Two Thoughts for President Obama on his Way to Copenhagen

Two Thoughts for President Obama on his Way to Copenhagen

December 16, 2009

With the President getting ready for Copenhagen, the EPA did what Congress would not: Put in place a policy to ultimately reduce carbon emissions. The EPA finding that greenhouse gases (GHG) pose a danger and thus trigger a process to reduce the risks through direct regulation has become the president’s only “deliverable” in Copenhagen. More important, the only forces that will ever prod Congress to take action on such difficult matter as climate are broad public opinion and pressures from powerful groups — and that’s where the real importance lies in the EPA finding and a series of additional rule-makings scheduled over the next year.

The finding and rule-makings should bolster the public’s existing opinion that serious measures to reduce greenhouse gas emissions action are required, while putting the fear of God in many business executives (or more precisely, the fear of unaccountable government regulators). And the threat that in the absence of congressional action, EPA may directly regulate the greenhouse gas emissions of every company in America is credible, given the Supreme Court’s recent holding that the law requires that EPA come to some finding about the dangers of those emissions. The only way for all the powerful groups that work so hard to stop or profoundly weaken climate legislation — see their most recent handiwork in the effective gutting of Waxman-Markey — is to enact a serious program that would preempt EPA. Are you listening, Big Coal? And climate activists should be on the same mission, once they consider what such regulation would look like under the next conservative Republican president.

The finding, however, could accelerate the search for new responses to climate change by broadening the debate beyond the cap-and-trade model which Congress has already rejected three times; and, if Kerry-Boxer ever comes to a vote, will almost certainly go down in defeat again. The leading alternative, of course, is a carbon-based tax with its revenues going to cut payroll or other taxes. It’s an approach that’s worked well in Sweden and now is being considered in France, Ireland and Denmark. Economists like it, because it doesn’t introduce additional volatility to energy prices as cap-and-trade does; and environmentalists like it, because a stable price for carbon is a prerequisite for businesses to invest large sums in developing and adopting alternative fuels and technologies. Now, if businesses can come to dislike the prospect of direct EPA regulation with enough fervor, a new consensus could emerge around a new way to address climate change.

Speaking of Copenhagen, let’s cut through the nonsense about the whole project foundering unless rich countries agree to pay for the climate efforts of poor countries. Climate change is almost entirely the business of the world’s developed and large, fast-developing countries, because poor countries simply don’t have enough electricity generation, factories, capital-intensive farming and automobiles to produce significant amounts of GHGs. In fact, the world’s three economically-dominant places — America, the European Union, and China — account for 55.5 percent of all emissions. Include twelve more nations — Russia, India, Japan, Canada, South Korea, Iran, Mexico, South Africa, Saudi Arabia, Australia, Brazil, Indonesia, — and you cover 85 percent of global emissions. Among those twelve, the only, barely plausible cases for assistance are India and Indonesia, although both are on sharply-rising growth and development paths that could soon generate the incentives and resources required to become more climate-friendly on their own. Ensuring that the world’s 120 or so other countries, most of them small and many of them poor, share some responsibility for addressing climate change is truly a secondary issue.

It’s also clear that at this time, virtually no country seems prepared to shoulder the cost of making even its own economy truly climate friendly, much less pick up the bills to make other countries less carbon-dependent. The best course is probably a business form of technology sharing, in which governments support the formation of joint ventures between developers in the United States, the EU and the other 12 or so large GHG emitting nations — especially, of course, China and India — to develop, produce and sell climate-friendly fuels and technologies. Then saving the planet could end up being good business for everybody.

One Way to Create 1 to 2 Million Jobs without Increasing the Deficit

December 8, 2009

At last week’s Jobs Summit, President Obama said he’ll consider any good idea to create jobs. I heard him say it, and I believe him. His speech yesterday at the Brookings Institution offered some decent, standard approaches, including more infrastructure spending and tax breaks for small businesses. The President would be well-served to cast his policy net a bit wider. Since the Great Recession began, the economy has shed an astounding 7.3 million private-sector jobs — and based on the last two recoveries, businesses could continue to cut back their labor forces for another year or longer. The President and Congress can create more government jobs whenever they like, for example by giving states an additional $50 billion or so targeted to jobs. But finding the right lever to get private companies to hire more people than they would otherwise is a lot harder.

The most direct and sensible approach is to somehow reduce the costs of hiring for companies. The unsurprising catch is that the incentives required to get them to hire a million or more new people, whom otherwise they wouldn’t have hired, are very expensive. So, most serious jobs proposals would either drive up our already-mammoth deficits or require a significant new tax.

Most, but not all, because there is one approach I know of that wouldn’t cost taxpayers anything. The foreign subsidiaries of America’s multinational companies currently hold offshore an estimated $1 trillion in past earnings, because our tax laws defer the U.S. corporate tax on those earnings until the parent companies bring them back to the U.S. parent company. The challenge is to leverage these funds for job creation at home, by creating a strong incentive for them to bring back a share of those earnings tied to a requirement that they use the funds to finance new hires. It’s the closest thing to “found money” that this administration and Congress will ever find.

