The Point

The 2016 Elections Will Be All about Incomes

March 23, 2015

The key issue in next year’s elections is already clear: Recent Census Bureau data show that after two decades of strong, steady and reliable income growth by American households of virtually every type – the 1980s and 1990s — as many as two-thirds of households suffered steadily declining incomes as they aged from 2002 to 2013. Yes, the incomes of the more fortunate third of the country continued to rise, but at less than half of the rate of their counterparts in the 1990s and 1980s. These are the top-line results from a new study of mine that Brookings released earlier this month; and this is the first essay in a series reviewing my findings — and what policymakers can do about it.

The study tracks the income paths of many different types of households, as the heads of those households aged from their mid-20s to their late-50s. Since politics and policy matter, I also tracked the incomes of households of various ages through each of the last five presidencies. (And since the economy’s course in every president’s first year is set by his predecessor, we begin each president’s accounting in year-two of his first term.) For example, let’s consider households headed by people in the late-30s and early-40s at the beginning of each president’s term. Their incomes rose, after inflation, by an average of 2.8 percent per-year as they aged through Ronald Reagan’s presidency (1982-1989); and under Bill Clinton (1994-2001), the comparable age-cohort has gains averaging 2.5 percent per-year through his two terms. But the gains by that age group plummeted to 0.3 percent per-year under George W. Bush (2002-2009) and rose only slightly, to 0.6 percent per-year, through Barack Obama’s first term (2010-2013).

It’s no mystery why so many Americans still revere Reagan and Clinton. Under their presidencies, every type of household shared in broad income progress — whether those households were headed by men or women; by whites, African-Americans, or Hispanics; or by those with college educations or those without degrees. It’s also no mystery why so few Americans revere Bush-2 or Obama, since under their presidencies, those steady income gains shrank sharply or, more often, turned into substantial income losses. For example, let’s look at households headed by high school graduates, who throughout this period account for about half of all Americans. Under Reagan, households headed by high school grads in their late-30s and early-40s when he took office had steady income gains averaging 2.6 percent per-year; and under Clinton, the comparable group registered steady income gains averaging 2.4 percent per-year as they aged through his terms. Yet, under Bush-2, households headed by high school graduates of comparable ages saw their incomes fall steadily by about 0.3 percent per-year; and under Obama, their losses accelerated to 1.8 percent per-year.

The results also reveal a distinctive life-cycle to the income growth of most of us. Across every group, people achieve their largest percentage-gains in income in their mid-20s to mid-30s; their income growth slows in their late-30s to mid-40s, and then it plateaus for most people in their late-40s and early-50s. With this in mind, let’s turn to the income paths of younger households headed by young African-Americans under each president. Households headed by blacks in their late-20s and early-30s when Reagan took office saw income gains averaging 3.8 percent per-year as they aged through his two terms, and the income growth of comparable households under Clinton was even stronger, averaging 7.3 percent per-year. Yet, under Bush-2, the income gains of households headed by relatively young African-Americans slowed sharply to 1.8 percent per-year; and under Obama, the same group’s gains averaged just 0.1 percent per-year.

If income stagnation and decline are central issues in the 2106 elections, what could the next president and Congress do about it? The necessary policy shifts fall into two categories. The first category covers those economic policies which both Reagan and Clinton followed, and which Bush-2 and Obama effectively abandoned. The second category involves responses to the structural changes in the economy that have blunted broad, normal income gains.

Here, I’ll sketch the outlines of the first category, which touch on three basic elements of a mainstream economic program. First, both Reagan and Clinton supported substantial increases in long-term public investments, especially in education and infrastructure. Second, both Reaganomics and Clintonomics addressed growing budget deficits through substantial revenue increases and some spending reforms – from the very beginning in Clinton’s case, and more belatedly under Reagan. The combination supported strong rates of business investment and healthy increases in productivity, and both in turn helped to life people’s incomes.

