A New Jobs Program for America

A New Jobs Program for America

March 30, 2010

We have a really, serious problem with job creation. It’s been more than a half-year since the economy began to grow again — including several months of very strong, stimulus-fueled gains — but private sector employment continues to fall. The truth is, these results shouldn’t surprise anyone with a long memory. While businesses began to create more new jobs than they destroyed within three months of the end of the 1981-1982 recession, that didn’t happen for a full 14 months following the 1991 downturn and for more than two years after the 2001 recession.

The problem this time looks even more daunting. The economy is growing, but the pace may be moderating already. That’s because this time, most Americans have lost part of their savings and part of their homes’ value, leaving them more cautious about going on the kind of spending spree that used to drive early recoveries. And when people are cautious, businesses are too — with the result they don’t hire much. To get job creation going, we have to restore confidence so people and firms will begin spending again.

We also have to deal with a deeper problem linked to globalization. In a world with tens of thousands of new businesses created across the globe over the last decade, the resulting, intense competition forces companies to hone their efficiency and control their costs much more stringently. And when their costs for, say, health care and energy go up, they often have to cut back somewhere else — and they usually start with jobs and wages. That’s why U.S. companies created less than half as many new jobs, relative to how fast the economy grew, during the last expansion as they did in the 1990s and 1980s. To change these dynamics, we’ll have to slow the inflation in health care and energy prices. The President’s reforms enacted last week are a modest, first step; but millions of jobless Americans can’t afford to wait for them to take hold.

They don’t have to: We have developed a four-part program that would substantially accelerate job creation over the next several years. First, President Obama and Congress should make it cheaper for companies to hire new people. The most direct way to do that is to suspend the employer’s share of payroll taxes for new, net hires in their first year on the job — that would cover all new employees in firms that expand their total workforce and total payrolls. In the second year, the company would pay 50 percent of the employer’s payroll tax contribution. Employees who work hard for those two years will learn how to do their particular jobs especially well, which should be enough for their employers to keep them on after their payroll tax break ends.

The experts at the Congressional Budget Office found that this approach creates more jobs, per federal dollar spent, than any other. In fact, the jobs bill passed two weeks ago includes a light version of this policy, in a seven-month payroll tax holiday for hiring people who have been out of work for a while. It’s a start; but we need a permanent program, not a temporary fix, and one that doesn’t ask people to stay jobless until they qualify.

Next, the President and Congress should help everyone become a more valuable worker. Look around: Every modern office or factory is organized around computers, the Internet and other information technologies. Yet, nearly half of people working today — and more than half of those out of work — have little or no skills to use these technologies. As we’ve argued and written before, we can help everyone become a more valued employee by providing free computer and Internet skill training — and we can do that, at relatively little cost, by providing grants to community colleges to cover the cost of keeping their computer labs open and staffed at night and on the weekends, so anyone can walk in and receive training. Here, too, the President has said it’s a good idea — so why not enact it now?

Part three of this program involves more assistance for state and local governments to suspend their continuing layoffs of police, prison guards, firemen, sanitation workers, and other public service employees until a genuine economic expansion begins. This was a good idea for the original stimulus package, and it’s just as good an approach for a jobless recovery. And Wall Street can help pay for it with the revenues from a new tax on the bonuses for executives of financial institutions that took taxpayer money to stay afloat. We saved their jobs; now, they can help save ours.

The fourth part of our package involves the arcane structure of taxation for multinational companies. U.S. multinationals today hold some $1 trillion in financial assets outside the United States, bought with the profits they earned abroad. They keep all that money outside America, because while they’ve already paid foreign taxes on it, they have to pay additional U.S. corporate taxes when they bring those funds home. In practice, we’ll never see most of those funds under current law, since multinationals generally repatriate those profits only when they have domestic tax losses that can offset them. So, Congress at little cost could grant U.S. multinationals one year to bring home these funds and pay a much lower corporate tax rate than normal, so long as they use those funds to create jobs. This approach is the only, virtually free stimulus available to us — since the funds come from overseas – and we should grab it.

These four measures won’t change the structure of this recovery or the larger economic environment in which it is unfolding. Yet, within that structure and environment, these steps could significantly enhance the job prospects of millions of Americans.

