The Economic Logic in the President’s Speech to Congress

The Economic Logic in the President’s Speech to Congress

February 25, 2009

President Obama superb address Tuesday night had an underlying, unifying logic which some may have missed, but which hopefully readers of this will recognize. First, on the financial and economic crisis, he embraced the three basic steps we have urged since last September: On top of a stimulus aimed at long-term investments and helping the states — that’s now done — there will be new requirements that banks getting help from taxpayers use it to expand their lending, and new steps to keep people in their homes and bring down foreclosure rates. It’s just economic common sense — but that’s precisely what most of official Washington casually casts aside in favor of scoring short-term, political points. (Take a look at Governor Bobby Jindal’s empty and sneering response to the President’s speech. His repeated citing of Katrina as a model for government action, by itself, should be a career-ending act.)

The President also laid out a domestic agenda for the rest of his first term, and it looks like the most sweeping since FDR and LBJ. I suppose that personal blogs, by definition, are no place for humility, so here it is straight. The three cornerstone Obama initiatives — slow down our fast-rising health care costs, expand energy conservation and our use of alternative fuels, and give everybody new chances to upgrade their working skills — are the exact prescription laid out in my recent book, Futurecast: How Superpowers, Populations and Globalization Will Change the Way You Live and Work, more than a year ago. It’s also been a regular theme of this blog and a series of papers written for NDN, the progressive think tank which also advised the Obama campaign and transition.

Here, too, it’s just economic common sense, for a world being transformed by globalization. The underlying logic of the President’s program springs from the fierce new challenges Americans face under globalization to their jobs and incomes. Globalization has made competition much stronger, and that competition leaves American businesses and their workers in a bind. Their costs have been rising very fast, especially for health care and energy, but intense global competition makes it harder for companies to raise their prices to cover these rising costs. The result is that the wages of most American stopped rising since about 2002, even as they became more productive. And most can’t find higher wages by getting new jobs, because before the current crisis began, the same forces had made this period the weakest for job creation since World War II.

The President understands that coming out of the current crisis isn’t enough, if we just return to another period of growth without wage gains or healthy job creation. He also understands another theme of Futurecast and this blog, namely that about half of Americans also need new skills if they aspire to jobs with a real future. That’s the basis for the third plank of the domestic agenda he laid out last night — genuine, new access for young people to go to college or receive other, post-secondary training, and new opportunities for everyone else to upgrade their skills.

President Obama’s first speech to Congress already ranks as the most serious and thoughtful presidential address on the economy in decades. Perhaps it took an historic crisis to break through the political cant and mental laziness that has gripped our economic agenda for so long. But the president is using this moment to put forward not only meaningful answers for the crisis, but serious, long-term remedies for much deeper economic problems which other politicians routinely ignore. That’s presidential leadership of the sort we haven’t seen since, well, FDR.

Where the Administration’s Plan for the Housing Crisis Could Fall Short

February 19, 2009

The President today announced a plan to cut foreclosures and reboot new mortgage financings, at least when the economy shows signs of new life. The fact of offering a plan is an advance, given that Bush and his people did nothing and proposed nothing, even as the crisis reached critical mass. As we have written here since the crisis first broke, keeping people in their homes is fundamental to solving the larger economic problem. Again, it’s the fast-rising foreclosures and mortgage delinquencies that are eroding and destroying the value of hundreds of billions of dollars in mortgage-backed securities and the credit default swaps that “back them up” (sic). And it’s the falling value of those securities and swaps, in turn, which has led to the effective bankruptcy of financial institutions that had leveraged themselves to their eyeballs to buy them or issued them and then kept them (how dumb was that?).

While the act of proposing anything serious puts the Obama administration ahead of its predecessor, passing such a low threshold is hardly very meaningful — especially since the problems continue to worsen. More than nine percent of mortgages today are either in foreclosure or delinquent, two to three times the numbers from just two years earlier; and if everything continues to unravel, those numbers could double in another year. If that happens, there won’t be many large U.S. banks left standing. Many of the homeowners now in trouble could manage, if they just could refinance at current rates. But banks quite naturally see someone in financial trouble as a poor credit risk for a new loan, which is what refinancing is. And the fall in housing prices means tens of millions of those people can’t qualify to refinance. That’s because refinancing is available today only if you owe no more than 80 percent of the original mortgage’s value. The catch for millions of families is that as the value of their home goes down, their existing mortgage (the one being refinanced) accounts for a greater percentage of the value being refinanced. In the worst cases, people just walk away from a $200,000 home with a $300,000 mortgage — and who would refinance one of those? In millions of other, less extreme cases, the falling prices simply disqualify people for refinancing.

