24 September 2006

Enough resources to meet the growing needs?



MORE OF EVERYTHING
Sep 14th 2006

Does the world have enough resources to meet the growing needs of the emerging economies?

THE average income of the 5.5 billion people on this planet who live in emerging economies has been growing at a cracking pace: an annual rate of over 5% in recent years. As people grow richer, they want more cars and household appliances as well as better homes and roads. This, in turn, means a huge increase in the demand for energy and raw materials.

Emerging economies already account for over half of the world's totalenergy consumption. Since 2000 they have been responsible for 85% of the increase in world energy demand. China alone accounted for one-third of the increase in world oil consumption. The developing world's demand for industrial raw materials is also rising rapidly. China's share of world metal consumption has jumped from less than 10% to around 25% over the past decade. In the three years to 2005 the country accounted for 50% of the increase in world consumption ofcopper and aluminium, almost all the growth in nickel and tin and more than the entire rise in demand for zinc and lead (which means the restof the world consumed less of them).

Some of the extra demand in China reflects a shift in production from other parts of the globe, but most of it is a net boost to globaldemand. Since 2000 world energy consumption has been increasing at an annual average of 2.6%, twice as fast as in the previous decade. Yet China and other emerging economies have only just begun to make an impact on commodity markets. Given the size of their populations, their use of raw materials is still modest. For instance, China uses only one-third as much copper per person as does America. Its oilconsumption per person is only one-thirteenth that of America (see
chart 8).

China's current demand for raw materials per person is roughly at the stage of Japan's and South Korea's during their respective economic take-off. If China follows a similar path to South Korea's as its income rises, then its total oil consumption could increase tenfold in absolute terms over the next three decades, and yet it would still beusing 30% less oil per person than the United States does today.

Currently about 90% of China's energy is produced at home, but infuture the country will need to import much more of it. A study by Deutsche Bank predicts that its oil imports will jump from 91m tonnes to 1,860m tonnes by 2020. The bank also reckons that copper imports will rise from 3m tonnes to 20m tonnes. No wonder China is forging close trade links with commodity producers in Africa, the Middle East, Australia and Latin America.

Rising demand in emerging economies has caused oil and commodity prices to surge in recent years. The prices of both oil and metals have roughly tripled since 2002. This has been good for commodity producers, most of which are developing economies. The past few years have seen the sharpest rise in commodity prices in modern history, with metal
prices in real terms gaining twice as much as in the booms of the 1970s and 1980s.

Previous commodity booms have always been followed by slumps. Indeed, the long-term trend in commodity prices has been firmly downwards. Even with the recent rise, prices in real terms are less than half of what they were in the mid-19th century (see chart 9). The shift in developed countries' output from metal-bashing industries to services has curbed demand, as have technological advances that have provided substitutes, such as fibre optics instead of copper wire. Better technology has also
improved rates of mineral extraction, increasing supply.

DIFFERENT THIS TIME?
However, some analysts claim that the world is now in the middle of a "super-cycle", fuelled by soaring demand in emerging economies, which will keep prices high for the foreseeable future. Demand from emerging economies continues to grow strongly and supply remains tight, so the equilibrium price of raw materials does appear to have increased. But other experts argue that this is a speculative bubble and prices are unsustainable. According to Simon Hayley, an economist at Capital
Economics, many analysts make the mistake of extrapolating from the recent rate of growth in demand and underestimating the potential for increasing supply.

Farm output can be increased most quickly; stepping up oil production takes the longest. Higher oil prices will encourage more investment and production, but it can take up to seven years for new projects to come on stream. Meanwhile, higher prices help to curb demand by encouraging a switch to alternative fuels and changes in consumer behaviour, such as buying more fuel-efficient cars. Capital Economics expects the oil price to fall to $50 a barrel by the end of 2007 from its current level of $70, but other analysts expect it to stay above $60 for several years. And strong demand with little or no spare capacity means a high risk of price spikes if supply is disrupted.

Prices of commodities other than oil are more likely to fall because supply and demand are more responsive to price. Reserves of metals are vast. According to Mr Hayley, total deposits of copper (inferred from geological evidence) would last 107 years and of iron ore 151 years at current rates of consumption. These deposits may not all be profitable to extract with current technology, but high prices will encourage technological advances. A study by Martin Sommer, an economist at the
IMF, finds that copper prices are currently almost three times above the cost of the least efficient producers, a much higher ratio than at the peak of the 1980s boom.

