Why Progressives Should Work to Control the Rising National Debt

March 10th, 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.

Posted in Uncategorized | No Comments »

Broadband and American Jobs

March 3rd, 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.

Posted in Economy, Stimulus | No Comments »

The True Costs of “Charging it” in America

February 24th, 2010

American consumers gained a few basic protections this week regarding their credit and debit cards, but they’re only the beginning of the reforms needed here. One of the largest issues remains untouched and unmentioned: The big credit and debit card networks, along with the large banks that issue most cards, impose “interchange” or “swipe” fees on merchants of 1.5 percent to 3.25 percent of every credit or debit card purchase. This should matter to everyone, because most of these fees are passed along in higher prices on every purchase, whether or not it involves a credit card. To be sure, merchants and consumers gain economic benefits from the credit card system. But the fees attached to every card purchase are some five-to-six times the actual costs of processing a credit card transaction; and the card networks and card-issuing banks have managed to insulate themselves from any competitive pressures that might bring down those fees.

These findings come from an analysis we just completed for Consumers for Competitive Choice. Our study found that in 2008, merchants paid the credit card networks and the banks issuing the cards some $48 billion in these swipes fees. Of that, less than 20 percent went to cover the actual costs of processing credit and debit card charges and to covering fraudulent charges, with the remaining 80 percent going for a variety of forms of gravy. Only the absence of real market forces enables the card companies and banks to maintain these fees at levels that so far exceed their actual costs.

And all of us bear the costs of these excessive fees. We calculated that merchants pass along about 56 percent of these fees in higher prices. And since the credit card networks bar merchants from charging their customers a lower price if they don’t charge it, the high swipe fees raise the price of everything bought by consumers or businesses — from food, clothing and computers to gasoline, restaurant meals, or furnishings. In all, these excess swipe fees cost the average household some $230 per-year. And if the fees were limited to the actual processing costs plus a normal profit, the lower prices for everything would expand real demand enough to create nearly 250,000 more jobs.

All of this comes about because our credit-card system operates along the lines of two interlocking cartels, allowing limited competition among their members while insulating themselves from outside price pressures. Just three card companies — Visa, MasterCard and American Express — account for more than 95 percent of all consumer charges and two-thirds of all business card transactions. That means that merchants have no choice but to accept most or all of these cards, which in turns means that consumers and businesses that want to charge it have no choice but to do so with these cards.

Furthermore, most of these charges occur on cards issued by just four financial institutions: 70 percent of all charges are placed on cards issued by JP Morgan Chase, Bank of America, Citigroup, and American Express. The four issue a bewildering variety of cards, with various rewards and annual fees attached to different swipe fees for merchants when they’re used. For example, between Visa and MasterCard, merchants are subject to more than 300 separate swipe rates and fees. But under the rules set down by the card networks and banks, a merchant that accepts one Visa or MasterCard has to accept all of them, regardless of the swipe fees imposed for charges on particular cards.

These arrangements tend to push up the swipe fees. Most of the fees go to the banks. So, Visa, MasterCard and American Express compete for bank business by promising higher swipe fees; while the banks compete for new subscribers by offering increasingly elaborate rewards programs financed by the higher fees. Nor do the cartel-like rules imposed by the card networks and banks allow downward pressures on those fees: Merchants cannot choose which cards to accept based on the fees they pay, which might put pressures on high-fee cards; nor can they charge less for those paying by cash or using low-fee cards, which would allow consumers and businesses to put the pressure on the high-fee cards.

These arrangements are also baldly unfair. More than half of all lower and moderate-income Americans don’t carry credit or debit cards at all, and relatively few of those who do have cards qualify for the rewards programs. Yet, they’re forced to pay higher prices for everything they purchase, just in order to help finance the card-rewards programs offered to more affluent people.

It’s long-past time to fundamentally change this part of the system. Australia used to have swipe fees averaging just 0.95 percent. They adopted reforms limiting the fees to the actual processing costs, plus reasonable profit, and they fell to an average of 0.50 percent. Through it all, Australia has retained a healthy credit and debit card system. We should follow Australia’s example and grant the Federal Reserve or the Federal Trade Commission new authority to set reasonable rules for swipe fees.

Posted in Economy, Politics | 1 Comment »

The Perverse Politics that Now Surrounds Economic Policymaking

February 18th, 2010

The most remarkable aspect of our current economic predicament is the politics surrounding it, which are now as dysfunctional and perverse as Bear Stearns or AIG just before they tanked in 2008. The latest illustration is the partisan analysis of the effectiveness of last year’s stimulus, one year after its passage. While every cable TV loudmouth with economic opinions calls himself or herself an economist, there was never a debate among real economists over whether an $800 billion, two-year package of spending and tax cuts would help turn around growth and employment. Whether one thinks that economic relationships were better described by John Maynard Keynes and Robert Solow, or by Friedrich von Hayek and Milton Friedman, the conclusion is that it would. And one year later, the data show that it did: Growth is back, albeit still weak; and the rapid ascent of joblessness slowed sharply, not from a spurt of new job creation but because many fewer people lost their jobs.

The short-term benefits of the stimulus have been willingly acknowledged by conservative economists from Harvard’s Martin Feldstein (Reagan’s CEA chair) to AEI’s Kevin Hassett (McCain’s economic tutor). That makes the current carping by GOP leaders either mindlessly uninformed or willfully misleading.

