who read resumes want to know what you’ve done.
2. When writing accomplishments, quantify them whenever possible. For example, “Increased sales 15%.” “…resulting in
savings of $40,000.” “…doubling the number of customers.”
3. If you’ve had at least one job in your chosen field after graduation, list your education after your work experience.
4. Tailor your resume to fit the job you want. If you are responding to an ad, and you have six of the eight key
requirements, be sure your resume says so. Don’t make the reader infer how competent you are. Companies generally
spend less than one minute reading your resume during the first screening.
5. Make sure there are no typos or improper uses of words. One of the top traits that hiring managers want is excellent
communication skills. Since spell checkers don’t catch everything, be sure to have someone else proofread your resume.
If you want to improve the odds that you’ll land a job you’ll really love, make sure your resume reflects your strongest
motivations and talents. A career assessment can be an enormous help. Not only does an assessment identify what truly
motivates you, it gives you words to help you explain it. Weave those words into your resume so that it accurately
represents your potential.
For example, your assessment may show that you are “Methodical and thorough in routine procedures.” Use those words,
link them to a specific accomplishment and you’ve just strengthened your resume. Try it with all of the traits where you
score your highest levels of motivation. These phrases will stand out to hiring managers who value these traits.
“Henry Neils is President and Founder of Assessment.com, the leading online career assessment company focused on
helping employees and employers work together for their mutual benefit. Millions of people have gained personal insight
into their careers by using the tools, such as MAPP™ (Motivational Appraisal of Personal Potential), provided at
Assessment.com.”
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Market Cap is the True Measure of a Company's Value
Why is a stock that cost $50 cheaper than another stock priced at $10?
This question opens a point that often trips up beginning investors: The per-share price of a stock is
thought to convey some sense of value relative to other stocks. Nothing could be farther from the truth.
In fact, except for its use in some calculations, the per-share price is virtually meaningless to investors
doing fundamental analysis. If you follow the technical analysis route to stock selection, it’s a different
story, but for now let’s stick with fundamental analysis.
The reason we aren’t concerned with per-share price is that it is always changing and, since each
company has a different number of outstanding shares, it doesn’t give us a clue to the value of the
company. For that number, we need the market capitalization or market cap number.
The market cap is found by multiplying the per-share price times the total number of outstanding shares.
This number gives you the total value of the company or stated another way, what it would cost to buy the
whole company on the open market.
Here’s an example:
Stock price: $50
Outstanding shares: 50 million
Market cap: $50 x 50,000,000 = $2.5 billion
To prove our opening sentence, look at this second example:
Stock price: $10
Outstanding shares: 300 million
Market cap: $10 x 300,000,000 = $3 billion
This is how you should look at these two companies for evaluation purposes. Their per-share prices tell
you nothing by themselves.
What does market cap tell you?
First, it gives you a starting place for evaluation. When looking a stock, it should always be in a context.
How does the company compare to others of a similar size in the same industry?
The market generally classifies stocks into three categories:



Small Cap under $1 billion
Mid Cap $1 - $10 billion
Large Cap $10 billion plus
Some analysts use different numbers and others add micro caps and mega caps,
however the important point is to understand the value of comparing companies of
similar size during your evaluation.
You will also use market cap in your screens when looking for a certain size company to balance your
portfolio.
Conclusion
Don’t get hung up on the per-share price of a stock when making your evaluation. It really doesn’t tell you
much. Focus instead on the market cap to get a picture of the company’s value in the market place.
Fundamental analysis is a method for evaluating a stock on the basis of observing key ratios and
understanding the underlying business.
What is Fundamental Analysis?
Fundamental analysis is the practice of studying the fundamentals of a company to
determine if a business is a good investment. Fundamental analysis can answer questions
such as "what are the chances this business is going to go bankrupt" and "how certain can I
be that this stock will continue paying dividends?" It involves studying financial statements
such as the balance sheet.
It is considered the opposite of technical analysis.
Fundamentals are the financial characteristics of a company. They refer to the amount of
debt a business has, the level of profitability, the available cash on-hand, inventory and
receivable turns, as well as return on equity, assets, and investment. These characteristics
are used in fundamental analysis to determine the suitability of a particular stock or bond
for investment. They provide a standard that can be used to compare two businesses in the
same industry or sector.
If a company is going deeper into debt and making less money each year, the fundamentals
are said to be deteriorating.
What is Technical Analysis?
Technical analysis is the practice of studying the stock market's past in an attempt to
determine its future. People who utilize technical analysis often study charts and graphs of
a particular stock, industry, and / or sector to try and find patterns.
Here's how it works: A technical analyst may look at XYZ's stock and notice the price has
risen every February, then fallen sharply in March every year for the past four years. They
would then buy XYZ stock in February because he / she believed the market was likely to
repeat the same price pattern. Technical analysis does not pay particular attention to the
fundamentals of a stock.
Tools of Fundamental Analysis
Fundamental analysis is the process of looking at a business at the basic or
fundamental financial level. This type of analysis examines key ratios of a business to
determine its financial health and gives you an idea of the value its stock.
Many investors use fundamental analysis alone or in combination with other tools to evaluate stocks for
investment purposes. The goal is to determine the current worth and, more importantly, how the market
values the stock.
This article focuses on the key tools of fundamental analysis and what they tell you. Even if you don’t plan
to do in-depth fundamental analysis yourself, it will help you follow stocks more closely if you understand
the key ratios and terms.
Earnings
It’s all about earnings. When you come to the bottom line, that’s what investors want to
know. How much money is the company making and how much is it going to make in
the future.
Earnings are profits. It may be complicated to calculate, but that’s what buying a company is about.
Increasing earnings generally leads to a higher stock price and, in some cases, a regular dividend.
When earnings fall short, the market may hammer the stock. Every quarter, companies report earnings.
Analysts follow major companies closely and if they fall short of projected earnings, sound the alarm. For
more information on earnings, see my article: It’s the Earnings.
While earnings are important, by themselves they don’t tell you anything about how the market values the
stock. To begin building a picture of how the stock is valued you need to use some fundamental analysis
tools. These ratios are easy to calculate, but you can find most of them already done on sites like
cnn.money.com or MSN MoneyCentral.com.
Fundamental Analysis Tools
These are the most popular tools of fundamental analysis. They focus on earnings,
growth, and value in the market. For convenience, I have broken them into separate
articles. Each article discusses related ratios. There are links in each article to the other
articles and back to this article.
The articles are:
1.
2.
3.
4.
5.
6.
7.
8.
9.
Earnings per Share – EPS
Price to Earnings Ratio – P/E
Projected Earning Growth – PEG
Price to Sales – P/S
Price to Book – P/B
Dividend Payout Ratio
Dividend Yield
Book Value
Return on Equity
No single number from this list is a magic bullet that will give you a buy or sell recommendation by itself,
however as you begin developing a picture of what you want in a stock, these numbers will become
benchmarks to measure the worth of potential investments.
Fundamental Analysis versus Technical Analysis
The key differences
There are two general schools of stock analysis: fundamental and technical. This feature describes the
two schools and the key differences between them.
Fundamental Analysis
Fundamental stock analysis requires, among other things, a close examination of the financial statements
for the company to determine its current financial strength, future growth and profitability prospects, and
current management skills, in order to estimate whether the stock's price is undervalued or overvalued. A
good deal of reliance is placed on annual and quarterly earnings reports, the economic, political and
competitive environment facing the company, as well as any current news items or rumours relating to the
company's operations. Simply put, fundamental analysis concerns itself with the "basics" of the business
in assessing the worth of a stock.
Numerous ratios, derived from balance sheet and income statement data, are used in fundamental
analysis including such widely used ratios as, Working Capital Ratio, Debt-equity Ratio, Return on Equity
Ratio, Earnings per Share, etc.
Fundamental analysis may be the preferred method to use for mid to longer term investors. However, it is
not suitable for use by day traders because of the amount of research required, and the fact that trades
are entered into and exited within a very short time frame.
Technical Analysis
Technical analysis does not concern itself with a company's basics or fundamentals. Rather, technical
analysis involves the study of a stock's trading patterns through the use of charts, trend lines, support and
resistance levels, and many other mathematical analysis tools, in order to predict future movements in a
stock's price, and to help identify trading oportunities.
The basic foundations or premises of technical analysis are that a stock's current price discounts all
information available in the market, that price movements are not random, and that patterns in price
movements, in very many cases, tend to repeat themselves or trend in some direction.
Bob Prechter, a famous practitioner of technical analysis once commented that, "... the main problem with
fundamental analysis is that its indicators are removed from the market itself. The analyst assumes
causality between external events and market movements, a concept which is almost certainly false. But,
just as important, and less recognized, is that fundamental analysis almost always requires a forecast of
the fundamental data itself before conclusions about the market are drawn. The analyst is then forced to
take a second step in coming to a conclusion about how those forecasted events will affect the markets!
Technicians only have one step to take, which gives them an edge right off the bat. Their main advantage
is that they don't have to forecast their indicators."
A very large number of technical indicators have been developed over the years, including the widely
used overbought/oversold indicators such as the Relative Strength Index, and the trend following
indicators such as Moving Averages.
While technical analysis can be a great help in trading the market, no technical indicator is infallible.
Further, technical analysis is only as good as its interpreter. Finally, a significant of time must be spent in
learning the principles of technical analysis, and in how to properly interpret the various charts and other
technical indicators.
Basic Chart Reading
Types of Charts
The main type of security chart is the OHLC chart, or the Open-High-Low-Close chart. They are named
such as each data point, or bar, conveys four pieces of information (five really). The bar can represent
any time frame, from one minute to one month, and anything in between.
These charts come in two basic flavors:


plain vanilla
candlestick
Plain Vanilla
Each data point is made up of a vertical line, a small horizontal line on either side of this bar, and a bar at
the bottom of the chart (top right).
For the upper bar, the top of the vertical line represents the high of the period while the bottom represents
the low. The horizontal hash mark on the left side of the line shows the opening price while the one to the
right gives the closing price. The vertical bar at the bottom of the chart tells the volume story.
Candlestick
The candlestick chart (top right) takes the plain vanilla approach a step further. There is now a long, thin
bar surrounded by a shorter, fatter bar.
The long, thin inner bar, or wick, represents the same thing it did in the plain vanilla chart: the high and
the low.
The shorter fatter bar gives the remaining information: the open and close. However, it's the color of the
bar which signifies which is which.
A hollow bar means the open was lower than the close. Thus, the bottom of a hollow bar is the open and
the top is the close. A filled bar, on the other hand, means the open was higher than the close. Therefore,
the top of a filled bar is the open while the bottom is the close.
Keep in mind this in show way shows the relation to the previous bar.
A hollow bar, which is an up bar within the time period, could be lower than the previous
bar. While the hollow bar means the bar itself is an up bar, it doesn't tell you whether it's
up or down from the previous bar.
And on the bottom of the chart volume is still volume.
Support & Resistance
Support
Support is exactly what it sounds like, support for prices. Think of it as a price floor. It is an area of
concentrated demand.
Imagine yourself in zero gravity, floating through the room. As you approach the floor you expect to
stabilize your motion, eventually making your way back to a floating state. You may touch down several
times, but each time you do you fully expect to stop there.
By looking at a chart, you can observe how the prices have come down several times and bounced off
support? They don't actually have to touch the line, but they should at least come close. {It is the
‘average’ floor line}
prices have come down several times and bounced off support? They don't actually have to touch the
line, but they should at least come close.
When It's Time to Change
One more time, remember yourself floating through the room. What would happen if you broke through
the ceiling and got to the next level? What was the ceiling now becomes the floor. It works the same way
with charts. After breaking through support (resistance), the previous line often becomes resistance
(support).
RESISTANCE BECOMES SUPPORT, THIS IS WHY IT IS AN ARBITRARY LINE ACCORDING TO
ONE’S JUDGEMENT. As the stock behaves, the support or resistance lines as floor and
ceiling lines also “move” to show a narrow band of behavior.
Art of the Lines
Looking at the charts one thing should become clear: there is no one perfect line. Every technician could
conceivably come up with a slightly different variation.
But it's OK! The important thing is being consistent with one's implementation of these tools. Some things
to keep in mind when drawing support and resistance:


the longer support/resistance has been in effect, the 'stronger' it tends to be
the more points the line touches, the better


there is no need to draw across absolute tops or bottoms, rather try to catch the
bulk of price action
intraday highs and lows, and even opening prices, aren't quite as important as
closing prices
Significance?
Just what does all this mean? Should one buy at support or sell? What about resistance? As usual, the
survey says: it depends.
Remember, support is an area of concentrated demand, where you'd expect buying to exceed selling.
Conversely, resistance is an area of concentrated supply, where selling is expected to overwhelm buying.
However, these areas of supply and demand aren't unquenchable.
Some common uses of support:




go long just above support
when long, use a stop just below support
cover shorts near support
go short if prices break below support
Some common uses of resistance:




go short just below resistance
when short, use a stop just above resistance
exit longs near resistance
go long if prices break above resistance
There's Always More
Now before you go jumping in, why not take a moment and put on a pair of bathing trunks, eh? Support &
resistance by themselves aren't the holy grail of charting. Most chartists will use additional tools and
indicators to try and verify whether signals are 'legitimate' or 'false'.
For now, though, if you want to use what you have read here, I suggest you look at lots of charts and
learn to spot support and resistance on your own.
The Uptrend
As the name implies, an uptrend is defined by a general rise in the price level of a security. {seen as 2
parallel lines that follow the stock’s behavior/movement as it they were in a ‘gutter’ or a ‘lane’ or a ‘road’.
If the path goes up it is an upward trend.
The idea here is the same as it is in drawing support and resistance: don't worry about touching
extremes. Rather, concentrate on finding the 'best fitting' trendline.
Then, by drawing a roughly parallel line along the high end of prices a price channel is created. By
capturing most of the price action in this channel one has now created support and resistance lines for a
security which is not in congestion. But the use of these differs somewhat from a stock not in a trend.
The uses of support do change a bit in an uptrend:


good buy points are still created by prices reaching the support line
it's still not a bad idea to have a stop in below the trendline should prices break.
Keep in mind this stop will be ever rising, and must be recalculated daily.

it's not necessarily a time to short when prices do break. That may or may not be
the case, but more clues are usually needed.
And what about resistance?



rather than selling an entire position as prices approach resistance one might just
want to lighten the load a little, selling a portion of a position, if anything at all
it's definitely not a place to get short
as for a break of resistance, just as the break of support, more clues are needed
to determine a possible course of action. A break up could be an indication of a
strengthening and quickening trend, or it could be the sign of a blowoff and final
rally before reversal.
The Downtrend
The downtrend is quite similar to the uptrend except, you guessed it, the level of prices is in a general
decline. And you thought this technical analysis stuff was tough!
And once again, uses of support differ from uses in congestion:



a good place to cover a portion of a short, if anything at all
not somewhere to get long
breaks through require additional information to determine a course of action
And resistance:



a good place to get short
stops above support are still useful and must be continually recalculated as
prices trend down
not necessarily a reason to get long if prices break above support
It's Pretty Easy
If you understand the basic idea of support and resistance then trendlines and channels are no big deal.
They just represent a way to illustrate support and resistance on trending securities.
The STOP ORDER
One the Support and Resistance lines are identified you can determine what should be the very worst
price you can pay for holding on to a stock BEFORE YOU BUY IN.
Should you use the previous support line which was broken, at about the 309 level? Or what about the
previous resistance line around 335? Either would seem like a good choice, with 335 giving you more
breathing room for daily ups and downs in the price, but 309 risking less. I drew another possibility, this
one the current downtrend line. This one would put your stop for the next day at about 314. More
breathing room than using 309, and less risk than using 335. While using the trendline would require you
to change your buy stop order everyday, it seems that it would be more beneficial as the contract dropped
and the trade went in your favor. With the other possibilities, you would need to wait for new support
and/or resistance levels to be formed before changing your order based on something in the chart.
The actual values for the stop order can differ. For example, using the support line, should you place your
order right at 309? Or should you go a couple of ticks above the line, say 312? You really don't want to be
closed out of the trade if the price touches the line. Instead, why not wait until the price breaks through
before you decide you were wrong? This is a personal decision and should be made based on your
beliefs and what you are comfortable with.
Other than these options, you could decide on an arbitrary loss amount, perhaps based on a percentage,
and set your stop there. But outside of the previously mentioned points, this number would have little
meaning. Why would you expect the price to encounter some resistance at this point?
It is believe that using stops based on chart reading (money amounts) on a chart are more effective than
percentage stops.
Remember, each line representation is a perfectly straight line from a specific starting date or price to an
upward or downward direction towards a specific date or price, assuming the dates are horizontal and the
price movements are vertical on your given chart.
Note: on a downward trend, it is important to establish a new support, but most importantly a new
resistance line (both of which are always perfectly horizontal , imposed on a chart. The resistance line is
important if one wants to get out when one is losing money and wants to get out on the best prices. The
support price is important if one is selling short or perhaps has an option or is in a different strategy or
using dif instruments that favor a downward trend. Your financial instrument strategy is important to keep
in mind before buying and determining the Stop Loss price.
If you continue to draw the downtrend line daily, you would have been knocked out just after June 15 if
you were using the line as your exact order point. However, if you left some cushion above this line for
your order, then you would have probably gotten out around June 29. This paragraph states that if you
were on tract of things closely you would have gotten out on the 15 th. Or , it turns out you would have had
to look to another acceptable opportunity on the stocks’ downward trend but the difference between the
prices on the 15th and 29 is negligible except your money was tied up without enhancement and more
days of worry.
Finding a new resistance line to use is a little more difficult. The new one I drew is based on the very
small re-tracement a few days after the break (when it went dramatically up or down in price.) A break
can also be a one-time news release, or based on some regular regulatory reporting or event or a
seldom-happening planned or unplanned.
The resistance line drawn based on this "high" was only touched once, although it was almost touched a
second time, means the stock price reached a high point within its new trend but never again touched that
ceiling. Thus it never turned into an almost trend when it failed to continue behaving within that range.
That is why trader decided to get out as stock, in reality, was establishing a new lower price behavior.
Coincidentally, whether or not you used a tight or loose stop based on this line you would have exited on
the same day had you been using a tight stop with the trendline. {As I said in the previous paragraph, the
difference between the 15th and 29th getting out point was the same because in the interim or those two
dates, the stock price dipped.
The art involved here is that everyone draws their own lines, and they aren't all going to match. When it
comes down to it, this is a very subjective method, whereas percentage stops are not. In the end, the
choice is yours on what method to use. I prefer to put a little extra work in and evaluate what I believe to
be more "accurate" prices.
Moving Averages
As Support & Resistance
In the Support & Resistance and Trendlines & Channels installments I covered those lines which need to
be drawn in by hand by the technician. Thus, for the same chart, several technicians could see several
different lines. All right, or all wrong, depending on the resultant price action.
For those who'd like something a little more concrete, a moving average could fit the bill. Significant (i.e.
widely used) MAs are often used for the purpose of finding support and resistance on a chart.
in an uptrend the safest buying opportunities are presented on pullbacks. But pullbacks to what? If one
isn't interested in drawing the 'best fitting' trendline and possibly getting it wrong, how about the 20-day
MA?
Why 20? Well, it is widely used and it is short term enough for trading, but not so short as to get
whipsawed about.
As Trade Signal Generator
There are two ways MAs can be used to generate trading signals:


prices cross over the MA
one MA crosses another
Prices Cross Over the MA
The rules for trading signals are simple: buy after prices, which were below the MA, close above it. Sell
when prices, which were above the MA, close below it.
But does it mean when selling one should close a long AND go short? Usually, the answer is no. Oh sure,
there are those always in a trade no matter what side. But most MA traders will only be long in an uptrend
and only be short in a downtrend. A longer term average can be used to measure the trend while a
shorter term trend is used to generate the trade signals.
On Broadcom (BRCM) it worked like a charm using a 20-day MA. One could have gone long around 120
or so and wouldn't have exited until prices resided over the 220 area. A nice 100 point gain.
One MA Crosses Another
The rules for MA crossover's differs a bit: buy when the fast (i.e. shorter term) MA crosses up above the
slow MA. Sell when the fast MA crosses down below the slow MA. Again, most traders will only be long in
an uptrend and short in a downtrend.
Let's look at Doubleclick (DCLK) with a fast MA of 10 days and a slow MA of 20 days. It generated a buy
signal around 65. While a sell hasn't yet been triggered, the time may be soon.
The Problem of Whiplash
In the hand picked examples I've provided both of these trade signal generators surely seem like
foolproof methods. But they are not. The single most common problem with using MAs as such is the
problem of whiplash.
What's whiplash? The problem of whiplash occurs when a stock trades around its MA for some time,
constantly popping up above and down below. Many trade signals are generated. Few, if any, are
profitable.
The Barnesandnoble.com (BNBN) chart provides a perfect example. In a span of a month three separate
buy signals were generated. All three ended shortly thereafter in the red.
How can one minimize the chance of whiplash? Several ideas come to mind:



For price crossovers, the longer the MA, the less whiplash occurs: Very short
MAs will often hug prices and thus generate many crossovers and many signals.
For MA crossovers, the greater the difference in the two MAs, the less whiplash
occurs: If the MAs are too close to one another, too similar, they will cross each
other often.
Stick to obvious, strong trends: The BNBN chart would have been a poor trading
candidate. While it is arguably in a very mild uptrend, it surely can't be
considered obvious, or strong.
From the different types to their different uses, The mistake now would be to take everything learned in
this article and immediately implement it into ones trading plan.
Instead, the right way to go about it is try and determine which type and which use of MAs is best for your
current methodology. Heck, they may be useless to you. Or, they could be another powerful weapon to
add to your arsenal.
Trendlines & Channels
What happens if you're looking at a support and/or resistance line and you get hit in the head with a rock?
Hmmm, on second thought, scratch that idea. Don't even think about trying it at home.
How about this? What if you tilt your monitor while you're looking at a support/resistance line? What do
you get?
Right, you get a line which is no longer parallel to the floor you're standing on. The line can still act as
support/resistance, but it also acts as a trendline.
The Trend Is Your Friend
No doubt you've heard the saying. A similar thought might be swim with the current, not against it. Or,
don't step in front of a runaway train.
The idea is to try and determine where prices want to go and to follow. Instead of trying to pick turning
points one should concentrate on just going along for a ride.
Understanding Cyclical and Non-Cyclical Stocks
Just like in war and football, investing is about offense and defense. It’s hard to find
success with just one tactic. Cyclical and non-cyclical stocks should be part of your
arsenal.
You have several means to apply both offense and defense to your investing, including:



Mix of stock, bonds, and cash
Diversification by size and industry
Mix of value and growth stocks
Another tool you have is mixing cyclical and non-cyclical stocks in your portfolio to counteract a changing
business cycle. Definition:
Business Cycles represent the long-term patterns of expansion and contraction in the economy as
witnessed by the flow from recession to recovery and back.
When the market senses bad times coming in the economy, it will move toward non-cyclical or defensive
stocks and away from cyclical issues.
The stock prices of cyclical and non-cyclical stocks relate to how the business cycle changes.
Cyclical stocks move more dramatically, both up and down, with the cycle, while noncyclical stocks show little movement relative to the cycle.
The Big Picture
The idea behind cyclical and non-cyclical stocks is simple. When money is tight, what
can you do without or put off, and what do you really need?
You may want a new car, but if your budget is very tight, it may have to wait. However, toothpastes, toilet
paper, and electricity can’t wait.
Cyclical stocks represent those items and services for consumers and businesses that they buy when
confidence in the economy is high.
Non-cyclical stocks represent those items and services for consumers and businesses that they can’t put
off no matter what the state of the economy.
Standard & Poor’s classifies stocks into 10 sectors. Two of the sectors, Consumer Staples and Utilities,
are non-cyclical stocks and the rest are cyclical. See the complete list at the end of this article.
Here’s some more detail on non-cyclical and cyclical stocks.
Non-Cyclical Stocks
Non-Cyclical Stocks or defensive stocks do well in economic downturns, since demand
for their products and services continues regardless of the economy.
The classic example of non-cyclical stocks is utilities. Everyone from consumers to businesses needs
water, gas, and electricity. When the economy is growing, these stocks tend to lag behind, however
during economic downturns; their steady returns may look good.
Another classic example of non-cyclical stocks is household non-durable goods, such as toothpaste, toilet
paper, cleaning materials.
Cyclical Stocks
Cyclical stocks follow an upward turn in the business cycle when businesses and
consumers are spending money.
Automobile companies are classic cyclical stocks. When the economy is good and people are working,
car sales do well. However, if there are layoffs and uncertainty or high interest rates, people may decide
to hold on to their car another year.
Businesses expand during good times. They buy new equipment and build new facilities, so equipment
sales and construction are cyclical stocks.
When the economy cools, businesses run down inventory, put off expansions, and delay purchases.
Cyclical stocks such as steel manufacturing and sales suffer when business slows down.
Conclusion
It pays to keep an eye on the business cycle and know where it is and where it is going.
For investors wanting a more conservative posture, non-cyclical stocks – many of which
also pay nice dividends – should make up part of you portfolio.
You should understand that this relative safety comes with a price like everything else in the market and
that is missing growth opportunities in an up market.
Standard & Poor’s Sectors
Here is how S&P classifies stocks by sector:










Consumer Discretionary
Consumer Staples
Energy
Financials
Health Care
Industrials
Information Technology
Materials
Telecommunication Services
Utilities
Not everyone follows S&P sector breakouts so don’t be surprised if you visit a site like MorningStar, for
example, and find a completely different set of sector identifiers.
Stock Sectors - How to Classify Stocks
One of the ways investors classify stocks is by type of business. The idea is to put
companies in similar industries together for comparison purposes. Most analysts and
financial media call these groupings “sectors” and you will often read or hear about how
certain sector stocks are doing.
One of the most common classification breaks the market into 11 different sectors. Investors consider two
of there sectors “defensive” and the remaining nine “cyclical.” Let’s look at these two categories and see
what they mean for the individual investor.
Defensive
Defensive stocks include utilities and consumer staples. These companies usually don’t suffer as much in
a market downturn because people don’t stop using energy or eating. They provide a balance to
portfolios and offer protection in a falling market.
However, for all their safety, defensive stocks usually fail to climb with a rising market for the opposite
reasons they provide protection in a falling market: people don’t use significantly more energy or eat more
food.
Defensive stocks do exactly what their name implies, assuming they are well run companies. They give
you a cushion for a soft landing in a falling market.
Cyclical stocks
Cyclical stocks, on the other hand, cover everything else and tend to react to a variety
of market conditions that can send them up or down, however when one sector is going
up another may be going down.
Here is a list of the nine sectors considered cyclical:









Basic Materials
Capital Goods
Communications
Consumer Cyclical
Energy
Financial
Health Care
Technology
Transportation
Most of these sectors are self-explanatory. They all involve businesses you can readily identify. Investors
call them cyclical because they tend to move up and down in relation to businesses cycles or other
influences.
Basic materials, for example, include those items used in making other goods – lumber, for instance.
When the housing market is active, the stock of lumber companies will tend to rise. However, high interest
rates might put a damper on home building and reduce the demand for lumber.
How to Use
Stocks sectors are helpful sorting and comparison tools. Don’t get hung up on using just
one organization’s set of sectors, though. MorningStar.com uses slightly different
sectors in its tools, which let you compare stocks within a sector.
This is extremely helpful, since one of the ways to use sector information is to compare how your stock or
a stock you may want to buy, is doing relative to other companies in the same sector.
If all the other stocks are up 11% and your stock is down 8%, you need to find out why. Likewise, if the
numbers are reversed, you need to know why your stock is doing so much better than others in the same
sector – maybe its business model has changed and it shouldn’t be in that sector any longer.
Conclusion
You never want to be making investment decisions in a vacuum. Using sector information, you can see
how a stock is doing relative to its peers and that will help you understand whether you have a potential
winner or loser.
Today, any investor can access powerful research tools that before the Internet were not available and
many of them are free. Of course, there are some very sophisticated tools that come with hefty price tags;
however, for most investors all the research they’ll need is free or available for a modest subscription.
Stock Screener
The most basic research tool is the stock screener. This handy program does in
nanoseconds what would take you hours and hours of research by hand to do – and
best of all, there are many of them on the Internet free for you to use. Some of the
better ones come as part of subscription packages to the better research sites, but you
can get a feel for how they work for free.
The concept is simple. You want to identify stocks that meet certain criteria. (Incidentally, this is how you
go about building a portfolio, rather than haphazardly investing in whatever stock looks good at the
moment.)
Stock screening programs allow you to enter qualifiers such as industry type, market cap, sales,
dividends, and so forth. The more sophisticated the screen, the larger number of qualifiers.
After you put in all the qualifiers, the screener looks at all the companies listed on the major exchanges
and pulls out those that meet your qualifications. You get a list of the companies. If the list is too large,
you can run the screen again with tighter qualifications to reduce the number of hits.
The more sophisticated screeners allow you to run further screens on the set you just generated, while
the free screeners tend to leave you with just the list. Either way, you have just saved yourself hours and
hours of work by narrowing down the possible candidates.
MSN Money.com
One of the simplest and easiest to use comes from MSN Money.com. Despite its
simplicity, the screen yields some powerful results.
The screen lists your results with links to each company. Click on the link and you will get a financial
snapshot of the company. It is a powerful tool to get you started.
Once you are comfortable with the basic screener, download the free deluxe screener. It takes some
getting used to and is much more detailed than the simple screen, however if you really want to narrow in
(and, ultimately, you do) on investment targets, get to know your way around screeners like this one.
Many look and work very much alike, but you need to know what you are looking for and what you need
to ask from the screener before they can be of real benefit. The great thing about using the free screeners
like this one from MSN.com is you can spend all the time you need experimenting and testing without
running up a big bill.
Stock screeners are just one tool; however, they should be the first tool you master as you begin learning
to do research.
A Look at Growth, Income, and Value Investing
Developing an investing philosophy may seem like an academic exercise, however over
time, it will help shape your thinking about the types of stocks that work for your
portfolio.
This first of a two-part series looks at the three main investing philosophies:



Growth
Value
Income
Most investors fall into one or a combination of these investing philosophies.
Growth Investors
As the name implies, growth investors look for the rising stars. They are interested in
companies that have high potential for earning growth. High earning growth invariable
leads to high stock prices – at least in theory. Growth investors are willing to bet on
young companies that show promise of becoming leaders in their industry.
The technology stocks, especially during the late 1990s, were the perfect example of growth stocks.
Many of these young companies started with an idea and nothing more and now are
large successful companies.
Of course, a great many more of those same technology companies started out with an idea and nothing
more and ended up where they started. Which is to say that growth investing carries the risk that some of
your investments are going to fail. As much as Americans like success stories, there are more failures
than successes when it comes to market leadership.
Value Investors
Value investors look for the stocks that the market has overlooked. Value doesn’t mean
cheap as in low per share price, but under priced relative to the value of the company.
These are stocks the market has passed over while chasing some other industry sector or more
glamorous investments. The value investor looks for stocks with a low price/earnings ratio meaning the
market is not willing to pay much in the way of a premium for the stock.
Of course, the value investor needs to make sure there in nothing wrong with the company that would
warrant a low stock price other than neglect or market inattention. Assuming the company is solid, the
value investor’s strategy is to buy and hold the stock, anticipating the future time when the market will
recognize the company’s worth and bid the stock up to its true value.
Income Investors
Income investing is the most straight-forward of all philosophies and the most
conservative. Income is the motivation and investors target companies paying high and
consistent dividends.
People near or in retirement are fond of this strategy for obvious reasons. The companies that qualify for
the income investor tend to be large and well-established. There is always some risk involved in investing
in stocks, however this remains the most conservative of the investing philosophies.
If the stock price increases, that’s icing on the cake for the income investor who would probably trade
some capital appreciation for a higher dividend.
Conclusion
These three investing philosophies take in a large number of investors, however it is not required that you
fall purely in one camp or another. As a practical matter, you will likely modify your investing philosophy
as your life circumstances change.
How Asset Allocation Can Help You Achieve Your
Investing Goals
Asset allocation is a snappy phrase that simply means dividing your investments among
several different categories in an attempt to protect your portfolio from wild swings in
any one section.
Some experts believe that asset allocation is the single most important factor in investment success.
Generally, you will want to consider a mix of stocks, bonds, and cash. The percentage you select for each
investment category is the process of asset allocation.
For example, you may decide that your particular situation calls for a mix of 80 percent stocks, 15 percent
bonds, and 5 percent cash. You might further break it down this way:
Stocks 80%
Income 20%
Growth 40%
Foreign 10%
Small-Cap 10%
Total: 80%
Bonds 15%
Long-Term 10%
Mid-Term 5%
Total: 15%
Cash 5%
Short-Term Bond Fund 5%
Total: 5%
These are hypothetical numbers for a hypothetical investor.
You should base your particular allocation on a number of factors, including:




Risk tolerance
Years to retirement
Your income
Your savings
Splitting your assets among different investment categories helps you weather the ups
and downs that are part of the investing cycle. For example, bonds and cash may add
balance to your portfolio.
Investors often use the terms “diversification” and “asset allocation” interchangeably; however, asset
allocation is a much more thoughtful process. Diversification means not investing solely in any one
investment category. Asset allocation takes that one step further and assigns specific percentages to
each category.
A general guideline is that younger investors can afford to be more aggressive because they have more
time to ride out short-term drops in the market cycle. Older investors may be more comfortable with a
conservative plan, particularly as they get closer to retirement. The more time you have, the better
chance you have to reach your goals.
Things to Remember:



Asset allocation is the process of splitting your investments among stocks,
bonds, and cash.
A properly balanced portfolio can help protect you from severe market
fluctuations.
Risk tolerance plays a big role in portfolio selection.
Things to Do

Look at your portfolio at least once a quarter for proper balance – more
frequently in turbulent markets.