The President’s Reforms and the New Politics of Containing Health Care Costs

March 24, 2010

The health care reforms enacted this week are an unequivocal political triumph for President Obama. He turned back the most intense and dogged partisan campaign to stop a piece of legislation seen in this era, enhancing his own popularity and power until at least the next setback. More important, the reforms as passed constitute the most serious social-policy achievement in two generations. They not only provide a clear and secure route to insurance coverage for two-thirds of the Americans who don’t have it. The President’s reforms also end a sheaf of abhorrent insurance practices—most notably, preexisting condition clauses and lifetime coverage caps—which withhold payment for care when, as it happens, people actually need it most. The open question, however, is whether the reforms also will make the country’s health care system more sustainable by slowing its trajectory of cost increases.

Without reforms to do so, those prospects are at once scary and unsustainable. A few months ago, we calculated how much an average, middle-class family should expect to spend on health care in 2016: The answer is fully one-third of the family’s real annual income—a level that’s unsustainable both economically and politically.

Here’s how we figured it out. The Congressional Budget Office tells us that an average family will earn $54,000 per-year in 2016, when moderately-priced family insurance coverage will cost $14,700. Most people’s employers will pay much of that bill; but those payments come out of people’s wages, not the company’s profits. Taking this into account, a middle class family’s earnings in 2016 should come to $68,700 ($54,000 + $14,700), of which $14,700 or 21.4 percent will go for health insurance. That’s not all. Experts figure that their co-payments and other uninsured expenses, on average, will come to another $5,100 in 2016. They’ll also pay taxes to help cover other people’s health care—2.9 percent of their cash wages for Medicare ($1,566), plus perhaps $1,500 more in federal and state income taxes for Medicaid and for Medicare costs not covered by the 2.9 percent payroll tax and for the subsidies for the uninsured under the new reforms. Add up all of that, and it comes to $22,766 or 33.3 percent of the middle-class family’s adjusted income of $68,700.

As Harvard health care expert David Cutler and others have concluded as well, the new reforms provide a credible beginning for what will still be a long and arduous process to control cost increases. Here’s how. To begin, the insurance exchanges should reduce costs in the individual and small-group insurance market, while the investments in IT should help slow costs across the system. In the largest and fastest-growing part of health care, treating the fast-rising numbers of older Americans, the reforms also include significant cost reductions in Medicare. Perhaps most important, Medicare will move from volume-based payments to reimbursements based on the value of the treatments. In addition, the reforms create a new Medicare advisory board to propose new ways to cut costs or save expenses, tied to a process for fast-tracking the recommendations through Congress; and there are also cuts in overpayments for Medicare Advantage and other supplemental Medicare plans, as well as new measures to reduce Medicare fraud and abuse. Finally, there’s a new emphasis on prevention programs, which could significantly reduce future costs.

All of this will help, but it won’t reduce the share of our average family’s income going to health care by more than a percentage-point or two. To make a bigger difference, each party will have to accept much more difficult changes advanced by its rival. So, Democrats will have to live with taxing a good share of the value of employer-provided coverage—the only tax increase conservatives will swallow these days—along with malpractice reforms more far-reaching than the limited state-based “experiments” enacted this week. For their part, Republicans will have to accept a public option, the only way to introduce real competition for insurers in areas where one or two of them now constitute an effective monopoly or duopoly.

Happily, the passage of the President’s reforms this week will make such hard steps much more likely politically, if not any easier. The reason is that with these reforms, the federal government, for the first time, has accepted overall responsibility, and ultimately accountability, for the nation’s health care system. When costs continue to rise sharply, as they will, voters across the country will have Washington as a focus for their displeasure, and the next election as an effective way to express it. That political prospect will drive much more stringent steps to contain costs, as it has in every other advanced country in the world. Only it’s coming later here, which is why we now spend so much more than other countries on health care.

Multinational Companies and Job Creation: How the Boeing-Airbus Rivalry Matters

March 17, 2010

With joblessness still unmoved by our historically easy fiscal and monetary policies, the political chatter is full of charges that globalization, especially the role of multinational companies, costs America millions of jobs. The facts are less clear-cut, and the impact on job creation depends substantially on whether the multinationals are ours or foreign based.

For several years, for instance, Boeing and the European multinational Airbus have been competing for a $35 billion contract to develop and build the next generation of tanker aircraft that refuel other planes in-flight. Boeing is as close to a domestic U.S. company as a large U.S. manufacturer can be these days, with 96 percent of its physical assets located here and ties to a far-flung global network of suppliers and vendors. Its face-off with Airbus pits it against a division of the European Aeronautic Defense and Space Company (EADS), which maintains 96 percent of its physical assets in Germany and France while also depending on a global suppliers and vendors. For years, PR flacks for both companies have claimed that each would create many more jobs than the other, if it won the contract. In practice, Boeing and Airbus would both need roughly the same number of workers, worldwide, to develop and build the new tanker; and in order to be cost- competitive, most of this work would occur at the two companies’ existing facilities. For an economist or a business person, this means that a U.S. based company would produce most of those jobs here, where its physical plant is, while a European-based firm would have to produce most of the jobs in Europe.