Contrast that with Bush-2, who not only cut federal support for education and modern infrastructure. Bush also enacted outsized tax cuts to deal with a mild recession and the first entitlement (prescription drugs for seniors) ever passed without a dedicated revenue source; and on top of all this, he prosecuted two wars with no provisions to pay for either. Obama had to take on Bush’s fiscal legacy, compounded by the 2008-2009 economic collapse. He properly proposed a large stimulus, including some public investments; but he soon had to accept premature austerity, including cuts in public investments. It now appears that unless the next president changes course, much of Obama’s progress on the deficit will prove to be temporary.

The third element is politically touchy, but the economic benefits are clear: Both Clinton and Reagan successfully pushed measures that liberalized trade and foreign direct investment. There was the first free trade pact with a developing economy (NAFTA, proposed by Reagan, negotiated under Bush-1, and enacted under Clinton), the historic Uruguay round that created the World Trade Organization (initiated under Reagan, negotiated under Bush-1 and Clinton, and enacted under Clinton), the U.S. accession to the Asian-Pacific Economic Cooperation (APEC) group under Bush-1 and Clinton, and the 1999 U.S. trade pact with China under Clinton. These measures cost some Americans their jobs; but they created even more jobs by helping U.S. businesses tap into foreign demand, especially in fast-growing developing nations. These measures also have intensified competition, which normally leads to changes that produce innovation and higher productivity. Yet, for all of their obvious benefits, multilateral trade talks under Bush-2 and Obama have failed to produce any new agreement, although Obama continues to press for new accords with the European Union and 11 Pacific Rim nations, including Japan.

In the next installment in this series, we’ll look at what happened to the incomes of households headed by women and by older age cohorts without college degrees, and review some measures to end-run some of the adverse effects of globalization on broad income progress.


Income growth and decline under recent U.S. presidents and the new challenge to restore broad economic prosperity

March 5, 2015

The condition of most American households, and of the country as a whole, is set largely by people’s income – both the levels, and the income progress that people make as they age from their 20’s to their 30’s, 40’s and 50’s. For generations, most Americans have believed that if they work hard, they’ll have real opportunities to earn steadily rising incomes. Such broad based upward mobility is one of the reasons that Americans have been generally optimistic and willing to extend opportunity to successive minority groups. But is that the way America really works? One common view argues that wages have stagnated and most Americans have made, at best, modest income progress since the 1970s. This view is based on a time series of a single statistic, “aggregate median household income.” In fact, the true picture is more complex.

Today, the Brookings Institution issues a new report which I worked on for the past year. Using new Census Bureau data, I analyze household incomes by age cohort – say, people age 25 in 1980 or in 1990 –and then follow those age cohorts as they age. The results revise what we thought we knew about incomes. The data show that broad, strong income gains were hallmarks of the 19809s and 1990s. Moreover, the steady progress of the Reagan and Clinton years covered just about everybody — households headed by men and by women; by whites, blacks and Hispanics; and by those with college degrees, high school diplomas, and no degrees at all. This broad upward mobility, however, simply stopped under Bush and has not recovered under Obama. Moreover, this dramatic turnaround, including declining incomes from 2002 to 2013 for a majority of American households, affects every demographic group.

I’ll be writing more about what’s really happened to income, why, and what we can do about in coming weeks and months. If you want to read the report for yourself, click here

The Peculiar Economics of Falling Oil Prices

December 8, 2014

The sharp fall in worldwide oil prices is a silver lining with a silver lining, even if the linings are a bit tarnished. The price of the world’s most widely-used commodity has fallen sharply over the last five months, from a spot market price of $115 per-barrel in late June to $77 last week. For consumers everywhere, that means major savings that will mainly go to purchase other goods and services; and those boosts in demand should spur more business investment. So, if low prices hold for another six months, analysts figure that growth in most oil-consuming and oil-importing countries could be one-half to a full percentage-point higher than forecast, including here in the U.S. and in the EU, China and Japan.  It’s a blow to the big oil-producing and oil-exporting nations; but the global economy will come out ahead. After all, the U.S., EU, China and Japan account for more than 65 percent of worldwide GDP, while the top ten oil exporting countries, led by Saudi Arabia and Russia, make up just over six percent.

