At Last, the Net Neutrality Fight Is Over

At Last, the Net Neutrality Fight Is Over

December 21, 2010

Official Washington, which usually doesn’t accomplish much at all, is having a week of extraordinary achievement.  There’s the deal on taxes which should boost the economy next year and into 2012, the START Treaty, the long-overdue end to discriminations against gays and lesbians in our military, and now new open Internet rules from the Federal Communications Commission (FCC).  The text of those rules hasn’t been released yet; but based on the Commission’s public discussion and vote today, the FCC has finally resolved a very thorny issue by striking the right balance.  The order adopted today, which hopefully will end the battles over the concept of “net neutrality,” will apply new rules for fairness to broadband network providers, but without impairing the incentives they need to invest hundreds of billions of dollars more in the Internet’s basic infrastructure.

 As I wrote a few weeks ago after FCC Chair Julius Genachowski announced his view of these rules, the Commission’s decision should protect the rights of consumers while allowing broadband companies to manage their own networks and figure out for themselves how best to address online congestion and other quality-of-service issues. All of this will be open for public scrutiny, since today’s announcement includes new transparency requirements that oblige broadband providers to disclose their network management practices.  And if this resolution of net neutrality does lead to greater investments by those providers, as expected, that can only mean more jobs next year as well.

The Pitfalls of Economic Nostalgia

December 15, 2010

The United States faces economic problems as daunting as any seen since the 1930s. GDP growth and job creation remain slow in the early stages of the current recovery, when both should be strong.  Moreover, the pressures of globalization, along with technological advances, have reduced the capacity of American businesses to create new jobs even when demand is strong.  These changes have boosted productivity, but most people’s wages and incomes remain stalled.  And in the most dynamic sectors of our economy, those technological advances increasingly demand skills beyond those of most working Americans.  These developments also have produced rapidly widening gaps in incomes and wealth, so that 20 percent of Americans now own 93 percent of the nation’s financial assets.  And the one asset that most families can claim, their homes, has lost an average of 30 percent of its value in the last three years.

Yet, Washington continues to respond to these challenges through an economics of nostalgia.  The economic agenda of most conservatives today consists mainly of tax cuts for those at the top who earn, save and invest the most, resting on an unflagging faith that markets are self-correcting and invariably produce the best possible outcome.   After all, this approach seemed to work in the 1980s — even if its reprise under George W. Bush led to nearly a decade of historically anemic job creation and stagnating incomes, and culminated in a disastrous financial meltdown and long deep recession of 2007-2009.   The progressive response amounts mainly to a series of stimulative spending and tax measures bolstered by virtually unlimited and free loans for large financial institutions to stimulate their own lending.   And while similar approaches worked in the 1960s and 1990s, the current iteration has produced the weakest recovery in decades.

The progressives are closer to the mark than the conservatives, because when the private sector underperforms as badly as ours has over the last 18 months, it needs stimulus of the sort currently promoted by the President and likely to pass the Senate this week.   But in an economy hampered by serious structural problems, stimulus alone cannot ignite strong and self-sustaining gains in growth, jobs and incomes.  To accomplish that, both sides need to put aside their traditional responses and consider new approaches that can directly address the structural problems holding back real prosperity.  Ironically, the most significant initiative to do so is the one program that the Administration gets the least credit for – the health care reforms or at last those parts which over time should slow the rate of increase in medical and insurance costs, and thereby help provide a foundation for faster job creation and wage gains.

These nostalgic economic nostrums seem to blind most of Washington to the necessity for a new economic strategy.  For example, it should be evident to all but the most ideologically-blinkered free marketers that the housing market has been dysfunctional for nearly a decade.  Moreover, the sustained decline in housing values has produced a “negative wealth effect” which continue to dampen consumer demand when the various stimulus measures run out.  Conservatives argue for letting those markets work their will, which would amount to another two years of slow demand and declining assets for most Americans.  A better strategy begins by acknowledging that declining housing values are a real problem, now driven by high levels of home foreclosures.  We can try to fix that with a new loan program to help families facing foreclosure keep their homes.  And if that strengthens consumer demand, it should also trigger significant increases in business investment – and together, both should generate real job gains.