The problem is that years of low prices have caused under investment,and producers have been caught out by the jump in demand. But in the long term capacity should catch up and prices will fall. Global spending on exploration for non-ferrous metals rose to $5 billion in 2005, from $1.9 billion in 2002. High prices are also encouraging users to look for alternatives.

Commodity bulls argue that China has reached the most commodity-intensive stage of its development: industrialisation,
urbanisation and infrastructure all use lots of raw materials. If China's growth remained as commodity- and energy-intensive as at present, supply would struggle to catch up and there could indeed be further upward pressure on prices. However, the country's investment boom cannot continue at its current pace. The government aims to shift the balance of growth from exports and investment towards private consumption, which implies slower growth in the demand for raw materials. The Chinese leadership has also announced a target of a 20% cut in energy use per unit of GDP by 2010.

The risk is that new supplies of commodities will come on stream just as global demand starts to slow, causing prices to drop sharply. The commodity boom may anyway have been exaggerated by speculation as new investors piled into the market. However, an analysis by the IMF suggests that speculative investment has had much less effect on metal
prices than it has on oil prices.

Mr Sommer's study, using a model that estimates both future demand and future supply, forecasts that by 2010 prices of copper and aluminium in real terms will fall by 53% and 29% respectively as supply increases. This is broadly in line with prices in the futures market, which signal a 44% average fall in metal prices in real terms over the next five years, whereas oil futures are close to the current spot price.

Such a drop would still leave metal prices well above their level at the start of this decade, in contrast to previous booms after which price rises were always fully reversed. This is because global demand is likely to continue to grow much faster than it has done in the past. Even if the growth in China's demand for commodities slows in future, it will remain faster than in rich economies. Because of the country's increasing weight in the world economy, this will keep up global demand.

Moreover, as China's demand for raw materials slows, India's is likely to take off. India currently consumes only one-eighth as much copper and one-third as much energy per person as does China. India's export growth has been led by business and IT services, which use fewer raw materials. But India needs to expand its manufacturing to create more jobs, and to improve its dreadful infrastructure. UBS reckons that India's raw-material demand will triple over the next ten years as capital expenditure and infrastructure spending increase.

A study by Ting Gao, Cameron Odgers and Jiming Ha, at China International Capital Corporation, forecasts that annual growth in China's demand for copper will slow from an average of 14% over the past 15 years to 9% between 2006 and 2020, whereas India's will accelerate from 7% to 20% over the same period. Even if demand in the rest of the world continued to grow at the same pace as before, this would lift the annual rate of growth in global demand for copper from 3.5% between 1990 and 2005 to 5.3% over the next 15 years. For other commodities, too, the growth in global demand is forecast to speed up, even as growth in China slows down. The authors conclude that commodity prices will remain historically high.

Over the next few decades, one of the main determinants of increased oil demand will be higher car ownership in emerging economies. At present there are only two cars for every 100 people in China, against 50 in America. Goldman Sachs forecasts that China's car ownership will rise to 29 per 100 by 2040. The total number of cars in China and India combined could rise from around 30m today to 750m by 2040 (see chart 10)--more than all the cars on the world's roads today. Even so,
car-ownership rates in those two countries would still be only half those in America today.

KEEP IT GREEN
Many people worry more about the environmental damage resulting from emerging countries' rising energy demand than they do about rising prices. Rapid industrialisation has already caused an alarming increase in emissions of greenhouse gases and air pollution. China has 16 of the world's 20 most air-polluted cities. America is still the world's largest spewer of carbon emissions, but China is expected to overtake it within a decade or so. A report by Zmarak Shalizi, an economist at
the World Bank, forecasts that on current policies carbon emissions in China and India will more than double by 2020--though that would still leave China's carbon emissions per person at only one-third of the current level in America.

The world does not have the resources for another 5 billion or so people to behave the way that Americans do today. It may not be about to run out of energy and commodities, but higher prices will certainly force big changes in lifestyles. The era of cheap raw materials is over.

See this article with graphics and related items at http://www.economist.com/surveys/displaystory.cfmstory_id=E1_SRSRDVD

Go to http://www.economist.com for more global news, views and analysis from the Economist Group.

How now brown town?