The hitch for this rosy scenario is that much of the revenues that OPEC countries now won’t see would have gone into financial and direct investments in the U.S. and EU. That means that new investments in American and European stocks and bonds could be reduced by some $300 billion per-year. The upshot may be slightly higher interest rates and slightly lower equity prices, which would dampen the growth benefits of lower oil prices.

The lower prices are driven mainly by supply and demand, but market expectations and some strategic maneuvering by Saudi Arabia play a role, too. Yes, worldwide oil supplies are up with rising production from U.S. and Canadian tar sands and shale deposits, and Libya’s fields are fully back online. Moreover, these supply effects are amplified by softness in demand for oil, coming from economic stagnation in much of Europe and Japan, China’s slower growth, and our own increasing use of natural gas. Oil prices also are influenced, however, by the prices that buyers and sellers expect to prevail months or years from now. Last week, when the “spot price” of crude oil was about $77 per-barrel, the price for oil to be delivered next month was almost $10 lower. In fact, the world’s big oil traders see crude prices continuing to decline not simply into 2015, but for a long time: The price for oil to be delivered in mid-2016 is less than $72 per-barrel and, according to these futures prices, not expected to reach even $80 per-barrel until 2023.

Don’t count on a decade of cheap oil. Yes, technological advances have brought down the cost of extracting oil from tar sands, shale and deep water deposits, as well as the cost of producing and transporting natural gas. But the economics of these new energy sources work best at prices higher than those prevailing today. A long period of low oil prices would slow the growth of supply from those sources — and so, drive oil prices back up. The Saudis are counting on it.  They’ve refrained from cutting their own production, which could restore higher prices, in hopes that another year of low prices will slow down investments in all those alternatives sources.

The truth is, oil prices will rise again whether the Saudis’ tactic works or not. While the outlook for much stronger growth remains slim for Japan and much of Europe, an extended spell of lower energy prices will support higher growth here, in China, and across many of the non-oil producing countries in Asia, Latin America and Africa. Stronger growth and energy demand will bring on line more alternative sources of energy — as long as oil prices are high enough for the alternatives to be competitive.

This is an old story. Oil prices fell, and as sharply as they did this year, in 1985 and 1986, in 1997 and 1998, and in the aftermath of the 2008 – 2009 financial upheavals. Each time, oil prices marched up again after one, two, or at most three-to-four years. Of course, that volatility also makes some people billionaires. To join them, what you’ll need is patience and a hedge fund’s access to credit. With that, all you do is go out and purchase a few billion dollars in contracts to take delivery of crude in 2018 or 2020 at today’s futures prices, and then dump the contracts when oil prices once again head north of $100 per-barrel.

The Economic Foundations of this Year’s Mid-Term Elections

November 19, 2014

The usual explanations for the Democrats’ drubbing in this year’s mid-term elections have focused mainly on the lopsided number of Democrats up for reelection, especially in red states; low turnout among important parts of the Obama coalition; and the President’s depressed popularity. But there’s also one very basic and underlying issue that played an important part; not only in this year’s GOP wave, but also in the Democratic landslides in 2006 and 2008, the last GOP wave in 2010, and the Democratic sweep in 2012. What has happened to the incomes of middle-class Americans?