Recently, I was able to test these assumptions when Boeing asked if we could conduct an impartial analysis of jobs and the tanker contract. I agreed with certain conditions. First, our study would ignore the PR claims from both sides. Second, we would focus on the new investments in plant, property and equipment provided under the contract, and construct an objective jobs estimate using historical data on the relationship for aircraft makers between these new investments and job creation. Finally, we would use only publicly-available and verified data, plus the two firms’ formal proposals to the Pentagon.

In its formal submission, Airbus proposed to partner with the U.S.-based Northrop Grumman, a common arrangement for foreign multinationals competing for Pentagon contracts. Airbus’s plans also showed that, as expected, it planned to develop and produce most of the new planes? at its existing facilities in Europe, with Northrop Grumman mainly assembling it here. Furthermore, reams of government data established that U.S. subsidiaries of foreign aircraft makers are much less invested here than their U.S. counterparts. Those subsidiaries also generate substantially fewer new U.S. jobs for every dollar of new investment here, which means they do the more labor-intensive tasks back home.

Whichever firm ultimately wins this contract will use a substantial share of the funds to pay outside vendors and suppliers, as suggested earlier, and these payments will create thousands more jobs indirectly. But there are no public data on where the myriad parts of each company’s global supply chain are located, so no one can say how many new U.S. jobs will be created indirectly under this contract by either rival. One might plausibly assume that the supply chain of a U.S.-based firm is more concentrated here than the supply-chain of a European-based firm; but since we don’t have the data to test that assumption, we set it aside.

These facts and factors produced some definitive results: We found that over the 18-year life of the contract, we should expect Boeing to produce 10 times as many U.S. jobs — roughly 3,500 to 4,000 jobs per-year — as Airbus-Northrop-Grumman. In fact, since the study was completed, Northrop-Grumman pulled out of the competition, leaving Airbus to face-off alone against Boeing.

These findings throw additional light on other common concerns about multinational companies. Perhaps most important, as Airbus’s case suggests, new investments and job creation by a multinational in its home economy are often accompanied by new investments and jobs by its foreign subsidiaries. That’s just the way that multinationals do business. For example, when Ford or Dell build a new plant abroad, the operations of that facility will generate new business back home, including investment and jobs, because the headquarters will continue to provide its subsidiaries with more advanced services and produce the most advanced parts. That makes the economic impact of multinationals here largely “distributional.” The worldwide networks of multinational companies shift many thousands of basic service and basic production jobs abroad, while creating a smaller number of more highly-paid, more advanced service and production jobs here.

The Pentagon should always award its contacts to those firms that can most credibly and efficiently produce the new systems required for American national security. That said, the impact of those contracts on job creation cannot be considered a matter of economic indifference, especially in a period when American businesses seem capable of producing new jobs only at much lower rates than previously.

Why Progressives Should Work to Control the Rising National Debt

March 10, 2010

Politicians on the lookout for ways to stir up voters recently have lit upon America’s fast-growing national debt, whether the context is health reform, unemployment benefits or the war in Afghanistan. These concerns are often merely excuses for opposing basic health insurance for working people, or help for out-of-work families, or standing up to Al Qaeda; but let’s take them at their word. What we find is that these concerns about national debt are largely misplaced — yet, not entirely so.

Ironically, progressives probably have more compelling political reasons to control this debt than would the current crop of conservative Republicans. Since the time of Ronald Reagan, Republican conservatives have understood well that the large deficits that pile up the national debt deny Democrats the resources to carry out any new initiatives. That’s precisely the dynamic that Bill Clinton and his followers understood when they pressed to balance the budget — and so, at once, create the political space to expand government’s role and deny conservatives the excuse that we can’t afford it.

Let’s go to the numbers: The total U.S. national debt today is about $12.4 trillion, and CBO expects us to add another $1 trillion a year for another decade. The combination of a high national debt that’s also growing much higher very quickly can drive up interest rates. But in strictly economic terms, these numbers aren’t as high as they may seem. The federal government itself holds $4.5 trillion of the debt, with nearly 60 percent of it sitting in the Social Security Trust Fund — and these securities can’t even be sold or traded on financial markets. That brings down the publicly-held, economically-relevant debt to $7.9 trillion. In fact, another $780 billion of that is held by the Federal Reserve, which uses its portfolio of government securities to expand or contract the money supply, and turns back to the Treasury most of the interest it earns.