Pittsburgh
How now brown town?
Sep 14th 2006 | PITTSBURGH
From The Economist print edition

A former steel city is now proclaiming its cleaner land and clever minds
A FEW years ago, the Pittsburgh region was so desperate to hang on to its brightest young people that its boosters thought about running television ads featuring “Border Guard Bob”, a patrolman who would have stopped youngsters on their way out of town and urged them to stay. Wisely, the boosters scrapped that idea. And increasingly it seems as though the worries were misplaced anyway. Many of the graduates from Pittsburgh's 34 universities—led by Carnegie Mellon and the University of Pittsburgh—do stick around, and some of them are finding work in cutting-edge scientific fields. A couple of decades after the collapse of the local steel industry prompted many Pittsburghers to flee, the city has a rosier future.

Pittsburgh will not experience an explosion of population and investment, like the booming cities of America's south-west. But it is part of a pleasant and affordable region with an improving mix of industries and enviable demographics—which is as much as many parts of the country can hope for. And besides shaping young minds, Pittsburgh is also doing its best to reshape old land, by cleaning up former mining and industrial sites for uses that suit the modern economy.

One place where these two trends converge is in the SouthSide Works development, a 34-acre (14-hectare) collection of shops, offices and living space being built on the site of an old LTV steel plant on the Monongahela river. The idea, which is popular in many other American cities, is to try to create an area close to the centre of town where young professionals can live and play, as well as work. That might improve Pittsburgh's appeal to creative or knowledge-intensive workers—and those who employ them.

The SouthSide Works aside, however, plenty of clever young people already seem to be staying. Although the region's overall education levels are not that impressive, says Chris Briem, an economist at the University of Pittsburgh, those figures are partly skewed by its high ratio of elderly residents. Among Pittsburghers 25-34 years old, by contrast, 41.9% have graduated from university, placing the city among America's top ten. More than 17% of those young people have also earned an additional graduate or professional degree: the fourth-highest share in the country, behind only Washington, DC (think lawyers), Boston and San Francisco.

Much of Pittsburgh's drive to clean up brownfield sites is more mundane than SouthSide Works, or the engineering and biotech labs in the city's universities. But it is nonetheless useful in updating and rounding out the local economy. The city has plenty of land near the airport, for example, that will soon be accessible on a new highway spur connected to the interstate system. That could be appealing to companies looking for new places to put distribution centres—a crucial bit of America's logistics-driven economy. Some of this land is undercut by old mines, so the government is blasting the mines open, filling areas back in and then flattening them out.

These efforts have a clear logic to them. Pittsburgh is within one day's drive, or a short flight, of the whole eastern seaboard, which accounts for more than half of America's retail sales. But it has lower costs than the big coastal cities. Its potential appeal as a logistics hub thus gives it a fighting chance of attracting the sort of distribution investments that have helped such cities as Louisville, Kentucky and Memphis, Tennessee, though on a smaller scale. A few thousand such jobs would help many locals with moderate levels of education. The city is already showing off a sprawling distribution facility for Dick's Sporting Goods, a big retailing chain.

As Pittsburgh upgrades its local economy, it will increasingly have demography on its side. Because so many prime-age workers moved away in the early 1980s—often taking children with them—it now has lots of old folk. At the last census, in 2000, 15.6% of Pennsylvania's population was over 64 years old—second only to Florida—and the Pittsburgh region is older than the rest of the state. But now the Grim Reaper will even things out. Over the next quarter-century, however, the Census Bureau expects Pennsylvania's over-64 population to grow by only 50%, the smallest increase of the 50 states. The national elderly population will grow more than twice as quickly, while that of currently vibrant states in America's south-west will explode. When today's most glamorous regions begin to face that brutal arithmetic, many of today's young Pittsburghers may be glad they stayed put.

Goldwater Today

Goldwater Today
CC Goldwater on what her grandfather would make of today’s GOP.
By CC Goldwater
Special to Newsweek
Updated: 2:03 p.m. ET Sept 16, 2006
Sept. 16, 2006 - As the granddaughter of Barry Goldwater, I am often asked what I think my grandfather would have felt about the direction of today’s Republican Party. What I found in the past year I spent making a documentary about the man, “Mr. Conservative: Goldwater on Goldwater,” is that my grandfather is one person for whom it is pretty hard to speak. He was vocal about his opinions, which he presented with a rare clarity.