In a forthcoming report from the Brookings Institution, I trace the income paths of several “age-cohorts” of Americans as they aged over the last 35 years. For a long time, the direction of that path was given: Average Americans could and did improve their economic lot simply by working hard, year after year. Certainly, that’s precisely what happened in the 1980s and 1990s. Using new Census Bureau data, we can now track the median income of age-cohorts as they grow older — for example, the incomes of those age 25 in 1980 when they turn 35 in 1990 and 45 in 2000. Those data tell us, for example, that the median real income of households headed by people ages 25-to-29 in 1982 rose from $44,785 in that year to $60,927 in 1992 and $76,427 in 2002 — income gains 3.5 percent per-year, year after year for 20 years.

This has mattered in the last six elections, because, in recent years, those regular gains virtually stopped. For example, the median income of households headed by people ages 25-to-29 in 1991 rose from $48,098 in 1992 to $66,374 in 2002, for gains averaging 3.8 percent per-year; yet by 2012, their median income was still just $66,551, for annual gains averaging just three-tenths of one percent for a decade.

The graph below depicts the incomes paths of households headed by those ages 25-to-29 in 1982 (the light blue line) and those ages 30-to-34 in 1982 (the dark blue line) from 1982 to 2012. It clearly shows their incomes rising steadily through the 1980s and 1990s, until it simply stopped in 2000 or 2002.

Now, income gains usually slow sharply when people reach their mid-to-late forties and older. So let’s look at the income paths of households headed by people ages 25-to-29 in 1991 and people ages 30-to-34 in 1991. Again, we see their incomes rising sharply and steadily through the 1990s, and stalling out from 2000 or 2002 until the present.

By looking at the path of median income gains by the same age groups under each President, we also can draw some tentative conclusions about the relationships between these gains and political success. For example, take households headed by people ages 25-to-29 in the second year of each President’s term. The median household income of that age cohort increased at average rates of 4.0 percent per-year in the 1980s under Reagan and 5.3 percent per-year in the 1990s under Clinton — and then decelerated sharply to 1.9 percent per-year under Bush II and 2.6 percent per-year under Obama. The contrast is even greater with older households. The median incomes of households headed by people ages 35-to-39 in the second year of each President’s term grew at average annual rates of 2.8 percent under Reagan and 2.5 percent under Clinton, followed by gains of just 0.3 percent per-year under Bush II and actual losses of 0.1 percent per-year under Obama. (The Obama record here covers only 2010-2012, because the last available year of these income data by age covers 2012).

We also constructed the income paths of age cohorts by the gender, race and ethnicity, and educational levels of their household heads. Income differences based on race and ethnicity have not changed much since the early 1980s — which tells us households headed by whites, blacks and Hispanics have made roughly comparable income progress for the last 35 years. In the case of gender, incomes grew much faster for female-headed households in the 1990s than male-headed households, but that dynamic was reversed for the last decade.

There is one finding that can well explain the unusual volatility and disaffection of so many American voters over the last decade. In 2000, 16 percent of households were headed by people without high school diplomas, and another 51 percent were headed by people without college degrees. From 2002 to 2012, the median income of the first group, across age cohorts, declined at an average annual rate of 2.4 percent, year after year; and the median income of the second group, across age cohorts fell at an average annual rate of 1 percent, year after year. That tells us that two-thirds of American households have suffered persistent income losses as they aged from 2002 to 2012, through eight years of economic expansion along with two years of serious recession. The median income of the remaining households, headed by college graduates, increased over this period — but at only one-third of the rate of households headed by college graduates in the 1980s and 1990s.

These trends have enormous electoral consequences. They explain why, in recent years, overall positive economic numbers and growth are not translating into feelings of shared prosperity. That’s why so many Americans are angry and ready to turn on whichever party has most recently failed to restore the broad income progress that almost everyone experienced in the 1980s and 1990s.

Are Financial Crises the New Normal?