The problem of slow job creation isn’t limited to our current circumstances – in the expansion of 2002-2007, American businesses created jobs at less than half the rate, relative to GDP growth, seen in the expansions of the 1980s and 1990s.  Much of this problem comes from the intense competitive pressures unleashed by globalization, which limit the ability of businesses to pass along higher costs by raising their prices, and therefore forces them to cut costs when, for example, their energy, health care or pension bills go up.  A reasonable response to this problem would be measures to lower the cost to businesses of creating new jobs.  For the short term, for example, we can give U.S. multinationals 18 months to bring back their foreign profits at a lower tax rate, but only if they already expand their U.S. workforces by 5 percent to 10 percent.  That would produce an estimated 750,000 to 1.3 million additional jobs.  For the longer term, we should consider cutting the payroll tax for employers on a permanent basis and using a carbon fee to restore the revenues for Social Security.

Similarly, neither stimulus nor the market alone can affect the growing mismatch between the IT skills required to excel at most well-paying jobs today and the training of most American workers over age 30 or 35 years.  For $300 million to $400 million a year – a fraction of the smallest bank bailout of 2008 or 2009 – Washington could provide grants to community colleges to keep their computer labs open and staffed in the evenings and on weekends so any adult could walk in and receive free computer training.  It’s also time to join the rest of the advanced world in recognizing that higher education has become as much a public good as elementary and secondary education.  Our idea-based economy now requires that government also ensure genuine low-cost access for both undergraduate and graduate training for anyone attending public colleges and universities, tied perhaps to a requirement for a year or two of public service.

This leaves us a major structural problem that at least Washington acknowledges – the prospect of damaging long-term deficits once the economy recovers, tied to fast-rising entitlement spending for retiring boomers.  The economics of nostalgia will be of little use here as well, but a view of a more effective strategy will require a separate discussion.

Taxes and the Art of the Possible

December 8, 2010

Barack Obama exhibited this week what Machiavelli called the essential quality of a successful statesman, “virtu,” or the capacity to advance a society’s vital interests while respecting the constraints of conditions beyond his control. The vital interest at stake here is a decent economic expansion that improves the circumstances of the vast majority of Americans, and the critical condition beyond the President’s control was the Republicans’ ability to block any tax increase for a very small minority of high-income households. While this week’s tax deal isn’t nearly enough to drive a robust recovery, it should be good economic news for most Americans.

Yes, the President agreed to two more years of the Bush tax cuts for very well-to-do people, covering their overall incomes, dividends and capital gains, and sheltering all but the very richest estates from inheritance taxes for two years. But those were concessions to conditions beyond his control, since without them, there would have been no action at all. Moreover, in return the President won the GOP leaders’ acquiescence to some significant help for nearly everyone else.  Beyond two more years of lower tax rates for average Americans, he secured expanded tax credits for parents putting their children through college, a one-year payroll tax reduction for working people, an expanded Earned income Tax Credit for working poor families, and an additional year of unemployment benefits for millions of out-of-work Americans.  

To be sure, that won’t be enough to drive a strong expansion. That still requires difficult measures to correct the distortions that brought on the original financial crisis and still continue to dampen the expansion.  A strong revival of consumer spending, of the sort that powers most early expansions, still depends on steps to stabilize housing prices. And while this week’s deal includes another dose of tax breaks for business investment, a surge in business spending will have to wait for consumers to begin spending freely again and for lenders to clear their books of billions of dollars in real estate-related investments that continue to deteriorate. Nevertheless, the deal passes the basic test of sound economic policy by moving the economy in the right direction, and should help nudge the jobless rate down a bit. 