Still, those opinions have echoes today, and as the documentary shows, while my grandfather didn’t leave his party, his party has left him. Though he’s often depicted as the father of conservatism, Barry Goldwater would be considered a moderate today. He was firmly pro-choice, a supporter of gay rights and, in his later years, said that he thought it was okay for gays to serve in the military.

Fundamentally, it’s clear that Barry would not have been comfortable with the increasing influence of the Christian right over the GOP. My grandfather would have been appalled by the whole political grandstanding of the Terri Schiavo mess.

The Constitution was Barry’s bible. He felt strongly about what it represented and the guidance it gave to establishing our government. And he thought that most U.S. citizens took it for granted. “Most Americans have never even read it and that’s a shame,” he once said. “Kids are not learning about it because it’s not honored the way it used to be.”

We need to remember the true values and freedoms the Constitution guarantees us. The main lesson I learned from my grandfather: “Government needs to stay out of personal lives, and do the job that we entrusted them with—to run and govern our country efficiently and truthfully, according to the laws our forefathers crafted.” That’s a message worth remembering today.

Throughout my life, I was encouraged to be honest and truthful to all those I came in contact with. We need to encourage our youth to do the same. That begins with the people we look up to, our parents and government. We have to have something that we can trust and believe in and not fear. “Trust and fear cannot coexist at the same time,” Barry said. Anyone who motivates our decisions by fear cannot restore the principles of a country founded in freedom. “I will support whoever is running our country as long as they abide by those principles and will run our country and not our lives.”

CC Goldwater was five when her grandfather, Arizona Senator Barry Goldwater, ran for President in 1964. Her documentary, “Mr. Conservative,” features interviews with major public figures and never-before-seen home movies and photos. It premieres Monday, Sept. 18 at 9 p.m., ET, on HBO.

© 2006 Newsweek, Inc

19 September 2006

In Iraq, Military Forgot Lessons of Vietnam

In Iraq, Military Forgot Lessons of Vietnam
Early Missteps by U.S. Left Troops Unprepared for Guerrilla Warfare
By Thomas E. Ricks
Washington Post Staff Writer
Sunday, July 23, 2006; Page A01

The real war in Iraq -- the one to determine the future of the country -- began on Aug. 7, 2003, when a car bomb exploded outside the Jordanian Embassy, killing 11 and wounding more than 50.

That bombing came almost exactly four months after the U.S. military thought it had prevailed in Iraq, and it launched the insurgency, the bloody and protracted struggle with guerrilla fighters that has tied the United States down to this day.

There is some evidence that Saddam Hussein's government knew it couldn't win a conventional war, and some captured documents indicate that it may have intended some sort of rear-guard campaign of subversion against occupation. The stockpiling of weapons, distribution of arms caches, the revolutionary roots of the Baathist Party, and the movement of money and people to Syria either before or during the war all indicate some planning for an insurgency.

But there is also strong evidence, based on a review of thousands of military documents and hundreds of interviews with military personnel, that the U.S. approach to pacifying Iraq in the months after the collapse of Hussein helped spur the insurgency and made it bigger and stronger than it might have been.

The very setup of the U.S. presence in Iraq undercut the mission. The chain of command was hazy, with no one individual in charge of the overall American effort in Iraq, a structure that led to frequent clashes between military and civilian officials.

On May 16, 2003, L. Paul Bremer III, the chief of the Coalition Provisional Authority, the U.S.-run occupation agency, had issued his first order, "De-Baathification of Iraq Society." The CIA station chief in Baghdad had argued vehemently against the radical move, contending: "By nightfall, you'll have driven 30,000 to 50,000 Baathists underground. And in six months, you'll really regret this."

He was proved correct, as Bremer's order, along with a second that dissolved the Iraqi military and national police, created a new class of disenfranchised, threatened leaders.

Exacerbating the effect of this decision were the U.S. Army's interactions with the civilian population. Based on its experience in Bosnia and Kosovo, the Army thought it could prevail through "presence" -- that is, soldiers demonstrating to Iraqis that they are in the area, mainly by patrolling.

"We've got that habit that carries over from the Balkans," one Army general said. Back then, patrols were conducted so frequently that some officers called the mission there "DAB"-ing, for "driving around Bosnia."

The U.S. military jargon for this was "boots on the ground," or, more officially, the presence mission. There was no formal doctrinal basis for this in the Army manuals and training that prepare the military for its operations, but the notion crept into the vocabularies of senior officers.