We actually tried this once before, in a fashion, and it worked reasonably well. In 2004, Congress slashed the corporate tax on such “repatriated” earnings for one year, from 35 percent to 5.25 percent, and IRS data show that it increased net inflows of those earnings by $312 billion, including $252 billion by U.S. manufacturers. The 2004 law also told companies they had to use the new funds they brought back to, among other things, finance new workers, new investment, or pay down domestic debt. Recent surveys found $73 billion of the repatriated earnings went to create or retain jobs, $75 billion for new capital spending, and $39 billion to pay down domestic debt. Here’s the free lunch: In the short run, the temporary program raised $34 billion in new federal revenues. And it may not even have reduced revenues over the long-term, or not by much, since without the tax break, most U.S. multinationals keep their foreign-source earnings abroad indefinitely, or at least until they can be used to offset domestic losses for tax purposes.

We can estimate what would happen if we tried this approach again. A recent analysis I did with AEI’s Aparna Mathur found that such a policy could bring back $420 billion in foreign-source income now held abroad. And if the program were targeted again in the same way as in 2004, it could mean $97 billion for new employment, or enough to create or save 2.6 million jobs over two years, as well as $101 billion for new capital spending, enough to produce long-term wage gains of 1.3 percent.

Skeptics will claim that most companies would use their repatriated funds in other ways, such as stock buy-backs; and since money is fungible, the government couldn’t stop them. Two academic studies built models which inferred that this happened last time; but there’s no real evidence that companies evaded the restrictions, and a recent academic survey suggests that most did follow the law. Even if some didn’t, we can tighten the restrictions this time. We could allow multinationals to bring back offshore earnings for one or two years and pay just 5 or 10 percent corporate tax on them here, so long as they use those funds only to create new, net jobs or increase their net investment. That means they would have to not only hire new people, but expand their overall workforces. It might just help businesses create between 1 million and 2 million new jobs while actually reducing the deficit, which seems like the kind of new idea the President is looking for.

How to Create New Jobs in a Troubled Economy

December 2, 2009

The inconvenient truth that lies behind this week’s White House jobs summit is that there are no magic bullets for an economy thrown over the cliff by a huge financial crisis. Even with all of our stimulus, bailouts, tax breaks and special Fed lending programs, job losses continue to mount, dampening investment and overall demand. That’s not all: Despite the administration’s efforts to stem home foreclosures, they continue to rise and so pull down more mortgage-backed securities and their derivatives, which in turn also dampens business lending and jobs. We’re also seeing mounting losses in commercial real estate, propelled by higher vacancy rates and more tenants simply unable to pay their rents, which are driving up failures by the banks which lent out the money to develop those buildings. Those failures also eat away at demand, investment and jobs.

And we’re still highly vulnerable to more damaging shocks. So, stock markets around the world fell sharply this past week when one of the world’s largest commercial real estate companies, the government-owned Dubai World, announced that it couldn’t pay its lenders. For many, Dubai World’s problems raised the scary possibility of sovereign debt defaults, which would be another blow to financial institutions around the world that hold most sovereign debt. And nations aren’t the only sovereigns whose bonds could be in trouble: The largest real estate bubble and worst recession in 80 years could also compromise the debt status of the world’s seventh largest economy, the state of California.

While large fiscal and monetary stimulus will always help an economy in free fall — we saw that in the modest rebound in third quarter GDP — the number of Americans working could continue to fall for at least another year, because the economy had serious problems with job creation before the crisis hit. After the 2001 recession, the briefest and mildest on record, the number of people working continued to slump for two years; and over the course of the 2002-2007 expansion, American businesses created jobs at less than half the rate of the previous two expansions.

So, the country has a serious problem with jobs, one which requires serious responses. A little more stimulus can play a role here, especially targeted to state governments whose labor forces are being squeezed between their falling revenues and balanced budget requirements. The cure for the private sector will have to involve stronger and more permanent measures that can directly reduce the cost to businesses of creating new jobs.

Here’s a start: Exempt from payroll taxes the first $3,000 to $5,000 of wages paid in each of the first two years to new hires by firms that expand their work forces. Because it would be a permanent measure that would reduce social security revenues, we should pay for it and use the new revenues to make the social security trust fund whole. We can do that by enacting a small “Tobin tax” on financial market transactions, equal to, say, one-quarter of one percent of the value of trades, and pressing other major countries to do so as well. James Tobin, the Nobel laureate who first proposed such a tax for currency trades, noted it could help reduce destabilizing currency speculation. Given the recent crisis, slowing down speculation seems like the right medicine for stocks and bonds today. And at such a low rate, it shouldn’t affect long-term investment, especially if other financial-center countries go along. And if we don’t take strong measures, we will almost certainly find ourselves grappling with serious problems with job creation for many years.