The Serious Economic Measures that Congress Won’t Consider

The Serious Economic Measures that Congress Won’t Consider

January 20, 2010

What amounts to a small miracle for Washington just happened: The Congressional Budget Office (CBO) issued a new report on the effectiveness of different policy approaches for boosting growth and jobs, and the findings affirm basic economic logic. They also support the particular policy ideas that we urged on the administration at the White House Jobs Summit and, before that, for months here. As CBO figures it, the best way to boost employment, in jobs per-federal dollar, and the second best way to boost growth quickly, in dollars of new output per-federal dollar, is to cut the payroll taxes paid by employers who also increase their overall payrolls. CBO calculates that this approach would be six to eight times more powerful in creating jobs than cutting personal income taxes, four times as potent as spending more on infrastructure, and twice as powerful as new investment breaks for businesses or additional aid to the states.

The reasons are obvious once you clear away the scenarios concocted by lobbyists for other approaches. It’s virtually the only proposal that’s actually targeted directly at job creation, and it’s effective because it directly reduces a company’s cost to create new jobs. Its projected power to boost GDP follows directly from its success in creating jobs, since the new workers would spend virtually everything they earn, boosting output in the goods and services they choose and the jobs required to produce those goods and services.

CBO also found that the best way to spur growth quickly, again in new output per-federal dollar, and the second best way to boost employment, in jobs per-federal dollar, is to expand assistance to unemployed Americans. This is as classic an exercise in Keynesianism as they come. Jobless people can be counted on to spend everything extra they receive, boosting demand for lots of goods and services; and meeting their additional demand requires more workers, materials and goods. It also has the virtue of doing some good for millions of people. We’ve lost an astonishing 7.3 million jobs since this downturn began. More than half of the unemployed today (counting those who’ve given up looking, in despair) have been out of work for at least a half-year. For the rest of us, CBO found that it would boost growth and jobs, again, significantly more than infrastructure spending and many times more than income or business tax breaks.

Basic economic logic didn’t stop the Bush administration from focusing its stimulus tax policies on precisely the broad tax cuts that, CBO now confirms, do little in a downturn for growth or jobs. Sadly, the facts and logic also didn’t deter the current administration and Congress from giving away one-third of the 2009 stimulus package in this way, and considering more investment tax breaks as a part of a new jobs package.

The CBO report also doesn’t mention that providing more jobless benefits and a year of payroll tax relief for employers won’t be nearly enough. On our present path, the expansion beginning to unfold won’t look or feel much like the 1990s, when job creation was strong and most people’s incomes rose smartly. It’s much more likely to follow the course of the Bush expansion, when job creation was weak and most people’s incomes stagnated (or worse). And by the way, don’t be distracted by a few months of strong economic data. GDP growth will likely come in quite high for the fourth quarter of last year — we’ll know soon enough — because that’s when businesses began to replenish the inventories they’ve been drawing down since late 2007. But inventory swings don’t translate into income gains or lasting jobs.

The reason we’re on this path is that Washington still hasn’t done much about the problems that gave us such a disappointing expansion last time and the disastrous downturn that followed it. Even if health reform passes, it won’t include the strong medicine needed to reduce the squeeze on jobs and wages coming from employers’ skyrocketing health care costs. There’s also precious little in the sheaf of education and workplace proposals now before Congress — and they may not even get to them — to expand an average worker’s access to the skills everyone will need in the next decade to operate in technology-intensive workplaces. Nor are there any prospects left this year of passing energy reforms that could reduce our dependence on high-carbon energy imports, and consequently lessen our economic vulnerability to the swings in their international prices.

Washington has also done so little to restructure the mortgage markets that brought on the broader financial crisis that home foreclosures will still set new record levels this year, creating another stumbling block for a strong expansion. And the prospects for meaningful financial reforms to goad Wall Street into funding the American economy, instead of their latest round of high-risk security bets, seem to be nearly gone.

After this week’s race in Massachusetts, can anyone seriously doubt that a majority of Americans are truly and finally fed up with Washington’s incapacity to do what makes economic sense?

America’s Path and the Rise of the Rest

January 13, 2010

The perennial question of America in decline is back. It’s the subject of new books and the cover story of the Atlantic Monthly, where James Fallows does his usual credible job with it. As usual, the forces animating the current sense of national malaise about the future seem to be everywhere, from the chronic disrepair of our infrastructure and the sad state of public education, to the soaring public debt and the quagmires of our foreign wars. On top of these dismal matters, there’s growing inequality and social polarization, and the failures of almost every important institution, from the press and leading universities to, of course, Congress and Wall Street. Fallows paints a dreary picture. But he’s also impressed, and rightly so, with American society’s flexibility and openness to new people — from obscure origins here and from everywhere else — with new ideas, new technologies, new ways of conducting business, and new ways of living what almost everyone else in the world would call the good life. He figures that these qualities would be enough to meet any difficulty — but for a political system that these days seems unable to address any serious challenge.