For example, a briefing by the 1st Armored Division's engineering brigade stated that one of its major missions would be "presence patrols." And then-Maj. Gen. Ricardo S. Sanchez, then the commander of that division, ordered one of his brigade commanders to "flood your zone, get out there, and figure it out." Sitting in a dusty command tent outside a palace in the Green Zone in May 2003, he added: "Your business is to ensure that the presence of the American soldier is felt, and it's not just Americans zipping by."

The flaw in this approach, Lt. Col. Christopher Holshek, a civil affairs officer, later noted, was that after Iraqi public opinion began to turn against the Americans and see them as occupiers, "then the presence of troops . . . becomes counterproductive."

read the rest of the story at the link above...

18 September 2006

What's Really Propping Up The Economy

Business Week
SEPTEMBER 25, 2006
COVER STORY

What's Really Propping Up The Economy
Since 2001, the health-care industry has added 1.7 million jobs. The rest of the private sector? None

If you really want to understand what makes the U.S. economy tick these days, don't go to Silicon Valley, Wall Street, or Washington. Just take a short trip to your local hospital. Park where you don't block the ambulances, and watch the unending flow of doctors, nurses, technicians, and support personnel. You'll have a front-row seat at the health-care economy.

For years, everyone from politicians on both sides of the aisle to corporate execs to your Aunt Tilly have justifiably bemoaned American health care -- the out-of-control costs, the vast inefficiencies, the lack of access, and the often inexplicable blunders.

But the very real problems with the health-care system mask a simple fact: Without it the nation's labor market would be in a deep coma. Since 2001, 1.7 million new jobs have been added in the health-care sector, which includes related industries such as pharmaceuticals and health insurance. Meanwhile, the number of private-sector jobs outside of health care is no higher than it was five years ago.

Sure, housing has been a bonanza for homebuilders, real estate agents, and mortgage brokers. Together they have added more than 900,000 jobs since 2001. But the pressures of globalization and new technology have wreaked havoc on the rest of the labor market: Factories are still closing, retailers are shrinking, and the finance and insurance sector, outside of real estate lending and health insurers, has generated few additional jobs.

Read more at the link above...

The new GOP buzzword: Fascism

Fascism
"Fascism is also typified by totalitarian attempts to impose state control over all aspects of life: political, social, cultural, and economic; in the examples given, by way of a strong, single-party government for enacting laws and a strong, sometimes brutal militia or police force for enforcing them. Fascism exalts the nation, state, or race as superior to the individuals, institutions, or groups composing it.

Fascism uses explicit populist rhetoric; calls for a heroic mass effort to restore past greatness; and demands loyalty to a single leader, leading to a cult of personality and unquestioned obedience to orders (F├╝hrerprinzip).

Fascism attracted political support from diverse sectors of the population, including big business, farmers and landowners, nationalists, and reactionaries, disaffected World War I veterans, intellectuals such as Gabriele D'Annunzio, Curzio Malaparte, Filippo Tommaso Marinetti, Carl Schmitt and Martin Heidegger to name a few, conservatives and small businessmen, and the masses to whom they promised work and bread. In countries such as Romania and Hungary (and to a lesser extent in other states), Fascism had a strong base of support among the working classes and extremely poor peasants."
http://en.wikipedia.org/wiki/Fascism

The new GOP buzzword: Fascism
POSTED: 12:12 p.m. EDT, September 4, 2006
WASHINGTON (AP) -- President Bush in recent days has recast the global war on terror into a "war against Islamic fascism." Fascism, in fact, seems to be the new buzz word for Republicans in an election season dominated by an unpopular war in Iraq.

Bush used the term earlier this month in talking about the arrest of suspected terrorists in Britain, and spoke of "Islamic fascists" in a later speech in Green Bay, Wisconsin. Spokesman Tony Snow has used variations on the phrase at White House press briefings.

Sen. Rick Santorum, R-Pennsylvania, in a tough re-election fight, drew parallels on Monday between World War II and the current war against "Islamic fascism," saying they both require fighting a common foe in multiple countries. It's a phrase Santorum has been using for months.

And Defense Secretary Donald H. Rumsfeld on Tuesday took it a step further in a speech to an American Legion convention in Salt Lake City, accusing critics of the administration's Iraq and anti-terrorism policies of trying to appease "a new type of fascism." (Full story)

White House aides and outside Republican strategists said the new description is an attempt to more clearly identify the ideology that motivates many organized terrorist groups, representing a shift in emphasis from the general to the specific.