June 17, 2014

The policy-making committee of the Federal Reserve Board meets again tomorrow, and the news won’t be encouraging. The one-percent decline in GDP in the first quarter disposed of the Fed’s forecast for 2.9 percent growth this year, and they have to lower it to the range of 2.0 percent to 2.5 percent. That’s just what the IMF did yesterday, forecasting as well that the United States won’t reach full employment again until 2017. So the Fed will leave interest rates at rock-bottom levels through at least next year. But Fed chair Janet Yellen will also continue to wind-down the quantitative easing program, because doing otherwise would signal big troubles ahead for the U.S. economy and scare the daylights out of the markets. In short, happy days are still out of reach, and there’s little the Fed can do about it.

We know it could be a lot worse, since it was much worse not very long ago. And it is much worse in other places. Consider Argentina: On Monday, the Supreme Court refused to let the Argentine government arbitrarily void its contracts with selected American lenders. So, now Argentina — with admittedly the world’s most irrepressibly, irresponsible, freely-elected government — may face another sovereign debt default by the end of the month. And according to the ratings agencies, the place next in line for a debt default is Puerto Rico. If it happens, the Obama administration will have to swallow hard and bail out our island Commonwealth — or risk economic chaos there and new problems for important banks here and in Puerto Rico.

Across the pond, Yellen’s counterpart at the European Central Bank (ECB), Mario Draghi, continues to work overtime to stave off a European financial crisis. Two years ago, Greece, Spain, Portugal and Italy were all teetering towards sovereign debt crises, until Draghi stepped in and pledged that the ECB would purchase as many of their bonds as it took to support their debt markets. Two years later, those debts continue to rise, though not as fast as before. But their economies are still not productive enough to attract the foreign investors they need to support their large public debt burdens. And the large European banks which hold more of those bonds than anyone except the ECB are still unprepared to weather a serious crisis. Yet, you wouldn’t know it from official pronouncements: Wolfgang Münchau reported this week in the Financial Times that the “adverse scenario” designed by the ECB to stress-test those banks’ ability to weather a big shock is, in certain respects, more optimistic than the ECB’s own forecast.

Finally, while China blusters that its renminbi should be an exchangeable, global currency on par with the dollar, the flood of credit it unleashed to maintain high growth in recent years has left much of its banking system technically insolvent. And its “shadow banking system” — the network of arrangements that many Chinese municipalities and businesses use to borrow funds outside the regular banking system — is in equally precarious shape. The only things protecting China from its own financial crisis are strict credit controls and the fact that the renminbi is not an exchangeable currency, which insulate it from the judgments of global capital markets.

The fact is, financial crises have become as common as they were in the 19th century before the rise of central banking. This new cycle started in Latin America in 1985–1986, followed by Spain, Japan and Sweden in 1990–1991, moved on to Mexico in 1995 and East Asia in 1997–1998, and then to the United States in 2008–2009. The European Union has barely skirted its own crisis for the last three years, and the strains are intensifying in China. In ways that no one understands, the ultimate source of these cascading crises almost certainly lies in the globalization of capital markets. Until we figure out how and why this is happening, everyone’s prosperity will be hostage to upheavals that governments cannot control and can only barely manage.

World Bank Shocker — China’s GDP to Top the U. S. in 2014 — Means Little

May 1, 2014

The World Bank shook up a lot of people this week with its declaration that by a new accounting, China’s GDP will top America’s this year. But the meaning and significance of that accounting remain at best elusive. Last year, the World Bank reported that using prevailing exchange rates, China’s GDP in 2012 was barely half that of America ($8. 2 trillion versus $16. 2 trillion). The new report draws on a statistical adjustment called “purchasing power parity,” or PPP, often used to compare GDP in two or more countries when exchange rates fluctuate widely. In analytic shorthand, PPP calculates GDP by looking at what it costs households in one country to feed, house, educate and otherwise take care of itself — including the costs of doing business and maintaining government — compared to households in another country.  