So, the debt worth worrying about economically comes to about $7.1 trillion, equivalent to a little less than half of our 2009 GDP of $14.46 trillion. Looking at the national debt as a share of GDP, as economists do, makes sense, because when that share goes up, it usually means that government deficits are growing faster than the economy that finances them. Stated a little differently, when the debt’s share of GDP goes up, it usually means that the government is involved in allocating more of the economy. To many economists, this portends slower long-term growth, because government is rarely as efficient as markets in making those allocations.

That’s just what’s happening. The share of GDP represented by all of our publicly-held debt has risen from 40 percent just a few years ago to about 50 percent today, and it’s headed for 65 percent by 2015. But, the share is expected to plateau at that level from 2015 to 2020, even without new steps to reduce the deficits. The same goes for the debt as a share of the total or gross national debt: It comes in at about 80 percent of GDP today and is projected to reach 95 percent of GDP in 2015, where again it will roughly remain from 2015 to 2020. Such a fast-rising national debt, at least for the next five years, will suggest to some a less efficient economy — but maybe not, because we don’t have to assume that no other technological or organizational development emerge over the next few years that make us more efficient.

Other economists have different worries: They note that historically, when a country’s debt reaches some fairly high level of GDP, investors begin to lose confidence. And when that happens, those investors may demand much higher interest rates to keep buying the debt; or, in more extreme cases, refuse to buy any more of the country’s debt at almost any price. Across many countries and many years, this no-confidence trigger-level appears to lie at debt equal to 90 to 100 percent of a country’s GDP. But that’s certainly not a hard rule: Japan passed that level without experiencing a debt or currency crisis, and investors almost certainly would grant the United States and the dollar greater slack than Japan and its yen.

Others would have us worry about the interest costs to service the government’s debt. Because, in a roundabout way, the federal government uses bookkeeping notations to “pay” the interest it owes itself, and the Fed gives back most of the interest it earns, what’s at issue here is the interest on the remaining, publicly-held debt. In 2009, this debt came to about $7 trillion. Because interest rates have been low, the interest payments came to $187 billion last year, or less than 1.3 percent of GDP.

That wouldn’t matter much economically, but for one catch: Nearly half of it was paid out to foreign investors, especially foreign governments. If Americans owned all of our national debt, the cost of servicing it would be a wash economically, since one set of Americans (taxpayers) would pay another set of Americans (the bondholders). As it happens, foreigners now own 47 percent of all publicly held U.S. debt — including nearly $900 billion owned by the Chinese Government (that’s more than the Federal reserve holds), $770 billion held by the Japanese Government and that nation’s investors, and another $210 billion by Middle Eastern governments and their reigning families. All of those payments are deadweight losses for the U.S. economy and leave us poorer.

These foreign payments, however, also highlight the political costs. For instance, the interest paid last year to foreign governments dwarfs the annual cost of the President’s health care reforms. And over the next few years, those costs will increase very sharply, because the debt will go up quickly and interest rates will almost certainly be considerably higher. In 2015, for example, the Treasury expects to pay out more than $400 billion in net interest — at least half of it to foreign investors — and those payments should reach more than $650 billion by 2020. These increases in interest payments sent abroad would dwarf the cost of virtually any new social program that progressives might imagine.

Our large and fast-growing national debt also contains another potential trap. While a prosperous America can handle a national debt of $12 trillion or even $20 trillion a decade from now, another financial or economic meltdown on top of such debt could sink us all. America entered the 2008-2009 financial crisis and recession with an unusually small national debt as a share of GDP. That’s why the upcoming decade of trillion-dollar annual deficits (driven mainly by the costs of tens of millions of retiring boomers) will still leave us with a national debt smaller than our GDP. But imagine that a second meltdown requires new bailouts and new stimulus at least as great as the recent ones, but this time coming on top of existing, trillion dollar deficits. Global investors may well balk at those financing demands, producing a downward economic spiral for us all that would be very hard to stop.

This scenario isn’t very hard to imagine, given Washington’s inability to agree to the financial market reforms required to avert it. That leaves us with controlling the rising national debt. If the two parties don’t have the stomach to regulate Wall Street, perhaps they eventually will find their way, as Bill Clinton did, to reducing the underlying deficits.

Broadband and American Jobs

March 3, 2010

With the FCC preparing to issue new rules and policies to promote universal broadband access, Washington’s hive of think tanks and foundations (and lobbying shops that masquerade as one or the other) have issued a flurry of new studies on broadband’s impact on American jobs. It’s a marriage of two genuinely vital matters: Ensuring that every American has access to the wired world that increasingly permeates most people’s economic and social opportunities; and finding ways to restart job creation across the economy. Perhaps most important for the FCC’s deliberations, the new studies point to the different jobs impact of the network’s two principal parts, the companies that build the broadband infrastructure and those that provide its content.