"I think it's an appropriate definition of the war that we're in," said GOP pollster Ed Goeas. "I think it's effective in that it definitively defines the enemy in a way that we can't because they're not in uniforms."

The right term?

But Muslim groups have cried foul. Bush's use of the phrase "contributes to a rising level of hostility to Islam and the American-Muslim community," complained Parvez Ahmed, chairman of the Council on American-Islamic Relations.

Conservative commentators have long talked about "Islamo-fascism," and Bush's phrase was a slightly toned-down variation on that theme.

Dennis Ross, a Mideast adviser to both the first Bush and Clinton administrations and now the director of the Washington Institute for Near East Policy, said he would have chosen different words.

"The `war on terror' has always been a misnomer, because terrorism is an instrument, it's not an ideology. So I would always have preferred it to be called the `war with radical Islam,' not with Islam but with `radical Islam,"' Ross said.

Why even mention the religion? "Because that's who they are," Ross said. "Fascism had a certain definition. Whether they meet this or not, one thing is clear: They're radical. They represent a completely radical and intolerant interpretation of Islam."

While "fascism" once referred to the rigid nationalistic one-party dictatorship first instituted in Italy, it has "been used very loosely in all kinds of ways for a long time," said Wayne Fields, a specialist in presidential rhetoric at Washington University in St. Louis.

"Typically, the Bush administration finds its vocabulary someplace in the middle ground of popular culture. It seems to me that they're trying to find something that resonates, without any effort to really define what they mean," Fields said.

Memories of World War II

Pollster Andrew Kohut, director of the Pew Research Center, said the "fascist" label may evoke comparisons to World War II and remind Americans of the lack of personal freedoms in fundamentalist countries. "But this could only affect public opinion on the margins," he said.

"Having called these people `evildoers,' fascism is just a new wrinkle," he said.

The tactic recalled the first President Bush's 1990 likening of Iraq's Saddam Hussein to Adolf Hitler.

"I caught hell on this comparison of Saddam to Hitler, with critics accusing me of personalizing the crisis, but I still feel it was an appropriate one," the elder Bush later wrote in a memoir.

It was one of the few times the younger Bush has followed his father's path on Iraq.

Charles Black, a longtime GOP consultant with close ties to both the first Bush administration and the current White House, said branding Islamic extremists as fascists is apt.

"It helps dramatize what we're up against. They are not just some ragtag terrorists. They are people with a plan to take over the world and eliminate everybody except them," Black said.

Stephen J. Wayne, a professor of government at Georgetown University, suggested White House strategists "probably had a focus group and they found the word `fascist.'

"Most people are against fascists of whatever form. By definition, fascists are bad. If you're going to demonize, you might as well use the toughest words you can," Wayne said.

After all, the hard-line Iranian newspaper Jomhuri Eskami did just that in an editorial last week blasting Bush's "Islamic fascism" phrase. It called Bush a "21st century Hitler" and British Prime Minister Tony Blair a "21st century Mussolini."

Copyright 2006 The Associated Press. All rights reserved.This material may not be published, broadcast, rewritten, or redistributed.

13 September 2006

What If There Were No Illegals?

What If There Were No Illegals?
Mary Crane, 09.11.06, 6:00 AM ET

With Congress back in session for the fall term, one issue will hit closest to home for small businesses across the United States--immigration reform.

According to the Bureau of Labor Statistics, 15% of the 144.3 million workers in the United States are foreign-born, including millions of unauthorized immigrants. There are no official government statistics for how many of these undocumented workers are employed by small-business owners, but according to the Pew Hispanic Center, most of them work in sectors typically led by small businesses. Nearly a third work in service occupations; 19% work in construction; 15% in production, installation and repair; and 4% in farming.

The employment of unauthorized workers is currently prohibited under the 1986 Immigration Reform and Control Act. The law requires employers to fill out an Employment Eligibility Verification Form, or I-9, for each employee, and employees must provide valid identification and a Social Security number. The employer must then evaluate the documents' authenticity and keep the I-9 on file for three years.