Setting aside the fact that U. S. -China exchange rates have been pretty stable, here’s how PPP works. You start with a basket of personal and business goods and services in each country, taking account of habits, tastes and preferences. So, the Chinese basket will be different from its American counterpart because, for example, Americans eat potatoes and subscribe to premium cable stations while Chinese eat rice and go to outdoor cinemas. Since a serving of potatoes in America costs more than a serving of rice in China, China’s GDP is adjusted (upward) to take that into account. These comparisons also require adjustments for quality. Americans pay much more for health care and housing than Chinese — but the quality and quantity per-household of these services and goods as Americans consume them is much higher and larger than Chinese enjoy. So, World Bank statisticians have to not only observe prices and levels of consumption, but also come up with adjustment factors for differences in quality for each country. The truth is, nobody knows how to do that for countless goods and services, including the Bank’s PPP experts.

The United States is the baseline for PPP calculations. So if China’s basket of goods and services takes half as much income to buy there as the American basket does in the United States, after accounting for quality differences, China’s GDP is adjusted up by that increment. I should also mention that PPP analysis can produce a range of results based not only on all of the adjustments, but also on which of four distinct and accepted ways of calculating PPP the analyst uses. This week’s announcement of PPP-based GDP came after the World Bank applied a new weighting regimen to one of the four methods. What it means, then, depends on all of those assumptions and calculations, which makes any conclusions based on that accounting problematic, at best. As the Bank itself noted, “Because of the complexity of the process used to collect the data and calculate the PPPs, it is not possible to directly estimate their margins of error.

By any accounting, China’s GDP has been growing very rapidly for several decades. The reasons are pretty basic. They start with the world’s largest workforce producing Chinese goods and services. And, thanks to the foreign direct investments of advanced technologies and business methods, much of it from America, Western multinationals have given China the means to make all those workers more productive. Yet, the lives led by China’s people remain a world away from the lives of Americans. Even using the World Bank’s PPP calculations, per-capita GDP in China is just $9,844, compared to $53,101 in the United States.

One more caveat: China’s PPP-adjusted GDP may be said to statistically rival America’s — whatever that means — only because U. S.  growth has been unusually slow for more than a decade. If the American economy had continued to expand since 2001 at the rate it grew in the 1990s, our GDP would still be more than 20 percent bigger than China’s even using the World Bank’s new adjustments and accounting. For that, we have no one to blame but our policymakers and ourselves.

Zero Day Exploits — Can We Control the Arms Race? By Sonecon Managing Partner Paul Stockton

April 14, 2014

Yesterday, a new stage of the “roaring debate” over cyber policy made the news, thanks to David Sanger of the New York Times. He revealed that the U.S. government is now one of the biggest purchasers of information about “zero days,” which are software coding flaws that can be used by cyber criminals to penetrate computers and (potentially) wreak havoc on the power grid, financial institutions, or other infrastructure sectors.

When the government identifies a zero day, Sanger reported, the Obama Administration will ordinarily recommend that the vulnerabilities be disclosed so software manufacturers and users can patch them. However, because cyber weapons that exploit zero days can have such devastating effects, the Administration has also decided to keep knowledge of them secret when there is “a clear national security or law enforcement need” to do so.

The United States is one of many buyers in the thriving, unregulated marketplace for zero day exploits, which Michele Goldman and I recently analyzed in Curbing the Market for Cyber Weapons. Russia, China, North Korea, and Iran also eagerly purchase the zero days that hackers sell in this market to any client with the cash, no questions asked.

On balance, allowing this free-for-all cyber weapons bazaar to flourish weakens our national security. Our government gets to purchase powerful zero days, but so do our potential adversaries, who can use them to attack our critical infrastructure and other networks. As more and more nations (and non-state actors such as Al Qaeda) gain access to cyber weapons they could never build on their own, helping the zero day market flourish by sustaining U.S. purchases in it is a dangerous strategy.

The more difficult question is what the United States can do to clamp down on this market. Unilateral disarmament makes no sense: as long as potential adversaries are in the game, stopping our own purchases would be counter-productive. Instead, the Obama Administration should explore how international agreements might be forged to limit the zero day market, and how stronger invectives can be created for software manufacturers to eliminate zero day exploits before our adversaries find them. Both opportunities for progress are examined in Curbing the Market for Cyber Weapons.