Fallows is right about almost all of this, as far he goes. Unfortunately, that’s not nearly far enough. The analysis, along with most of what’s said in Washington these days, misses how much the context of America’s problems has gone global over the last generation. It’s most obvious in the economic sphere, where the financial meltdown, our problems creating jobs, even our soaring public debt are all intertwined with globalization. The housing bubble, for example, drew on global dynamics driving up all asset prices. That’s why housing bubbles appeared not just here, but around the world — and one is just getting started now in China, with housing prices in Shanghai and Beijing jumping 50 percent in the last year. And it was global institutions drawing on global savings that drove the explosion of financial instruments and their derivatives around this bubble.

The problem with jobs is also one that Washington policymakers can’t understand, much less solve, until they begin to view it in its true, global context. A generation of radical economic reforms across most of Asia, Eastern Europe and much of Latin America, along with huge transfers of new technologies and entire business organizations from the West to everywhere else, produced hundreds of thousands of new businesses around the world. For at least a decade, they’ve been competing with our own companies and workers, either directly or indirectly in their own home markets. When competition becomes turbo-charged like this, everybody has to figure out how to cut costs — and in countries where most workers earn decent livings, like America, those cuts started with jobs and wages. So, the answers to our jobs problem will have to be a lot more complicated than a new tax break for small businesses or ecologically-fashionable sectors.

Everywhere we look, the problems and the opportunities that America faces involve our relationships with the rest of the world. We will never manage a transition to a low-carbon economy by simply own ingenuity and grit — and why should we, when by definition, the climate problem and its solutions are entirely global. Similarly, the notion that the President, Congress and the Pentagon, among themselves, can work out the “solution” to Afghanistan — as the last administration recklessly imagined it could with Iraq — is one that could only be taken seriously on Fox news. And if, as most of us suspect, great social and economic opportunities lie in the wired world of broadband and wideband, 3G and 4G, their true potential can only be tapped and managed on a global basis.

So, the challenges we face are not about the prospect of America’s decline at all. They’re about the rise of the rest of the world and our capacity to understand and operate in a genuine global context.

The World Is Watching and, Oops, There Go Our Interest Rates!

January 6, 2010

Here’s a piece of dry financial data that could herald big changes in our politics and economy: Over the last five weeks, yields on 10-year U.S. Treasury bonds have risen nearly two-thirds of a point. The interest rates the U.S. government pays are rising across the board, and quickly, and it’s not because the Federal Reserve is tightening credit — the economy is still too weak and vulnerable for that. Rates are rising, because the world’s largest global investment funds are “limiting their exposure to the US economy,” as the Financial Times puts it. These funds move trillions of dollars in and out of investments around the world, on behalf of governments like China and Saudi Arabia, financial and industrial giants like UBS and Gazprom, billionaires from scores of countries and, behind a veil of shell companies in tax havens, a few hugely wealthy and liquid dictators and criminal organizations.

These funds are sending the White House and Congress a clear message: They think that Washington is taking on more debt than the American economy can handle. More important, they believe that when global markets catch up with this view, they will drive up U.S. interest rates sharply, starting with Treasuries, and then moving on to loans to businesses, consumers, and, yes, homebuyers looking for mortgages.

It’s hard to fault their logic: In 2009, the Treasury borrowed about $1.4 trillion, or nearly 60 percent more than the $885 billion it had to borrow over Bill Clinton’s entire two terms. It’s almost certainly true that all that borrowing last year, along with the Fed’s willingness to flood every financial institution with liquidity (free money), prevented the Great Recession from morphing into a Second Great Depression. But these large and obvious benefits don’t nullify or negate the costs. And what’s happening now with interest rates means that those costs may be coming home to roost sooner than anyone would have wished.

This problem is not really a new one, and President Obama should start by reviewing how his predecessors handled it. The combination of a deep recession, tax cuts and a new military buildup produced an explosion of new debt in the early 1980s; it happened again in the early 1990s from another bad recession and a ramp-up in military spending (remember the first Gulf War?). The formula in both cases was essentially the same. First, pass revenue increases that look out a few years. It’s not part of the right-wing canon, but Reagan accepted tax increases enacted in 1982, 1983, 1984 and 1986. Clinton did the same in 1993, building on what the first President Bush (the serious one) did in 1991. And they all also had policies to slow down some spending — Reagan cut health care and slowed his own military buildup down the line; Clinton cut military spending and slowed health care several years out.

Apart from a few chronically uninformed complainers, most analysts can agree that these changes helped produce pretty successful runs for the economy in the mid-1980s and latter-1990s. And most economists agree that the strong growth of those years owed quite a bit to Reagan’s and Clinton’s success in reassuring the investment funds of their own day that the American economy could handle the government’s debt.

However, just as we don’t have to accept the years of stagnation that would follow from doing nothing as world markets drive up our interest rates, it would be a terrible mistake to turn this into a deficit-cutting frenzy in 2010 and 2011. That would almost certainly ensure another round of Great Recession. So, President Obama’s challenge is to reassure global funds and the larger global markets that he, too, can put in place a new fiscal program that several years from now will get control of the spiraling debt. The biggest difference is that these days, the verdict no longer comes mainly from U.S.-based funds and markets. To the money men in China, Saudi Arabia, Singapore, and even Japan, Germany and France, America is no longer even a sentimental favorite. So the new lesson that this President has to learn — and it will be a hard one, given the powerful pressures in Washington for an America-centric approach to everything — is that this country’s prospects henceforth will usually depend, most critically, on what’s happening beyond our own borders.