The temporary nature of these measures also provides intriguing opportunities for Democrats.  The payroll tax reduction would expire one year from now, just as the 2012 campaigns get going.  Ultimately, neither party would let that happen, but the President could use its prospect to drive progressive social security reforms. For example, the 2 percent cut in the payroll tax rate for employees could be phased out very gradually, and the lost revenues could be offset by raising the cap on the wages subject to the tax. The 1983 social security reforms set the cap to cover 90 percent of all wages, rising each year at the same rate as average wages. But since the wages of those at the top have grown much faster than the average, today the cap covers only 85 percent of wages. Push it back to 90 percent, as the Bowles-Simpson Commission has proposed, and we could phase out the “temporary” tax rate reduction over a decade’s time and take a big step towards guaranteeing the system’s long-term solvency.

Moreover, the tax cuts for high-income Americans could be more vulnerable politically two years from than they are today. It’s safe to say that the deficit will be a hot-button issue in 2012, and with the Bush tax cuts now set to expire in January 2013, the election-year deficit debate will include heated arguments over who should have to pay higher taxes. According to current polls, at least, the public’s answer is those high-income folks. 

While the loudest complaints about the deal have come from progressive Democrats, the real question is why the Republicans agreed to it. For all of the GOP’s talk about jobs and deficits, the deal exposes their real bottom line: Preserve at almost any cost lower taxes on the incomes of the top 2 percent of Americans and on the estates of the top 0.5 percent. The deal equally highlights the President’s priorities — tax relief for the middle class, and help for the unemployed and the poor. And if the economy finally begins to gather steam by 2012, the contrast embedded in this week’s deal might well boost the President’s prospects.

The Quiet Role of Class in the Coming Budget Battle

December 2, 2010

The political struggle over how the federal budget will shape American government is now in full swing and likely to dominate Washington for the next two years. This week, the President joined the battle by proposing a two-year freeze on federal pay, his symbolic version of Bill Clinton’s maxim that “the era of big government is over.” In doing so, he aligns himself with growing public skepticism about the value of much of what Washington does. Yet, the anger driving the public debate isn’t really about federal spending much less federal pay. It’s about continuing high unemployment and stagnating incomes, because if Washington can’t get that right, what credibility does it have to manage everything else the public pays for? 

There’s another, more subliminal factor feeding the public’s anger about taxes and spending, and the only accurate term for it is economic class. Most Americans are fine with rich people getting richer, even when they get richer faster than everyone else — as long as the rest of us make progress too. But that’s clearly and painfully not the case today — the stock market and corporate profits are way up and multi-million-dollar Wall Street bonuses are back; while high unemployment won’t budge, wages are down, and the value of most people’s homes keep falling. On top of that, it was middle-class Americans who financed a recovery, through taxpayer bailouts and emergency spending, which so far seems to benefit only the wealthy. These factors alone should give Republicans pause as they prepare to block the extension of unemployment benefits and hold tax cuts for the middle-class hostage to preserving the tax cuts for the well-to-do.

The bigger political question is how most Americans would feel about the GOP’s hard-line positions, if they realized how much the economy in recent years has tilted to favor the wealthy. Recent data from the Federal Reserve document this tilt. In 2007, for example, the top one percent of Americans owned about 35 percent of all of this country’s assets or wealth — including houses, stocks, bonds, businesses, and so on — and the top 10 percent owned 70 percent of those assets.

The distribution of financial assets is even more skewed: In 2007, the top one percent owned 43 percent of the total value of all bank accounts, stocks and bonds, business equity, mutual funds, pensions, and retirement savings; and the top 20 percent of Americans owned an astonishing 93 percent. Ownership of only one type of asset is still spread around fairly broadly: With 70 percent of Americans being homeowners, the bottom 90 percent owned 40 percent of the total value of all residential real estate in 2007. But that fact is no longer evidence for the conservative trope that good times for the wealthy presage good news for everyone else: Since 2007, the housing bust has destroyed about 30 percent of the value of American homes, and it was triggered by Wall Street geniuses who took the taxpayer bailouts and now are pocketing multi-million dollar bonuses.