Republicans Maintain Hard Opposition to Obamacare at Their Own Political Peril

April 2, 2014

The political struggle over Obamacare has reached a critical inflection point as real events have overtaken its opponents’ basic arguments. That opposition has always drawn on doubts about the public’s real interest in a federal guarantee to health insurance and their tolerance for a mandate to enforce it. After the program’s fitful start, it is now clear that large numbers of Americans are prepared to spend considerable time and money to sign on. The Rand Corporation estimates that 9.5 million people who had no coverage a month or a year ago now do, thanks to the Affordable Care Act (ACA).

In my analysis of the data, I found that the newly-insured number at least 7.8 million and as many as 10.9 million. And if the governors and legislatures in 24 states had not inexplicably turned down the ACA’s Medicaid expansion — a decision three of those states are reconsidering — the number of newly insured today would range from 11 million to 14 million.

These numbers create a political inflection point, because the program’s demonstrated appeal renders it simply impossible to repeal. Arguing against a new federal benefit is an easy political challenge for conservatives. By contrast, withdrawing a benefit that millions already depend on is a, at best, herculean task. Just try to imagine any future Congress or President actually withdrawing practical access to medical coverage from millions of moderate-income families, millions of young adults covered by their parents’ policies, and millions of more people with preexisting medical conditions.

Moreover, this political inflection point will strengthen not only as more people enroll, but also, and even more important politically, as Obamacare generates benefits for everyone else. To begin, surveys show that several million people would like to change jobs, but stay where they are, out of concerns about losing their healthcare coverage. Now, they can do as they like — and the enhanced labor mobility should help the economy.

More important, by enrolling large numbers of previously-uninsured people, Obamacare should slow increases in everyone’s insurance premiums — or even lower premiums. As countless studies have shown, most people without coverage get their medical care in emergency rooms.  Since they usually cannot pay the bills for that care, hospitals pass along those costs through higher charges on everyone else, which in turn leads to higher insurance premiums. The ACA not only will relieve some of those direct pressures on premiums; its mandated coverage will also generate more income for insurers, further easing upward pressures on premiums.

This would be very good news for the American economy. Over the last decade, healthcare coverage has been the single, fastest-rising cost for most U.S employers. But as globalization has intensified competition, many of those employers have found themselves unable to pass along their higher healthcare costs by simply raising their prices. Their only recourse, as I have written many times, has been to cut other costs — beginning with jobs and wages. In the end, therefore, the ACA could contribute to broader gains in employment and incomes — and that could produce a political inflection point that could support political realignment.

Beyond the Sabre Rattling, Will Russia or the West Bail Out Ukraine?

March 6, 2014

The crisis over Ukraine is quickly becoming a geostrategic conflict. As Vladimir Putin maneuvers to restore Russia’s right to behave with a superpower’s impunity, particularly in its own backyard, the West pushes back. But economic forces also have shaped this confrontation, especially Ukraine’s record as the world’s worst-performing industrial economy over the last twenty years. It was popular discontent with this disastrous performance that drove the recent dissent, which in turn triggered such a bloody response from Viktor Yanukovych — and that response consolidated the opposition and cost Yanukovych his job. Beyond this week’s political and military maneuvers, the outstanding question is, who will bail out the Ukrainian economy — Russia, or the EU and the United States — as the price of drawing the country into its trading system?