Examine your current holdings and figure out the percentage you have invested
in each category: stocks, bonds, and cash, and ask yourself if you are
comfortable with that mix.
Reliable Sources of Market News on the Internet
When it comes to getting market news, you might feel like the person trying to get a
drink out of a fire hose – overwhelmed.
There are hundreds of sites on the Internet, hundreds of magazines, and cable TV channels all devoted
to reporting business and stock market news. This site would be included in this grouping. With all this
competition, you have access to more information than any generation of investors ever.
However, not all the information is of the same quality, nor do all the providers present it with the same
degree of appropriateness. As competition for your attention increased, some of the providers became
more dramatic in an attempt to draw you to their venue.
Consider the Source
One of the most important considerations in choosing information providers is their motivation. All news
providers are motivated by something, whether it is to sell advertising or their own products.
Some of the information sources are tied to companies that have a vested interest in keeping you on their
site or selling you a product. Their business model may or may not shade the information they provide.
For example, a company that sells life insurance might offer personal finance information on its website
heavily weighted toward buying life insurance.
Companies that sell registered securities (stocks, bonds, and so forth) must meet certain standards
regarding what they can publish about their products. Material on their websites is likely to be more
objective than non-registered products.
Straight News
These are several of my favorite online sources of news that I can recommend to get
you started. You may have your own favorites, however if you haven’t tried these out
you may want to give them a try.



Wall Street Journal When it comes to getting straight business news on a daily
basis, the gold standard is the Wall Street Journal, either in print or online. This
link will get you a two-week free look at the online version.
MorningStar.com MorningStar is another premier information provider. They
have an abundant site that covers both stocks and mutual funds. For the really
in-depth information, you need to subscribe to their premium membership, but
like the Wall Street Journal, you can sign up for a free trail period to try it out.
Yahoo Finance A typical Yahoo site with no frills, but a ton of information. If you
don’t mind the stark interface, the site is loaded with resources.
Listed below are some other sources I find useful for keeping on top of market and company news
Why the Market Rises and Falls
What moves the stock market?
That complex question has many answers. Some market movers are obvious, while others creep up on
us unseen. In this and subsequent articles, I’ll look at some of the economic, political, and societal issues
that may cause the market to change direction or speed up or slow down its momentum.
A quick list of the obvious includes:








Inflation
Interest rates
Earnings
Oil/Energy Prices
War/terrorism
Crime/fraud
Serious domestic political unrest
CNN & FOX OFTEN USES “SENTIMENT”
As you can see, many of these have serious long-term implications, while others may
only cause temporary disruptions.
However, the one factor not listed above that drives the market absolutely crazy is uncertainty. The
market cannot stand surprises and when there is the chance that something may change, it rattles the
market.
There is a theory that our stock markets are “efficient,” meaning that everyone has access to the same
information at the same time. Of course, this is not true, but in a broad sense, the market taken as a
whole expects to know about events and news in time to absorb them.
For example, if the Federal Reserve Board’s Open Market Committee (the Fed) expects to raise interest
rates by one-quarter percent at its next meeting, the market will absorb and factor that rate increase into
prices before the committee meets. If the committee follows through as expected, there is usually little or
no market response. However, if the Fed raises interest rates by one-half percentage point instead, the
market will probably react abruptly.
Surprising economic news, war or terrorism, and other unexpected events disturb the markets sense of
control and often send it in a tailspin. Of course, really good news can cause a big bump in prices, but it
seems like these days it’s bad news that captures most of the headlines.
What Does this Mean to You?
For most investors, these market bumps are just that – temporary bumps that soon
smooth out. However, you need to be aware of the factors that move the market, since
they can create opportunities as well as problems.
If you have had you eye on a stock, but felt it was a little over-priced, one of these market events might
just take enough wind out of its price to put it in your buy range.
On the other hand, if you need to sell, watch for earnings reports, Fed meetings, and other predictable
events that might shave some points off your stock.
PRICE EARNINGS
introducing the concept of stock evaluation or how you decide if a company’s stock price accurately
reflects its worth.
If you can’t determine a stock’s value, how will you know whether the current price is high, low, or about
right? Fortunately, there are many resources to help you evaluate stocks, although you must be careful
since some of these sources may be less than objective in their analysis
The Basics
However, let’s stick with the basics first. For most investors, stock evaluation revolves around the
company’s earnings. Everything else either adds to or takes away from the earnings report. Earnings
simply are the company’s profit – how much money did it make in any given period.
This is not to say that small or rapidly growing companies with negative earnings have no value or that
their earnings’ reports are meaningless – quite the contrary. All earnings reports have meaning in the
proper context.
Positive Earnings
Investors expect established companies like Coca Cola to have positive earnings. If
Coke reports lower earnings for a quarter, the stock will likely drop unless there is a
reason that explains this as a one-time event. Young companies, on the other hand,
may go for years with negative earnings and still enjoy the favor of the market if
investors believe in the future of the company.
So, in addition to the actual earnings, is the expectation of earnings. A company may report positive
earnings for a quarter, but fall short of expectations and see its stock tumble.
Earnings (or growth towards positive earnings) tell you how healthy a company is and if it may pay
dividends or grow through capital appreciation (higher stock price).
Earnings Per Share
The basic measurement of earnings is “earnings per share” or EPS. This measurement
divides the earnings by the number of outstanding shares. For example, if a company
earned $12 million in the third quarter and had 8 million shares outstanding, the EPS
would be $1.50 ($12 million / 8 million).
The reason you reduce earnings to a per share basis is to facilitate comparison with another company
and to show how to divide the profit. Two companies that each had $12 million in earnings would look the
same with just those raw numbers. However, if one company had 8 million shares outstanding and the
other company had 4 million shares outstanding, which stockholders will profit the most.
Time Interval
You can use the earnings per share measurement in three time intervals:



For the previous year called “trailing earnings per share”
For the current year
For coming year called the “forward earnings per share”
Only the trailing EPS is actual. The current and forward EPS are estimates.
When you hear news commentators talk about “earnings season,” they are referring to the quarterly
earnings reports companies have to file with the SEC.
You can look at these reports online via the SEC site called Edgar.
Companies that fail to meet earnings expectations usually make the business news with reports of a
falling stock price.
Investors use many other tools in evaluating stocks, but it all begins and usually ends with earnings.
How are Stock Prices Set Each Day?
How much does a share of stock cost?
That’s like asking how long is a piece of string. The answer is ‘it depends.’
Once a stock moves out of the IPO stage and into the open market, there are a number of factors that go
into setting the price.
Opening Price
For example, Amalgamated Kumquats closes on Tuesday at 25½; what will it open at
on Wednesday morning? The answer is: who knows. Most likely, it will open
somewhere around 25½, but any number of things might cause it to open higher or
lower. Before the market opens on Wednesday:




Civil war in Elbonia, the prime producer of Kumquats
President of Amalgamated Kumquats arrested for looting the company
FDA says Kumquats cure baldness
Huge oil reserves discovered on Amalgamated property
All of these circumstances and many others could influence the price up or down
In the end, it remains a question of what a buyer is willing to pay and a seller is willing to
take.
The swirl of market, political, and industry news influences whether there are more buyers or sellers for a
particular stock in the market at any one time.
Clean Slate
Every day the market opens, it’s a clean slate. Investors must meet no set prices.
Stocks that the day before were flying high may not get off the ground today. The ugly
duckling turns into a cash cow (how’s that for mixing metaphors).
The point is a share of stock is worth what someone else is willing to pay for it. That is the heart of
investing. A stock may be a good buy at $35 per share and a terrible buy at $50 per share to one
investor, however another investor may not think twice about paying $50 per share. Which is the right
price? Often only time will tell. Many years ago, some investors thought $10 per share was too much for
Microsoft and refused to buy it. Too bad for them.
Fair Price
Successful investors decide what a fair price for a particular stock is and that’s where
they buy. They don’t let market hysteria goad them into overpaying. Likewise, if nothing
has fundamentally changed with the company, but the stock is dropping along with the
market, successful investors will sit tight and not be frightened off a good price.
As you develop you investing skills, you will learn strategies and techniques to help you establish a fair
price for stocks and either get that price or find another stock to buy that meets you investing criteria.
Definition: The first time a company issues stock for sale to the public is known as the initial public
offering or IPO. The company is said to be “going public” when this happens. The offering is highly
regulated and often surrounded by a lot of media attention. Hot technology stocks in the late 1990s often
saw immediate price increases of 300% or more and just as often a corresponding collapse.
Earnings per Share: The amount of profit each share of a company is entitled to.
Going Public: Slang for when a company is planning an IPO.
IPO: Short for Initial Public Offering. An IPO is when a company sells stock in itself for the
first time.
Market Cap: The amount of money you would have to pay if you bought ever share of
stock in a company. [To find out what it is, multiply the number of shares by the price per
share.] Short for Market Capitalization.
Share: A share represents an investor's ownership in a "share" of the profits, losses, and
assets of a company. It is created when a business carves itself into pieces and sells them
to investors in exchange for cash.
Ticker Symbol: A short group of letters that represents a particular stock [e.g., "Coca
Cola" is referred to as "KO"].
Underwriter: The financial institution or investment bank that is doing all of the paperwork
and orchestrating a company's IPO.
Introduction
The stock market can be a great source of confusion for many people. The average person
generally falls into one of two categories. The first believe investing is a form of gambling;
they are certain that if you invest, you will more than likely end up losing your money.
Often these fears are driven by the personal experiences of family members and friends
who suffered similar fates or lived through the Great Depression. These feelings are not
ground in facts and are the result of personal experience. Someone who believes along this
line of thinking simply does not understand what the stock market is or why it exists.
The second category consists of those who know they should invest for the long-run, but
don’t know where to begin. Many feel like investing is some sort of black-magic that only a
few people hold the key to. More often than not, they leave their financial decisions up to
professionals, and cannot tell you why they own a particular stock or mutual fund. Their
investment style is blind faith or limited to “this stock is going up. We should buy it.” This
group is in far more danger than the first. They invest like the masses and then wonder why
their results are mediocre [or in some cases, devastating].
In this series of lessons, I set out to prove that the average investor can evaluate the
balance sheet of a company, and following a few relatively simple calculations, arrive at
what they believe is the “real”, or intrinsic value of the company. This will allow a person to
look at a stock and know that it is worth, for instance, $40 per share. This gives each
investor the freedom to know when a security is undervalued, increasing their long-term
returns substantially.
Before we examine how to value a company, it is important to understand the nature of
businesses and the stock market. This is the cornerstone of learning to invest well.
WHY THE MARKET EXISTS?
Business is the cornerstone of any economy. Almost every large corporation started out as a
small, mom-and-pop operation and through growth, became financial giants. Wal-Mart, Dell
Computer, and McDonald’s had combined profits of $10.34 billion this year. Wal-Mart was
originally a single-store business in Arkansas. Dell computer began with Michael Dell selling
computers out of his college dorm room. McDonald’s was once a small restaurant no one
had heard of. How did these small companies grow from tiny, hometown enterprises to
three of the largest businesses in the American economy? They raised capital by selling
stock in themselves.
When a company is growing, the biggest hurdle is often raising enough money to expand.
Owners generally have two options to overcome this. They can either borrow the money
from a bank or venture capitalist, or sell part of the business to investors and use the
money to fund growth. Taking out a loan is common, and very useful – to a point. Banks
will not always lend money to companies, and over-eager managers may try to borrow too
much initially, wrecking the balance sheet. Factors such as these often provoke owners of
small businesses to issue stock. In exchange for giving up a tiny fraction of control, they are
given cash to expand the business. In addition to money that doesn’t have to be paid back,
“going public” [as its called when a company sells stock in itself for the first time], gives the
business managers and owners a new tool: instead of paying cash for an acquisition, they
can use their own stock.
To better understand how issuing stock works, let’s look at a fictional company “ABC
Furniture, Inc.”
After getting married, a young couple decided to start a business. It would allow them to
work for themselves, as well as arrange their hours around their family. Both husband and
wife have always had a strong interest in furniture, so they decide to open a store in their
hometown. After borrowing money from the bank, they name their company “ABC
Furniture” and go into business. The first few years, the company makes little profit because
the earnings are plowed back into the store, buying additional inventory and adding onto
the building to accommodate the increasing level of merchandise.
Ten years later, the business has grown rapidly. The couple has managed to pay off the
company’s debt, and profits are over $500,000 per year. Convinced that ABC Furniture
could do as well in several larger, neighboring cities, the couple decides they want to open
two new branches. They research their options and find out it is going to cost over $4
million dollars to expand. Not wanting to borrow money and be strapped with interest
payments again, they decide to sell stock in the company.
The company approaches an “underwriter”, such as Goldman Sachs or JP Morgan, who
determines the value of the business. As mentioned before, ABC Furniture earns $500,000
after-tax profit each year. It also has a book value of $3 million [the value of the land,
building, inventory, etc. subtracted by the company’s debt] The underwriter researches and
discovers the average furniture stock is trading at 20 times earnings [a concept we will
discuss more in-depth later].
What does this mean? Simply, you would multiply the earnings of $500,000 by 20. In ABC’s
case, the answer is $10 million. Add book value, and you arrive at $13 million. This means,
in the underwriter’s opinion, ABC Furniture, is worth thirteen million dollars.
Our young couple, now in their 30’s, must decide how much of the company they are willing
to sell. Right now, they own 100% of the business. The more they sell, the more cash they’ll
raise, but they will also be giving up a larger part of their ownership. As the company
grows, that ownership will be worth more, so a wise entrepreneur would not sell more than
he or she had to.
After discussing it, the couple decides to keep 60% of the company and sell the other 40%
to the public as stock. [This means that they will keep $7.8 million worth of the business.
Because they own a majority of the stock, they will still be in control of the store.] The other
40% they sold to the public is worth $5.2 million. The underwriters find investors who are
willing to buy the stock, and give a check for $5.2 million to the couple.
Although they own less of the company, their stake will hopefully grow faster now that they
have the means to expand rapidly. Using the money from their public offering, ABC
Furniture successfully opens the two new stores and have $1.2 million in cash left over
[remember it was going to cost $4 million for the new stores]. Business is even better in the
new branches, which are in more populated cities. The two new stores both make around
$800,000 a year in profit each, with the old store still making the same $500,000. Between
the three stores, ABC now makes an annual profit of $2.1 million dollars.
This is great news because, although they don’t have the freedom to simply close shop
anymore, the business is now valued at $51 million dollars [multiply the new earnings of
$2.1 million per year by 20 and add the book value of $9 million; there are three stores
now, instead of one]. The couple’s 60% stake is worth $30.6 million dollars.
With this example, it’s easy to see how small businesses seem to explode in value when
they go public. The original owners of the company are, in a sense, wealthier overnight.
Before, the amount they could take out of the business was limited to the profit. Now, they
are free to sell their shares in the company at any time, raising cash quickly.
This process is the basis of Wall Street. The stock market is, at its core, a large auction
where ownership in companies just like ABC Furniture is sold to the highest bidder each
day. Because of human nature – the emotions of fear and greed – a company can sell for
far more or less than its intrinsic value. The good investor’s job is to identify those
companies that are selling below their true worth, and buy as much as they can.
The Purpose of the Stock Market
Business is the cornerstone of every economy. Almost every large corporation started
out as a small, mom-and-pop operation and through growth, became financial giants.
Wal-Mart, Dell Computer, and McDonald’s had combined profits of $10.34 billion this
year. Wal-Mart was originally a single-store business in Arkansas. Dell computer began
with Michael Dell selling computers out of his college dorm room. McDonald’s was once
a small restaurant no one had heard of. How did these small companies grow from tiny,
hometown enterprises to three of the largest businesses in the American economy?
They raised capital by selling stock in themselves.
When a company is growing, the biggest hurdle is often raising enough money to expand. Owners
generally have two options to overcome this.
They can either borrow the money from a bank or venture capitalist, or sell part of the business to
investors and use the money to fund growth. Taking out a loan is common, and very useful – to a point.
Banks will not always lend money to companies, and over-eager managers may try to borrow too much
initially, wrecking the balance sheet. Factors such as these often provoke owners of small businesses to
issue stock. In exchange for giving up a tiny fraction of control, they are given cash to expand the
business. In addition to money that doesn’t have to be paid back, “going public” [as its called when a
company sells stock in itself for the first time], gives the business managers and owners a new tool:
instead of paying cash for an acquisition, they can use their own stock.
Why Stocks Become Over / Under Valued
Now that you know how the stock market works, we are going to take a closer look at the
individual factors that cause wild fluctuations in stock prices. Understanding this concept
will help you to take advantage of the manic-depressive behavior that sometimes seems to
affect your portfolio. The last part of Lesson 2 will focus on explaining Ben Graham's
famous metaphor "Mr. Market".
Vocabulary
Bear Market: Slang for when the stock market is in a general, prolonged period of falling
stock prices. Opposite of a bull market.
Broker: A person who buys or sells an investment for you [stocks, bonds, commodities,
etc.] in exchange for a fee, called a "commission"
Bull Market: Slang for when the stock market is in a general, prolonged period of rising
stock prices. Opposite of a bear market.
Dividend: A dividend is a portion of a company's earnings that is paid out to shareholders
on a quarterly or annual basis. Most dividend policies are set by the current management.
Exchange: An exchange is a place in which options, futures, and shares in stocks, bonds,
indexes, and commodities are traded. The most famous in the United States is the New
York Stock Exchange.
Index: An index is a benchmark which is used as a reference marker to which financial
performance is measured and compared against. The Dow Jones Industrial Average and
Standard & Poor's 500 are examples.
Institution: A word used to describe any company, brokerage house, or entity that is not
an individual.
Margin: A margin account lets a person borrow money from a broker to purchase
securities. The difference between the amount of the loan, and the price of the securities, is
called the margin.
Market Maker: A market maker is a person, brokerage, bank, or institution that maintains
a permanent firm bid and ask price on a certain stock. This means that they are standing
and prepared at any moment to pay a particular price to buy or sell a stock.
Mr. Market: An investment concept created by Benjamin Graham in the early part of the
20th century. Will be discussed in this lesson.
Sector: A group of stocks that are in the same business [e.g., the "Utilities" sector would
include Water and Power & Light companies].
Volume: The number of shares of stock traded during a particular time period.
Introduction
In the last lesson, we established why stocks came into existence. In this essay, we are
going to examine how the stock market actually works - everything from what drives stock
prices up and down to how stocks are purchased on an exchange. Perhaps more
importantly, we will discuss one of [if not the] most important investment concept of all...
Mr. Market.
What Makes Stock Prices Go Up and Down
In the introduction to the first lesson. I wrote that the entire purpose of these essays was
to reach the average investor that it is possible to look at the financial statements of a
company and determine what the stock is really "worth". Ideally, the investor is looking for
companies that are trading below their "true" (or intrinsic) value, with the belief that
someday the market will realize these securities are undervalued and the stock will rise.
This reveals one of the self-evident quirks of the stock market. Sometimes companies will
trade for half their value, while at other times, they will trade for 2, 3, 5, 10, or 20 or more
times more than they are really worth. While this creates wild price fluctuations (known as
"volatility" in financial jargon), it is the very thing that allows us, as investors, to make
money.
For a moment, we are going to discuss the 4 most common things that cause these priceswings. (In other words, we are answering the question "Why do the stocks of good
businesses sometimes sell below or above their intrinsic value?)
They are:
1.)The
investor
vs.
the
speculator
2.)The
commodity
nature
of
stocks
3.)Life
(it
sounds
4.) Temporary Problems
general,
but
it
will
make
more
sense
later)
First, let's look at the Investor vs. Speculator.
The Investor vs. Speculator
Over the course of the past several decades, the term "investor" has been used for anyone
who owns a share of stock. It is important that you understand this is not the case. When
a person buys a stock, they are doing it as one of two people: either an investor or a
speculator.
What's the difference? An investor is someone who carefully analyses a company, decides
exactly what it is worth, and will not buy the stock unless it is trading at a substantial
discount to its intrinsic value. They are able to say, for example, that "Company 'X' is
trading for $48 per share, but it is worth $62 per share." They make their investment
decisions based on factual data and do not allow their emotions to get involved. A
speculator is a person who buys a stock for any other reason. Often, they will buy shares in
a company because they are "in play" (which is another way of saying a stock is
experiencing higher than normal volume and its shares may be being accumulated or sold
by institutions). They buy stock not on the basis of careful analysis, but on the chance it
will rise from any cause other than a recognition of its underlying fundamentals.
Speculation itself is not necessarily a vice, but its participants must be absolutely willing to
accept the fact that they are risking their principal. While it can be profitable in the short
term (especially during bull markets), it very rarely provides a lifetime of sustainable
income or returns. It should be left only to those who can afford to lose everything they are
putting up for stake.
How do these two different types of activity affect stock price? The speculator will drive
prices to extremes, while the investor (who generally sells when the speculator buys and
buys when the speculator sells) evens out the market, so over the long run, stock prices
reflect the underlying value of the companies. If everyone who bought common stocks
were an investor, the market as a whole would behave far more rationally than it does.
Stocks would be bought and sold based on the value of the business. Wild price fluctuations
would occur far less frequently because as soon as a security appeared to be undervalued,
investors would buy it, driving the price up to more reasonable levels. When a company
became overpriced, it would promptly be sold. Speculators on the other hand, are the ones
who help create the volatility the value investor loves. Since they buy securities based
sometimes on little more than a whim, they are apt to sell for the same reason. This leads
to stocks becoming dramatically overvalued when everyone is interested and unjustifiably
undervalued when they fall out of vogue. This manic-depressive behavior creates the
opportunity for us to pick up companies that are selling for far less than they are worth.
This leads to a fundamental belief among value investors that although the stock market
may, in the short-term, wildly depart from the fundamentals of a business, in the long-run
the fundamentals are all that matter. This is the basis behind the famous Ben Graham
quote "In the short-term the market is a voting machine, in the long-term, a weighing
one." Sadly, some reject this basic principle of the stock market. Several months ago, I
received an email from a reader who asserted that "the economic fundamentals of a
company have no relation to the stock price." This is completely false. My response was a
simple message that read "If fundamentals don't matter, what if Coca-Cola never sold
another bottle of Coke? How long do you think the stock price would stay at its current
level?" When put in this light, the folly of the "fundamentals don't matter" becomes
evident. The next time someone preaches this, simply ask "what happens to the stock if
the company can't make its payments and defaults on its loans?" When they answer "it
goes bankrupt", simply smile and walk away. Fundamentals do matter.
Unfortunately, countless investors believe the myth this gentleman does. The perfect
example of this is the dot-com boom of the late 1990's. Companies that generated no profit
and had very little, if any, book value were selling at astronomical levels. "Surely this would
prove that fundamentals mean nothing," some would argue. On the contrary, it proves our
point entirely. Only a few short years after the initial stock market bonanza, the economic
realities of these companies came back to haunt them. Most fell 90% or more from their
highs, with many more going bankrupt, ultimately worth less than the paper their stock
certificates were printed on.
The Commodity Nature of Stocks
One of the elements that contribute to the fluctuation in stock prices is the nature of the
stock market itself. In lesson one, I explained the stock market is, at its core, "a large
auction where ownership in various companies is up for sale to the highest bidder." Since
there are only a set number of shares available at any given time, any buying activity will
drive the price of these shares up. Selling will drive share prices down.
In this respect, stocks are no different than a commodity such as oil. They are subject to
the same laws of supply and demand. When there are more shares available than demand,
each of those shares is worth less. The opposite is true when there is more demand than
shares available. This explains why institutions and very wealthy individuals build up
positions1 in their favorite stocks slowly. If someone wanted to buy several million dollars
worth of stock in a company and they simply placed on massive order with their broker [this
is known as a block trade2], the stock price would skyrocket because there wouldn't be
enough shares available at the time to fill the order. The same is true when a wealthy
individual or institutions wants to sell a large chunk of stock in a company. If they were to
dump them on the open market all at once, there would not be enough buyers to buy the
stock they were selling. This would cause the stock to immediately tank, wiping out huge
amounts of market capitalization, even though the underlying economics of the company
haven't changed.
1
When
someone
is
said
to
be
"building
up
a
position"
it
means
they
are
slowly
accumulating
shares
in
a
company.
2 A block trade is generally considered to be anything over $100,000 or 10,000 shares.
Life
This leads us to the third factor that causes stock price fluctuations. Life. Say, for example,
that a wealthy individual dies and his family needs to sell of a substantial amount of stock
for tax purposes. Or maybe a large company or institution runs into financial difficulty,
wants to build a new production facility or pay down debt. It will sell its shares and stock
holdings to cover this expenditures. In both cases, large amount of securities are going to
be sold, none of which are in connection to the company performing badly. Even though
the stock may be an excellent investment, suddenly there is a large sell order that will drive
the price down. This sort of event is, in most cases, unpredictable and can help drive a
wonderful business to a selling price below what it is worth. These are the type of
investments we are looking to make; great businesses that have been temporarily driven
down to unjustifiable lows.
All three of these factors work together to help drive stock prices to either extreme. Once
an investor understands them, he or she is free to take advantage of them.
Temporary Problems
Before we continue, there is one more factor that occurs fairly often and can move a stock
to extremely low levels. Generally it goes something like this; a good company runs into
temporary trouble that neither endangers its life or affects long term profitability. Wall
Street nonetheless overreacts in its characteristic way, and punishes the company by
driving the stock lower.
This was the case with American Express in 1963. The company had revolutionized travel
with the introduction of traveler's checks, and had tremendous success with the introduction
of the American Express card. The business ran into trouble when one of its subsidiaries, a
warehouse in Bayonne, New Jersey, was the subject of massive fraud. A company known
as Allied Crude Vegetable Oil Refining parked tanks of vegetable oil in the warehouse in
exchange for receipts which guaranteed the tanks existed and contained what they were
said to. Allied used these receipts as collateral on loans. The problem began when Allied
defaulted on its debt. Creditors moved in to take possession of the vegetable oil stored in
the American Express warehouse. When they went to open the tanks, they found that they
contained not vegetable oil, as American Express had guaranteed and issued receipts for,
but sea water, which is worth far less. The creditor's collateral was worth $150 million less
than thought, and American's subsidiary was partially to blame for issuing the guaranteeing
receipts. Although the company may not have been forced to pay anything [since the
mistake was made by a subsidiary and not the parent company itself], the then-CEO
Howard Clark felt the business was "morally bound" to try to make up the different. He
offered $60 million to Allied's creditors. The stock was driven from $60 per share to $49
1/2.
Although the loss of sixty million dollars was nothing to be scoffed at, it certainly was not
going to ruin the company. Wall Street had overreacted and punished the stock more than
was called for. The stock would eventually return to its previous levels, and in ensuing
years, climb much higher, making a substantial profit for the investor who was wise enough
to recognize that 1.) the company was not in serious danger, and 2.) he or she could take
advantage of the temporary situation and Wall Street's folly in over-punishing the business,
and pick up the stock for a cheap price.
This leads us to to the final point of this lesson: Mr. Market. We have now established why
stock prices are sometimes driven to highs and lows. Now we are going to go one step
further and explain how the investor should think about the price swings of the market.
Mr. Market
As I've made clear in these essays, an investor should treat each of his or her stock
purchases as if they were going to buy the entire company. In most cases, you don't need
to worry about the economy or even the stock market as a whole. The only requirements of
a relatively successful investor are the ability to value a business and the right psychological
approach to stock prices. We are going to firmly establish the second of these valuable
skills in this portion by explaining the concept of Ben Graham's "Mr. Market". This relatively
simple metaphor will forever change the way you look at stock prices, and if employed
correctly, increase your investment returns noticeably.
The concept of Mr. Market goes something like this: imagine you are partners in a private
business with a man named Mr. Market. Each day, he comes to your office or home and
offers to buy your interest in the company or sell you his [the choice is yours]. The catch
is, Mr. Market is an emotional wreck. At times, he suffers from excessive highs and at
others, suicidal lows. When he is on one of his manic highs, his offering price for the
business is high as well, because everything in his world at the time is cheery. His outlook
for the company is wonderful, so he is only willing to sell you his stake in the company at a
premium. At other times, his mood goes south and all he sees is a dismal future for the
company. In fact, he is so concerned, he is willing to sell you his part of the company for
far less than it is worth. All the while, the underlying value of the company may not have
changed - just Mr. Market's mood.
The best part of this entire arrangement: you are free to ignore him if you don't like his
price. The next day, he'll show up at your door with a new one. For your interest, the more
manic-depressive he is, the more opportunity you will have to take advantage of him [don't
worry, he doesn't have feelings or mind being taken advantage of.] As long as you have a
strong conviction of what the company is really worth, you will be able to look at Mr.
Market's offers and reject or accept them... the choice is yours.
This is exactly how the intelligent investor should look at the stock market - each security
that is traded is merely a part of a business. Each morning, when you open up the
newspaper or turn on CNBC, you can find Mr. Market's prices. It is your choice whether or
not to act on them and buy or sell. If you find a company that he is offering for less than it
is worth, take advantage of him and load up on it. Surely enough, as long as the company
is fundamentally sound, one day he will come back under the sway of a manic high and
offer to buy the same company from you for a much higher price.
By thinking of stock prices in this way - as mere quotes from an emotionally unstable
business partner - you are free from the emotional attachment most investors feel toward
rising and falling stock prices. Before long, when you are looking to buy stock you will
welcome falling prices. The only time you want to invite high stock prices is when you are
eager to sell your securities for some reason. Thankfully, in most cases [except those
caused by "Life" which we discussed earlier], you are free to wait out Mr. Market's emotional
roller coaster until he offers a price that you consider equal to or higher than intrinsic
value. This is perhaps your greatest advantage in your investments
These terms and definitions will help.
Ask: The lowest price a seller is willing to accept when selling a security (stock).
Bear: An investor who believes the market as a whole or a particular stock will decline. A bear is the
opposite of a Bull.
Bid: The highest price a buyer is willing to accept when purchasing a security.
Blue Chip: A company that has a history of solid earnings, regular and increasing dividends, and an
impeccable balance sheet. Examples: Coca-Cola, Berkshire Hathaway, & Gillette. We have an entire
subject area dedicated to Blue Chip stocks!
Book Value: The value of the company if all liabilities were subtracted from assets and
common stock equity. The book value has very little relation to the market value. In
industries in the technology sector, this number is almost always miniscule compared to
market capitalization.
Broker: A person that buys or sells an investment vehicle for you (securities, bonds, commodities, etc.,) in
exchange for a fee which is called a commission.
Bull: An investor who believes the general market or a particular stock is going to increase in price.
Dividend: A portion of a company's income that is paid out to shareholders on a quarterly or annual basis.
Dividends are declared by the Board of Directors.
Dow Jones Industrial Average: The Dow Jones Industrial Average (or DJIA for short) is by far the most
popular and widely used gauge of the U.S. Stock Market. It consists of a price-weighted list of 30 highlytraded Blue Chip companies.
Market Capitalization: A company's market capitalization (or "market cap" as it s frequently called) is
calculated by taking the number of outstanding shares of stock multiplied by the current price-per-share.
NASDAQ: A stock exchange where mostly shares of technology companies such as Microsoft and Cisco
are traded. An exchange is a place where options, futures, and shares in stocks, bonds, indexes, and
commodities are traded. The most famous in the United States is the New York Stock Exchange.
P/E Ratio: How much money you are paying for $1 of the company's earnings. In other words, if a
company is reporting a profit of $2 per share, and the stock is selling for $20 per share, the P/E ratio is 10
because you are paying ten-times earnings ($20 per share divided by $2 per share earnings = 10 P/E.)
Spread: The difference between the Ask and the Bid.
Stock: Stock is ownership. A business is divided up into shares of stock and parts of the company (the
shares) are sold to investors to raise money. For more information, check out the investing lessons.
Yield: When a company pays a dividend the yield is the percentage of the stock price in relation to the
dividend paid. In other words, if a stock is trading for $10 and pays a dividend of $0.50, the yield is 5%,
because for every $10 you invest, you would receive 5% back annually in the form of a fifty-cent dividend.
The most important qualities every good investment
possesses
New investors are often interested in purchasing a company's stock but are not sure
where to begin. These four characteristics should serve as helpful guidelines in your
search for a good investment. Imagine that you own a business. If you were to divide
that business up into small pieces and sell those pieces, you would essentially have
issued stock. Quite simply, stock is ownership in a company.
The money you raise from selling those "pieces" of your business can be used to build new plants and
facilities, pay down debt, or acquire another company. A smart owner will keep at least 51% of the stock,
which will allow them to retain control of the day to day activities. Any person or institution that owns over
a majority of the stock is called the "controlling shareholder". Essentially, this person can do anything they
want - right down to firing the CEO.
WHAT ARE PENNY STOCKS?
Penny Stocks are any stock that trades below $5 per share. Most financial advisors and
long-term investors tend to avoid them completely because of the extremely high risk
that comes with owning them. They generally tend to fluctuate wildly in price, and
although some report spectacular gains in a matter of a few days [or even hours], those
who invest in them are generally surprised when they disappear altogether.
Generally, if a stock is trading that low, it is danger of losing its listing with an exchange. When this
happens, a company is normally either in very bad financial shape, or on the brink of bankruptcy. Smart
investors opt to avoid these.
WHAT IS A STOCK SPLIT
A stock split is essentially when a company increases the number of shares. For
example, if you owned 25 shares of XYZ at $15 per share, and there was a 2-1 stock
split, you would then own 50 shares worth $7.50 each. Why do companies issue splits if
you still have the same amount of money?
Liquidity. Some companies believe that their stock should be inexpensive so more people can buy it. This
creates a condition where more of the company's stock is bought and sold [this is called "increased
liquidity"]. The problem, in theory, is that the increased activity will also leads to bigger gains and drops in
the stock, making it more volatile.
Some investors believe splits are a good thing. [Their thinking goes "Well, if the stock was at $15, and
now it's at $7.50, it has to go back up to where it was!] This is wrong.
The stock is where it was... remember that each share now represents half of the equity
in the company that it did before the split. That means that each share is entitled to half
the dividend, half the earnings, and half of the assets that it once was.
Some companies have been famous for their no-split policies. The Washington Post has traded well into
the $600 per share range, and Berkshire Hathaway [which was at $8 a share in the 1960's] has traded
around $71,000. This has created the welcome condition of a stable shareholder base. A stock split is
essentially when a company increases the number of shares. For example, if you owned 25 shares of
XYZ at $15 per share, and there was a 2-1 stock split, you would then own 50 shares worth $7.50 each.
Why do companies issue splits if you still have the same amount of money?
Liquidity. Some companies believe that their stock should be inexpensive so more people can buy it. This
creates a condition where more of the company's stock is bought and sold [this is called "increased
liquidity"]. The problem, in theory, is that the increased activity will also leads to bigger gains and drops in
the stock, making it more volatile.
Some investors believe splits are a good thing. [Their thinking goes "Well, if the stock was at $15, and
now it's at $7.50, it has to go back up to where it was!] This is wrong. The stock is where it was...
remember that each share now represents half of the equity in the company that it did before the split.
That means that each share is entitled to half the dividend, half the earnings, and half of the assets that it
once was.
Some companies have been famous for their no-split policies. The Washington Post has traded well into
the $600 per share range, and Berkshire Hathaway [which was at $8 a share in the 1960's] has traded
around $71,000. This has created the welcome condition of a stable shareholder base.
A stock split is essentially when a company increases the number of shares. For
example, if you owned 25 shares of XYZ at $15 per share, and there was a 2-1 stock
split, you would then own 50 shares worth $7.50 each. Why do companies issue splits if
you still have the same amount of money?
Liquidity. Some companies believe that their stock should be inexpensive so more people can buy it. This
creates a condition where more of the company's stock is bought and sold [this is called "increased
liquidity"]. The problem, in theory, is that the increased activity will also leads to bigger gains and drops in
the stock, making it more volatile.
Some investors believe splits are a good thing. [Their thinking goes "Well, if the stock was at $15, and
now it's at $7.50, it has to go back up to where it was!] This is wrong.
The stock is where it was... remember that each share now represents half of the equity
in the company that it did before the split. That means that each share is entitled to half
the dividend, half the earnings, and half of the assets that it once was.
Some companies have been famous for their no-split policies. The Washington Post has traded well into
the $600 per share range, and Berkshire Hathaway [which was at $8 a share in the 1960's] has traded
around $71,000. This has created the welcome condition of a stable shareholder base. A stock split is
essentially when a company increases the number of shares. For example, if you owned 25 shares of
XYZ at $15 per share, and there was a 2-1 stock split, you would then own 50 shares worth $7.50 each.
Why do companies issue splits if you still have the same amount of money?
Liquidity. Some companies believe that their stock should be inexpensive so more people can buy it. This
creates a condition where more of the company's stock is bought and sold [this is called "increased
liquidity"]. The problem, in theory, is that the increased activity will also leads to bigger gains and drops in
the stock, making it more volatile.
Some investors believe splits are a good thing. [Their thinking goes "Well, if the stock was at $15, and
now it's at $7.50, it has to go back up to where it was!] This is wrong. The stock is where it was...
remember that each share now represents half of the equity in the company that it did before the split.
That means that each share is entitled to half the dividend, half the earnings, and half of the assets that it
once was.
Some companies have been famous for their no-split policies. The Washington Post has traded well into
the $600 per share range, and Berkshire Hathaway [which was at $8 a share in the 1960's] has traded
around $71,000. This has created the welcome condition of a stable shareholder base.
Share Price and Investing Decisions
If you had $1,000 to invest and were given the choice between buying 100 shares of
company ABC at $10 per share, or 5 shares of company XYZ at $125, which would you
choose? Many investors would go for the one hundred shares of ABC because the
share price is lower. "The $10 stock looks cheap," they argue, "the $125 per share price
for the other stock is too risky and rich for my taste."
If you agree with this reasoning, you're in for a shock. The truth is, you don't have enough information to
determine which stock should be purchased based on share price alone. You may find, after careful
analysis, the $125 stock is cheaper than the $10 stock! How? Let's take a closer look.
Share Price and Stock Splits - The Coca-Cola Example
Every share of stock in your portfolio represents a fractional ownership in a business. In
2001, Coca-Cola earned $3.696 billion in profit. The soft drink giant had approximately
2.5 billion shares outstanding. This means that each of those shares represents
ownership of 1/2,500,000,000 of the business (or 0.0000000004%) and entitles you to
$1.48 of the profits ($3.696 profit divided by 2.5 billion shares = $1.48 per share).
Assume that the company's stock trades at $50 per share and Coca-Cola's board of directors thinks that
is a bit too pricey for average investors. As a result, they announce a stock split. If Coke announced a 2-1
stock split, the company would double the amount of shares outstanding (in this case the number of
shares would increase to 5 billion from 2.5 billion). The company would issue one share for each share an
investor already owned, cutting the share price in half (e.g., if you had 100 shares at $50 in your portfolio
on Monday, after the split, you would have 200 shares at $25 each). Each of the shares is now only worth
1/5,000,000,000 of the company, or 0.0000000002%. Due to the fact that each share now represents half
of the ownership it did before the split, it is only entitled to half the profits, or $0.74.
The investor must ask himself which is better - paying $50 for $1.48 in earnings, or paying $25 for $0.74
in earnings? Neither! In the end, the investor comes out exactly the same. The transaction is akin to a
man with a $100 bill asking for two $50's. Although it now looks like he has more money, his economic
reality hasn't changed. This, incidentally, should prove it is pointless to wait for a stock split before buying
shares of a company.
Share Price Relative to Value
This all serves to make one very important point: share price by itself means nothing. It
is share price in relation to earnings and net assets that determines if a stock is
over or undervalued.
Going back to the question I posed at the beginning of this article, assume the following:

Company ABC is trading at $10 per share and has EPS of $0.15.

Company XYZ is trading at $125 per share and has EPS of $35.
The ABC stock is trading at a price to earnings ratio (p/e ratio) of 67 ($10 per share divided by $0.15 EPS
= 66.67). The XYZ stock, on the other hand, is trading at a p/e of 3.57 ($125 per share divided by $35
EPS = 3.57 p/e).
In other words, you are paying $66.67 for every $1 in earnings from company ABC, while company XYZ
is offering you the same $1 in earnings for only $3.57. All else being equal, the higher multiple is
unjustified unless company ABC is expanding rapidly.
Some companies have a policy of never splitting their shares, giving the share price the appearance of
gross overvaluation to less-informed investors. The Washington Post, for example, has recently traded
between $500 and $700 per share with EPS of over $22. Berkshire Hathaway has traded as high as
$70,000 per share with EPS of over $2,000. Hence, Berkshire Hathaway, if it fell to $45,000 per share,
may be a far better buy than Wal-Mart at $70 per share. Share price is entirely relative.
. What is the difference between day trading and swing trading ?
A. Day traders usually buy and sell securities during the same market day and, as a general
rule, do not hold stocks overnight. They are therefore said to be "flat" at the end of the day.
Many day traders make dozens of trades every market day hoping to capture profits that
arise from small intraday price fluctuations. Swing traders usually hold a stock from one day
to a week. Most swing traders concentrate on just a few selected stocks that they believe
will likely make a significant move in price in the near-term.
Q. What rules do you think are the most important for day traders?
A. There are many important rules that day traders should adhere to but the most
important of these are:



Always trade with the trend;
Cut losses short;
Never get emotionally involved with your trades.
Q. How much capital is needed to begin day trading?
A. Generally, an aspiring day trader should have enough trading capital to enable him or
her to buy at least 1000 shares of any given stock on any particular day - preferably
without having to use margin. There are very few stocks priced under $20 that have the
degree of liquidity necessary to make them suitable for day trading. This means that a
novice day trader should normally have trading capital of at least $20,000 to start. In
addition, the new day trader should treat this as 100% risk capital and should not have to
unduly worry that the whole amount of this capital may be lost very quickly.
Q. What is the difference between a market order, a limit order, and a stop loss
order?
A. Here are the key differences between each type of order:



A market order instructs your broker to buy or sell shares immediately at the current
market price. This will usually take place at the "ask" price.
A limit order instructs your broker to buy or sell shares at certain price specified by
you. When (and if) the price of the stock reaches the price you previously specified,
your order will be executed at that price.
A stop loss order instructs your broker to liquidate your position if the share price
drops by a certain amount specified by you.
Q. What does it mean to "short" a stock?
A. To "short" a stock you simply borrow stock (that you do not own) from your broker and
sell it immediately for cash. You will have the obligation to buy back the stock and return it
at some point in time in order to "cover" your short sale. When you sell a stock short, you
are hoping that the stock price will drop so that you can buy it back at a lower price than
what you sold it for, thereby making a profit on the transaction.
Q. Is every stock suitable for day trading?
A. No. A day trader should never trade unlisted or thinly traded (low volume) stocks These
stocks have poor liquidity and hence a higher price volatility. This may make it hard for you
to exit your position quickly at a fair price. Trade only high volume, well-known stocks.
Suitable Stocks for Day Trading
Basic Criteria
What basic characteristics should a stock have in order to make it a suitable candidate for potential day
trading? In my view, the most important attributes are:




Liquidity
Volume
Volatility
Price Transparency
Each of the above attributes will be discussed separately below.
1. Liquidity
Liquidity, broadly defined, is the existence of a sufficiently large number of buyers and sellers in a stock to
permit one to quickly and easily acquire or exit a position in the stock. Good liquidity is important to the
day trader who requires fast executions at relatively predictable prices. High liquidity also has the
additional advantage of (generally) reducing the bid-ask spread for a particular stock therefore reducing
execution costs for the day trader.
There is no quantitative measure of liquidity.
Liquidity is based on a number of factors, the most important of which are:




Volume of transactions on the market (the higher the better)
Number of shares outstanding (the more the better)
Breadth of ownership ( the higher the number of shareholders the better)
Number of market makers (the more the better)
Most of the stocks of the larger companies on Nasdaq and the NYSE will have a sufficient degree of
liquidity to make them potential day trading candidates. This is particularity true of stocks included in the
major indexes such as the Dow Jones Industrials or Nasdaq 100. On the other hand, relatively few smallcap companies would have sufficient liquidity to be attractive to most day traders.
2. Volume
Volume is a component of liquidity and is easily measurable. A good day trading stock should trade at
least 500,000 shares a day and preferably much more. Stocks with high volumes permit the day trader to
acquire or sell a large quantity of stock without unduly affecting the price of the stock.
3. Volatility
Volatility refers to the actual or expected price movement of a stock (either up or down) over a particular
period of time. In the case of day trading, the period of time to look at is a single day. Stocks which tend
to exhibit little movement in price during a typical trading day are not good candidates for day trading. A
good rule of thumb is to select for trading only those stocks which tend to fluctuate in price by at least
$2.00 in a typical trading day.
4. Price Transparency
Price transparency refers to the ability to obtain information as to the order flow for a particular stock. This
is also referred to as market depth. The Nasdaq II quote system provides information on all the bids and
asks at various price levels for a particular stock and not just the "inside market" quote (i.e. the highest
ask and lowest bid). In addition, the quantities of stock being offered and bid for at the various price levels
are made available. For day traders who have arranged for access to Nasdaq Level II quote screens, this
greatly helps the trader in assessing the relative strength or weakness of a stock and its likely direction in
price.
By way of contrast, NYSE quotes display only the highest bid and lowest ask prices. Only the specialist
(market maker) responsible for handling orders in a particular NYSE stock has knowledge of the complete
order flow for the stock. Accordingly, many day traders prefer to trade only Nasdaq stocks. This is not to
suggest that NYSE stocks are not good candidates for day trading under certain circumstances.
However, there is less price transparency on this exchange than on Nasdaq.
Level II: What Is It?
If you've even thought about becoming a trader there's no doubt you've heard about it. It may have been
spoken about like some holy grail. It could have been referenced as something one can't succeed
without. They're using it in day trading shops. They're using it at home. It is in, and to be in you've got to
have it.
It is level II. Now, what exactly is it?
What It Isn't
Before getting into what it is, let's get clear on what it isn't. It isn't a holy grail. It's not something one can't
succeed without. They might be using it in day trading firms and they might be using it at home. You
might need it, but you surely don't have to have it.
What it is, is a tool. And it is only one tool. One tool implies there are others, and it is in combination with
other tools that Level II truly gains its usefulness.
Understanding Level II isn't a cure all goes a long way to unlocking the power of it.
Level I
A Level I quote is the most basic information available about a stock. It is information available to all at no
extra fee. A Level I quote consists of:







Bid
Ask
Quote size
Last trade
Volume
High
Low
Level II
Level II goes a step beyond Level I. It basically reveals the order book for a Nasdaq stock. But it's not the
complete order book, rather it shows the best bid and offer of every market participant who is publicly
posting a quote.
The upper part of this Level II display should look familiar, it is basic Level I information. In this example
we have, left to right, top to bottom:



Last, Last Size, Change
Bid, Ask, Quote Size
Open, Low, High
To the right is what should be another familiar tool, the tape, or the ticker. It is a list of trades as they
happen. The price is given as well as the number of shares traded. Upticks are shown in green,
downticks in red, and zero ticks in gray.
But the information we're interested in, at least in this article, is the Level II information that makes up the
rest of the display.
On the left side are the current bids of market participants, ranked from best to worst, highest to lowest.
On the right are the offers, again ranked from best to worst, here from lowest to highest.
Each line in the display gives three pieces of information. The market maker ID, a four letter identifying
code, the price bidding or offering at, and the number of shares being bid for or offered.
For example, on the offer side, the fifth offer down reads as follows:
MSCO 89 1/2 10
What is this telling us? Morgan Stanley is offering 1,000 shares of Sun Microsystems (SUNW) at 89 1/2.
Now, where did I get that? MSCO is the market maker ID of Morgan Stanley. Since moscow is on the
right side, or offer side, of the window, it is selling stock. The price it would like to sell at is 89 1/2. It is
selling 1,000 shares as evidenced by its size of 10 (all sizes shown are in hundreds).
At this point I'm sure you have some questions. I'll try and knock them out one by one.
First, why are some IDs in red while others are black? Easy, in this Level II display (provided by RediPlus)
market makers and order flow firms are shown in black while ECNs are displayed in red. If you're not
familiar with these participants and how they differ don't worry, that's the subject of a future article. For
now just understand there is a significant different between the two.
Levels and Colors
Second, what's with all the colors, the apparent striations? There does seem to be a method to the
madness, doesn't there? But of course. Being included in a different color band separates each different
price level. As has become standard in Level II displays the first level, or the inside market, which
includes the best bid and best ask, is colored yellow. The second level, which is one level away from the
inside market, is in green. Beyond these two first levels the standardization isn't so standard. As we'll
learn later the first two levels are the most important anyway. The colors of other levels aren't important.
So long as you can quickly see the difference between levels the display is doing the job.
Based on the previous paragraph, if you were asked to look at the above picture for only a second, what
would be your answer to the following question: are there more buyers or sellers at the inside market? A
quick glance would allow you to see the yellow band is thicker on the bid side, thus there must be more
buyers. And there you have it, the reason for the color madness.
Depth
And the last discussion leads into the current discussion. Let's look at three different stocks in a Level II
display to see the difference between thick stocks and thin stocks.
SDL (SDLI) is a very thin stock. How do I define thin? A couple of things lead me to this summation:




Wide spread: while 7/16 may not seem to be too much for such a high priced
stock, this spread is in fact small for SDLI (guess I should have waited for a
better moment to capture the image!)
Few participants at each level: I can't find a price level with more than two
participants; most have only one. The first two levels contain three participants
on the bid side and only two on the offer.
Small Sizes: the largest size shown is 800 shares, most are under 500.
Price differences between each level vary widely: going down the first few levels
on the bid side we see from the best bid we drop down 1/16, then 5/16, then
3/16, 1/4, 1/4, 3/16, 1/16, 1/8, 1/4, 9/16, etc.
SUNW is thicker than it is thin, and as you can see much thicker than SDLI:




Small spread: 1/16 is generally the smallest you will normally see
Plenty of participants: the first two levels on the bid have eight players and there
are twelve on the offer.
Ample Sizes: there is a good mix of small and large size.
Price difference between each level is only 1/16
And we end with Cisco (CSCO), quite a thick stock:




Small spread: 1/16 is generally the smallest you will normally see
Plenty of participants: the first two levels on the bid have seventeen players and
there are sixteen on the offer.
Ample Sizes: there are plenty of large sizes along with some huge ones.
Price difference between each level is only 1/16
Game...
...but not set or match yet. The story has only just begun. There is much more to Level II, but with this
information you should at least be able to understand what you see in the window. Additional information
will come in the future. Until then, don't be shy to ask if you didn't understand everything.
Day Trading, Swing Trading, Position Trading, Online
Trading
There are several types of trading styles that persons seeking to profit from short term trades in the
market may wish to use. Here is a brief description of the most widely used short term trading styles.
Day Trading
Day traders buy and sell stocks throughout the day in the hope that the price of the stocks will fluctuate in
value during the day, allowing them to earn quick profits. A day trader will hold a stock anywhere from a
few seconds to a few hours, but will always sell all of those stocks before the close of each day. The day
trader will therefore not own any positions at the close of any day, and there is overnight risk. The
objective of day trading is to quickly get in and out of any particular stock for a profit anywhere from a few
cents to several points per share on an intra-day basis.
Day trading can be further subdivided into a number of styles, including:
Scalpers: This style of day trading involves the rapid and repeated buying and
selling of a large volume of stocks within seconds or minutes. The objective is to
earn a small per share profit on each transaction while minimizing the risk.
Momentum Traders: This style of day trading involves identifying and trading
stocks that are in a moving pattern during the day, in an attempt to buy such
stocks at bottoms and sell at tops.
Swing Traders
The principal difference between day trading and swing trading is that swing traders will normally have a
slightly longer time horizon than day traders for holding a position in a stock. As is the case with day
traders, swing traders also attempt to predict the short term fluctuation in a stock's price. However, swing
traders are willing to hold stocks for more than one day, if necessary, to give the stock price some time to
move or to capture additional momentum in the stock's price. Swing traders will generally hold on to their
stock positions anywhere from a few hours to several days.
Swing trading has the capability of providing higher returns than day trading. However, unlike day traders
who liquidate their positions at the end of each day, swing traders assume overnight risk. There are some
significant risks in carrying positions overnight. For example news events and earnings warnings
announced after the closing bell can result in large, unexpected and possibly adverse changes to a
stock's price.
Position Trading
Position trading is similar to swing trading, but with a longer time horizon. Position traders hold stocks for
a time period anywhere from one day to several weeks or months. These traders seek to identify stocks
where the technical trends suggest a possible large movement in price is likely to occur, but which may
not be fully played out for several weeks or months.
Online Trading
Online trading is not really properly described as a trading style. Rather, online trading is simply a term
that refers to the medium used to enter and execute trades. Online traders, which can include long term
investors, as well as day, swing and position traders, use either an Internet connection or a direct access
online trading platform to access and execute trades with Web based brokers.
An "Opening Gap" Day Trading Tactic
In cases where the markets are set to open up strongly, there will often be large gaps in
the opening prices of certain stocks from the prior day's closing prices. This can provide
profitable opportunities for day traders. The following sets out an easy to implement
strategy or tactic that may be used to capitalize on these opportunities.
Suppose that, prior to the opening bell, indications are that the market will open up quite strongly. A large
amount of buy orders for many stocks that have been placed prior to the market open will cause market
makers to increase the price of such stocks at the commencement of trading. In many cases, the amount
which the market maker opens or "gaps" up a particular stock will be higher than what is justified. This
creates what is often referred to as a "Bull Trap".
other words, the stock is sometimes opened up excessively high to entice investors to
buy simply because the stock shows strength at the open.
The setting up of a Bull Trap is the main reason why many stocks that gap up at the open tend to retreat
back in price after the first hour or so of trading. Once the pre-market open buy orders have all been filled,
the demand for these stocks often subsides.
There are exceptions, however, and these are what create some potentially profitable day trading
opportunities. In particular, chances are good that if a stock thathas opened up is able to reach a new
daily high after the first hour of trading, the strength shown at the open was real and not artificial because
there has been additional and continued buying after the pre-market orders have been filled. This
provides day traders the opportunity to use the following tactic or strategy:
1. Choose a Stock
Choose a stock that has opened by at least $1.00 over the prior day's closing price.
2. Allow Trading for One Hour
Permit the stock to trade for the first hour after the market opens and monitor it closely.
3. Set the Alert
After the first hour, set an alert 1/4 point above the high of the day using a trading system such as
Tradecast or the Executioner . It is important to use a good trading system that provides you with very
fast alerts and executions in order to use this tactic successfully.
4. Buy and Stop Loss Order
If the stock in fact moves to a new daily high, the alert will be triggered and you should then immediately
buy and, at the same time, place a stop loss sell order 1/4 point below the day's low.
Summary
This tactic or strategy provides day traders with a fair degree of profit potential. There is also limited down
side risk because of the protective stop loss sell order.
The Bid-Ask Spread
When you view stock prices on a trading screen, you will find that a stock has two quotes - the so-called
"bid" price and the so-called "ask" price. For example, suppose you own 100 shares of ABC Corporation,
and you want to buy or sell these shares. You obtain a quotation which indicates that the current bid price
– the price at which you can sell this stock - is $100 per share, and the current ask price – the price at
which you could buy the shares - is $101. These quotes mean that someone is willing to buy at least 100
shares of IBM at $100 and that another person is willing to sell at least 100 shares of the stock at $101.
The difference between these bid and ask prices is referred to as the "bid-ask spread". In the above
example, the spread is one dollar.
If you were to simultaneously buy and sell 100 shares of this stock in the market you
would lose the $1.00 spread.
Another way to describe the bid-ask is to say that the "bid price" represents the highest price that
somebody will pay for a stock at a particular point in time, whereas the "ask price" is the lowest price at
which someone is willing to sell a stock.
Why is there a bid-ask spread? To compensate for the risk that they run, Market Makers seek to buy
shares at a lower price and sell at a higher price. The bid-ask spread is, therefore intended to
compensate Market Makers for the risk they take in dealing with the stock and keeping the markets liquid.
The size of the bid-ask spread on a particular stock depends on several factors. In general, the more
liquid (volume) a stock is the smaller its bid-ask spread will be. Less liquid stocks usually have larger
spreads, as do lower priced stocks (in percentage terms). For a fairly liquid stock priced at around $100, a
spread of around 75 cents or so is not uncommon.
Note that the bid-ask spread is a "hidden" cost for day traders and other investors. It is a cost that is
additional to the normal commissions paid for executing trades. For frequent traders, the bid-ask spread
can rapidly erode trading capital. These traders should avoid stocks with inordinately high bid-ask
spreads, particularly when using market orders. In particular, it is best to avoid thinly traded stocks or
stocks priced under $5.00
What is a Market Maker?
You probably take for granted that you can buy or sell a stock at a moment's notice. Place
an order with your broker, and within seconds, it is executed. Have you ever stopped to
wonder how this is possible? Whenever an investment is bought or sold, there must be
someone on the other end of the transaction. If you wanted to buy 1,000 shares of Disney,
you must find a willing seller, and visa versa. It's very unlikely you are always going to find
someone who is interested in buying or selling the exact number of shares of the same
company at the exact same time. This begs the question, how is it that you can buy or sell
anytime? This is where a market maker comes in.
A market maker is a bank or brokerage company that stands ready every second of the
trading day with a firm ask and bid price. This is good for you, because when you place an
order to sell your thousand shares of Disney, the market maker will actually purchase the
stock from you, even if he doesn't have a seller lined up. In doing so, they are literally
"making a market" for the stock.
How do Market Makers make their Money?
Market Makers must be compensated for the risk they take; what if he buys your shares in
IBM then IBM's stock price begins to fall before a willing buyer has purchased the shares?
To prevent this, the market maker maintains a spread on each stock he covers. Using our
previous example, the market maker may purchase your shares of IBM from you for $100
each (the ask price) and then offer to sell them to a buyer at $100.05 (bid). The difference
between the ask and bid price is only $.05, but by trading millions of shares a day, he's
managed to pocket a significant chunk of change to offset his risk.
What is the Ask Price of a Stock?
In the stock market, the ask price is the lowest price a dealer or investor will sell a security
for on the stock market. It must always be compared to the Bid Price so the spread can be
calculated.
What is the Bid Price of a Stock?
In the stock market, the bid price is the highest price anyone is willing to pay for a security
at any given time. It must be compared to the ask price in order to calculate the spread.
What is a Stock's Spread?
A stock's spread is the difference between the ask and bid price. It is the spread that earns
market markers their profit.
The Small Order Execution System (SOES)
The existing Nasdaq Small Order Execution System (SOES) was created as a result of the
October 1987 stock market crash at a time when most Nasdaq market makers had to be
contacted by phone to arrange a trade. On the day of the 1987 market crash, many market
makers were accused of backing away from order requests or refusing to answer their
phones at all. Since the market makers had few or no buyers for the stocks, it meant that
they would have had to buy the stocks themselves in order to fill orders - something they
were reluctant to do in a free-falling market. The result was a huge loss of liquidity in the
Nasdaq market.
The many complaints from investors resulting from this lack of liquidity during the crash
prompted the Nasdaq to implement the SOES system in late 1987 - primarily for the
protection of the small investor. The SOES system permits individual traders to have orders
for 1000 shares or less filled at the current inside market price (best bid or ask)
automatically and immediately through a broker's software or direct access platform. SOES
orders are generally filled and reported back in seconds. The main purpose of the system is
to ensure that a certain amount of liquidity will always be readily available to smaller
investors for most Nasdaq stocks.
The following are some of the most important features of the SOES system:
1. Order Size
The SOES system allows you to buy or sell a Nasdaq stock at the inside market price, but
trades through this system can only be executed in lots of up to 200, 500 or 1000 shares,
depending on the stock. This is referred to as the "tier" size. Newer stocks like IPOs
generally have a tier size of 200 shares whereas other newly listed stocks and small cap
stocks normally have a tier size of 500 shares. The larger, well-established Nasdaq stocks
have a tier size of 1000 shares.
2. Mandatory Participation
Every market maker in Nasdaq National Market Securities must participate in the SOES
system and, if hit with a valid SOES order, must immediately execute that order.
Participation is voluntary for market makers in Nasdaq SmallCap Securites.
3. Types of SOES Orders
SOES orders must be market orders or limit orders placed at the current inside market
price. All or none, fill or kill, good till canceled and limit orders placed outside the inside
market are not accepted.
4. Execution Only Against Market Makers
The SOES system can only execute against market makers. It cannot execute against an
Electronic Communication System ("ECN") such as Island (ISLD).
5. Five Minute Rule
There is a 5 minutes rule for transactions. You cannot trade the same side (i.e. buy or sell)
of the same stock within a 5 minute period. This is to prevent a single trader from taking
too much liquidity out of the market at one time to the detriment of other traders.
6. Order Handling
SOES orders are executed in the order in which they are received. If a number of similar
SOES orders are ahead of yours, your order may not be executed as prior orders may use
up all of the liquidity available at a given price.
Electronic Communication Networks (ECNs)
Electronic Communications Networks (ECNs) are private electronic networks for order placement. These
fully automated systems match orders and set prices for trades without the intervention of market makers
or other middlemen. They permit individuals, institutions, and market makers to directly make their own
market in a particular stock. Although ECNs operate much like electronic stock exchanges, they are not
exchanges as a matter of law.
ECNs were incorporated into the Nasdaq trading structure in 1997 as a means of increasing competition
among market makers and to enhance market liquidity. In excess of 30% of all Nasdaq trades are now
routed through ECNs.
Anyone, including individual retail customers, can arrange to have their orders routed through an ECN.
ECNs directly link buyers and sellers in a "pure" auction market. Although there are
some differences in how each particular ECN operates, most follow basically the same
procedures for order handling. The following excerpt from the Island Web site succinctly
describes how the system works:
"Island provides investors with a virtual seat on the trading floor, enabling investors to meet directly at the
marketplace without having to rely on traditional market intermediaries. Each time an order is received,
Island's system is instantaneously scanned to determine if there is a matching order. If a matching order
exists, the order is executed immediately. In the event that there is no matching order, the order is
displayed on the BookViewer - a free, real-time, representation of Island's limit order book - until a
matching order is received, or the order is canceled. All orders are matched on a strict price-time priority
without regard to the number of shares or the identity of the person entering the order. Island’s top orders
are also represented in the Nasdaq National Best Bid/Offer (NBBO) display. Further, Island makes its
data freely available to the public over the Internet, through the BookViewer. As a result, at Island no one
has an information edge over anyone else, no one."
It is important to note that ECNs only accept limit orders (i.e. orders to buy or sell at a specific price rather
than at "market"). Further, market makers and institutions who wish to conceal large orders frequently use
ECNs to get their orders done anonymously.
In summary, the principal benefits of routing orders to an ECN are as follows:



You may avoid market makers and the payment of spreads by trading directly
with other customers
If your order is the highest bid or lowest ask on the ECN, it is represented on the
Nasdaq Level 11 screen together with other market makers in the stock
You may trade in complete anonymity as no one knows who you are.
The following table lists the ECNs which appear on a Nasdaq Level 11 quote screen.
ECN
Market Participant
Identification Code
Archipelago L.L.C
#ARCA
Attain
#ATTN
B-Trade Services L.L.C.
#BTRD
The BRASS Utility
#BRUT
Instinet Corportation
#INCA
The Island ECN
#ISLD
NexTrade
#NTRD
Spear, Leeds & Kellogg
#REDI
Strike Technologies
#STRK
Online Trading vs. Direct Access Trading
There are two ways to day trade electronically, namely:
1. Conventional online trading using your Internet browser and a Web based broker
2. Direct Access Trading systems using specialized software and a private network
It is important for day traders to understand the key features of, and the differences
between, these two forms of electronic trading.
Conventional online brokers provide Web based trading whereby the client logs in through
the broker's Web site and places orders through his Internet browser. By the time client
loads his browser, waits for the broker's Web page to load, logs in, enters his order, and the
broker reviews the order, several minutes may have elapsed. Further time may elapse
before the order is actually executed after being received and reviewed by the online broker
because several intermediaries may be involved in handling the order. In this regard, many
online brokerage firms do not always themselves execute client orders directly, but rather
may send the orders to other market makers for execution. This can result in slow execution
of orders at a higher price than the client may have expected. This is bad news for day
traders, as execution speed is critical for successful day trading.
By way of contrast, Direct Access Trading (DAT) systems allow one to trade stock directly
with a market maker or a specialist on the floor of the exchange, using special trading
software and high-speed computer linkages to the Nasdaq, NYSE and the various Electronic
Communications Networks (ECNs). With a DAT trading platform, a trader may place orders
directly into the market in real-time and trade directly with a market maker on Nasdaq, a
specialist on the floor of the NYSE, or with an ECN, without any broker participation at
all. There are no middle-men involved between the relevant stock exchanges, ECNs and the
individual trader. If there is a sufficient number of shares available at the price specified by
the trader, the order is executed in a fraction of a second and a confirmation is instantly
displayed on the trader's computer screen. Because no middle-man is involved, the trader
will save anywhere from a few seconds to several minutes of time to complete a typical
trade. Accordingly, the major advantage of a DAT system is that it results in much faster
executions than one can normally achieve using a conventional online broker.
Another major advantage of using a DAT over a conventional online broker is that, by using
a DAT platform, a trader may choose a specific market maker or ECN that he wants the
order sent to. A DAT system will provide the trader with access to Nasdaq Level II quotes,
thereby allowing him to see, in real-time, all of the available prices for each ECN and market
maker. The trader can then route his order to that particular ECN or market maker where
he thinks he is most likely to get the best price. With a conventional online broker, the
trader has no control over where the order is sent and, in any event, relatively few online
brokers provide their clients with Nasdaq Level 11 quote information.
Most firms who supply DATs charge commissions based on a scale which depends on the
number of trades that a trader makes over a given time period, plus a small additional fee
for trades placed with an ECN. The greater the number of trades, the lower the commission
per transaction. Commissions typically range from $10 to $15 for a 1000 share transaction.
In addition, most DAT suppliers charge a fee for the use of their proprietary trading
software, usually in the range of $100 to $300 per month. However, this charge is
sometimes waived if a trader makes a minimum number of trades per month.
In summary, as compared with conventional online brokers, day trading firms offer better
access to the markets, much faster executions, and greater control in order routing.
Level II: What Is It?
If you've even thought about becoming a trader there's no doubt you've heard about it. It may have been
spoken about like some holy grail. It could have been referenced as something one can't succeed
without. They're using it in day trading shops. They're using it at home. It is in, and to be in you've got to
have it.
It is level II. Now, what exactly is it?
What It Isn't
Before getting into what it is, let's get clear on what it isn't. It isn't a holy grail. It's not something one can't
succeed without. They might be using it in day trading firms and they might be using it at home. You
might need it, but you surely don't have to have it.
What it is, is a tool. And it is only one tool. One tool implies there are others, and it is in combination with
other tools that Level II truly gains its usefulness.
Understanding Level II isn't a cure all goes a long way to unlocking the power of it.
Level I
A Level I quote is the most basic information available about a stock. It is information available to all at no
extra fee. A Level I quote consists of:







Bid
Ask
Quote size
Last trade
Volume
High
Low
Level II
Level II goes a step beyond Level I. It basically reveals the order book for a Nasdaq stock. But it's not the
complete order book, rather it shows the best bid and offer of every market participant who is publicly
posting a quote.
The upper part of this Level II display should look familiar, it is basic Level I information. In this example
we have, left to right, top to bottom:



Last, Last Size, Change
Bid, Ask, Quote Size
Open, Low, High
To the right is what should be another familiar tool, the tape, or the ticker. It is a list of trades as they
happen. The price is given as well as the number of shares traded. Upticks are shown in green,
downticks in red, and zero ticks in gray.
But the information we're interested in, at least in this article, is the Level II information that makes up the
rest of the display.
On the left side are the current bids of market participants, ranked from best to worst, highest to lowest.
On the right are the offers, again ranked from best to worst, here from lowest to highest.
Each line in the display gives three pieces of information. The market maker ID, a four letter identifying
code, the price bidding or offering at, and the number of shares being bid for or offered.
For example, on the offer side, the fifth offer down reads as follows:
MSCO 89 1/2 10
What is this telling us? Morgan Stanley is offering 1,000 shares of Sun Microsystems (SUNW) at 89 1/2.
Now, where did I get that? MSCO is the market maker ID of Morgan Stanley. Since moscow is on the
right side, or offer side, of the window, it is selling stock. The price it would like to sell at is 89 1/2. It is
selling 1,000 shares as evidenced by its size of 10 (all sizes shown are in hundreds).
At this point I'm sure you have some questions. I'll try and knock them out one by one.
First, why are some IDs in red while others are black? Easy, in this Level II display (provided by RediPlus)
market makers and order flow firms are shown in black while ECNs are displayed in red. If you're not
familiar with these participants and how they differ don't worry, that's the subject of a future article. For
now just understand there is a significant different between the two.
Levels and Colors
Second, what's with all the colors, the apparent striations? There does seem to be a method to the
madness, doesn't there? But of course. Being included in a different color band separates each different
price level. As has become standard in Level II displays the first level, or the inside market, which
includes the best bid and best ask, is colored yellow. The second level, which is one level away from the
inside market, is in green. Beyond these two first levels the standardization isn't so standard. As we'll
learn later the first two levels are the most important anyway. The colors of other levels aren't important.
So long as you can quickly see the difference between levels the display is doing the job.
Based on the previous paragraph, if you were asked to look at the above picture for only a second, what
would be your answer to the following question: are there more buyers or sellers at the inside market? A
quick glance would allow you to see the yellow band is thicker on the bid side, thus there must be more
buyers. And there you have it, the reason for the color madness.
Learn from the Plunge
Dateline: 04/17/00
Black Monday it was called. October 19, 1987 the New York Stock Exchange lost 22.6% of its
value in a single day. Why that happened, and its aftermath, are detailed in other articles.
It is too recent to have a name yet, but last week the NASDAQ composite index lost 25 percent of its
value. The index plunged almost ten percent on Friday alone, based on emotion rather than
fundamentals. It is too soon to know whether this decline has ended or even to have agreement on what
caused it. It is not too soon to learn from it.
What we will look at here are lessons we can learn from these crashes, and how to apply them to nontreasury functions of your company.
The Second Great Depression
The crash of 1929 cut the Stock Exchange by 12.8% and it was followed by what we refer to as the
“Great Depression.” Yet the much larger drop of 1987 produced barely a ripple in time. The Dow Jones
Average actually finished higher at the end of 1987 than it had started and had recouped its losses within
two years. There was no “Second Great Depression.” The precipitous drop last week has not yet caused
even a bear market.
Plan for the Worst Case
It is not my intent to minimize the 1987 crash and its toll on people or the impact of last week's loss of $2
trillion (USD) of value on peoples finances. I simply point out that it could have been a lot worse. Why
wasn’t it? The 1987 crash had less severe consequences because major financial organizations, chief
among them the Federal Reserve Board, had made plans for how to deal with a similar disaster if it
occurred.
When the Stock Market collapsed, the Fed, and related organizations, took steps immediately to lessen
its effects. Their plan was put into action. What those steps were is detailed elsewhere. For our purposes
it is only important to recognize that there was a plan and that it was implemented immediately.
What We Learned
The important lessons from these Stock Market collapses then are these:
Disasters will occur
Have a plan before the disaster hits
React with urgency, but don’t panic
Ride it out
These same lessons apply to non-treasury aspects of the business. Here is an example:
One Major Client?
Have you noticed that the percentage of your business coming from one client has grown gradually over
the past few years so that they now account for 30 to 40 percent of your business? What would happen to
your company if that customer stopped ordering from you?
Disasters do occur: What you would do if something happened to that major client?
They could have a fire, their CFO could embezzle their cash and disappear, a consumer
panic (like e-coli) could dry up their sales overnight.
Have a plan before the disaster hits: Have you discussed with your key people what
you would do if that major client abruptly cut their business with you? Would you cut
production, offer price breaks to other customers for increased volume, find overseas
markets? Prepare that plan today. You can’t wait for the crisis to happen. You won’t have
time then.
React with urgency, but don’t panic: Once you have a plan, everybody knows what to
do when the crisis hits. This gives you an advantage over your competitors, because,
while they are thinking, you are acting. You know who will handle the press inquiries, who
will contact your supplier, who will call the bank. You are moving quickly, but there is no
panic, because you had a plan.
Ride it out: You had a plan, you executed it well, you adjusted it as needed. You have
done all you can. Recognize that “tomorrow is another day” and move forward.
Keep Learning
The valuable lessons we learned from the crash of 1987 and the "plunge of 2000 are important to all
areas of business. This is just one example. However, once you get your people thinking ahead you can
plan appropriate responses for other potential problems with greater ease.
Work on the big problems first. Focus on the things that could shut your business down. Then look at the
other things that, while not fatal, could seriously damage your company.
the lessons to be learned. Here is just a sampling:
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Stocks GuideSite
Guide Michael Griffis keeps you up-to-date on financial news and trends.
Day Trading GuideSite
Guide Rob Rak brings you daily market reports, brokers and more, from the fastpaced world of Day Trading.
Mutual Funds GuideSite
Guide Marlene Dziegeleski finds research, brokers, best-rated funds, and more
to help you minimize investment risk.
Tale of the Tape
How to read the stock market page, from Investing for Beginners Guide Ken
Little.
Stock Market Information for Entrepreneurs
Net links from Guide Judith Kautz.
Stock Market Simulations
Stock market simulation links from Guide Jim Dattilo.
Stock Market Games
A collection of links to Stock Market Games for Investment Clubs from Guide
Devin Holmes.
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Stock Drop: Retail Industry View
Retail Industry Guide Melody Vargas looks at the best and worst performing retail
stocks for the week and forecasts where retail industry stocks are headed in the
market.
Stock Market Crash '87 - Flashback
A look at behind the scenes consequences from Financial Services Guide Kathy
Durham.
The stock market crash of 1929
Resources for educators to teach about the Stock Market Crash of 1929 and the
ensuing Great Depression from Guide Melissa Kelly.
How Does the Stock Market Impact Fundraising
Guide Stan Hutton's article about how fluctuations in the stock market can impact
your fundraising.
A Standing Ovation for the Stock Market
Economics Guide John Irons explains stock market corrections by comparing
them to a concert.
Tulipmaniacs or Visionaries?
Guide Marco den Ouden asks, Are the folks buying Internet stocks part of a herd
caught up in a mania of buying or are they visionaries who see a potential their
critics don't see?
Do Changes in Stock Prices Cause Recessions?
The economy and the stock market are closely related. Many people examine the stock
market to find out how the economy is doing. It's long been known that if the stock
market is in a period of decline, the economy is sure to follow. However there is little
evidence that the stock market causes the economy to rise or fall. The stock market
does not directly affect the economy. It is simply a mirror of people's generally correct
beliefs about what is about to happen in the economy. The best way to understand this
is to realize that a stock market index the Dow Jones Industrial Average (DJI) is simply
a price. Because the value of index is a price, it only has two determinants: supply and
demand.
Supply
Any first year college textbook in Economics states that for most goods if the supply increases in the short
run then the price of the good should decline.
For example, if the car companies suddenly doubled their supply of cars then we would
expect the price of cars to fall.
If we thought that changes in the supply of stocks are the main cause of stock market rises and declines
then, according to this rule, when a company issues new stock we would expect the price of stock to
decline. If stock prices are largely determined by the supply of stocks and the market declines prior to an
economic decline, we should see a flood of new stock issues before a recession. This does not happen in
practice, as new stock issues tend to occur as the economy enters a growth period. This is because the
money made from a stock issue is used to increase the output of the company, which causes economic
growth to rise.
Demand
It appears that if we want to understand why the economy tends to move in the same direction as the
stock market, we'll have to consider the demand for stocks. To do this, we'll need to understand what
motivates an investors decision to buy or sell shares. Many investors such as Warren Buffett evaluate
their stock portfolios on their inherent value. The inherent value is the total expected earnings of the
company over a time period, discounted by the fact that a dollar today is not worth as much as a dollar
tomorrow. If investors believe that a recession is coming, then they will believe that company earnings will
be less in the future (since that typically takes place in a recession) which will decrease the inherent value
of the stock. When the inherent value of the stock is far below its current price, investors will sell the
stock, driving the price of the stock down.
If investors believe a boom is coming, they will increase their estimates of the inherent
value because future earnings should be higher than they previously expected. Often
this will lead to the inherent value being far higher than the current price of the stock, so
investors buy the stock. This leads the price of the stock to rise.
The belief that the stock market drives the economy is due to an error in logic. Generally we think that if A
came before B that A caused B. Philosophers refer to this as the post hoc, propter hoc fallacy. In this
case, the expectation of a decline in the economy causes the stock market to decline today. Or in logical
terms, A came before B, because the expectation of B caused A. It's also important to realize that it's not
the expectation of future economic changes that is causing changes in stock prices. It's the fact that
people are acting on these expectations. If investors bought and sold stocks based on astrological factors
or Barry Bonds' current homerun total then these would be causing the price of stocks to change. In a
situation like that, it would seem that the stars are causing the price of stocks to change; the economy
would have nothing to do with it.
It is because a large number of investors act on this inherent value principle that the economy tends to
follow the stock market. Investors are constantly watching macroeconomic variables to try and determine
when the next downturn in the economy will happen. Investors are often right when they predict the future
growth rate of the economy. As a result, they often sell off their shares before the economy goes into a
decline making it look like the stock market is causing a recession. In reality the causality runs the other
way because the two things that causes price to change are changes in supply or changes in demand.
What is a Rally in the Stock Market?
A rally is a term used to describe a sudden rise in stock prices, especially after a period of
falling ones. [For example, if the stock market drops in the morning and investors rush in
to buy companies at the cheaper prices, the stock market has rallied.]
If the increase in stock prices holds up, journalists and financial professionals refer to it as a
sustained rally. If it continues for several weeks or months, it is referred to as a bull
market.
What is a Bull Market?
A bull market is slang for when stock prices have increased for an extended period of time.
If an investor is "bullish" they are referred to as a "bull" because they believe a particular
company, industry, sector, or market in general is going to go up.
The Dividend Tax Cut - The Supply Side
So far we have just examined changes in demand, but we know that two factors always
affect price: demand and supply. What effect will the elimination of dividend taxation have
on the supply of stocks and bonds? We know that consumers are now willing to pay more
for stocks, and less for bonds. Corporations obtain funds for new projects by either selling
bonds or by issuing new stock. Since selling stocks is now more lucrative than issuing
bonds, because of the relative change in prices, we should see more companies selling
stocks, and fewer companies issuing bonds. Since the supply of bonds by corporations is
decreasing, we should see the price of these bonds increase. So this will mitigate the fall in
bond prices caused by changes in demand. In theory, it is possible for the supply effect to
outweigh the demand effect; this would happen if there were large enough reductions in the
amount of bonds issued. This would cause an overall rise in bond prices, and a lowering in
interest rates. This is exactly the opposite of what I've been arguing so far. However, a
dramatic fall in the amount of bonds issued is highly unlikely for two reasons. The first is
that companies usually prefer to sell bonds instead of issuing new stocks. This is due to the
fact that when a company sells stock, it is diluting the ownership of the company. If a
company issues too much stock, there is the risk that the a single investor or group of
investors will be able to buy enough stock in the company to take it over, which is called a
hostile takeover. Because of this, a big rush of new stock issues is unlikely.
The second reason this is unlikely is that corporations are not the only entities that sell
bonds. The federal government, along with state and municipal governments and public
utilities all issue bonds for their funding needs. Most governments are currently running into
budgetary crunches and many are running deficits for the first time in years. The federal
government will be forced to run a deficit due to increases in spending and declining
revenues due to this tax cut. To finance these deficits, governments will be forced to issue
more bonds. Because the number of government issued bonds will increase, we should not
expect to see a dramatic drop in the total overall value of bonds issued.
The Dividend Tax Cut - How Does This Effect Interest Rates?
What does any of this have to do with interest rates? Well, the interest rate on a bond is
inversely related to the price of the bond, meaning that as one goes up, the other goes
down. Consider a discount bond with a maturity length of one-year. Suppose you buy a
$100 bond with a maturity length of 1 year for $90. This means that you pay $90 today,
and on this date one year from now, you receive $100. The interest rate you get on this
bond (formally called the yield-to-maturity) is calculated by:
r = (value - price) / value
In this equation r is the interest rate (or yield to maturity), "price" is the price you pay for
the bond, and "value" is the amount you get in one year. Now as the price decreases, the
interest rate increases. This increase in the interest rate as the price decreases is shown in
the following chart for a discount bond with a maturity length of one year. 1
Price
r=
Interest Rate
100
(100 - 100)/100
0.00%
99
(100 - 99)/99
1.01%
98
(100 - 98)/98
2.04%
95
(100 - 95)/95
5.26%
90
(100 - 90)/90
11.11%
Definition: The interest rate is the yearly price charged by a lender to a borrower in order for the
borrower to obtain a loan. This is usually expressed as a percentage of the total amount loaned.
Definition of Discount Bonds: A discount bond is a bond bought at a discount, or a price
less than, its face value. The face value is the amount of money the holder of the bond
receives at the expiry date of the bond. Unlike coupon bonds, discount bonds only pay the
bearer once, when the bond expires.
Definition: A bond is a fixed interest financial asset issued by governments, companies, banks,
public utilities and other large entities. Bonds pay the bearer a fixed amount a specified end date. A
discount bond pays the bearer only at the ending date, while a coupon bond pays the bearer a fixed
amount over a specified interval (month, year, etc.) as well as paying a fixed amount at the end date.
Definition: Organizations like Standard and Poor's and Moody's rate the riskiness of corporate,
municipal, and government issued securities and gives each security a Bond Rating. The bond rating, or
more accurately the risk, is based on two elements: the probability the organization will file for bankruptcy
before the final bond payment is due and what percentage of the bondholder's clams creditors will receive
if a bankruptcy takes place.
Definition: The maturity date of a financial asset is the date at which that asset is
converted into a specified amount of money or physical assets.
(1) There are of course, other types of bonds, such as coupon bonds, with different
properties and different maturity lengths. However, the relationship between the price and
the interest rate (the yield to maturity) is the same, though the equation to calculate the
yield to maturity will be far more complicated.
Definition of a Oligopoly: A market for a good where a few major suppliers account for a
large majority of sales.
The Dividend Tax Cut - How Does Interest Rate Increases from Bonds Effect You?
This rise in interest rates will not be limited to just bonds. Banks and other financial
institutions use their customers’ deposits to either buy bonds or to loan to other customers
in the form of mortgages, car loans, and business loans. These loans usually carry an
interest rate of Prime + X%, where X is a number based on the likelihood the borrower will
go bankrupt and default on the loan. The more likely the lender is to default on the loan,
the higher X is: this is why Bill Gates gets a better rate on his mortgage than you do.
Since interest rates tend to be calculated based on Prime and the likelihood of the borrower
to go bankrupt, there is a perfect relation between them and the prime rate. The prime rate
is the interest rate at which banks lend money for a short-specified term to large
corporations that have little chance of going bankrupt in the near future. These loans are, in
reality, bonds, since the large corporations have to pay them back at a specified date, and
the banks can sell these loans to other banks or institutions if they wish.
Thus, if the demand for bonds decreases and causes a rise in the interest rate on bonds, the
prime rate will increase (because it is as an interest rate on a bond), and cause the rate of
interest to rise on all loans.
Definition of Prime Rate: The prime rate of interest is a rate of interest that serves as a benchmark for
most other loans in a country. The precise definition of prime rate differs from country to country. In the
United States, the prime rate is the interest rate banks charge to large corporations for short-term loans.
What Effects Does Monetary Policy Have?
[Q:]I'm having a little trouble trying to understand expansionary monetary policies and
contractionary monetary policies. Can you help explain what impact expansionary
monetary policies and contractionary monetary policies have on the economy?
[A:] Thanks for your great question. Students first learning economics often have trouble understanding
what contractionary monetary policy and expansionary monetary policy are and why they have the effects
they do.
Generally speaking contractionary monetary policies and expansionary monetary policies involve
changing the level of the money supply in a country. Expansionary monetary policy is simply a policy
which expands (increases) the supply of money, whereas contractionary monetary policy contracts
(decreases) the supply of a country's currency.
Expansionary Monetary Policy
In the United States, when the Federal Open Market Committee wishes to increase the
money supply, it can do a combination of three things:
1. Purchase securities on the open market, known as Open Market Operations
2. Lower the Federal Discount Rate
3. Lower Reserve Requirements
These all directly impact the interest rate. When the Fed buys securities on the open
market, it causes the price of those securities to rise. In my article on the Dividend Tax
Cut we saw that bond prices and interest rates are inversely related. The Federal
Discount Rate is an interest rate, so lowering it is essentially lowering interest rates. If
the Fed instead decides to lower reserve requirements, this will cause banks to have an
increase in the amount of money they can invest. This causes the price of investments
such as bonds to rise, so interest rates must fall. No matter what tool the Fed uses to
expand the money supply interest rates will decline and bond prices will rise.
Increases in American bond prices will have an effect on the exchange market. Rising American bond
prices will cause investors to sell those bonds in exchange for other bonds, such as Canadian ones. So
an investor will sell his American bond, exchange his American dollars for Canadian dollars, and buy a
Canadian bond. This causes the supply of American dollars on foreign exchange markets to increase and
the supply of Canadian dollars on foreign exchange markets to decrease. As shown in my Beginner's
Guide to Exchange Rates this causes the U.S. Dollar to become less valuable relative to the Canadian
Dollar. The lower exchange rate makes American produced goods cheaper in Canada and Canadian
produced goods more expensive in America, so exports will increase and imports will decrease causing
the balance of trade to increase.
When interest rates are lower, the cost of financing capital projects is less. So all else being equal, lower
interest rates lead to higher rates of investment.
What We've Learned About Expansionary Monetary Policy:
1. Expansionary monetary policy causes an increase in bond prices and a reduction
in interest rates.
2. Lower interest rates lead to higher levels of capital investment.
3. The lower interest rates make domestic bonds less attractive, so the demand for
domestic bonds falls and the demand for foreign bonds rises.
4. The demand for domestic currency falls and the demand for foreign currency
rises, causing a decrease in the exchange rate. (The value of the domestic
currency is now lower relative to foreign currencies)
5. A lower exchange rate causes exports to increase, imports to decrease and the
balance of trade to increase.
How much is the per capita money supply in the U.S.?
On page 3 of my article What is deflation and how can it be prevented? I look at the three main definitions
economists have of the money supply. Another good place for information on the money supply is The
Federal Reserve Bank of New York. The New York Fed gives the following definitions for the three money
supply measures:
"The Federal Reserve publishes weekly and monthly data on three money supply
measures -- M1, M2, and M3 -- as well as data on the total amount of debt of the nonfinancial sectors of the U.S. economy... The money supply measures reflect the
different degrees of liquidity -- or spendability - that different types of money have. The
narrowest measure, M1, is restricted to the most liquid forms of money; it consists of
currency in the hands of the public; travelers checks; demand deposits, and other
deposits against which checks can be written. M2 includes M1, plus savings accounts,
time deposits of under $100,000, and balances in retail money market mutual funds. M3
includes M2 plus large-denomination ($100,000 or more) time deposits, balances in
institutional money funds, repurchase liabilities issued by depository institutions, and
Eurodollars held by U.S. residents at foreign branches of U.S. banks and at all banks in
the United Kingdom and Canada."
We can figure out how much money there is in the United States per person over 21 by taking each
measure of the money supply (M1, M2, and M3) and dividing it by the total population of people who are
21 and older.
The Federal Reserve states that in September 2001, the M1 money supply stood at 1.2 trillion dollars.
While this is a little out of date, the current figure is close to this, so we'll use this measure. According to
the U.S. Census Population Clock the U.S. population currently stands at 291,210,669 people. If we take
the M1 money supply and divide it by the population, we find that if we divided M1 money up equally each
person would get $4,123.
This doesn't completely answer your question, as you wanted to know how much money there would be
per person over the age of 21. I don't know how many people over the age of 20 there are in the United
States, but Infoplease reports that in the year 2000 71.4% of the population was above the age of 19.
This implies that right now there are around 209,089,260 people in the United States who are 20 or older.
If we split up the M1 money supply among all those people, they would each get around $5,742.
We can do the same calculations for the M2 and M3 money supplies. The Federal Reserve reports that
the M2 money supply stood at $5.4 trillion in September 2001 and M3 was at $7.8 trillion. See the table
on the bottom of the page to see what the per capita M2 and M3 money supplies are.
Per Capita Money Supply
Money
Supply
Type
M1 Money
Supply
M2 Money
Value
Money Supply Money Supply Per
Per Person
Person Over 19
$1,200,000,000,000 $4,123
$5,742
$5,400,000,000,000 $18,556
$25,837
Supply
M3 Money
Supply
$7,800,000,000,000 $26,804
$37,321
Q: Why does money have value?
A: Money doesn't have any inherent value. It is simply pieces of paper or numbers in a ledger. A car has
value because it can help you get where you need to go. Water has a value because it has a use; if you
don’t drink enough of it you will die. Unless you enjoy looking at pictures of deceased national heroes,
money has no more use than any other piece of paper.
It didn't always work this way. In the past money was in the form of coins, generally composed of precious
metals such as gold and silver. The value of the coins was roughly based on the value of the metals they
contained, because you could always melt the coins down and use the metal for other purposes. Until a
few decades ago paper money in different countries was based on the gold standard or silver standard or
some combination of the two.
This meant that you could take some paper money to the government, who would exchange it for some
gold or some silver based on an exchange rate set by the government. The gold standard lasted until
1971 when President Nixon announced that the United States would no longer exchange dollars for gold.
This ended the Bretton Woods system, which will be the focus of a future article. Now the United States is
on a system of fiat money, which is not tied to any other commodity. So these pieces of paper in your
pocket are nothing but pieces of paper.
The Value of Money
So why does a five-dollar bill have value and some other pieces of paper do not? It’s
simple: Money is a good with a limited supply and there is a demand for it because
people want it. The reason I want money is because I know other people want money,
so I can use my money to others to get goods and services from them in return. They
can then use that money to purchase goods and services that they want. Goods and
services are what ultimately matter in the economy, and money is a way that allows
people to give up goods and services which are less desirable to them, and get ones
that are more so. People sell their labor (work) to acquire money now to purchase
goods and services in the future. If I believe that money will have a value in the future, I
will work towards acquiring some.
Our system of money operates on a mutual set of beliefs; so long as enough of us believe in the future
value of money the system will work.
What could cause us to lose that belief? It is unlikely that money will be replaced in the near future,
because the inefficiencies of a dual coincidence of wants system are well known. If one currency is to be
replaced by another, there will be a period in which you can switch your old currency for new currency.
This is what happened in Europe when countries switched over to the Euro. So our currencies are not
going to disappear.
The Curse of Inflation
Then why else might we think that our money might not be of value to others in the future? Well, what if
we believed our money wouldn’t be nearly as valuable in the future as it is today? This inflation of the
currency causes people to want to get rid of their money as quickly as possible. Inflation, and the rational
way citizens react to it, causes great misery for an economy. People will not sign into profitable deals
which involve future payments because they’ll be unsure what the value of money will be when they get
paid. Business activity sharply declines because of this. Inflation causes all sorts of other inefficiencies,
from the café changing its prices every few minutes, to the homemaker taking a wheelbarrow full of
money to the bakery in order to buy a loaf of bread.
The belief in money and the steady value of the currency are not innocuous things. If
citizens lose faith in the money supply and believe that money will be worth less in the
future economic activity can grind to a halt.
Money is essentially a good, so as such is ruled by the axioms of supply and demand. The value of any
good is determined by its supply and demand and the supply and demand for other goods in the
economy. A price for any good is the amount of money it takes to get that good. Inflation occurs when the
price of goods increases; in other words when money becomes less valuable relative to those other
goods. This can occur when:
1.
2.
3.
4.
The supply of money goes up.
The supply of other goods goes down.
Demand for money goes down.
Demand for other goods goes up.
The key cause of inflation is increases in the supply of money. Inflation can occur for other reasons. If a
natural disaster destroyed stores but left banks intact, we’d expect to see an immediate rise in prices, as
goods are now scarce relative to money. These kinds of situations are rare. For the most part inflation is
caused when the money supply rises faster than the supply of other goods and services.
So to answer your question, money has value because people believe that they will be able to exchange
their money for goods and services in the future. This belief will persist so long as people do not fear
future inflation. To avoid inflation, the government must ensure that the money supply does not increase
too quickly.
The Demand For Money Factor of Inflation Explained
[Q:] I read the article "Why Don't Prices Decline During A Recession?" on inflation and
the article "Why Does Money Have Value?" on the value of money. I can't seem to
understand one thing. What is the 'demand for money'? Does that change? The other
three elements all make perfect sense to me but 'demand for money' is confusing me to
no end. Thanks.
[A:] Excellent question!
In those articles, we discussed that inflation was caused by a combination of four factors. Those factors
are:
1.
2.
3.
4.
The supply of money goes up.
The supply of goods goes down.
Demand for money goes down.
Demand for goods goes up.
You would think that the demand for money would be infinite. Who doesn't want more
money? The key thing to remember is that wealth is not money. The collective demand
for wealth is infinite as there is never enough to satisfy everyones desires. Money, as
illustrated in "How much is the per capita money supply in the U.S.?" is a narrowly
defined term which includes things like paper currency, travellers checks, and savings
accounts. It doesn't include things like stocks and bonds, or forms of wealth like homes,
paintings, and cars. Since money is only one of many forms of wealth, it has plenty of
substitutes. The interaction between money and its substitutes explain why the demand
for money changes.
We'll look at a few factors which can cause the demand for money to change. For a more formal
treatment of theories of the demand for money see Paul Turner's Notes on "The Demand For Money".
1. Interest Rates
Two of the more important stores of wealth are bonds and money. These two items are substitutes, as
money is used to purchase bonds and bonds are redeemed for money. The two differ in a few key ways.
Money generally pays very little interest (and in the case of paper currency, none at all) but it can be used
to purchase goods and services. Bonds do pay interest, but cannot be used to make purchases, as the
bonds must first be converted into money. If bonds paid the same interest rate as money, nobody would
purchase bonds as they are less convenient than money. Since bonds pay interest, people will use some
of their money to purchase bonds. The higher the interest rate, the more attractive bonds become. So a
rise in the interest rate causes the demand for bonds to rise and the demand for money to fall since
money is being exchanged for bonds. So a fall in interest rates cause the demand for money to rise.
What is the Demand For Money?
2. Consumer Spending
This is directly related to the fourth factor, "Demand for goods goes up". During periods
of higher consumer spending, such as the month before Christmas, people often cash
in other forms of wealth like stocks and bonds, and exchange them for money. They
want money in order to purchase goods and services, like Christmas presents. So if the
demand for consumer spending increases, so will the demand for money.
3. Precautionary Motives
If people think that they will suddenly need to buy things in the immediate future (say it's 1999 and they're
worried about Y2K), they will sell bonds and stocks and hold onto money, so the demand for money will
go up. If people think that there will be an opportunity to purchase an asset in the immediate future at a
very low cost, they will also prefer to hold money.
4. Transaction Costs for Stocks and Bonds
If it becomes difficult or expensive to quickly buy and sell stocks and bonds, they will be
less desirable. People will want to hold more of their wealth in the form of money, so the
demand for money will rise.
5. Change in the General Level of Prices
If we have inflation, goods become more expensive, so the demand for money rises.
Interestingly enough, the level of money holdings tends to rise at the same rate as
prices. So while the nominal demand for money rises, the real demand stays precisely
the same. (To learn the difference between nominal demand and real demand, see
"What's the Difference Between Nominal and Real?")
6. International Factors
Usually when we discuss the demand for money, we're implicitly talking about the
demand for a particularly nation's money. Since Canadian money is a substitute for
American money, international factors will influence the demand for money. From "A
Beginner's Guide to Exchange Rates and the Foreign Exchange Market" we saw that
the following factors can cause the demand for a currency to rise:
1.
2.
3.
4.
An increase in the demand of that country's goods abroad.
An increase in the demand for domestic investment by foreigners.
The belief that the value of the currency will rise in the future.
A central banking wanting to increase its holdings of that currency.
To understand these factors in detail, see "Canadian-to-American Exchange Rate Case
Study" and "The Canadian Exchange Rate"
Demand for Money Wrap Up
The demand for money is not at all constant. There are quite a few factors which
influence the demand for money.
Factors Which Increase the Demand for Money
1.
2.
3.
4.
5.
6.
7.
8.
9.
A reduction in the interest rate.
A rise in the demand for consumer spending.
A rise in uncertainty about the future and future opportunities.
A rise in transaction costs to buy and sell stocks and bonds.
A rise in inflation causes a rise in the nominal money demand but real money
demand stays constant.
A rise in the demand for a country's goods abroad.
A rise in the demand for domestic investment by foreigners.
A rise in the belief of the future value of the currency.
A rise in the demand for a currency by central banks (both domestic and foreign).
Pursue RSCh
http://economics.about.com/cs/money/a/money_demand_2.htm
Definition: Fiat money is money that is intrinsically useless; is used only as a medium of exchange.
The Gold Standard vs. Fiat Money
[Q:] I saw the term "Gold Standard" mentioned in one of my textbooks. What was the
gold standard and how does it differ from today's system of money.
[A:] Excellent question! First we'll have a quick history lesson, then we'll see how it works and how it
differs from fiat money.
Definition of the Gold Standard
My normally extensive Economics Glossary does not have an entry on the gold standard, so we'll have to
look elsewhere for a definition. An extensive essay on the gold standard on The Encyclopedia of
Economics and Liberty defines the gold standard as "a commitment by participating countries to fix the
prices of their domestic currencies in terms of a specified amount of gold.
National money and other forms of money (bank deposits and notes) were freely
converted into gold at the fixed price." A county under the gold standard would set a
price for gold, say $100 an ounce and would buy and sell gold at that price. This
effectively sets a value for the currency; in our fictional example $1 would be worth
1/100th of an ounce of gold. Other precious metals could be used to set a monetary
standard; silver standards were common in the 1800's. A combination of the gold and
silver standard is known as bimetallism.
A Very Brief History of the Gold Standard
If you would like to learn about the history of money in detail, there is an excellent site
called A Comparative Chronology of Money which details the important places and
dates in monetary history. During most of the 1800s the United States was had a
bimetallic system of money, however it was essentially on a gold standard as very little
silver was traded. A true gold standard came to fruition in 1900 with the passage of the
Gold Standard Act. The gold standard effectively came to an end in 1933 when
President Franklin D. Roosevelt outlawed private gold ownership (except for the
purposes of jewelery). The Bretton Woods System, enacted in 1946 created a system of
fixed exchange rates that allowed governments to sell their gold to the United States
treasury at the price of $35/ounce. "The Bretton Woods system ended on August 15,
1971, when President Richard Nixon ended trading of gold at the fixed price of
$35/ounce. At that point for the first time in history, formal links between the major world
currencies and real commodities were severed". The gold standard has not been used
in any major economy since that time.
What Do We Use Today?
Almost every country, including the United States, is on a system of fiat money, which the glossary
defines as "money that is intrinsically useless; is used only as a medium of exchange". We saw in the
article "Why Does Money Have Value" that the value of money is set by the supply and demand for
money and the supply and demand for other goods and services in the economy. The prices for those
goods and services, including gold and silver, are allowed to fluctuate based on market forces. Next we'll
look at how the monetary system used can change other variables in the economy.
What Was The Gold Standard?
The Benefits and Costs of a Gold Standard
The main benefit of a gold standard is that it insures a relatively low level of inflation. In
articles such as "What is the Demand for Money?" we've seen that inflation is caused by
a combination of four factors:
1.
2.
3.
4.
The supply of money goes up.
The supply of goods goes down.
Demand for money goes down.
Demand for goods goes up.
So long as the supply of gold does not change too quickly, then the supply of money will
stay relatively stable. The gold standard prevents a country from printing too much
money. If the supply of money rises too fast, then people will exchange money (which
has become less scarce) for gold (which has not). If this goes on too long, then the
treasury will eventually run out of gold. A gold standard restricts the Federal Reserve
from enacting policies which significantly alter the growth of the money supply which in
turn limits the inflation rate of a country. The gold standard also changes the face of the
foreign exchange market. If Canada is on the gold standard and has set the price of
gold at $100 an ounce, and Mexico is also on the gold standard and set the price of
gold at 5000 pesos an ounce, then 1 Canadian Dollar must be worth 50 pesos. The
extensive use of gold standards implies a system of fixed exchange rates. If all
countries are on a gold standard, there is then only one real currency, gold, from which
all others derive their value. The stability the gold standard cause in the foreign
exchange market is often cited as one of the benefits of the system.
The stability caused by the gold standard is also the biggest drawback in having one. Exchange rates are
not allowed to respond to changing circumstances in countries. A gold standard severely limits the
stabilization policies the Federal Reserve can use. Because of these factors, countries with gold
standards tend to have severe economic shocks. Economist Michael D. Bordo explains:
"Because economies under the gold standard were so vulnerable to real and monetary shocks, prices
were highly unstable in the short run. A measure of short-term price instability is the coefficient of
variation, which is the ratio of the standard deviation of annual percentage changes in the price level to
the average annual percentage change. The higher the coefficient of variation, the greater the short-term
instability. For the United States between 1879 and 1913, the coefficient was 17.0, which is quite high.
Between 1946 and 1990 it was only 0.8.
Moreover, because the gold standard gives government very little discretion to use monetary policy,
economies on the gold standard are less able to avoid or offset either monetary or real shocks. Real
output, therefore, is more variable under the gold standard. The coefficient of variation for real output was
3.5 between 1879 and 1913, and only 1.5 between 1946 and 1990. Not coincidentally, since the
government could not have discretion over monetary policy, unemployment was higher during the gold
standard. It averaged 6.8 percent in the United States between 1879 and 1913 versus 5.6 percent
between 1946 and 1990."
So it would appear that the major benefit to the gold standard is that it can prevent long-term inflation in a
country. However, as Brad DeLong points out, "if you do not trust a central bank to keep inflation low, why
should you trust it to remain on the gold standard for generations?" It does not look like the gold standard
will make a return to the United States anytime in the foreseeable future.
What Is the Money Supply?
The U.S. money supply comprises currency—dollar bills and coins issued by the Federal
Reserve System and the Treasury—and various kinds of deposits held by the public at
commercial banks and other depository institutions such as savings and loans and credit
unions. On June 30, 1990, the money supply, measured as the sum of currency and
checking account deposits, totaled $809 billion. Including some types of savings deposits,
the money supply totaled $3,272 billion. An even broader measure totaled $4,066 billion.
These measures correspond to three definitions of money that the Federal Reserve uses:
M1, a narrow measure of money's function as a medium of exchange; M2, a broader
measure that also reflects money's function as a store of value; and M3, a still broader
measure that covers items that many regard as close substitutes for money.
The definition of money has varied. For centuries physical commodities, most commonly
silver or gold, served as money. Later, when paper money and checkable deposits were
introduced, they were convertible into commodity money. The abandonment of
convertibility of money into a commodity since August 15, 1971, when President Nixon
discontinued converting U.S. dollars into gold at $35 per ounce, has made the U.S. and
other countries' monies into fiat money—money that national monetary authorities have the
power to issue without legal constraints.
Why Is the Money Supply Important?
Because money is used in virtually all economic transactions, it has a powerful effect on
economic activity. An increase in the supply of money puts more money in the hands of
consumers, making them feel wealthier, thus stimulating increased spending. Business firms
respond to increased sales by ordering more raw materials and increasing production. The
spread of business activity increases the demand for labor and raises the demand for capital
goods. In a buoyant economy, stock market prices rise and firms issue equity and debt. If
the money supply continues to expand, prices begin to rise, especially if output growth
reaches capacity limits. As the public begins to expect inflation, lenders insist on higher
interest rates to offset an expected decline in purchasing power over the life of their loans.
Opposite effects occur when the supply of money falls, or when its rate of growth declines.
Economic activity declines and either disinflation (reduced inflation) or deflation (falling
prices) results.
What Determines the Money Supply?
Federal Reserve policy is the most important determinant of the money supply. The Federal
Reserve affects the money supply by affecting its most important component, bank
deposits.
Here's how it works. The Federal Reserve requires commercial banks and other financial
institutions to hold as reserves a fraction of the deposits they accept. Banks hold these
reserves either as cash in their vaults or as deposits at Federal Reserve banks. In turn, the
Federal Reserve controls reserves by lending money to banks and changing the "Federal
Reserve discount rate" on these loans and by "open-market operations." The Federal
Reserve uses open-market operations to either increase or decrease reserves. To increase
reserves, the Federal Reserve buys U.S. Treasury securities by writing a check drawn on
itself. The seller of the Treasury security deposits the check in a bank, increasing the seller's
deposit. The bank, in turn, deposits the Federal Reserve check at its district Federal Reserve
bank, thus increasing its reserves. The opposite sequence occurs when the Federal Reserve
sells Treasury securities: the purchaser's deposits fall and, in turn, the bank's reserves fall.
If the Federal Reserve increases reserves, a single bank can make loans up to the amount
of its excess reserves, creating an equal amount of deposits. The banking system, however,
can create a multiple expansion of deposits. As each bank lends and creates a deposit, it
loses reserves to other banks, which use them to increase their loans and, thus, create new
deposits, until all excess reserves are used up.
If the required reserve ratio is 20 percent, then starting with new reserves of, say, $1,000,
the most a bank can lend is $800, since it must keep $200 as reserves against the deposit it
simultaneously sets up. When the borrower writes a check against this amount in his bank
A, the payee deposits it in his bank B. Each new demand deposit that a bank receives
creates an equal amount of new reserves. Bank B will now have additional reserves of $800
of which it must keep $160 in reserves, so it can lend out only $640. The total of new loans
granted by the banking system as a whole in this example will be five times the initial
amount of excess reserve, or $4,000: 800 + 640 + 512.40 + 409.60, and so on.
In a system with fractional reserve requirements, an increase in bank reserves can support
a multiple expansion of deposits, and a decrease can result in a multiple contraction of
deposits. The value of the multiplier depends on the required reserve ratio on deposits. A
high required-reserve ratio lowers the value of the multiplier. A low required-reserve ratio
raises the value of the multiplier.
Even if there were no legal reserve requirements for banks, they would still maintain
reserves with the Federal Reserve, whose ability to control the volume of deposits would not
be impaired. Banks would continue to keep reserves to enable them to clear debits arising
from transactions with other banks, to obtain currency to meet depositors' demands, and to
avoid a deficit as a result of imbalances in clearings.
The currency component of the money supply is far smaller than the deposit component.
The Federal Reserve and the Treasury supply the banks with the currency their customers
demand, and when their demand falls, accept a return flow from the banks. The Federal
Reserve debits banks' reserves when it provides currency, and credits their reserves when
they return currency. In a fractional reserve banking system, drains of currency from banks
reduce their reserves, and unless the Federal Reserve provides adequate additional amounts
of currency and reserves, a multiple contraction of deposits results, reducing the quantity of
money.
Currency and bank reserves added together equal the monetary base, sometimes known as
high-powered money. The Federal Reserve has the power to control the issue of both
components. By adjusting the levels of banks' reserve balances, over several quarters it can
achieve a desired rate of growth of deposits and of the money supply. When the public and
the banks change the ratio of their currency and reserves to deposits, the Federal Reserve
can offset the effect on the money supply by changing reserves and/or currency.
The Federal Reserve's techniques for achieving its desired level of reserves—both borrowed
reserves that banks obtain at the discount window and nonborrowed reserves that it
provides by open-market purchases—have changed significantly over time. At first the
Federal Reserve controlled the volume of reserves and of borrowing by member banks
mainly by changing the discount rate. It did so on the theory that borrowed reserves made
member banks reluctant to extend loans, because their desire to repay their own
indebtedness to the Federal Reserve as soon as possible was supposed to inhibit their
willingness to accommodate borrowers. In the twenties, when the Federal Reserve
discovered that open-market operations also created reserves, changing nonborrowed
reserves offered a more effective way to offset undesired changes in borrowing by member
banks. In the fifties, the Federal Reserve sought to control what are called free reserves, or
excess reserves minus member bank borrowing.
In recent decades the Federal Reserve has specified a narrow range for the federal funds
rate, the interest rate on overnight loans from one bank to another, as the objective of
open-market operations. It has interpreted a rise in interest rates as tighter monetary policy
and a fall as easier monetary policy. But interest rates are an imperfect indicator of
monetary policy. If easy monetary policy is expected to cause inflation, lenders demand a
higher interest rate to compensate for this inflation, and borrowers are willing to pay a
higher rate because inflation reduces the value of the dollars they repay. Thus, an increase
in expected inflation increases interest rates. Between 1977 and 1979, for example, U.S.
monetary policy was easy and interest rates rose. Similarly, if tight monetary policy is
expected to reduce inflation, interest rates could fall.
From 1979 to 1982, the Federal Reserve tried to control nonborrowed reserves to achieve
its monetary target. The procedure produced large swings in both money growth and
interest rates. Forcing nonborrowed reserves to decline when above target led borrowed
reserves to rise because the Federal Reserve allowed banks access to the discount window
when they sought this alternative source of reserves. Since 1982 the Federal Reserve has
targeted the borrowed reserves level but downgraded the importance of achieving monetary
targets. In early 1991 it appeared to be paying attention once again to monetary growth
rates.
If the Federal Reserve determines the magnitude of the money supply, what makes the
nominal value of money in existence equal to the amount that people want to hold? One
way to make that correspondence happen is for interest rates to change. A fall in interest
rates increases the amount of money that people wish to hold; a rise in interest rates
decreases the amount they want. Another way to make the money supply equal the amount
demanded is for prices to change. When people hold more nominal dollars than they want,
they spend them faster, causing prices to rise. These rising prices reduce the purchasing
power of money until the amount people want equals the amount available. Conversely,
when people hold less money than they want, they spend more slowly, causing prices to
fall. As a result, the real value of money in existence just equals the amount people are
willing to hold.
An Alternative View of Money Supply Determination
A different view is that the magnitude of the money supply is determined not by the Federal
Reserve but by the decisions of the public and the banks. In this view banks supply only as
much in deposits as the public wants to hold. Additional reserves cannot lead to an increase
in the supply of deposits if the public does not want them. People will simply repay loans
and shrink the money supply. According to this view a decline in the money supply is a
response to a decline in people's demand to hold it, not an independent action by suppliers
to reduce the quantity of money.
This alternative view, however, fails to account for the close relationship between bank
reserves and deposits. If the alternative view were correct, we would observe discrepancies
between movements of reserves and deposits over quarterly periods. We do not. Deposits
cannot grow faster than reserves, given the required reserve ratio, no matter how avid the
public's demand. Deposits may grow slower than reserves, but only if banks, fearing for
their own safety in the absence of a reliable lender of last resort, want to accumulate excess
reserves, as happened in the thirties. To hold excess reserves means they forgo the
opportunity to hold earning assets. That is why banks usually hold minimal excess reserves.
History of the U.S. Money Supply
From the founding of the Federal Reserve in 1913 until the end of World War II, the money
supply tended to grow at a higher rate than the growth of nominal GNP. This increase in the
ratio of money supply to GNP shows an increase in the amount of money as a fraction of
their income that people wanted to hold. From 1946 to 1980, nominal GNP tended to grow
at a higher rate than the growth of the money supply, an indication that the public reduced
its money balances relative to income. Until 1986, money balances grew relative to income;
since then they have declined relative to income. Economists explain these movements by
changes in price expectations, as well as changes in interest rates that make money holding
more or less expensive. If prices are expected to fall, the inducement to hold money
balances rises since money will buy more if the expectations are realized; similarly, if
interest rates fall, the cost of holding money balances rather than spending or investing
them declines. If prices are expected to rise or interest rates rise, holding money rather
than spending or investing it becomes more costly.
The money supply has tended to rise more rapidly during business cycle expansions than
during business cycle contractions. The rate of rise has tended to slow down before the
peak in business and to accelerate before the trough.
Since 1914 an actual decline of the money supply has occurred during only three business
cycle contractions, each of which was severe as judged by the decline in output and rise in
unemployment: 1920 to 1921, 1929 to 1933, 1937 to 1938. The severity of the economic
decline in each of these cyclical downturns, it is widely accepted, was a consequence of the
reduction in the quantity of money, particularly so for the downturn that began in 1929,
when the quantity of money fell by one-third, an unprecedented reduction.
The United States has experienced three major price inflations since 1914, and each has
been preceded and accompanied by a corresponding increase in the rate of growth of the
money supply: 1914 to 1920, 1939 to 1948, 1967 to 1980. An acceleration of money
growth in excess of real output growth has invariably produced inflation—in these episodes
and in many earlier examples in this country and elsewhere in the world.
To ignore the magnitude of money supply changes is to court monetary disorder. That is the
lesson that the history of money supply teaches.
The money supply is just that — the amount of money within our economic system. There are various
measures of it, depending upon how you define money, and you may recognize the terms "M1, M2, M3"
and even "MZM." Currency and cash are the purest forms of money and are included in all measures of
the supply. Also included in the narrow measures of money (such as M1) is the amount of money in
checking accounts. Ever broader measures (M2, MZM, and M3) add on money market funds, CDs, very
large savings accounts, and so on..
It may be intuitive to suppose that the money supply grows when the government prints currency. But in
fact any money held in a bank or Federal Reserve vault that isn't in a customer's name is not included in
money supply. So when currency is printed, it doesn't get added to the money supply until it's needed.
(This will be important when we talk about the Y2K issue next week).
However, at any given time, there is a finite and an approximately calculable amount of money circulating
in the economy. This is the money supply.
Still with me? Good. An important part of monetary policy is the control of money supply. If too much
money enters the system too fast, you get inflation. This is because an increase in money relative to a
fixed number of consumable goods and services, results in rising prices. Think about it. If we all had 20%
more cash next week than we do now, chances are we'd see a huge pickup in spending and we
remember from Economics 101 that rising demand equals rising prices. Conversely, the effect of a
shrinking money supply is to choke off the stimulus necessary to keep an economy expanding. The Fed
tries to allow for enough money growth to sustain economic prosperity, but not so much as to cultivate
inflation.
The Fed controls the money supply in three ways. First, it sets the "reserve requirement" for all banks.
The reserve requirement is the amount of money a bank must hold in its reserve (typically its vault or on
deposit at other banks) relative to all the money it has lent out. Thus, the Fed can shrink the money
supply (known as "tightening") by requiring banks to hold more in reserve, which pulls money out of the
system. Of course, Fed governors can also expand the supply (known as "loosening") by lowering
reserve requirements.
The second way the Fed controls the money supply is through the buying and selling of Treasury bills and
notes. When the Fed sells a T-Bill, it's taking money out of the system and replacing it with a security,
which isn't counted in money supply — and vice versa when the Fed buys back bills and notes.
Finally, the Fed moderates the money supply through raising or lowering interest rates. The Fed sets the
federal funds rate, the rate that banks charge each other for overnight borrowing, and the discount rate,
which is the rate the Fed charges banks to borrow from it. Banks pass on the changes in these rates by
adjusting their lending and borrow rates accordingly. Rising rates tend to to tighten money supply by
discouraging use of money for spending. The opposite is true for falling rates.
If you want to see what the money supply looks like, check out my friend Ted Bos' Web site, Economagic.
Click on "M3 Money Supply," then "GIF Chart," then select the radio button next to "Percentage change
from same period last year," and then the "Make Chart" button. The black line is the absolute amount of
money. It's measured on the left scale in billions of dollars.. The red line is the annual percent change. It's
measured on the right scale.
Careful control of the money supply is imperative to a consistently productive economy. We've had steady
growth for most of this bull market and growth economy, and that's not simply luck. But recent tightening
may threaten this liquidity-led rise in stocks. And what about all that money that Fed's setting aside to
meet currency demands ahead of Y2K? What effect will that have? Tune in next week to find out.
The Economics Glossary defines money as:
Money is a good that acts as a medium of exchange in transactions. Classically it
is said that money acts as a unit of account, a store of value, and a medium of
exchange. Most authors find that the first two are nonessential properties that
follow from the third. In fact, other goods are often better than money at being
intertemporal stores of value, since most monies degrade in value over time
through inflation or the overthrow of governments.
So money isn't just pieces of paper. It's a medium of exchange that facilitates trade. Suppose I have a
Wayne Gretzky hockey card that I'd like to exchange for a new pair of shoes. Without the use of money, I
have to find a person, or combination of people who have an extra pair of shoes to give up, and just
happen to be looking for a Wayne Gretzky hockey card.
Quite obviously, this would be quite difficult. This is known as the double coincidence of
wants problem:
[T]he double coincidence is the situation where the supplier of good A wants
good B and the supplier of good B wants good A. The point is that the institution
of money gives us a more flexible approach to trade than barter, which has the
double coincidence of wants problem. Also known as dual coincidence of wants.
Since money is a recognized medium of exchange, I do not have to find someone who
has a pair of new shoes and is looking for a Wayne Gretzky hockey card. I just need to
find someone who is looking for a Gretzky card who is willing to pay enough money so I
can get a new pair at Footlocker. This is a far easier problem, and thus our lives are a
lot easier, and our economy more efficient, with the existance of money.
As for what constitutes money and what does not, the article How much is the per capita money supply in
the U.S.? gives the following definition, provided by The Federal Reserve Bank of New York:
"The Federal Reserve publishes weekly and monthly data on three money supply
measures -- M1, M2, and M3 -- as well as data on the total amount of debt of the
nonfinancial sectors of the U.S. economy... The money supply measures reflect
the different degrees of liquidity -- or spendability - that different types of money
have. The narrowest measure, M1, is restricted to the most liquid forms of
money; it consists of currency in the hands of the public; travelers checks;
demand deposits, and other deposits against which checks can be written. M2
includes M1, plus savings accounts, time deposits of under $100,000, and
balances in retail money market mutual funds. M3 includes M2 plus largedenomination ($100,000 or more) time deposits, balances in institutional money
funds, repurchase liabilities issued by depository institutions, and Eurodollars
held by U.S. residents at foreign branches of U.S. banks and at all banks in the
United Kingdom and Canada."
So there are several different classifications of money. Note that credit cards are not a
form of money.
Note that money is not the same thing as wealth. We cannot make ourselves richer by simply printing
more money, as shown in the article Why Not Just Print More Money?.
Here are a few more articles that will aid in your understanding of money:









What is Deflation and How Can it Be Prevented?
Why Does Money Have Value?
How Much is the Per Capita Money Supply in the U.S.?
What is the Demand For Money?
Are Credit Cards A Form Of Money?
Expansionary Monetary Policy vs Contractionary Monetary Policy
Why Not Just Print More Money?
What Was The Gold Standard?
When Stock Prices Go Down, Where Does the Money Go?
Why Not Just Print More Money?
[Q:] Can you help me find a "simple" way to explain why it is not a good idea to just
print more money. I’m having trouble explaining the connection between this and the
dollar becoming worthless.
[A:] Thanks for your great question!
The issue of the value of money has come up in articles such as "Why Does Money Have Value?", "The
Demand For Money", and "Prices and Recessions". However, I’ve never really answered the question
“Why Not Just Print More Money”. So I’ll do that now.
Wouldn’t We All Be Wealthier If We Printed More Money?
If we print more money, prices will rise such that we’re no better off than we were
before. To see why, we’ll suppose this isn’t true, and that prices will not increase much
when we drastically increase the money supply. Consider the case of the United States.
Let’s suppose the United States decides to increase the money supply by mailing every
man, woman, and child an envelope full of money. What would people do with that
money? Some of that money will be saved, some might go toward paying off debt like
mortgages and credit cards, but most of it will be spent. I know the first thing I’d do is go
down to Walmart and buy an Xbox or PlayStation 2 (if you have an opinion of which I
should buy e-mail me by using the feedback form).
I’m not going to be the only one who runs out to buy an Xbox. This presents a problem for Walmart. Do
they keep their prices the same and not have enough Xboxes to sell to everyone who wants one, or do
they raise their prices? The obvious decision would be to raise their prices. If Walmart (along with
everyone else) decides to raise their prices right away, we’d have massive inflation, and our money is
now devalued. Since we’re trying to argue this won’t happen, we’ll suppose that Walmart and the other
retailers don’t increase the price of Xboxes. For the price of Xboxes to hold steady, the supply of Xboxes
will have to meet this added demand. If there are shortages, certainly the price will rise, as consumers
who are denied an Xbox will offer to pay a price well in excess of what Walmart was formerly charging.
For the retail price of the Xbox not to rise, we will need the producer of the Xbox, Microsoft, to increase
production to satisfy this increased demand. Certainly this will not be technically possible in some
industries, as there are capacity constraints (machinery, factory space) that limit how much production
can be increased in a short period of time. We also need Microsoft not to charge retailers more per
system, as this would cause Walmart to increase the price they charged to consumers, as we’re trying to
create a scenario where the price of the Xbox won’t rise. By this logic we also need the per-unit costs of
producing the Xbox not to rise. This is going to be difficult as the companies that Microsoft buys parts
from are going to have the same pressures and incentives to raise prices that Walmart and Microsoft do.
If Microsoft is going to produce more Xboxes, they’re going to need more man hours of labor and
obtaining these hours cannot add too much (if anything) to their per-unit costs, or else they will be forced
to raise the price they charge retailers.
Wages are essentially prices; an hourly wage is the price a person charges for an hour of labor. It will be
impossible for hourly wages to stay at their current levels. Some of the added labor may come through
employees working overtime. This clearly has added costs, and workers are not likely to be as productive
(per hour) if they’re working 12 hours a day than if they’re working 8. Many companies will need to hire
extra labor. This demand for extra labor will cause wages to rise, as companies bid up wage rates in
order to induce workers to work for their company. They’ll also have to induce their current workers not to
retire. If you were given an envelope full of cash, do you think you’d put in more hours at work, or less?
Labor market pressures require wages to increase, so product costs must increase as well.
So Prices Must Go Up!
In short prices will go up after a drastic increase in the money supply because:
1. If people have more money, they’ll divert some of that money to spending.
Retailers will be forced to raise prices, or run out of product.
2. Retailers who run out of product will try to replenish it. Producers face the same
dilemma of retailers that they will either have to raise prices, or face shortages
because they do not have the capacity to create extra product and they cannot
find labor at rates which are low enough to justify the extra production.
In articles such as "Why Does Money Have Value?", "The Demand For Money", and
"Prices and Recessions" we've seen that inflation is caused by a combination of four
factors. Those factors are:
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
The supply of money goes up.
The supply of goods goes down.
Demand for money goes down.
Demand for goods goes up.
We’ve seen why an increase in the supply of money causes prices to rise. If the supply
of goods increased enough, factor 1 and 2 could balance each other out and we could
avoid inflation. Suppliers would produce more goods if wage rates and the price of their
inputs wouldn’t increase. However, we’ve seen they will increase. In fact, it’s likely that
they’ll increase to such a level where it will be optimal for the firm to produce the amount
they would have if the money supply had not increased.
This gets us to why drastically increasing the money supply on the surface seems like a good idea. When
we say we’d like more money, what we’re really saying is we’d like more wealth. The problem is if we all
have more money, collectively we’re not going to be any more wealthy. Increasing the amount of money
does nothing to increasing the amount of wealth or more plainly the amount of stuff in the world. Since the
same number of people are chasing the same amount of stuff, we cannot on average be wealthier than
we were before.
What are Cost-Push Inflation and Demand-Pull Inflation?
The terms cost-push inflation and demand-pull inflation are associated with Keynesian Economics.
Without going into a primer on Keynesian Economics (a good one can be found at Econlib) we can still
understand the difference between two terms.
In articles, we've seen that inflation is caused by a combination of four factors. Those
factors are:


The supply of money goes up.
The supply of goods goes down.


Demand for money goes down.
Demand for goods goes up.
Let's look at the definition of cost-push and demand-pull inflation and see if we can
understand them using our four factors.
Definition of Cost-Push Inflation
The text "Economics" (2nd Edition) by Parkin and Bade gives the following explanation
for cost-push inflation:
"Inflation can result from a decrease in aggregate supply. The two main sources of decrease in aggregate
supply are


An increase in wage rates
An increase in the prices of raw materials
These sources of a decrease in aggregate supply operate by increasing costs, and the
resulting inflation is called cost-push inflation
Other things remaining the same, the higher the cost of production, the smaller is the amount produced.
At a given price level, rising wage rates or rising prices of raw materials such as oil lead firms to decrease
the quantity of labor employed and to cut production." (pg. 865)
Aggregate supply is the "the total value of the goods and services produced in a country" or simply factor
2, "The supply of goods". The supply of goods can be influenced by factors other than an increase in the
price of inputs (say a natural disaster), so not all factor 2 inflation is cost-push inflation.
Of course, the next question would be "What caused the price of inputs to rise?". Any combinations of the
four factors could cause that, but the two most likely are factor 2 (Raw materials such as oil have become
more scarce), or factor 4 (The demand for raw materials and labor have risen).
Definition of Demand-Pull Inflation
Parkin and Bade give the following explanation for demand-pull inflation:
"The inflation resulting from an increase in aggregate demand is called demand-pull inflation. Such an
inflation may arise from any individual factor that increases aggregate demand, but the main ones that
generate ongoing increases in aggregate demand are
1. Increases in the money supply
2. Increases in government purchases
3. Increases in the price level in the rest of the world
"(pg. 862)
Inflation caused by an increase in aggregate demand, is inflation caused by factor 4 (An increase in the
demand for goods). The three most likely causes of an increase in aggregate demand will also tend to
increase inflation:
1. Increases in the money supply This is simply factor 1 inflation.
2. Increases in government purchases The increased demand for goods by the
government causes factor 4 inflation.
3. Increases in the price level in the rest of the world Suppose you are living in
the United States. If the price of gum rises in Canada, we should expect to see
less Americans buy gum from Canadians and more Canadians purchase the
cheaper gum from American sources. From the American perspective the
demand for gum has risen causing a price rise in gum; a factor 4 inflation.
Inflation in Summary
Cost-push inflation and demand-pull inflation can be explained using our four inflation factors. Cost-push
inflation is inflation caused by rising prices of inputs that causes factor 2 (The supply of goods goes down)
inflation. Demand-pull inflation is factor 4 inflation (The demand for goods goes up) which can have many
causes.
The Link Between The Business Cycle and Inflation
[Q:]When there is an economic expansion, demand seems to outpace supply,
particularly for goods and services that take time and major capital to increase supply.
As a result, prices generally rise (or there is at least price pressure) and particularly for
goods and services that cannot rapidly meet the increased demand such as housing in
urban centers (relatively fixed supply), advanced education (takes time to expand/build
new schools), but not cars because automotive plants can gear up pretty quickly.
First, do you agree with this and if not, how do you see it?
Second, when there is an economic contraction, supply initially outpaces demand. However prices for
most goods and services don't go down, and neither do wages.
My main question is why don't prices go down for goods and services? I expect for wages, it's just
stickiness from the corporate/human culture...
people don't like to give pay cuts... managers tend to lay off before they give pay cuts
(though I've seen exceptions). Why don't prices go down for most goods and services?
[A:] Great question! Your analysis is spot on. Now on to your question:
In my article titled Why Does Money Have Value we saw that changes in the level of prices (inflation) was
due to a combination of the following four factors:
1.
2.
3.
4.
The supply of money goes up.
The supply of goods goes down.
Demand for money goes down.
Demand for goods goes up.
In a boom, we would expect that the demand for goods to rise faster than the supply. All
else being equal, we would expect factor 4 to outweigh factor 2 and the level of prices to
rise. Since deflation is the opposite of inflation, deflation is due to a combination of the
following four factors:
1.
2.
3.
4.
The supply of money goes down.
The supply of goods goes up.
Demand for money goes up.
Demand for goods goes down.
We would expect the demand for goods to decline faster than the supply, so factor 4
should outweigh factor 2, so all else being equal we should expect the level of prices to
fall.
From my article titled A Beginner's Guide to Economic Indicators we saw that measures of inflation such
as the Implicit Price Deflator for GDP are procyclical coincident economics indicators, so the inflation rate
is high during booms and low during recessions. The information above shows that the inflation rate
should be higher in booms than in busts, but why is the inflation rate still positive in recessions?
The answer is that all else is not equal. The money supply is constantly expanding, so the economy has a
consistent inflationary pressure given by factor 1. The Federal Reserve has a table listing the M1, M2,
and M3 money supply. (To learn about these definitions, see How much is the per capita money supply in
the U.S.?). From Recession? Depression? we saw that during the worst recession America has
experienced since World War II, from November 1973 to March 1975, real GDP fell by 4.9 percent. This
would have caused deflation, except that the money supply rose rapidly during this period, with the
seasonally adjusted M2 rising 16.5% and the seasonally adjusted M3 rising 24.4%. Data from
Economagic shows that the Consumer Price Index rose 14.68% during this severe recession. A
recessionary period with a high inflation rate is known as stagflation, a concept made famous by Milton
Friedman. While inflation rates are generally lower during recessions, we can still experience high levels
of inflation through the growth of the money supply.
So the key point here is that while the inflation rate rises during a boom and falls during a recession, it
generally does not go below zero due to a consistently increasing money supply.
What's a recession? How do we know if we're in one?
There’s an old joke among economists that states:
A recession is when your neighbor loses his job.
A depression is when you lose your job.
The difference between the two terms is not very well understood for one simple reason: There isn’t a
universally agreed upon definition. If you ask 100 different economists to define the terms recession and
depression, you’d get at least 100 different answers. I’ll try to summarize both terms and explain the
differences between them in a way that almost all economists could agree with.
Recession: The Newspaper Definition
The standard newspaper definition of a recession is a decline in the Gross Domestic
Product (GDP) for two or more consecutive quarters.
This definition is unpopular with most economists for two main reasons.
First, this definition does not take into consideration changes in other variables. For
example this definition ignores any changes in the unemployment rate or consumer
confidence. Second, by using quarterly data this definition makes it difficult to pinpoint
when a recession begins or ends. This means that a recession that lasts ten months or
less may go undetected.
Recession: The BCDC Definition
The Business Cycle Dating Committee at the National Bureau of Economic Research (NBER) provides a
better way to find out if there is a recession is taking place. This committee determines the amount of
business activity in the economy by looking at things like employment, industrial production, real income
and wholesale-retail sales. They define a recession as the time when business activity has reached its
peak and starts to fall until the time when business activity bottoms out. When the business activity starts
to rise again it’s called an expansionary period. By this definition, the average recession lasts about a
year.
What's the difference?
Depression
Before the Great Depression of the 1930s any downturn in economic activity was
referred to as a depression. The term recession was developed in this period to
differentiate periods like the 1930s from smaller economic declines that occurred in
1910 and 1913. This leads to the simple definition of a depression as a recession that
lasts longer and has a larger decline in business activity.
The Difference
So how can we tell the difference between a recession and a depression? A good rule
of thumb for determining the difference between a recession and a depression is to look
at the changes in GNP. A depression is any economic downturn where real GDP
declines by more than 10 percent. A recession is an economic downturn that is less
severe.
By this yardstick, the last depression in the United States was from May 1937 to June 1938, where real
GDP declined by 18.2 percent.
If we use this method then the Great Depression of the 1930s can be seen as two
separate events: an incredibly severe depression lasting from August 1929 to March
1933 where real GDP declined by almost 33 percent, a period of recovery, then another
less severe depression of 1937-38. The United States hasn’t had anything even close to
a depression in the post-war period. The worst recession in the last 60 years was from
November 1973 to March 1975, where real GDP fell by 4.9 percent. Countries such as
Finland and Indonesia have suffered depressions in recent memory using this definition.
Now you should be able to determine the difference between a recession and a depression without
resorting to the poor humor of the dismal scientists
When Stock Prices Go Down, Where Does the Money Go?
[Q:]When stocks take a beating, where does the lost money go?
Example: I bought shares of AOL at $80, but the shares are now worth $15. In whose pocket did my loss
of the $65 go?
This leads me to believe that even in a super-down market, somebody is making a lot of money.
[A:] Thanks for your interesting question! It’s one that comes up quite often, usually from someone who
just sold a stock for a loss.
When you have a “where does the money go?” type question, a good way of answering it is to construct a
simple example. We’ll use four different entities: one company, AOL, and three people named Mert,
Becky, and Rachel. AOL has a share in the company that they are willing to sell, and each of our entities
have the following amount of money in the bank:
Initial Positions




AOL has $0 (but owns 1 share)
Mert has $200
Rachel has $500
Becky has $1000
Suppose that the following events take place:
Share Sales
1. AOL has an IPO (initial public offering), and sells one share of stock to Mert for
$30.
2. AOL’s stock goes up, and Mert sells his share to Rachel for $80.
3. The bubble bursts, AOL’s stock value crashes, and Rachel sells her share to
Becky for $15
If we take each transaction one at a time, we can follow where the money goes. We’ll
compare each person’s current wealth to the wealth they had when they started. First
AOL goes public and sells a share to Mert for $30.
Transaction 1: AOL sells one share to Mert for $30




AOL has $30 (down 1 share, up $30 from initial)
Mert has $170 (up 1 share, down $30 from initial)
Rachel has $500
Becky has $1000
A tech boom occurs and Mert worries it may not last and he sells his share to Rachel for
$80.
Transaction 2: Mert sells his share to Rachel for $80




AOL has $30 (down 1 share, up $30 from initial)
Mert has $250 (up $50 from initial)
Rachel has $420 (up 1 share, down $80 from initial)
Becky has $1000
Mert was right and the tech bubble burst. Rachel is worried that AOL may go bankrupt,
so she decides to sell her share to Becky for $15.
Final Transaction: Rachel sells her share to Becky for $15




AOL has $30 (down 1 share, up $30 from initial)
Mert has $250 (up $50 from initial)
Rachel has $435 (down $65 from initial)
Becky has $985 (up 1 share, down $15 from initial)
If we’ve done our calculations correctly, the total money lost has to equal the total
money gained and the total number of stocks lost has to equal the total number of
stocks gained. Mert ($50) and AOL ($30) are collectively up $80, and Rachel ($65) and
Becky ($15) are collectively down $80, so no money has entered or left the system.
Similarly AOL’s one stock loss is equal to Becky’s one stock gained.
Suppose the true “value” of the share is $15. Then we can figure out each entities net value by adding
$15 per share to anyone who has a share, and subtract $15 per share to anyone who is down a share.
Net Value of the Four Entities




AOL has a net value of $15 (up $15 from initial)
Mert has a net value $250 (up $50 from initial)
Rachel has a net value $435 (down $65 from initial)
Becky has a net value $1000 (even)
It has become quite clear where Rachel’s lost $65 has gone: Mert has $50 of it, and
AOL has $15 of it. If we change the value of the stock, the total net amount AOL and
Becky are up will be equal to $15, so for every dollar the stock goes up, Becky will have
a net gain of $1 and AOL will have a net loss of $1. So no money will enter or leave the
system when the price changes.
Note that in this situation nobody put more money in the bank from the down market. Mert was the big
winner, but he made all his money before the market crashed. After he sold the stock to Rachel, he’d
have the same amount of money if the stock went to $15 or if it went to $150.
It is true that AOL’s net value does go up when the stock price goes down, because when the price of the
stock plunges, it becomes cheaper for AOL to repurchase the share they sold to Mert. If the stock price
goes to $10 and they repurchase the share from Becky, they will be up $20 as they initially sold the share
for $30. However, if the stock price goes to $70 and they repurchase the share, they will be down $40.
Note that unless they actually make this transaction AOL does not gain or lose any cash from changes in
the share price. I've assumed that they do not repurchase the share, so AOL has not gained money from
the lower stock price.
Lastly consider Rachel's situation. If Becky decides to sell her share to AOL, from Rachel’s perspective it
doesn’t matter what price Becky charges AOL as Rachel will still be down $65 no matter what the price.
But unless AOL actually makes this transaction, they're up $30 and down one share, no matter what the
market price of that share is.
By constructing an example, we can see where the money went, and see that the guy making all the
money made it just before the crash happened.
Elasticity Explained
[Q:] I'm taking economics in college for the first time and I keep hearing the term
elasticity. We've been given about five different formulas for elasticity and I'm not sure
when we should use any of them. Can you help me out?
[A:] Absolutely! Elasticity is a concept that is used throughout microeconomics and is often
misunderstood by students.
On the right hand side of this article I've included links explaining each of the major types of elasticity.
You can also take a tour explaining each type one at a time by following the link on the bottom of this
article.
What is Elasticity?
The Economics Glossary gives the following definition for elasticity:
"Elasticity is a measure of responsiveness.
The responsiveness of behavior measured by variable Z to a change in environment
variable Y is the change in Z observed in response to a change in Y. Specifically, this
approximation is common:
elasticity = (percentage change in Z) / (percentage change in Y)
The smaller the percentage change in Y is practical, the better the measure is and the closer it is to the
intended theoretically perfect measure."
Don't worry if that definition went over your head. The key thing to understand is that we use elasticity
when we want to see how one thing changes when we change something else. How does demand for a
good change when we change its price? How does the demand for a good change when the price of a
substitute good changes? These are the type of questions that elasticities help us answer.
A Primer on the Price Elasticity of Demand
The Price Elasticity of Demand (commonly known as just price elasticity) measures the
rate of response of quantity demanded due to a price change. The formula for the Price
Elasticity of Demand (PEoD) is:
PEoD = (% Change in Quantity Demanded)/(% Change in Price)
Calculating the Price Elasticity of Demand
You may be asked the question "Given the following data, calculate the price elasticity
of demand when the price changes from $9.00 to $10.00" Using the chart on the bottom
of the page, I'll walk you through answering this question. (Your course may use the
more complicated Arc Price Elasticity of Demand formula. If so you'll need to see the
article on Arc Elasticity)
First we'll need to find the data we need.
We know that the original price is $9 and the new price is $10, so we have
Price(OLD)=$9 and Price(NEW)=$10. From the chart we see that the quantity
demanded when the price is $9 is 150 and when the price is $10 is 110. Since we're
going from $9 to $10, we have QDemand(OLD)=150 and QDemand(NEW)=110, where
"QDemand" is short for "Quantity Demanded". So we have:
Price(OLD)=9
Price(NEW)=10
QDemand(OLD)=150
QDemand(NEW)=110
To calculate the price elasticity, we need to know what the percentage change in quantity demand is and
what the percentage change in price is. It's best to calculate these one at a time.
Calculating the Percentage Change in Quantity Demanded
The formula used to calculate the percentage change in quantity demanded is:
[QDemand(NEW) - QDemand(OLD)] / QDemand(OLD)
By filling in the values we wrote down, we get:
[110 - 150] / 150 = (-40/150) = -0.2667
We note that % Change in Quantity Demanded = -0.2667 (We leave this in decimal terms. In
percentage terms this would be -26.67%). Now we need to calculate the percentage change in price.
Calculating the Percentage Change in Price
Similar to before, the formula used to calculate the percentage change in price is:
[Price(NEW) - Price(OLD)] / Price(OLD)
By filling in the values we wrote down, we get:
[10 - 9] / 9 = (1/9) = 0.1111
We have both the percentage change in quantity demand and the percentage change in price, so we can
calculate the price elasticity of demand.
Final Step of Calculating the Price Elasticity of Demand
We go back to our formula of:
PEoD = (% Change in Quantity Demanded)/(% Change in Price)
We can now fill in the two percentages in this equation using the figures we calculated earlier.
PEoD = (-0.2667)/(0.1111) = -2.4005
When we analyze price elasticities we're concerned with their absolute value, so we ignore the negative
value. We conclude that the price elasticity of demand when the price increases from $9 to $10 is 2.4005.
How Do We Interpret the Price Elasticity of Demand?
A good economist is not just interested in calculating numbers. The number is a means
to an end; in the case of price elasticity of demand it is used to see how sensitive the
demand for a good is to a price change. The higher the price elasticity, the more
sensitive consumers are to price changes. A very high price elasticity suggests that
when the price of a good goes up, consumers will buy a great deal less of it and when
the price of that good goes down, consumers will buy a great deal more. A very low
price elasticity implies just the opposite, that changes in price have little influence on
demand.
Often an assignment or a test will ask you a follow up question such as "Is the good price elastic or
inelastic between $9 and $10". To answer that question, you use the following rule of thumb:



If PEoD > 1 then Demand is Price Elastic (Demand is sensitive to price changes)
If PEoD = 1 then Demand is Unit Elastic
If PEoD < 1 then Demand is Price Inelastic (Demand is not sensitive to price
changes)
Recall that we always ignore the negative sign when analyzing price elasticity, so PEoD is always
positive. In the case of our good, we calculated the price elasticity of demand to be 2.4005, so our good is
price elastic and thus demand is very sensitive to price changes.
Primer on the Price Elasticity of Supply
The Price Elasticity of Supply measures the rate of response of quantity demand due to
a price change. If you've already read The Price Elasticity of Demand and understand it,
you may want to just skim this section, as the calculations are similar. (Your course may
use the more complicated Arc Price Elasticity of Supply formula. If so you'll need to see
the article on Arc Elasticity) We calculate the Price Elasticity of Supply by the formula:
PEoS = (% Change in Quantity Supplied)/(% Change in Price)
Calculating the Price Elasticity of Supply
You may be asked "Given the following data, calculate the price elasticity of supply
when the price changes from $9.00 to $10.00" Using the chart on the bottom of the
page, I'll walk you through answering this question.
First we need to find the data we need.
We know that the original price is $9 and the new price is $10, so we have
Price(OLD)=$9 and Price(NEW)=$10. From the chart we see that the quantity supplied
(make sure to look at the supply data, not the demand data) when the price is $9 is 150
and when the price is $10 is 110. Since we're going from $9 to $10, we have
QSupply(OLD)=150 and QSupply(NEW)=210, where "QSupply" is short for "Quantity
Supplied". So we have:
Price(OLD)=9
Price(NEW)=10
QSupply(OLD)=150
QSupply(NEW)=210
To calculate the price elasticity, we need to know what the percentage change in quantity supply is and
what the percentage change in price is. It's best to calculate these one at a time.
Calculating the Percentage Change in Quantity Supply
The formula used to calculate the percentage change in quantity supplied is:
[QSupply(NEW) - QSupply(OLD)] / QSupply(OLD)
By filling in the values we wrote down, we get:
[210 - 150] / 150 = (60/150) = 0.4
So we note that % Change in Quantity Supplied = 0.4 (This is in decimal terms. In percentage terms it
would be 40%). Now we need to calculate the percentage change in price.
Calculating the Percentage Change in Price
Similar to before, the formula used to calculate the percentage change in price is:
[Price(NEW) - Price(OLD)] / Price(OLD)
By filling in the values we wrote down, we get:
[10 - 9] / 9 = (1/9) = 0.1111
We have both the percentage change in quantity supplied and the percentage change in price, so we can
calculate the price elasticity of supply.
Final Step of Calculating the Price Elasticity of Supply
We go back to our formula of:
PEoS = (% Change in Quantity Supplied)/(% Change in Price)
We now fill in the two percentages in this equation using the figures we calculated.
PEoD = (0.4)/(0.1111) = 3.6
When we analyze price elasticities we're concerned with the absolute value, but here that is not an issue
since we have a positive value. We conclude that the price elasticity of supply when the price increases
from $9 to $10 is 3.6.
How Do We Interpret the Price Elasticity of Supply?
The price elasticity of supply is used to see how sensitive the supply of a good is to a
price change. The higher the price elasticity, the more sensitive producers and sellers
are to price changes. A very high price elasticity suggests that when the price of a good
goes up, sellers will supply a great deal less of the good and when the price of that
good goes down, sellers will supply a great deal more. A very low price elasticity implies
just the opposite, that changes in price have little influence on supply.
Often you'll have the follow up question "Is the good price elastic or inelastic between $9 and $10". To
answer that, use the following rule of thumb:



If PEoS > 1 then Supply is Price Elastic (Supply is sensitive to price changes)
If PEoS = 1 then Supply is Unit Elastic
If PEoS < 1 then Supply is Price Inelastic (Supply is not sensitive to price
changes)
Recall that we always ignore the negative sign when analyzing price elasticity, so PEoS is always
positive. In our case, we calculated the price elasticity of supply to be 3.6, so our good is price elastic and
thus supply is very sensitive to price changes.
A Primer on the Income Elasticity of Demand
The Income Elasticity of Demand measures the rate of response of quantity demand
due to a raise (or lowering) in a consumers income. The formula for the Income
Elasticity of Demand (IEoD) is given by:
IEoD = (% Change in Quantity Demanded)/(% Change in Income)
Calculating the Income Elasticity of Demand
On an assignment or a test, you might be asked "Given the following data, calculate the
income elasticity of demand when a consumer's income changes from $40,000 to
$50,000". (Your course may use the more complicated Arc Income Elasticity of Demand
formula. If so you'll need to see the article on Arc Elasticity)Using the chart on the
bottom of the page, I'll walk you through answering this question.
The first thing we'll do is find the data we need.
We know that the original income is $40,000 and the new price is $50,000 so we have
Income(OLD)=$40,000 and Income(NEW)=$50,000. From the chart we see that the
quantity demanded when income is $40,000 is 150 and when the price is $50,000 is
180. Since we're going from $40,000 to $50,000 we have QDemand(OLD)=150 and
QDemand(NEW)=180, where "QDemand" is short for "Quantity Demanded". So you
should have these four figures written down:
Income(OLD)=40,000
Income(NEW)=50,000
QDemand(OLD)=150
QDemand(NEW)=180
To calculate the price elasticity, we need to know what the percentage change in quantity demand is and
what the percentage change in price is. It's best to calculate these one at a time.
Calculating the Percentage Change in Quantity Demanded
The formula used to calculate the percentage change in quantity demanded is:
[QDemand(NEW) - QDemand(OLD)] / QDemand(OLD)
By filling in the values we wrote down, we get:
[180 - 150] / 150 = (30/150) = 0.2
So we note that % Change in Quantity Demanded = 0.2 (We leave this in decimal terms. In percentage
terms this would be 20%) and we save this figure for later. Now we need to calculate the percentage
change in price.
Calculating the Percentage Change in Income
Similar to before, the formula used to calculate the percentage change in income is:
[Income(NEW) - Income(OLD)] / Income(OLD)
By filling in the values we wrote down, we get:
[50,000 - 40,000] / 40,000 = (10,000/40,000) = 0.25
We have both the percentage change in quantity demand and the percentage change in income, so we
can calculate the income elasticity of demand.
Final Step of Calculating the Income Elasticity of Demand
We go back to our formula of:
IEoD = (% Change in Quantity Demanded)/(% Change in Income)
We can now fill in the two percentages in this equation using the figures we calculated earlier.
IEoD = (0.20)/(0.25) = 0.8
Unlike price elasticities, we do care about negative values, so do not drop the negative sign if you get
one. Here we have a positive price elasticity, and we conclude that the income elasticity of demand when
income increases from $40,000 to $50,000 is 0.8.
How Do We Interpret the Income Elasticity of Demand?
Income elasticity of demand is used to see how sensitive the demand for a good is to an
income change. The higher the income elasticity, the more sensitive demand for a good
is to income changes. A very high income elasticity suggests that when a consumer's
income goes up, consumers will buy a great deal more of that good. A very low price
elasticity implies just the opposite, that changes in a consumer's income has little
influence on demand.
Often an assignment or a test will ask you the follow up question "Is the good a luxury good, a normal
good, or an inferior good between the income range of $40,000 and $50,000?" To answer that use the
following rule of thumb:



If IEoD > 1 then the good is a Luxury Good and Income Elastic
If IEoD < 1 and IEOD > 0 then the good is a Normal Good and Income Inelastic
If IEoD < 0 then the good is an Inferior Good and Negative Income Inelastic
In our case, we calculated the income elasticity of demand to be 0.8 so our good is income inelastic and a
normal good and thus demand is not very sensitive to income changes.
A Primer on the Cross-Price Elasticity of Demand
The Cross-Price Elasticity of Demand measures the rate of response of quantity
demanded of one good, due to a price change of another good. If two goods are
substitutes, we should expect to see consumers purchase more of one good when the
price of its substitute increases. Similarly if the two goods are complements, we should
see a price rise in one good cause the demand for both goods to fall. Your course may
use the more complicated Arc Cross-Price Elasticity of Demand formula. If so you'll
need to see the article on Arc Elasticity. The common formula for the Cross-Price
Elasticity of Demand (CPEoD) is given by:
CPEoD = (% Change in Quantity Demand for Good X)/(% Change in Price for Good Y)
Calculating the Cross-Price Elasticity of Demand
You're given the question: "With the following data, calculate the cross-price elasticity of
demand for good X when the price of good Y changes from $9.00 to $10.00." Using the
chart on the bottom of the page, we'll answer this question.
We know that the original price of Y is $9 and the new price of Y is $10, so we have Price(OLD)=$9 and
Price(NEW)=$10.
From the chart we see that the quantity demanded of X when the price of Y is $9 is 150
and when the price is $10 is 190. Since we're going from $9 to $10, we have
QDemand(OLD)=150 and QDemand(NEW)=190. You should have these four figures
written down:
Price(OLD)=9
Price(NEW)=10
QDemand(OLD)=150
QDemand(NEW)=190
To calculate the cross-price elasticity, we need to calculate the percentage change in quantity demanded
and the percentage change in price. We'll calculate these one at a time.
Calculating the Percentage Change in Quantity Demanded of Good X
The formula used to calculate the percentage change in quantity demanded is:
[QDemand(NEW) - QDemand(OLD)] / QDemand(OLD)
By filling in the values we wrote down, we get:
[190 - 150] / 150 = (40/150) = 0.2667
So we note that % Change in Quantity Demanded = 0.2667 (This in decimal terms. In percentage terms
this would be 26.67%).
Calculating the Percentage Change in Price of Good Y
The formula used to calculate the percentage change in price is:
[Price(NEW) - Price(OLD)] / Price(OLD)
We fill in the values and get:
[10 - 9] / 9 = (1/9) = 0.1111
We have our percentage changes, so we can complete the final step of calculating the cross-price
elasticity of demand.
Final Step of Calculating the Cross-Price Elasticity of Demand
We go back to our formula of:
CPEoD = (% Change in Quantity Demanded of Good X)/(% Change in Price of Good Y)
We can now get this value by using the figures we calculated earlier.
CPEoD = (0.2667)/(0.1111) = 2.4005
We conclude that the cross-price elasticity of demand for X when the price of Y increases from $9 to $10
is 2.4005.
How Do We Interpret the Cross-Price Elasticity of Demand?
The cross-price elasticity of demand is used to see how sensitive the demand for a
good is to a price change of another good. A high positive cross-price elasticity tells us
that if the price of one good goes up, the demand for the other good goes up as well. A
negative tells us just the opposite, that an increase in the price of one good causes a
drop in the demand for the other good. A small value (either negative or positive) tells
us that there is little relation between the two goods.
Often an assignment or a test will ask you a follow up question such as "Are the two goods complements
or substitutes?". To answer that question, you use the following rule of thumb:



If CPEoD > 0 then the two goods are substitutes
If CPEoD =0 then the two goods are independent (no relationship between the
two goods
If CPEoD < 0 then the two goods are complements
In the case of our good, we calculated the cross-price elasticity of demand to be 2.4005, so our two
goods are substitutes when the price of good Y is between $9 and $10.
A Primer on Arc Elasticity
One of the problems with the standard formulas for elasticity that are in many freshman
texts is the elasticity figure you come up with is different depending on what you use as
the start point and what you use as the end point. An example will help illustrate this.
When we looked at Price Elasticity of Demand we calculated the price elasticity of demand when price
went from $9 to $10 and demand went from 150 to 110 was 2.4005. But what if we calculated what the
price elasticity of demand when we started at $10 and went to $9? So we'd have:
Price(OLD)=10
Price(NEW)=9
QDemand(OLD)=110
QDemand(NEW)=150
First we'd calculate the percentage change in quantity demanded: [QDemand(NEW) - QDemand(OLD)] /
QDemand(OLD)
By filling in the values we wrote down, we get:
[150 - 110] / 110 = (40/110) = 0.3636 (Again we leave this in decimal form)
Then we'd calculate the percentage change in price:
[Price(NEW) - Price(OLD)] / Price(OLD)
By filling in the values we wrote down, we get:
[9 - 10] / 10 = (-1/10) = -0.1
We then use these figures to calculate the price-elasticity of demand:
PEoD = (% Change in Quantity Demanded)/(% Change in Price)
We can now fill in the two percentages in this equation using the figures we calculated earlier.
PEoD = (0.3636)/(-0.1) = -3.636
When calculating a price elasticity, we drop the negative sign, so our final value is 3.636.
Obviously 3.6 is a lot different from 2.4, so we see that this way of measuring price elasticity is quite
sensitive to which of your two points you choose as your new point, and which you choose as your old
point. Arc elasticities are a way of removing this problem.
Arc Elasticity
When calculating Arc Elasticities, the basic relationships stay the same. So when we're
calculating Price Elasticity of Demand we still use the basic formula:
PEoD = (% Change in Quantity Demanded)/(% Change in Price)
However how we calculate the percentage changes differ. Before when we calculated Price Elasticity of
Demand, Price Elasticity of Supply,Income Elasticity of Demand, or Cross-Price Elasticity of Demand
we'd calculate the percentage change in Quantity Demand the following way:
[QDemand(NEW) - QDemand(OLD)] / QDemand(OLD)
To calculate an arc-elasticity, we use the following formula:
[[QDemand(NEW) - QDemand(OLD)] / [QDemand(OLD) + QDemand(NEW)]]*2
This formula takes an average of the old quantity demanded and the new quantity demanded on the
denominator.
By doing so, we will get the same answer (in absolute terms) by choosing $9 as old and
$10 as new, as we would choosing $10 as old and $9 as new. When we use arc
elasticities we do not need to worry about which point is the starting point and which
point is the ending point. This benefit comes at the cost of a more difficult calculation.
If we take the example with:
Price(OLD)=9
Price(NEW)=10
QDemand(OLD)=150
QDemand(NEW)=110
We will get a percentage change of:
[[QDemand(NEW) - QDemand(OLD)] / [QDemand(OLD) + QDemand(NEW)]]*2
[[110 - 150] / [150 + 110]]*2 = [[-40]/[260]]*2 = -0.1538 * 2 = -0.3707
So we get a percentage change of -0.3707 (or -37% in percentage terms). If we swap the old and new
values for old and new, the denominator will be the same, but we will get +40 in the numerator instead,
giving us an answer of the 0.3707. When we calculate the percentage change in price, we will get the
same values except one will be positive and the other negative. When we calculate our final answer, we
will see that the elasticities will be the same and have the same sign. To conclude this piece, I'll include
the formulas so you can calculate the arc versions of price elasticity of demand, price elasticity of supply,
income elasticity, and cross-price demand elasticity. I recommend calculating each of the measures using
the step-by-step fashion I detail in the previous articles.
New Formulas - Arc Price Elasticity of Demand
To calculate the Arc Price Elasticity of Demand, we use the formulas:
PEoD = (% Change in Quantity Demanded)/(% Change in Price)
(% Change in Quantity Demanded) = [[QDemand(NEW) - QDemand(OLD)] / [QDemand(OLD) +
QDemand(NEW)]] *2]
(% Change in Price) = [[Price(NEW) - Price(OLD)] / [Price(OLD) + Price(NEW)]] *2]
New Formulas - Arc Price Elasticity of Supply
To calculate the Arc Price Elasticity of Supply, we use the formulas:
PEoS = (% Change in Quantity Supplied)/(% Change in Price)
(% Change in Quantity Supplied) = [[QSupply(NEW) - QSupply(OLD)] / [QSupply(OLD) +
QSupply(NEW)]] *2]
(% Change in Price) = [[Price(NEW) - Price(OLD)] / [Price(OLD) + Price(NEW)]] *2]
New Formulas - Arc Income Elasticity of Demand
To calculate the Arc Income Elasticity of Demand, we use the formulas:
PEoD = (% Change in Quantity Demanded)/(% Change in Income)
(% Change in Quantity Demanded) = [[QDemand(NEW) - QDemand(OLD)] / [QDemand(OLD) +
QDemand(NEW)]] *2]
(% Change in Income) = [[Income(NEW) - Income(OLD)] / [Income(OLD) + Income(NEW)]] *2]
New Formulas - Arc Cross-Price Elasticity of Demand of Good X
To calculate the Arc Cross-Price Elasticity of Demand, we use the formulas:
PEoD = (% Change in Quantity Demanded of X)/(% Change in Price of Y)
(% Change in Quantity Demanded) = [[QDemand(NEW) - QDemand(OLD)] / [QDemand(OLD) +
QDemand(NEW)]] *2]
(% Change in Price) = [[Price(NEW) - Price(OLD)] / [Price(OLD) + Price(NEW)]] *2]
Notes and Conclusion
Keep in mind that for all over these formulas it doesn't matter what you use as the "old"
and as the "new" value, just as long as the "old" price is the one associated with the
"old" quantity. You could call the points A and B or 1 and 2 if you like, but old and new
works just as well.
So now you can calculate elasticity using a simple formula as well as using the arc formula. In a future
article, we will look at using calculus to compute elasticities.
Basics of the use of Money
Judy Logback, founder and development coordinator of the Kallari Association, answered our
questions:
With what environmental organization are you affiliated?
I arrived in Ecuador in 1997 and throughout the past seven years have visited and worked
with more than 600 rural families to encourage them to establish the Kallari Association, a
small farmers' and artisans' organization dedicated to sustainable organic production of a
diverse array of products, made up of 24 Amazon indigenous and mestizo communities,
totaling 1,700 members. The farmers and artisans who make up Kallari are dedicated to
meeting their basic economic needs without sacrificing Amazon rainforests, historical
ethnobotanical knowledge, or cultural traditions.
I am considered the founder of Kallari, but my current position deals much more with
development. In the past two years I have managed to turn over the majority of the
administrative responsibility to Kallari's democratically elected directive board.
What, in a perfect world, would constitute "mission accomplished"?
When the Kallari Association's artisans and farmers are earning an annual income of no
less than $2,500 per year per family. Compare this to when I arrived in the region, when a
farm family earned little more than $500 per year and the main cash-crop markets
available consisted of coffee, cocoa, corn, and timber.
What do you really do, on a day-to-day basis?
Every day is very different and it is a little difficult to portray the scattered activities I am
involved in.
In a given year I spend 10 months in Ecuador -- roughly half of that time is in the
Amazon, and the other half in Quito. For the past two years I have traveled a couple of
months in the U.S. promoting Kallari and trying to sow a global conscience. My favorite
activities when I am in the Amazon are to hike through rainforest trails and cross Amazon
tributaries to visit the farms of the Kallari members to see old friends, learn about more
species of plants used for craft production, review cocoa trees, buy fruit and hardwoodtree seed, deliver checks, letters, or invitations, and enjoy Amazon foods. About half of my
time in the Amazon I teach rainforest ecology courses.
What long and winding road led you to your current position?
I am from Kansas and spent most of my childhood in a farming village, where most
families derived at least half of their income from farming. In high school and college, I
had the opportunity to work at The Land Institute, an excellent nonprofit organization
established to research sustainable agriculture. From there I received a scholarship to
attend Beloit College in Wisconsin, where I earned a B.S. in environmental biology and
Spanish.
I had several biological-research, conservation, and habitat-restoration positions, but
although I enjoyed the challenges of biological field research, it left me with a sense of
failure. As researchers we could study the decline of species diversity or attempt to find
the most intact ecosystems and promote land purchase or easements to prevent them
from becoming strip malls or suburban neighborhoods. However, we could not solve the
underlying problems of economic progress fueling the destruction of natural resources.
I felt that instead of land purchase and reserve management, grassroots work with rural
people was the more urgent necessity within conservation work. I dedicated my career to
countering rainforest destruction, but more with tenacity for creating sustainable markets
than biological expertise. If international markets are the leading cause of tropical
deforestation, than as members of the international community it is our responsibility to
create and develop markets that reinforce rainforest conservation, while promoting the
preservation of cultural traditions.
How many emails are currently in your inbox?
I have more than 350 right now, but I try to keep it at less than 100. Unfortunately I
spend much of June and July in the Amazon without internet access so I am still trying to
catch up.
Who's the biggest pain in the ass you have to deal with?
Extractive industries (specifically logging, oil, and gold mining in Ecuador) that use their
power to manipulate local government, contaminate the landscape, and completely
override labor and human-rights policies.
Who's nicer than you would expect?
I have been amazed by the Ecuadorian people's willingness to share the little they have -the shop owner a block from our apartment in Quito will gladly lend me food for a week or
two, until I have the money to repay him for my staples.
Where were you born? Where do you live now?
Wichita, Kan., in the U.S. Tena or Quito, in Ecuador.
What do you consider your environmental coming-of-age moment or experience?
Although my parents were incredible examples of environmental stewardship, I rejected
their frugal lifestyle until meeting my high school biology teacher, John Craft. He took the
time to answer our probing questions about his life decisions and by doing so helped us
realize that each of our actions have social, environmental, and economic impacts in other
parts of the world. My general life goals and vocation were completely solidified by the
time I was 16 years old and they have changed very little in the past 15 years.
What's on your desk right now?
I have been invited to accompany the Kallari board members to promote their cocoa at the
Slow Food Salone de Gusto in Italy, the Terra Madre agricultural event, and the
Eurochocolate Festival, all sponsored by Slow Food, for 11 days in October. I am
concerned about preparing all of our presentation materials and handling the logistics of
traveling with people who are not experienced backpackers.
Also, we are preparing to maximize the sale of Kallari crafts before the holiday shopping
rush, as we have a diverse stock of crafts and only a few months to sell the majority of
our merchandise. I have already received two or three orders this week, after a summer
drought of marketing activity.
What environmental offense has infuriated you the most?
The Ecuadorian president (who seems to have funded his election campaign through
support from the U.S.) has proposed and is in the process of passing a bill that makes all
genetic material, except human, property of the state. This includes all ethnobiological
applications and basically overrides former international policies to protect the intellectual
property rights of the indigenous nations of Ecuador. Although it may not be a direct
environmental offense, I foresee that the long-term environmental effects of completely
stealing a people's right to the intellectual use of their biological resources further
threatens natural resources and obliterates their market potential.
Who is your environmental hero?
I recently had the honor of meeting Judith Kimerling, the woman who researched and
documented environmental and social violations by the Texaco oil company in Ecuador.
Her work led to the current lawsuit against Texaco and has been an incredible motivation
for me during my time in Latin America.
Who is your environmental nightmare?
Dick Cheney and his puppet, George W. Bush.
What's your environmental vice?
I don't have the space or time to cultivate my own organic grains, vegetables, and fruits. I
do look forward to a time when I can find an empty lot nearby and rent it to spend at least
an hour each day growing enough produce for at least the bulk of my own nutritional
requirements.
I also rent a large apartment in Quito where friends, volunteers, and staff stay in a
community-type atmosphere. It has electricity from the hydroelectric dams and hot water
heated by natural gas. I would prefer to have the money to help Kallari restructure a
building in Quito with solar-heated water and solar-energy collectors.
How do you get around?
I often take public buses to Tena and to project visits that are more than 30 miles from
Quito; however, I attempt to ride my bicycle or walk whenever possible when I am in the
city.
What are you reading these days?
Song of the Dodo, Beyond Backpacking, Cradle to Cradle, Good Stuff (Worldwatch
Institute guide to consumer decisions), and I like to keep Dao de Jing with me to reflect on
from time to time. I am awaiting the arrival of Stolen Harvest and recently finished Fast
Food Nation and Savages.
What's your favorite meal?
I'm always satisfied after eating odd fruits and nuts all day and sitting down to a typical
rural meal in the Amazon. The average dinner includes beans, rice, boiled plantains,
manioc with chili sauce, fresh fish (cooked in leaves), and sweetened lemongrass or
cinnamon tea to wash it down.
Are you a news junkie?
I am so busy that when a strike paralyzed the nation of Ecuador and the president was
overtaken by a coup, I barely noticed.
Which stereotype about environmentalists most fits you?
My father paid me what I consider to be one of the greatest compliments when he said,
"You are not only an environmental activist, but an active environmentalist." I have not
purchased a new piece of clothing in years, or a new pair of shoes in over a year. I use
natural soaps and leftover shampoo bits from other housemates. I put little effort into my
personal appearance, ride my bicycle almost everywhere possible, and try to invest much
of my meager earnings back into my work with Kallari. My material goals in life include
never owning a combustion-motor vehicle, a television, or a DVD player.
What's your favorite place or ecosystem?
I have yet to find somewhere as impressive as the rainforests of the Andes foothills, at the
beginning of the Amazon basin.
Would you label yourself an environmentalist?
Most of my friends and staff call me one, and I think they are correct, since I dedicated my
career to the environment when I was young. I also consider myself a humanist and
realize that we will not prevent habitat destruction until we take into account the social
and economic factors that lead to environmental devastation, seek alternatives, and make
them easily available to the most isolated rural people (who are the true stewards of the
majority of the world's remaining private property of high biodiversity).
What's your favorite movie?
The Trip to Bountiful is one of my all-time favorites.
Mac or PC?
We use both, but I prefer Mac because it has much less risk of virus infection, and our
database is on a Mac because they are much more reliable and user-friendly.
What are you happy about right now?
Although my work can be stressful, I love the challenge and could not imagine a job that
would fulfill me more and capitalize better on my talents, experience, background, and
interests. Even though I don't have children, I feel a tremendous responsibility and an
honor that I have managed to find a career that not only helps the environment, but
actually empowers people to protect their own rainforests.
If you could have every InterActivist reader do one thing, what would it be?
Spend time with a child and make the effort to explain why it is important to live in
modesty and learn to appreciate what you have. The incredible pressure on youth to
purchase and consume needs to be balanced by discussion and a good example from their
parents and other adults.
Cryo-Surgery: A lasting solution for a painful problem
Date: 10/12/2004
Contact: Tom Worobec
Lawrence Fallat, DPM, director of the Podiatric Surgical Residency program at Oakwood Healthcare System (OHS)
is pioneering a new, minimally invasive surgical procedure to treat the problem of heel pain.
“It’s an innovative technique,” said Dr. Fallat. “Cryo-surgery has been used for decades to treat prostate cancer and
melanoma. Now, we’re taking it and applying it to the foot, specifically for those people who are suffering from
plantar fasciitis, which is the inflammation of a tough band of tissue on the bottom of the foot. This inflammation
causes extreme heel pain. And we are seeing dramatic results.”
The procedure to treat the heel pain lasts about six to seven minutes and happens right in Dr. Fallat’s office. A
three-millimeter incision is placed in the heel of the foot where a two-millimeter tube is then inserted. The tube is
extremely cold. It freezes and destroys the pain nerves in the heel.
“Those nerves will grow back but the pain does not come back with them,” explained Dr. Fallat. “There is no
permanent damage to the foot, no permanent numbness or balance and mobility problems.”
The healing period lasts about two to three days.
“It’s nothing like the six-week healing period for other types of surgeries that treat plantar fasciitis,” said Dr. Fallat.
One of the other assets of this program is its success rate.
“This treatment is very effective,” said Dr. Fallat. “The procedure has a 90 percent success rate, and these are
people who have failed all of the other conventional treatments available.”
Currently, Dr. Fallat is the only physician in Michigan to perform this procedure as a treatment for plantar fasciitis.
House panel votes to strengthen whistleblower protections
By Lori Sharn, CongressDaily
Sept, 30, 2004
The House Government Reform Committee voted Wednesday to strengthen protections
for whistleblowers by closing some of the "loopholes" in the law protecting federal
whistleblowers from recrimination.
The Whistleblower Protection Enhancement Act (H.R. 3281) passed the committee by a voice
vote. The Senate Governmental Affairs Committee passed similar legislation (S. 2628) July 21.
Rep. Todd Platts, R-Pa., offered a substitute he said was a compromise. "Although [it] does not
contain all the provisions I had hoped for, it is a solid step in the right direction," said Platts, whose
amendment passed by voice vote. "I think while there can be an effort to pursue other aspects in
addition to what this bill does, that doesn't take away from what is good in this bill."
Platts said loopholes developed in the original 1989 Whistleblower Protection Act as it was
interpreted by the Merit Systems Protection Board and the Federal Circuit Court. He said replacing
the "irrefragable" standard for proof of government corruption with a "substantial evidence"
standard would help protect government whistleblowers.
The bill approved Wednesday clarifies congressional intent that "any" whistleblower disclosures
includes those "without restriction to time, place, form, motive, context or prior disclosure made to
any person by an employee or applicant, including a disclosure made in the ordinary course of an
employee's duties."
The legislation prohibits retaliatory investigations of employees, and require a Government
Accountability Office study to determine how often security clearances have been revoked in
retaliation for whistleblowing.
"There may be some other things we may want to look at, but that does not diminish the
importance of this bill," Platts said. "We think the burden of proof that we've put in the bill is a
balance of responsible burden of proof and will better service the best interests of the American
public and will allow legitimate whistle blowers to come forward and be protected against
retaliation."
Platts said he looks forward to working with the sponsors of the senate bill in conference
committee to resolve the issue.
However, Tom Devine, director of the Government Accountability Project, a leading whistleblower
organization, said Platts' amendment has a fatal flaw in that it does not give whistleblowers access
to the federal appeals courts and does not prevent whistleblowers from being stripped of their
security clearances.
"Without structural reform it is only a temporary stopgap. The law's fatal flaw since passage has
been minor league due process rights for enforcement, because whistleblowers do not have
normal access to court," Devine said in news release. "The Senate committee approved a cure.
The House committee approved a band aid."
-- Daniel Pulliam of Government Executive contributed to this report.
This document is located at http://www.govexec.com/dailyfed/0904/093004markup1.htm
National park funding determined by political clout rather than need
At a time when three-quarters of national parks are having their base budgets cut and park
advocates are crying out about the desperate need for more funding, it may gall many enviros to
find out how capricious and politically motivated park funding really is. Consider the little-known
Cuyahoga Valley National Park in Ohio: Its base budget is $9.5 million this year, more than the
budgets of many parks that are much larger and more famous, including Wyoming's Grand Teton
National Park and Utah's Zion National Park. What gives? Former Ohio Rep. John Sieberling (D)
chaired the House Parks and Public Lands Subcommittee and had the clout to secure big bucks
for the park in his state. And he's certainly not the only powerful member of Congress to tilt
budgets in favor of local pet parks, which are often better funded than the jewels of the national
park system. Enviros, though, have resisted past efforts to review criteria for creating and
maintaining parks.
straight to the source: Deseret Morning News, Lee Davidson, 28 Sep 2004
<http://www.grist.org/cgi-bin/forward.pl?forward_id=3201>
WHISTLE WHILE WATCHFUL
Corruption in the NYC Police Internal Affairs Bureau
posted by John Marchisotto on Wednesday September 29 2004 @ 06:25AM PDT
POLICE DEPARTMENT CITY OF NEW YORK
September 27, 2004
From: Sergeant John F. Marchisotto, Tax#901906, S.I. Housing Viper Unit
To: Commissioner Rose Gill Hearn, Department of Investigation,
SUBJECT: INVESTIGATE CORRUPTION BY HIGH RANKING MEMBERS OF THE NEW YORK CITY
POLICE INTERNAL AFFAIRS
1. On May 17, 2004 I sent a letter to Chief Charles Campisi, Chief of the Internal Affairs Bureau. This
letter detailed how high ranking members under his command failed to investigate corruption and serious
misconduct that I had reported. The letter also detailed how I was targeted by the Internal Affairs Bureau
after I had blew the whistle on numerous acts of Police corruption on Channel 7 ABC News. The reporter
identified me as a Police Department WHISTLE BLOWER. Directly before the airing of the segment I was
immediately hauled into the Internal Affairs Bureau and subjected to intense interrogation. Several High
Ranking Internal Affairs members utilized intimidation tactics to sway an official investigation and failed to
investigate the corrupt acts that I had reported. The Internal Affairs Bureau suffered a severe blow by
having a member of the department report acts of corruption to a major news network during prime time.
The vindictiveness by members of the Internal Affairs Bureau members was well noted during their
interrogations. To further add insult they served me with Charges and Specification saying my conduct
was prejudicial to the good order of the Police Department. When is reporting corruption prejudicial to the
good order of the Police Department? Under N.Y.C. Whistle Blower Law I should have been protected.
2. On May 18, 2004, while I was at work I received a threatening phone call on a Police Department
phone. The caller started cursing me out and called me a "Rat Fuck". I picked up my tape recorder from
my desk and turned it on and put the mic to the ear piece of the phone and tried to find out the identity of
the person threatening me. The caller made threats such as "why don't you kill yourself before somebody
in the Police Department does it for you". The caller also made discriminatory reference to race and the
fact I was being supported by prominent African American leaders. After this threatening phone call I was
very upset and called Police Headquarters and asked to be transferred to the Chief of Internal Affairs
Bureau. I asked to speak directly to the chief because my life was just threatened and my previous
complaints that I had reported to the Internal Affairs Command Center were not properly investigated.
Deputy Inspector Mason and Sergeant Byrne, Internal Affairs Bureau, Group #1 were ordered to interview
me regarding the threats. They responded to my work location and listened to the threatening call that I
had taped. D.I. Mason told me they would get all the incoming phone records and will conduct a proper
investigation into my complaint. D.I. Mason also told me he was investigating my letter dated May 17,
2004 (Corrupt and Inappropriate Acts by High Ranking Officials within the Internal Affairs Bureau).
3. On September 21, 2004 D.I. Mason notified me that I was the SUBJECT of an Internal Affairs
investigation. I immediately contacted my attorney who in turn contacted Sgt. Byrne. My Attorney was
informed that the Internal Affairs Bureau Investigators were unable to confirm that I received a threatening
phone call on May 18, 2004. This clearly suggested that I was never threatened. Once again I went from
being the complainant to the subject of an investigation. My Attorney was informed by Sgt Byrne that
phone records failed to provide information to verify my complaint. Sgt. Byrne further told my Attorney that
they don't believe I received the threatening phone call, and phone records show no incoming phone calls
made to me that day. What is most ironic about that is that Sgt. Byrne himself called that phone number
twice after the threatening phone call was made. Once he called to ask me for directions and the second
call was to inform me that he was outside my location. My Attorney also informed me, that it is his belief
that the Internal Affairs Bureau is charging me with making a false complainant. What is also ironic is that
I have evidence of being threatened on tape. I do have possession of the authentic threatening tape
which is available to anyone for analysis.
4. On May 16, 2004 a press conference was held on my behalf on the steps of City Hall. The press
conference was held by N.Y.S. Assemblyman Keith L.T. Wright. Lieutenant Eric Adams from the police
organization called 100 Blacks in Law Enforcement Who Care was also present. This press conference
was held to support me against the retaliatory charges the Internal Affairs Bureau brought against me.
The press conference appeared that same night on the six o'clock news on Channel 7. On May 17, 2004,
the story was also featured in the Staten Island Advance. The article was titled "Whistleblowing Cop says
NYPD Being Spiteful". The article showed I was being supported by prominent black leaders. On May 19,
2004 on my way to work I was threatened by retired Police Officer Licari outside and inside of Dunkin
Donuts. This was also reported to the same Internal Affairs investigators. Instead of the investigators
trying to find out who had threatened my life, they have spent their time trying to investigate me.
5. Deputy Inspector Mason who is the Commanding Officer of the Internal Affairs Bureau, Group #1, has
failed to conduct an impartial investigation into my complaints. His agenda is clear. He is obsessed with
protecting the image of the Internal Affairs Bureau as well as the New York City Police Department. I
have once again been falsely accused of wrong doing. I also believe that the Internal Affairs Bureau may
have tampered with or destroyed evidence related to the phone records in question. I am sure that finding
the true identity of the person who threatened me is not the primary focus for the Internal Affairs
investigators.
6. It is obvious to me that it was a member of the New York City Police Department that threatened my
life. The Internal Affairs Bureau would never want to disclose that this is true. Therefore, they insist on
utilizing every tactic to discredit my complaint. I have assisted in this investigation in every way possible. I
was able to tape most of the threats made during the phone call and even paid for the tape to be
enhanced for better identification. As far as the phone records I am more than happy to pay for an
independent investigator to obtain and analyze the phone records in this case. It is apparent that the
actions of the Internal Affairs investigators in this case have gone from total incompetence to a criminal
cover-up.
7. Due to the forgoing facts, I have sought the advice of several City Officials. As a result, I have been
advised by Ms. Elizabeth Blaney, from the Office of The Public Advocate that the Department of
Investigation should conduct an immediate investigation into the actions of the Internal Affairs
investigators. I will also be meeting with Councilman Peter F. Vallone JR., Chairman on Public Safety
staff, to further address these issues. It is extremely disturbing to know that the Police Department cannot
properly police themselves.
8. I'm requesting a written response from your office on whether the Department of Investigation will
investigative this complaint. Please feel free to contact me with any questions you may have.
Sincerely Yours,
John Marchisotto Sergeant
Cc Public Advocate Betsy Gotbaum, Office of the Public Advocate Councilman Peter F. Vallone JR.,
Chairman of Public Safety Committee
Feedback on same Infoshop.org
Now this is ironic, a sergeant looking for support from the anarchists. First,
when was it that you actually learned that there was corruption in the
police force? I mean I would take a wild guess that around 99.9% of all
anarchists who were never police and yet are actually aware that “all”
police forces across the country and the world are corrupt. Now this is just
a hunch. But the very natures of the police force that have special
protections (state sanctioned) and wear a gun over time become very
corrupt. The very nature of having an internal affairs bureau should speak
volumes. Cop looking after Cop. “A hey partner I know that I know you and
your family but I have to arrest you because I saw you kick, kill, steal,
rape, brutalized, intimidate, pull over, say racist remarks, look after each
other, molest, punch, plant evidence, surveyed, etc. illegally.” What a joke.
Where were you when your force was rounding up Arab-Americans? Where were you
when the fed’s were intimidating anarchists groups? Where were you when you saw your
partners shove someone a little too hard one night because they were having a bad day?
Where were you when the police force and feds were putting out mass propaganda
against civil liberty groups? Where were you when …?
You should always remember this poem: First They Came for the Jews First they came
for the Jews and I did not speak out because I was not a Jew. Then they came for the
Communists and I did not speak out because I was not a Communist. Then they came
for the trade unionists and I did not speak out because I was not a trade unionist. Then
they came for me and there was no one left to speak out for me. Pastor Martin Niemöller
Charity
identifies true statements.
identifies false statements.
identifies statements of undetermined or ambiguous veracity.
Select this link for an expanded definition of our rating system.
Breast Cancer:
The CIGNA Foundation was donating money to breast cancer research for
every visitor to their site.
The proceeds from certain a special USPS postage stamp support breast
cancer research.
The Avon cosmetics company is donating 10¢ to breast cancer research
every time visitors receive a "hug" from an animated bear.
You can help underprivileged women obtain free mammograms by clicking
a button on a web site.
Houghton Mifflin:
For every 25 Polar Express e-mails received, Houghton Mifflin donated a
book to a children's hospital.
Hunger Relief:
You can direct money to hunger relief by clicking a button on The Hunger
Site.
Campbell's Chunky Soup is donating a can of soup to the hungry for each
click made on a special page on its web site.
Red Cross:
Warner Bros. will contribute money to the American Red Cross every time
visitors forward an e-mail message to a friend.
Christopher Reeve:
You can trigger a $1 donation to paralysis research by sending a birthday
greeting to actor Christopher Reeve.
Toys for Tots:
Excedrin will donate money to the Toys for Tots program for each visitor
who clicks on their web site.
Animal Rescue:
You can help donate food to abused, neglected, and abandoned animals by
clicking a button on a web site.
Pink M&Ms:
In the Fall of 2004, part of the proceeds from sales of bags of pink and
white M&Ms will go to fund breast cancer research.
World's Largest Pink Ribbon:
The 3M company is constructing the World's Largest Pink Ribbon in Times Square
to support breast cancer awareness.
CONTINUE FROM HERE http://www.aamc.org/comments.htm on the left hand side menu
which has submenus.
What can I do if I’m dissatisfied with the mental health therapy services/treatment I’m
receiving?
Feeling comfortable with the mental health professional you have is very
important to the success of your treatment.
FAQs home
As you work with your therapist or doctor, you should begin to feel gradual relief from your distress,
develop self assurance, have a greater ability to make decisions and experience increased comfort in
your relationship with others. At times, therapy may be painful and uncomfortable but episodes of
discomfort can occur during the most successful therapy sessions.
If you feel you are not getting results or don’t feel comfortable with the therapist, it may be because
the treatment you are receiving is not the one best suited to your specific needs. First, discuss these
concerns with your therapist. A competent therapist will be eager to discuss your reactions to therapy
and respond to your feelings about the process.
If you are still dissatisfied and have other options in your community, try to arrange a consultation with
another therapist to help you decide whether to change therapists. The resources listed in NMHA’s
“How do I find treatment?” can help you find another mental health professional.
If you are dissatisfied with the mental health services you are receiving from a community mental
health center, you can request a consultation with or a change to another therapist. If you are still not
satisfied, ask to speak with the center’s administrator.
If you feel your therapist is violating professional standards or ethics there are regulatory
agencies in every state that assist consumers in these types of situations.