The administration wants to address this precise part of the problem, by providing $75 billion in subsidies to banks to defray half of the cost of refinancing for several million homeowners at risk of losing their homes. Mortgages owned by Fannie Mae and Freddie Mac are also eligible here, and they’re the ones most likely to actually see their interest rates reset, since the government owns Fannie and Freddie and can direct them to do it. It will be harder to convince bankers already staring at enormous losses on their books — or soon to be there, especially if they’re worried that their bondholders could sue them for resetting loans. The plan also has some $100 billion for the Treasury to keep buying more of Fannie and Freddie’s failing mortgage-backed securities since, as we also have said repeatedly, until foreclosure rates return to normal, the biggest bank bailout in the world won’t prevent more banking losses.

There are more direct ways to address foreclosures. We could provide direct loans to tide over those in trouble, or Fannie and Freddie could reset the loans of everyone in trouble. The problem is that anyone advancing such a common-sense approach would become a very large political target — and not just for reflexively-critical House Republicans. How could the president or his advisors explain to those who work hard and spend less, so they can keep their mortgage payments up to date, why they don’t qualify for a lower interest rate from the government, when their neighbor who spent more or just had harder luck does qualify? More plainly, how does the government choose who would qualify for such direct help without enraging most of those who wouldn’t? In effect, the administration plan finesses this problem by letting banks choose, without compelling them to do so. But if the economy continues to worsen and the plan doesn’t work — a very real possibility, indeed — don’t be surprised to see the administration revisit it six months from now with a much less “voluntary” approach.

The Impact of the Great Recession on Trade

February 11, 2009

The new trade data out today show, unhappily, that the surest way to drive down our trade deficit is a deep recession that cuts into the money Americans have to buy imports. In December, the trade imbalance fell to less than $40 billion, a 35 percent drop from its $62 billion level last July. (It’s all seasonally-adjusted.) The last time the trade deficit was this low was November 2003. Imports shrank by $74 billion, from $230 billion in July to $174 billion in December, or nearly 25 percent. Of course, the same thing is happening to our trading partners: Our exports also fell 21 percent, from $168 billion to $134 billion. Since we import so much more than we export, the decline in imports really drives down the overall deficit.

This is a window into something new and important: With globalization, the world can suffer the central cost of protectionism — a deep fall in trade — without passing any new laws or regulations. The crux of it is that as the share of what the world produces that’s traded across borders rises — 18 percent of worldwide GDP was traded in 1990, compared to 30 percent in 2006 — a serious recession in a few large places moves quickly around the world, driving down global trade. That’s particularly serious for countries that really depend on exports, which means most of the developing world. The global data are still sketchy; but it looks like in the last months of 2008 and the beginning of this year, exports (month-to-month) fell 25 percent in China, 33 percent in Korea, and 40 percent in the Philippines. To see how serious this is, consider that exports represent about 40 percent of GDP in all of those countries. It’s even worse in Taiwan, where exports account for 62 percent of GDP and fell 44 percent rate in November, compared to a year earlier. The other deeply trade-dependent region is Europe, where serious problems coming from this massive slowdown in trade will hit home within the next few months.

The serious problem which they and others will face is fast-rising job losses by the people who produce the exports and those who make the goods and services that those workers purchase. So, as the world slides into this Great Recession, calls for new forms of protection for export industries are cropping up all over the place. We certainly hear these calls here, even though the United States for decades has been generally more accommodating of our trading partners than they have been towards us. We’ve pressed for more trade liberalization, pressed for it earlier, and stuck with generally low trade barriers and an aggressive global economic footprint more than our major trade partners. Countries like Japan, France and Germany don’t provide a very high threshold on these matters, to be sure, but we have consistently cleared it.

Yet, here we are today, on the brink of passing a “Buy America” provision that will bar the use of foreign-made manufactured products and goods in many projects supported by the stimulus package. President Obama said he wanted the Senate to dial it back, since he understands that it would invite real retaliation that would injure more export-industry workers. So, the Senators added a caveat that the restrictions can’t violate our WTO obligations. Here’s the translation of that: “Buy America” will mainly target developing countries, because Japan, EU nations and other advanced countries are all signatories to WTO agreements to not discriminate against other countries in many areas, including government procurement. China, Brazil, India and most other developing nations are not yet signatories. So, we can expect a good dose of tit-for-tat protection from those countries. And that could disrupt the production networks and supply chains of some of our largest, global companies, such as Dell, Coca-Cola, Boeing and Pfizer At a time of grave economic turmoil and peril, this can’t make any sense.