Stated simply, Ukraine is the economic equivalent of a failed state. After gaining independence in 1991, the country moved briefly to liberalize its economy along the same lines as most of Eastern and Central Europe. But Ukraine soon jettisoned its reforms in favor of the state-oligarch model also evolving in Russia. Some twenty years later, Ukraine’s GDP has shrunk 30 percent.  Even Russia’s sorry economy is 20 percent bigger than it was in 1991 — and Poland’s economy, which looked much like Ukraine’s in 1991, grew 130 percent over the same period. Ukraine’s economic performance has been so terrible, for so long, that its sovereign debts are now considered the equivalent of junk bonds. Even before the crisis, Ukraine’s credit rating was worse than Greece’s — no small feat — and no better than that of Argentina, a global financial pariah for its mismanaged debt defaults and summary expropriations of foreign-owned companies.

Ukraine’s debts soon come due, with some $15 billion in sovereign bonds maturing this year and another $15 billion in 2015. With a current account deficit equal to 8 percent of its GDP, Ukraine cannot pay off and refinance those debts without large-scale aid — some $20 billion to $25 billion — and affiliating itself with a larger trading system. An economic and trade alliance with Russia would deliver the bailout, but with little prospects of improving the underlying economy. The EU and the United States (through the IMF) also are prepared to provide the bailout, if the Ukrainian government will accept far-reaching economic reforms. The EU-US/IMF reforms should lead to better economic times down the road. But they also would mean more short-term hardships for ordinary Ukrainians. That’s why Yanukovych sided with Putin: He feared that he could lose his grip on power if times got even worse — and yet, of course, he lost power anyway.

With a new, pro-Western government in charge in Kiev, Ukraine’s fate may well lie in the hands of Europe and the United States. Their choice is simple to state, if difficult to execute — namely, do they put sufficient economic and diplomatic pressure on Putin, to convince him to pocket his own bailout and let the West pick up the pieces?


Memo to Democrats: U.S. Workers could be Big Winners in the Current Trade Talks

February 6, 2014

President Obama’s drive to complete new open trade agreements with the European Union and 11 Pacific Rim nations are the most critical economic initiatives of his second term. Their importance reflects the basic patterns of economic growth across the world. After a decade of unusually weak growth, job creation and income gains, America’s prospects for rising wages and employment are increasingly linked to how successfully American businesses can tap into foreign demand. Beyond the big demand issues, the two agreements also should subtly affect the tradeoffs that American multinationals face between exporting goods and services produced here, versus expanding their European and Asian operations. And those more subtle effects could produce large long-term benefits for American workers.  

The Transatlantic Trade and Investment Partnership (TTIP) talks would end most tariffs and reduce countless other barriers to open trade between the United States and the 27 countries of the European Union, with their combined GDP of some $17 trillion. Not only would the agreement give American businesses and investors nearly as much access to European consumers and businesses as Germany or France, including the fast-growing emerging economies of Central and Eastern Europe. Equally important, such an agreement would recalibrate the choices that U. S. companies face today between exporting to Europe and increasing their foreign direct investments there. For the first time, America’s multinationals could enjoy nearly unfettered access to the European market without setting up more operations there.

The second proposed agreement, the Trans-Pacific Partnership (TPP), also would reduce tariffs and other barriers between and among ourselves and Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. Not counting ourselves and our NAFTA partners, Mexico and Canada, where we already enjoy open trade; the other TPP countries represent nearly $9 trillion of potential demand for our goods and services.  And much like the proposed EU-US partnership, the Pacific agreement would, at once, lower barriers to U.S. exports to those countries and change the calculus of foreign direct investment (FDI) versus exports in ways that would tilt more towards exports. If 10 percent of our current FDI flows to countries involved in the two agreements shifts to domestic investments or simply higher profits, it could boost U. S. employment by as much as 450,000 jobs.

These initiatives present a singular opportunity to open up markets that represent nearly half of all non-U.S. global GDP.  As the world’s most comprehensive and productive economy, the United States will be well positioned to use this enhanced access to increase our global market shares in countless advanced goods and services. And, by reducing the costs of exporting into foreign markets, as compared to setting up more new factories and offices inside those markets, these agreements could be the first new trade pacts for a global economy that genuinely favor U.S. workers.