The Protection and Advocacy (P&A) office investigates complaints about mental health
treatment in public and private facilities including hospitals, nursing homes, community
facilities, board and care homes, homeless shelters, jails, and prisons. Find your state P&A
office via the Substance Abuse and Mental Health Services Administration's National Mental
Health Information Center (SAMHSA) Services Locator to access the State Resource Guide
for your state.

To complain about a mental health professional in private practice, contact your state
licensing board. State licensing boards’ contact information can be found using the
SAMHSA Services Locator to access the Mental Health Services Directory for your
state. Your state Protection and Advocacy office may also be able to provide contact
information for the appropriate licensing boards.
If you need further assistance on mental health issues or referrals, please contact the NMHA
Resource Center at 1-800-969-6642 or email us.
http://www.nmha.org/infoctr/FAQs/treatmentdissatisfied.cfm
National Mental Health Association
Resource Center
About the Resource Center
NMHA’s information and referral center serves people seeking mental
health information for themselves, family members or friends, provides
guidance on how to become an advocate for mental health rights and
offers resources for professionals. If you need immediate help call the
National Hopeline Network 1-800-SUICIDE (1-800-784-2433) to reach a
24 hour crisis center in your area.
•
•
•
•
•
About Our Services
The Resource Center provides:
• Brochures (single copies free of charge available upon request)
and downloadable fact sheets on more than 60 mental health
topics
• Referrals to more than 6000 treatment centers, support groups,
and national organizations
• Staff of experienced, professionally trained professionals
NMHA does not offer medical advice, legal advice or counseling
but can provide referrals to other organizations that offer these
services.
•
•
•
•
•
•
•
FAQs: Answers to Frequently Asked Questions
• How do I find mental health therapy services/treatment?
• How do I find a support group in my community?
• Who can I talk with about medication questions?
• How can I get help paying for my prescriptions?
• What can I do if I’m dissatisfied with my mental health therapy
services/treatment?
• How can I find a local NMHA affiliate?
• How can I request permission to reprint NMHA fact sheets or
establish a link to or from the NMHA web site?
FAQs
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Fact Sheets
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Books
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NMHA Programs
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Resource Center
Advocacy
Resources
State Advocacy
Update
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Statements
Help Desk
How to reach us:
Telephone: 1-800-969-NMHA (6642)
Mail: NMHA 2001 N. Beauregard Street,12th floor, Alexandria, VA 22311
TTY: 1-800-433-5959
Email our help desk at this site
Our toll free number is accessible from all 50 states and is staffed Monday through Friday from 9:00
am - 5:00 p.m. Eastern time. During non-business hours, holidays, or if our staff is temporarily
unavailable, you may leave a voicemail message.
How Soon Can You Expect a Response?
Individual telephone, voicemail, e-mail, or regular mail requests are promptly processed and
responded to within 2 business days. You will receive educational materials in direct response to your
request.
http://www.nmha.org/infoctr/index.cfm
Virginia Resources
State Mental Health and Substance Abuse Agency
For more information about admission, care, treatment, release, and patient follow-up in public or private
psychiatric residential facilities, contact your State mental health and substance abuse agency:
James S. Reinhard, M.D., Commissioner
Department of Mental Health, Mental Retardation and Substance Abuse Services
P.O. Box 1797
Richmond, VA 23218
Phone: 804-786-3921
Fax: 804-371-6638
TDD: 804-371-8977
E-mail: [email protected]
Internet: www.dmhmrsas.state.va.us/
Street address for United Parcel Service and Federal Express Delivery:
1220 Bank Street
Richmond, VA 23219
State Protection and Advocacy Agency
Each State has a protection and advocacy agency that receives funding from the Federal Center for
Mental Health Services. Agencies are mandated to protect and advocate for the rights of people with
mental illnesses and to investigate reports of abuse and neglect in facilities that care for or treat
individuals with mental illnesses. These facilities, which may be public or private, include hospitals,
nursing homes, community facilities, board and care homes, homeless shelters, jails, and prisons.
Agencies provide advocacy services or conduct investigations to address issues that arise during
transportation or admission to such facilities, during residency in them, or within 90 days after discharge
from them. Contact:
Virginia Office of Protection & Advocacy
202 North Ninth Street, Ninth Floor
Richmond, VA 23219
Phone/(TDD) 804-225-2042
Fax: 804-225-3221
Toll-free: 800-552-3962 (Statewide)
E-mail: [email protected]
Internet: www.vopa.state.va.us
Centers for Medicare and Medicaid Services (CMS)
The Centers for Medicare and Medicaid Services, which are part of the Department of Health and Human
Services, investigate some complaints about treatment facilities that receive Medicare and Medicaid
funding. For further information at the national level, contact:
Centers for Medicare and Medicaid Services (CMS)
7500 Security Boulevard
Baltimore, MD 21244-1850
Phone: 410-786-3000
E-mail: [email protected]
Internet: www.CMS.gov
You may also share your concerns with staff at the Centers for Medicare and Medicaid Services office in
your area, which is Region 3. The regional office address and telephone number are:
Philadelphia Regional Office
Centers for Medicare and Medicaid Services
150 South Independence Mall West, Suite 216
Philadelphia, PA 19106
Phone: 215-861-4140
Fax: 215-861-4240
Internet: www.CMS.gov
Advocacy Organizations
Local chapters of the National Mental Health Association have information about community services and
engage in national and State level advocacy. For more information about the association, write or call:
Mental Health Association of Virginia
503 East Main Street, Suite 707
Richmond, VA 23219
Phone: 804-225-5591
Fax: 804-225-5593
E-mail: [email protected]
The National Alliance for the Mentally Ill maintains a helpline for information on mental illnesses and
referrals to local groups. The local self-help groups have support and advocacy components and offer
education and information about community services for families and individuals. For information about
the Alliance's affiliates and activities in your State, contact:
NAMI Virginia
P.O. Box 1903
Richmond, VA 23218-1903
Phone: 804-225-8264
Fax: 804-643-3632
Toll-free: 888-486-VAMI (8264)
E-mail: mailto:[email protected]
Internet: www.namivirginia.org
Statewide consumer organizations are run by and for consumers of mental health services and promote
consumer empowerment. These organizations provide information about mental health and other support
services at the State level and are active in addressing and advocating for mental health system issues.
For information about consumer activities in your area, contact:
Martha Mead, Director
Office of Legislation and Public Relations
Department of Mental Health, Mental Retardation and Substance Abuse Services
P.O. Box 1797
1220 Bank Street
Richmond, VA 23219-1797
Phone: 804-786-9048
Fax: 804-371-2308
Internet: www.dmhmrsas.state.va.us/
Brian Parrish, Director
Virginia Organization of Consumers Asserting Leadership
P.O. Box 1248
Charlottesville, VA 22902
Phone: 434-243-7878
Toll-free: 888-771-2030
Internet: www.vocalsupportcenter.org
The National Mental Health Consumers' Self-Help Clearinghouse, funded partly by the Center for Mental
Health Services, promotes and helps to develop consumer-run self-help groups across the country.
Technical assistance and materials are available on such topics as organizing groups, fundraising,
leadership development, incorporating, public relations, advocacy, and networking. For more information,
contact:
The National Mental Health Consumers' Self-Help Clearinghouse
1211 Chestnut Street, Suite 1207
Philadelphia, PA 19107
Phone: 215-751-1810
Fax: 215-636-6312
Toll-free: 800-553-4KEY (539)
Internet: www.mhselfhelp.org
The National Empowerment Center is a Technical Assistance Center run by mental health
consumers/survivors. The Center's mission is to carry a message of recovery, empowerment, hope and
healing to people who have been diagnosed with mental illness. The Center provides information and
referrals to consumer/survivor resources nationwide and offers technical assistance to individuals and
groups involved in consumer empowerment activities. The Center distributes recovery-related
publications and sponsors education and training activities. For information on consumer/survivor
activities in your area, contact:
The National Empowerment Center
599 Canal Street
Lawrence, MA 01840
Toll-free: 800-769-3728
Fax: 978-681-6426
(TDD) 800-TTY-POWER (7693)
Internet: www.power2u.org
The Consumer Organization & Networking Technical Assistance Center (CONTAC), funded by the Center
for Mental Health Services, is a resource center for consumers/survivors and consumer-run organizations
across the United States. Services and products include informational materials; on-site training and skillbuilding curricula; electronic and other communication capabilities; networking and customized activities
promoting self-help, recovery, leadership, business management, and empowerment. For more
information contact:
Consumer Organization & Networking Technical Assistance Center (CONTAC)
P.O. Box 11000
Charleston, WV 25339
Phone: 888-825-TECH (8324)
Fax: 304-345-7303
Email: [email protected]
Internet: www.contac.org
Other Sources of Information
There are many sources of information that you can tap. Your area mental health authority, which is
generally a part of the local government, may be useful. Other branches of your city or county
government also may be able to help. For example, the education office might have information about
help for children, and the agency for the aging might know about services for senior citizens. In addition,
your family physician or area hospital may be able to make referrals. For legal advice, contact your local
bar association. Also, your local library and telephone yellow pages may have resource lists for sources
of help in your community.
Preceding was on
http://www.mentalhealth.org/publications/allpubs/stateresourceguides/virginia01.asp
Rsch http://www.hispanichealth.org/ action forum
Also http://www.nmha.org/infoctr/FAQs/supportGroup.cfm lots of links
And this link to short internet videos developed by CMS on various aspects of implementing
HIPAA.
http://www.eventstreams.com/cms/tm_001/launch.htm
And www.hhs.gov/ocr/hipaa/finalmaster.html -- OCR is responsible for enforcement of the privacy rule.
Here is an excellent overview. Uses an easy to follow question and answer format for providing guidance
http://www.ama-assn.org/ama/pub/category/6438.html (Not a Federal Government Site) -- AMA
site. Guides the reader through a compliance process. Physicians are the target audience, but
useful for clinics and others provider groups.
http://www.hipaadvisory.com/regs/index.htm (Not a Federal Government Site) -- Commercial
resource sponsored by Phoenix Health Systems. Site has many useful links on compliance
countdowns, privacy, tools and commercial products. Daily updates on wide range of HIPAA
issues.
http://www.wpc-edi.com/hipaa/HIPAA_40.asp (Not a Federal Government Site) -- Washington
Publishing Company, publisher of HIPAA implementation guides. Guides may be purchased or
downloaded for free in PDF format.
http://www.ama-assn.org/ama/pub/category/6698.html (Not a Federal Government Site) -- AMA
offers model forms: authorizations, consent and Notice of Privacy Practices. Reproduction and
use of the forms by physicians and their staff is permitted. Any other use, duplication or
distribution of the forms by any other party requires the prior written approval of the American
Medical Association, Health Law Department.
HIPAA Privacy Rule and Public Health Guidance from CDC and
the U.S. Department of Health and Human Services
http://www.cdc.gov/mmwr/preview/mmwrhtml/m2e411a1.htm
www.healthprivacy.org/info-url_nocat2304/info-url_nocat.htm (Not a Federal Government Site) -- Provides
a general overview of statutory health privacy protections under State law. Has a summary prepared for
each State.
Eliminating Hlthcare Disparity http://www.hrsa.gov/OMH/OMH/disparities/default.htm
RSCH http://www.volunteersinhealthcare.org/links.htm numerous LINKS
Reporting of Communicable and Noncommunicable Diseases
http://www.pabulletin.com/secure/data/vol32/32-4/161.html
AAMC personnel activities contact name list to inquire about speakers is on
http://www.aamc.org/about/subjectlisting.htm
Councils, Groups, & Resources of AAMC on
http://www.aamc.org/members/start.htm for follow up on each
Government Relations Representatives (GRR)
The Government Relations Representatives (GRR) Group, which is jointly sponsored by the AAMC and the
Association of Academic Health Centers (AHC), consists of individuals responsible for federal government relations
at medical schools, teaching hospitals, and academic health centers. GRR members are appointed by their dean, or
hospital CEO. Leadership for the group is provided by a steering committee of individuals nominated by their peers to
assist in meeting planning, coordinate professional development activities for GRRs, and advise on legislative
strategies for medical schools and teaching hospitals.
CONTACT AAMC Office of Governmental Relations
About the GRR
The GRR group meets three times a year in Washington, DC, usually in early March, May, and
September. The meetings are co-sponsored by the Association of American Universities (AAU) and the
National Association of State Universities and Land-Grant Colleges (NASULGC). Meetings generally
begin late on Monday afternoon with an invited speaker discussing issues at the forefront of medical
schools' and teaching hospitals' legislative and regulatory agendas, followed by a reception offering an
opportunity to converse and share ideas with colleagues. The meeting continues on Tuesday morning
with additional speakers, often Hill or agency staff, followed by comprehensive issue updates by
association staff. Each meeting is scheduled to end by noon on Tuesday, allowing GRRs to return home
or arrange individual Hill visits with legislators and staff. AAMC staff disseminate dates, times, and
agendas well in advance of each meeting so plans can be made to spend time wisely.
Members of the GRR Group are entitled to access a wide range of the AAMC's electronic resources. Of
particular interest are the Government Affairs and Advocacy web site, the electronic versions of
Washington Highlights and Washington Headlines, and the GRR Listserv.
Government Affairs and Advocacy Web Site
In an ongoing effort to deliver legislative and regulatory news to medical schools and teaching hospitals in
a timely and effective manner, the AAMC continues to enhance its government affairs and advocacy
presence on the Internet. The Government Affairs and Advocacy Web site ( THIS LED ME TO
http://www.aamc.org/advocacy/) offers the same high quality information and analysis AAMC members
have come to expect in a format that is easy to navigate and provides additional functionality. It was
designed to give the user as much flexibility as possible and to deliver the most relevant information with
the least amount of clicking and scrolling.
With links to the electronic version of Washington Highlights, AAMC issue briefs, testimony, a government
affairs calendar, and a list of important government relations links, the Government Affairs and Advocacy
Web site provides one-stop shopping for all government relations needs.
Washington Highlights and Washington Headlines
The AAMC offers its primary legislative and regulatory news publication, Washington Highlights, (THIS
LEADS ME TO http://www.aamc.org/advocacy/washhigh/ )in an easy-to-read electronic format on the
Web. While still available in the original print version, the electronic version allows for earlier access
without the delay of the mail. Online readers also have access to archived copies of Washington
Highlights and a search engine to locate important articles quickly.
Washington Headlines is the AAMC's weekly electronic news bulletin covering events in Washington.
This service offers brief summaries of the week's legislative and regulatory news drawn from and linked to
electronic versions of Washington Highlights. It is e-mailed free to subscribers over the Internet.
To subscribe to Washington Headlines, follow the links on the Washington Highlights homepage or send
an e-mail message to: [email protected], typing the words "subscribe aamcwash" in the
body of the message. Leave the subject line blank. Notification will occur when the request has been
fulfilled.
GRR Listserv
The GRR Listserv is intended to facilitate discussions among individuals responsible for federal
government relations at medical schools, teaching hospitals, and academic health centers. In addition,
the AAMC will use the listserv to communicate legislative information from Capitol Hill and the White
House. Through the listserv, participants will be able to exchange information and ideas, ask questions,
and keep up to date with what is happening in Washington.
To subscribe to the GRR Listserv, send an e-mail message to: [email protected], typing
"subscribe GRR" in the body of the message. Leave the subject line blank. Notification will occur when
the request has been fulfilled.
Need Password for
the GRR Private Site
The resources gathered here are for use by members of the Government Relations Representatives
(GRR) Group and other select AAMC constituents.
Latin Economies Recovering Nicely
by Claudio Freitas
18-OCT-04
I cover Latin American stocks listed in the North American market. This amounts to a total of 34 different companies
in three different countries (Brazil, Chile and Mexico), including diverse industries like financial services, retail, steel,
telecomunications, electric utilities, and conglomerates. In fact, it is difficult to treat Latin America as single entity--the
Latin American countries have certain similarities, but they also have remarkable differences. That is why sometimes
it is not easy to follow many diverse industries within three different countries.
As an example of companies I follow, I would mention Itaú (ITU) and Bradesco (BBD) in the Brazilian banking
industry, Telemar (TNE), Embratel (EMT), and Telesp Celular (TCP), among others in the Brazilian
telecomunication industry, Pao de Açúcar (CBD) and Wal Mart México (WMMVY) in the retail business, Copel
(ELP), Enersis (ENI), Endesa Chile (EOC) in the electricity utilities industry, CSN (SID) and Gerdau (GGB) in the
Brazilian steel industry, conglomerates like Quinenco (LQ) and Grupo Imsa (IMY), and many others.
That really is a vast coverage area. Is there one major issue that applies to Latin America as a whole right
now?
I believe the hot issue in Latin America is the strong economic recovery in Brazil and Mexico. In Brazil, there were
serious concerns about economic growth just four months ago. Most of local analysts believed GDP growth for 2004
would be something between 3% and 3.5%. They were all wrong. Currently 2004 GDP growth is expected to reach
more than 4.5%.
In Mexico, something similar has happened. In the begining of the year, there were major concerns that Mexico
would not recover very fast because of the Chinese competition in the North American market. It was not true; Mexico
is growing fast again after three difficult years. In fact, fast economic growth is creating inflation pressures in both
Mexico and Brazil. Central banks in those countries have begun to raise interest rates, but I do not believe this to be
an agressive movement. Quite the contrary, I understand that a moderate rate hike would be good for both Brazil and
Mexico in the short-to-medium term.
Should investors be underweighting or overweighting stocks in Latin America currently?
I believe today investors should be overweighting Latin American stocks. In the recent past, there was some concern
over economic growth in the region, but now economies are growing fast. North American interest rates were also a
source of concern. Higher international interest rates could hurt emerging economies, particularly in Latin America
where external debt remains high. Now it seems that rate hikes will be moderate.
The Chinese slow down was also a problem. Not long ago, many analysts believed commodities prices could go
down if the Chinese economy could not sustain high levels of economic growth. This could still be a huge problem for
Latin American countries, but Chinese economic growth remains strong at this time.
The point here is that the international economic environment has been good to Latin American countries, and I
expect this trend to continue in the short-to-medium term. During the last three months, Latin American major stock
indexes (Bovespa in Brazil and IPC in México) have been performing much better than the S&P index. I expect this
situation to continue in the following three months.
What particular stocks look like a buy right now?
I believe certain stocks in the Brazilian banking industry, particularly Itaú (ITU) and Bradesco (BBD), continue to be
good options. Credit demand in Brazil is growing fast, and higher local interest rates are not bad for local banks who
profit a lot from buying government bonds. In Mexico, Cemex (CX) is a great option, too. This stock price went down
after the RMC acquisition, and I believe it is now a good buying opportunity. The Brazilian steel industry is also
attractive--Gerdau (GGB) and CSN (SID) are good options. Both international demand and local demand are
growing very fast.
Are there any stocks you'd advise investors to stay away from?
I would avoid Mexican Coca Cola FEMSA (KOF), even though the Mexican economic recovery in on the move.
Competition is fierce in the Latin American beverage industry-- discount brands and Pepsi are fighting for more
market share, and the AmBev Interbrew merger created an even more competitive environment.
Looking forward three-to-six months, are there any developments investors should be looking for as they
continue to research this sector?
Yes, indeed. It is important to follow some trends in the following months. The North American interest rates are very
important, particularly for Brazil. Agressive rate hikes in U.S. would have an adverse effect in Latin America. Local
inflation rates in Brazil and Mexico are also important; higher local interest rates can be a short term problem as well.
In Brazil, it is also important to follow the developments of the new electric utility model, a very difficult political matter.
Last but not least, it is important to understand the pace of the Chinese economy. Commodity prices are very
important for Latin America--agricultural commodities are very important for Brazil and Argentina, and metal prices
are very important for Chile, Mexico and Brazil.
Claudio Freitas, CFA is a Zacks analyst covering various sectors in Latin America.
"Counting Electoral College votes" is available at:
http://www.handsonenglish.com/currentevents.html
This activity includes a short reading about the
election process, and a chart for students to track
Electoral College votes on election night. There is
also a U.S. map showing the number of electoral votes
for each state.
Eye Movement Desensitization and Reprocessing (EMDR): A Controversial
Treatment for Trauma Survivors
by Amy Scholten, MPH
Proponents of eye movement desensitization and reprocessing (EMDR) claim it is a breakthrough
treatment for those plagued with traumatic memories and other psychological problems. But does it
actually work?
Eye movement desensitization and reprocessing (EMDR) is a relatively new therapeutic technique that
increasing numbers of mental health professionals are using in the treatment of post-traumatic stress
disorder (PTSD), phobias, and a wide variety of psychological disorders. According to the American
Psychiatric Association, this fairly complicated treatment includes elements of behavioral, cognitive,
psychodynamic, body-based, and systems therapies.
A Brief History of EMDR
EMDR was developed by psychologist Francine Shapiro, PhD, in 1987 when she discovered, by chance,
that she could ease her own disturbing thoughts by moving her eyes rapidly from left to right. From
there, Dr. Shapiro studied the effectiveness of EMDR on people with PTSD. Her research showed that
EMDR held promise in reducing flashbacks, nightmares, negative thoughts and avoidant behaviors in
study participants. Since then, thousands of mental health professionals have received training in
EMDR and use it regularly with patients suffering from traumatic memories.
According to the EMDR International Association in Austin Texas, EMDR is often used to treat patients
with trauma resulting from:

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Sexual assaults
Other violent crimes
Combat
Airline and train crashes
Automobile and industrial accidents
In adults, these events often lead to symptoms such as nightmares, panic attacks, phobias, insomnia,
and substance abuse. In children, symptoms such as oppositional behavior, sleep disturbances, and
bed-wetting may be present.
What You Can Expect
If you are seeking EMDR treatment, the EMDR International Association recommends that you find an
EMDR-trained mental health professional who will guide you through eight phases of treatment. The
number of sessions and phases within each session varies from patient to patient, however, the eight
phases of treatment are essential. They include:
Phase one: patient history
The therapist will ask questions about your mental health history to evaluate your suitability for
treatment. You will be asked about the level of your distress, current life stressors, and medical
conditions. The therapist will then set up a treatment plan.
Phase two: preparation phase
The therapist will introduce you to EMDR, explain how it works, and let you know what you can
expect. He or she will discuss with you the possibility of increased symptoms between sessions. You
may be given an audiotape of relaxation exercises to use before and between EMDR sessions.
Phase three: assessment
You will be asked to identify the traumatic memory, or an image from that memory. Then you will be
asked to think about a negative thought you have about yourself in relation to the traumatic event,
such as “I am a bad person.” Next, the therapist will ask you to come up with a positive thought about
yourself, such as “I am a lovable person” and to rate how much you believe that thought, using a
rating scale called Validity of Positive Cognition (VOC). Lastly, you will focus on the traumatic image
and the negative thought you have about yourself and rate your level of emotional upset on a rating
scale called the Subjective Units of Disturbance Scale (SUDS).
Phase four: desensitization
You will be asked to focus on your disturbing feelings while letting your eyes follow the therapist’s
fingers as they move rapidly back and forth across a span of about 12 inches. This procedure is
repeated in sets, each of which last from 10 seconds to more than 1 minute. This will continue until
your emotional distress is greatly reduced (which you will indicate on the SUDS).
In some cases, instead of eye movement, the therapist may ask you to tap alternate hands on a chair
rest, or may use alternating sounds in your ears. Other more advanced strategies may also be used.
Phase five: cognitive restructuring
In this phase, the positive belief will be strengthened in an effort to replace the negative belief
associated with the traumatic memory. You will be asked to concentrate on the positive belief during
the eye movement sets. This will continue until you reach a specific rate on the VOC scale. When
evoking the traumatic memory, this should help you believe the positive thought about yourself.
Phase six: awareness of bodily sensation
As you hold the traumatic image and positive belief in your mind, you will focus on any tension that
arises in your body. During the following sets of eye movements, or other desensitization techniques,
the therapist will help you reduce bodily tension.
Phase seven: closure
Your therapist will talk to you about disturbing thoughts, images or emotions that may occur between
sessions and may ask you to keep a log or journal. Though these symptoms may be uncomfortable,
they are interpreted as a positive sign.
Phase eight: reevaluation
Before each new session, you will be reevaluated to see if the treatment effects have been
maintained. The therapist will continue to work with you on additional traumatic memories and
images, following the same eight-phase procedure.
Does EMDR Work, and If So, How?
Much of the literature available on EMDR is positive. A number of studies on EMDR have been
highlighted online in the paper “Eye Movement Desensitization and Reprocessing: A Controversial
Treatment Technique” by Suzanne Hurst and Natasha Milkewicz of the Virginia Consortium for
Professional Psychology. These studies, involving participants suffering from a variety of trauma
(abuse, sexual assault, sexual molestation, combat trauma, health crisis, relationship crisis, death of a
significant person), have suggested that EMDR may be effective in reducing many symptoms,
including anxiety, depression and intrusive thoughts, while increasing positive thoughts.
EMDR, however, does not work in every case of trauma and continues to be a controversial treatment.
Critics question the scientific validity of the method. Among their concerns are the following:
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Reports of decreased distress after EMDR may be influenced by positive reinforcement
and the patient’s desire to meet the therapist’s expectations.
EMDR is frequently supplemented with other interventions such as relaxation techniques
and cognitive restructuring. Therefore, the effectiveness of EMDR itself (“pure” EMDR) is
uncertain.
According to at least one study on Vietnam veterans with PTSD, the benefits of EMDR
were lost at a five-year follow-up.
There isn’t enough data to support the use of EMDR for the treatment of other psychiatric
and behavioral disorders such as phobias, anxiety and panic disorders, and eating
disorders.
Critics also question the fact that there is no data to explain how EMDR works. Dr. Shapiro theorizes
that EMDR works through an accelerated information processing system. A theory by Nathan Denny,
PhD, proposes that the eye movements of EMDR cause a reflex that somehow inhibits the “fight or
flight” stress response. EMDR was previously thought to work by distraction or by mimicking REM
sleep (which is believed to facilitate information processing and learning).
However, a 2001 meta-analysis of 34 studies found that while EMDR treatment did appear to have a
significant effect on various populations being treated for various conditions, in actuality, no effect was
found from eye movements themselves, when EMDR was compared to the same procedure without
them. So exactly which aspects of EMDR are helpful remains unclear.
Further Research Needed
While there are many questions surrounding the mechanism and scientific validity of EMDR, a number
of individuals have reported significant benefits after receiving the treatment. In 1998, EMDR made it
onto the American Psychological Association’s list of probable treatments for civilian PTSD. The
demand for EMDR continues to grow. Further research, employing larger samples and more objective
measures, is needed to reduce the controversy surrounding EMDR.
RESOURCES:
EMDR Institute, Inc.
http://www.emdr.com/
EMDR International Association
http://www.emdria.org/
SOURCES:
American Psychiatric Association, Psychiatric News
American Psychological Association, APA Monitor
Davidson P and Parker K. Eye movement desensitization and reprocessing (EMDR): A meta-analysis.
Journal of Consulting & Clinical Psychology. 2001; 69(2): 305-316
EMDR International Association
Main Entry: en·dorse
Pronunciation: in-'dors, enFunction: transitive verb
Inflected Form(s): en·dorsed; en·dors·ing
- en·dors·able --'dor-s&-b&l/ adjective
- en·dors·ee /in-"dor-'sE, "en-/ noun
- en·dors·er /in-'dor-s&r/ noun
Etymology: alteration of obsolete endoss, from Middle English endosen, from Middle French
endosser, from Old French, to put on the back, from en- + dos back, from Latin dorsum
1 a : to write on the back of; especially : to sign one's name as payee on the back of (a check) in
order to obtain the cash or credit represented on the face b : to inscribe (one's signature) on a
check, bill, or note c : to inscribe (as an official document) with a title or memorandum d : to
make over to another (the value represented in a check, bill, or note) by inscribing one's name on
the document e : to acknowledge receipt of (a sum specified) by one's signature on a document
2 : to approve openly <endorse an idea>; especially : to express support or approval of publicly
and definitely <endorse a mayoral candidate>
synonym see approve