In the most rigorous new study, Robert Crandall of the Brookings Institution and Hal Singer, a consultant, calculate the new jobs that arise directly from the tens of billions of dollars in new investments undertaken by broadband providers, laying cable, fiber and DSL lines, putting in place new connections, and building out wireless and satellite-based broadband networks. From 2003 to 2009, these direct investments created some 434,000 jobs; and over the next five years, the same process should produce more than 500,000 more jobs. And as we will see, these effects dwarf the job gains linked to the companies providing the content.

But the power of a market-based economy lies in the ways that a basic infrastructure such as broadband stimulates additional economic activity, much as highways and railroads once did. Building out these networks creates a platform for the development of thousands of new applications, and the combination creates new demand for the computers, software and other IT equipment needed to use the network and its applications.

Consider the iPhone cited in another new study from the Democratic Leadership Council. Without the broadband network, the iPhone would be just another cell phone. With it, Apple sold 43 million units in three years, its’ users downloaded 1 billion applications, and other mobile device makers scrambled to develop competing devices. And the people newly employed to produce these computers, software and other equipment earn wages and salaries, which enable them to buy more goods and services that yet more workers have to produce. Altogether, economists figure that these dynamics created another 430,000 jobs per-year from 2003 to 2009.

But there’s a big catch. As millions learned when the New Economy bubble burst in 2001, new technologies create enduring wealth and jobs only if they enable us to either do something entirely new or do more efficiently something we already do. Otherwise, the technology mainly moves around demand and the jobs linked to it: When we get our news from the Internet, it creates jobs on those sites while costing jobs at newspapers and magazines. This tradeoff happens especially when the economy is growing smartly and different companies and sectors have to compete for investment capital. So, we have to recognize that the cheering investment and job numbers for broadband don’t usually take account of the jobs that weren’t created when investment in other areas slowed — and that’s why economics is called the dismal science.

This caveat, however, also points to broadband’s real potential to create new efficiencies and new economic value — and the jobs that go with those gains. First, there are “spillovers” to other parts of the economy. So, as the use of broadband and its applications expand, other sectors from hotels and manufacturing to retail trade and educational services have to keep pace; and that requires that they increase their own investments in computers, software and so on. Those investments create new jobs not only to produce those technologies, but also to operate them once in place. One recent study estimated that for every one-percentage point increase in broadband penetration, several hundred thousand more new jobs are produced — and broadband access has been rising by several percentage-points per-year.

Combinations of broadband and advanced applications also can generate entirely new savings which allow people to spend more on other things, and so create additional jobs not counted in all of those studies. We see this happening in telecommuting, which saves transportation and other energy costs, as well as in telemedicine, which can not only reduce transportation and energy costs but also make the practice of certain areas of medicine more efficient and more effective. And if telemedicine saves people’s lives or reduces how long they’re sick, the economy gains all of the productivity which otherwise would have been lost.

There is one more catch in all of this good news: These various gains are not distributed evenly across the economy or equally across the society. It’s not just a matter of much of the gains going to workers in industries that develop and sell the fiber, cable, satellites, computers, cell phones, software, and so on. Beyond that, a recent study by the Public Policy Institute of California found that communities with new access to broadband — and parts of communities — experienced average job growth 6.4 percent greater than before they had broadband. To begin, much of those gains will be captured by workers with sound IT-related skills. Furthermore, this suggests that communities without such expanded access — and parts of cities where most residents remain not wired — will lag behind even more than before.

And within the broadband universe, the direct job gains associated with higher investments are also concentrated. Dividing that universe into the broadband providers such as AT&T or Verizon and the content providers such as Google and eBay, studies and SEC data show that, first, broadband providers invest three-to-four times as much as the content providers. Moreover, studies also find that each dollar invested by broadband providers creates about twice as many jobs as each dollar invested by the content providers.

These studies suggest several takeaways for the FCC. First, the FCC’s goal is the right one: Universal access to broadband is critical to promoting more job opportunities and economic growth across the economy. Second, the central element for job creation here are the investments required to ensure universal access — not only now, but also as broadband technologies continue to advance. The FCC should promote these investments in every way it can. At a minimum, the Commission should be extremely cautious about policy changes which could weaken the incentives for those investments — i.e., reduce their returns — or raise the price for people to access broadband.