But most people agree this system just isn't working, and hasn't worked for a long time. The number of unauthorized immigrants keeps growing--there are an estimated 11.5 million to 12 million illegal immigrants in the country, up from 8.4 million in 2000--and enforcement is next to nil. In 2003, only three employers were cited for employing illegal immigrants, according to the Internal Revenue Service.

An owner of one midsize manufacturer in Chicago says the current policy is "don't ask, don't tell."

"As long as the documents presented to us during the hiring process appear to be official, we photocopy them and place them on file, but we are not expected to be forgery experts," he says.

That "don't ask, don't tell" policy may soon come to an end. Two widely divergent bills have been passed to deal with the growing numbers of illegal immigrants, one in the House of Representatives and the other in the Senate. The two bills will have to be reconciled by the two chambers and signed by the president to become law. While it looks unlikely that either the House or Senate will compromise on such a hot-button security issue ahead of November's congressional elections, some compromise may be possible after the elections or early next year.

However, should the Democrats win control of the House or Senate, the entire nature of any immigration-reform measure could change.

The current Republican-sponsored House bill, passed in December 2005 as the Border Protection, Antiterrorism and Illegal Immigration Control Act (H.R. 4437), is more hawkish than the Senate measure. Among its provisions: Businesses will have up to six years to verify previously employed workers' legal status using a new national database culled from the Department of Homeland Security's Basic Pilot Program Employment Eligibility Verification System, first implemented in 1997. Employers are susceptible to fines and penalties of as much as $40,000 for hiring violations.

In May, the Senate passed its own Comprehensive Immigration Reform Act of 2006 (S. 2611). Like the House bill, the Senate legislation requires employers to register with a verification system based on the Basic Pilot Program. Under Title 3 of the bill, employers would have up to 18 months after the date when at least $400 million has been appropriated for the new Electronic Employment Verification System to register. The EEVS would replace the I-9 form system and would be used to check employees hired after the date of registration with EEVS.

Small businesses are likely to be most interested in the Senate bill's provisions for integrating illegal immigrants already living in the United States, including President George W. Bush's much-touted guest worker program.

Under that program, 200,000 new visas would be available each year for work-related entry in the United States. The visas would be good for three years and renewable for an additional three. After four years of the six-year term, the worker can petition for a green card. The bill also allows immigrants who have lived in the country illegally for five years or more to apply for citizenship, and it increases the number of available H-1B visas for skilled foreign workers.

Critics say the bill amounts to giving amnesty to the millions of illegal immigrants living in the U.S. and opens the door to millions more; advocates say the bill acknowledges the labor needs of American businesses by offering undocumented workers a path to legal status.

The vast majority of small-business owners--more than 90%--believe illegal immigration is a problem, according to an April survey by the National Federation of Independent Business. But while most are supportive of the House bill's security measures, many are wary of its enforcement efforts and penalties.

The distinction small-business owners make between the House bill and Senate bill is that the House measure requires employers to verify that each of their current employees is eligible to work in the United States, and it imposes stiff fines for violating the rules. The Senate bill, on the other hand, leaves the labor pool intact by providing legal measures for undocumented immigrants to stay and work in the United States, and penalties are less severe.

Those who oppose the House bill say the verification system, based on the Basic Pilot Program, won't be ready to meet the needs of over 7 million employers and over 140 million current employees under the deadlines the House bill sets. Under the Senate bill, employers would be required to check new hires against the EEVS, but not existing employees.

Proponents of the Senate bill say the Senate's verification system could prove to be a useful tool in the early stages of the hiring process once it is implemented.

"Given the history of the Basic Pilot Program, we don't have any confidence that it can ramp up from a system that has [around 10,000] employers now to a system used by the millions of employers that are in the country in six years," says John Gay, senior vice president of government affairs and public policy for the National Restaurant Association. He adds that for his constituents--restaurateurs are the number-one employer of immigrants nationwide--the $25,000 House penalties are steep. Small businesses, with fewer resources to spare than larger businesses, will likely have a harder time paying the fines and adapting to the government's new regulations and procedures.

Chances are, a decision won't be made on the bill until late this fall or in 2007, say some experts. For now, most small-business owners are reluctant to talk about their opinions of the House and Senate bills until there is a clearer picture of what a unified bill will look like.

And with anti-immigration voices like CNN's Lou Dobbs fueling the fire, many business owners who employ immigrants--legal or illegal--are afraid of looking like profiteers offering sub-par wages, while those who are anti-immigration are afraid of appearing discriminatory.