The tilt towards the wealthy is also much less steep in most other societies. While the top 10 percent of Americans own 70 percent of this country’s wealth and assets, the top 10 percent of Britons own only 56 percent of the wealth of their nation, the top 10 percent of Canadians own just 53 percent of their country’s assets, and the top 10 percent of Germans hold but 44 percent of the assets of their nation.  

The gap in incomes also has grown substantially over the last generation, and that suggests that the wealth disparities will only continue to increase. From 1982 to 2006, for example, the share of all annual income claimed by the top one percent of Americans increased from 13 percent to more than 21 percent; and the top 20 percent of us took home more than 61 percent of all the income earned here in 2006. Put another way, 80 percent of Americans have to divvy up about 38 percent of all the income generated in our economy. To be sure, a modestly progressive tax system ensures that the top one percent and the top 20 percent both contribute slightly larger shares of all federal revenues than they collect as income. But their share of federal revenues is also much smaller than their fast-growing share of the nation’s wealth.

These disparities have grown not from our politics, but from the way the economy is evolving. For example, our economy is increasingly capital-intensive — just consider, for example, how much more technology-dense most offices and workplaces are today, compared to just 20 years ago. Since capital is the source of more wealth creation than before, the wealth of those who own most of it has been growing faster. Incomes also are linked closely to the ability to work with all of that capital, increasing the income share of the top 20 percent of Americans with the most advanced skills and education. It is certainly not the burden or responsibility of government to alter the economy’s natural course. But when that course precludes meaningful economic progress for most people and creates profoundly undemocratic disparities in wealth and incomes, it surely becomes the government’s responsibility to ensure that the majority can genuinely thrive in that economy.

That’s a budget battle that President Obama could champion with confidence. For example, a good handful of subsidies for various industries would pay for low-cost access to college and graduate training for any young American with the drive and ability to see it through — as Britain, Germany and other countries, all with much smaller disparities of wealth and incomes, do. A small tax on financial transactions could float a new program of low-cost loans for homeowners with troubled mortgages, and so help stabilize the housing values that comprise the only asset of most Americans. Even a modest reform of the “carried interest” tax preference for hedge funds and private equity funds could more than pay for grants to community colleges to provide free computer training for any working person who wants it. And surely it’s time for the new realities of wealth and incomes in the United States to provide part of the framework for reforming our taxes and entitlements.

The FCC Gets It Right on Net Neutrality

December 1, 2010

Here are a few thoughts on the breaking news from the FCC on net neutrality, a matter I’ve written about repeatedly for several years. 

Today, FCC Chairman Julius Genachowski spelled out his proposal for new rules for the regulation of broadband networks.  They won’t satisfy everybody, and some outspoken advocates of so-called network neutrality are already throwing their stones, but the truth is, they’re pretty balanced and reasonable.  Mr. Genachowski wants the Commission to vote before the year ends, so they can use 2011 to focus on critical issues such as universal broadband.  Progress in that area — the key to digital equality — has been slowed by the telecom community’s focus on the neutrality rules. 

In brief, the Chairman’s proposal outlined at a press conference today (December 1st, 2010) would bar service providers from blocking any consumer’s access to any legal websites and applications of their choosing, and from unreasonable discrimination in delivering Internet traffic.  Net neutrality advocates may not acknowledge it, but that’s a big win for them — it directly addresses their fears that the large service providers will become gatekeepers to the web, deciding what consumers can do online.  For their part, the companies have always insisted that they have no interest in being gatekeepers, and this proposal should make that part of the debate moot. 

On the other side, Mr. Genachowski’s framework shouldn’t interfere with the incentives that the providers need to invest an estimated additional $300 billion or more in broadband infrastructure, to handle the sharp recent and projected increases in bandwidth demand coming largely from video applications.  The Commissioner did just the right thing by confirming the service providers’ right to manage their networks for congestion and offer specialized services to boost their bottom line.  And the best news is that it also should help the economy in coming years.