And we’ll still be vulnerable to legitimate, tit-for-tat from Europe and Japan, since they currently apply lower tariffs in many areas than mandated by the WTO. That means they could raise their tariffs without violating their WTO agreements — and we could do the same in the next round of retaliation.

The best way to cauterize this drive for protection is to take a deep breath, and make sure that workers have greater means to protect themselves. The administration is offering some of that, for example, in health care benefits for those who lose their jobs. We can go well beyond health care, however, especially in real opportunities for working people to expand or deepen their skills and abilities. That remains a serious gap in the stimulus, which hopefully the first Obama budget can rectify.

Shedding Light on the Stimulus Package

February 4, 2009

While the chorus of complaints about President Obama’s spending and tax package was dispiritingly predictable, the post-partisan surprise is that its basic structure is evolving to just about where it should be. The legislative process is adding its normal quotient of special interest subsidies on both the spending and tax sides — think of it as a “congressional tax,” because they really can’t help themselves. And, compared to the last decade of limitless tolerance for the unregulated escapades of Wall Street financiers that’s now pushing many of the world’s economies over a cliff, the partisan outrage at this conventional if distasteful part of the legislative process seems pretty hollow.

The important matter here is that at its core, the package should do roughly what we should want it to — with one gaping exception — given the gravity of current conditions and our equally serious, longer-term problems with wages and jobs. In effect, the administration has cleverly packaged some broadly useful, longer-term economic and social initiatives with some traditional “stimulus,” and it’s selling it as the answer to the crisis. It provides some of that answer — unfortunately, not all of it by a long shot — but it also offers the administration’s first responses to other legitimate matters on which President Obama happened to win his election.

First, there are at least $230 billion dollars in clear economic stimulus — notably, some $65 billion for more food stamps and an extension of unemployment benefits and $30 billion in other assistance for low-income households, all of which will directly support consumption; and another $80 billion in large grants to states dealing with fast-falling revenues and balanced budget requirements, which will save jobs and so also support consumption. There also are about $50 billion out of a larger pot of infrastructure projects that can properly count as stimulus — for schools, highways, transit, public hospitals, and so on — because they can get started fairly quickly and absorb idle resources (that’s mainly idle construction and machine workers, and equipment). Then there’s nearly $90 billion for state Medicaid programs. That’s not stimulus precisely, but it will relieve states from having to choose between cutting medical treatment for poor and elderly people or cutting other jobs and purchases to maintain those treatments. Given our circumstances, there are no sensible, post-partisan arguments against these provisions.

The second tranche of the package provides some $250 billion in tax cuts, most of it the first stage of the President’s promised tax relief for the now-famous “95 percent of Americans” plus another year of relief from the Alternative Minimum Tax’s slide down the income scale. There’s no point calling this stimulus. The fix in the AMT is an annual ritual which would happen with or without the package. A small package of business tax cuts (maybe $20 billion) also will do little economic good or harm. And the same can be said of the personal tax cuts. The best guess of economists is that 75 to 80 percent of that will be saved with no stimulus effect, since 60 percent of last spring’s rebates were saved and anxieties over falling incomes, job losses, or worse have all intensified since then. But they’re still worth doing as progressive, post-partisan down payments on using the tax code to respond to the sharp increases in inequality under our recent, unlamented conservative regime. It certainly would be better to adopt these kinds of changes as part of a broader reform of the tax code. But as tax changes go, they have the unusual virtue of actually helping most people.

Finally there’s a third group of some $220 billion in new public investment s — in education, training, broadband, clean tech, environmental cleanups, modernizing the electricity grid, energy efficiency, health care IT and medical research, and yes, more as well. The current Great Recession is brutal, and it’s getting worse; but one reason it’s so painful is that it followed an economic expansion in which, the income data tell us, most Americans barely held their own ground. These investments are close enough to a post-partisan agenda for raising the productivity of the overall economy as well as millions of workers, plus a small down-payment on addressing climate change. And the productivity pieces, at least, could begin to address the remarkable, recent stagnation in most people’s incomes. It will take much more than that to restore the strong wage and job gains we saw in the 1990s, notably serious cost containment in health care and a lot more energy efficiency than is in sight right now. But it’s a useful first step.

So it’s not just “stimulus,” but also the heart of the President’s first year agenda — and on balance, that’s a good thing. The missing piece remains what we have lamented for six months now (check the blog) — there’s still no new policy to stem the rising foreclosure rates driving the freeze in the capital markets, which in turn propelled the worst global downturn in 75 years. Without that, the stimulus and the new investments will have little lasting effect. So that remains the most important, unfinished business of the President’s first 100 days.