To be sure, economists have serious and legitimate differences about stimulus, principally about whether their long-term costs outweigh the short-term benefits. Ironically, here’s where the perverse and dysfunctional streak in our current economic debate really kicks in. While a neoclassical economist would expect smaller short-term benefits and larger long-term costs from stimulus than a Keynesian colleague, both would agree that the prospect that government borrowing will continue to expand even after a real recovery takes hold calls for long-term deficit reduction. So, how to explain GOP opposition to the President’s call for pay-as-you-go budget rules and a bipartisan deficit reduction commission? In this case, the ideological blinders which dictate no tax increases even to control runaway deficits reinforce their political calculus that any achievement by the President could diminish the public’s anger at incumbents. The result is the GOP’s perverse and dysfunctional “just say no” approach to the economic debate.

With public concerns over long-term deficits heating up — especially among the Tea Party followers currently being courted furiously by Republican leaders — the GOP probably won’t be able to maintain its blanket opposition to any serious move to reduce those long-term deficits. But in other areas of economic policy where the politics are less clear-cut, most notably financial reform, their across-the-board opposition will be easier to maintain. Moreover, the economics of financial reform are also less clear-cut, producing diverse views among Democrats as well. With most Republicans unwilling to even consider a bipartisan meeting of the minds over these reforms, the structural problems that led to the market meltdown of 2008-2009 will remain unaffected. In the wake of a financial crisis that very nearly tipped the world into a global depression, the politics that produce this outcome are unconscionable.

The final irony may come if this political strategy succeeds. If Republicans pick up large numbers of seats in Congress come November, their enhanced numbers and especially their new members will force them to show they can produce some real change. And those pressures, in turn, will require compromises with the President and congressional Democrats that seem utterly out-of-reach today.

Posted in Uncategorized | No Comments »

The New Dominos as the Economic Crisis Enters its Latest Phase

February 10th, 2010

The dislocations from the worldwide, economic meltdown aren’t over by a long shot. Nearly two years after Bear Stearns’ collapse, the crisis continues to generate a stream of nasty twists and turns. Moreover, most of these developments have global dimensions, almost all of them are highly complex and only partly understood, and many require rapid responses that must be carried out under relentless public and partisan scrutiny. This constitutes the largest policymaking challenge since the dawn of the postwar era in foreign policy and international economic arrangements.

The most recent, nasty twist is the specter of a sovereign debt default in Greece. Technically, it means that Greece is running such large deficits, relative to its economy and private savings, that it may find itself unable to finance them while also servicing and refinancing its existing debt. Countries default on their debts regularly — it’s virtually a national habit for places like Argentina — but the crisis makes this situation different. First, the government bonds of Greece and countries like it are held mainly by Western financial institutions such as Citigroup and Deutsche Bank. Another round of big losses for them will mean more delays before normal credit flows to businesses resume, which in turn will mean slower growth, and longer and higher unemployment, for Europe and the United States.

The second ugly twist is that Greece is not alone. For months, international finance experts have worried about the sovereign debt status of not only places such as Portugal, Ukraine and Lithuania, but also Ireland, Spain and Italy. These concerns will heighten if Greece’s debt goes down, which in turn could make additional defaults more likely. And if the debt of a major country fails, we could find ourselves back to the financial conditions of Autumn 2008, but this time with much less fiscal and monetary capacity to address them.

While even President Obama couldn’t explain a U.S. taxpayer bailout for Greece, its implications for the European Union should be enough to spur a European bailout. While Greece represents just 3 percent of the EU’s total GDP, a Greek debt default would trigger a crisis for the Euro — and a Euro crisis in turn would drive up interest rates across Europe and choke off their recovery. An EU bailout of Greece, however, will demonstrate that the EU cannot enforce its own, basic rules on deficits and national debts. That lesson will also weaken the Euro — which means a stronger dollar later this year and weaker U.S. exports to help pull our own economy out of its ditch.

America, of course, has its own serious problems dealing with deficits and national debt. The GOP “party of small government” won’t agree to President Obama’s proposal to create a bipartisan commission to tackle the long-term problem, something Republican presidents and leaders had supported until Obama won the White House. GOP congressional leaders also have said no to pay-as-you-go rules to limit future deficits — rules they also liked in the 1990s — because paying for future tax cuts could mean fewer of them. In the land well beyond Washington, where economic sanity still rules, contemplating tax cuts in the face of trillion dollar deficits makes no sense. And even Ronald Reagan, the fiscal godfather of today’s GOP leaders, agreed to large tax hikes on business (1982), payrolls (1983) and energy (1984) when he faced unmanageable deficits. Yet, even George W. Bush’s catastrophic example of what happens when a serious recessions collides with large underlying deficits hasn’t convinced them to reexamine their talking points on tax cuts.

That’s one reason why the rating service Moody’s acknowledged last week that it might downgrade America’s debtor status from AAA to AA. A downgrade remains pretty remote — unless the economy swoons again, coming this time on top of a $1.4 trillion deficit instead of a $400 billion one. And debt defaults by Greece and another country could certainly trigger such a swoon. As it is, Greece’s problems have produced billions of dollars in speculative bets on Wall Street against the Euro. In fact, these bets follow recent and even more widespread Wall Street speculation against the dollar, winning bets which produced the record profits and large bonuses reported recently by Goldman Sachs and others.

All of this confirms, with disheartening certainty, that the forces which created the global economic crisis are still with us, and most of the policy challenges remain unmet.

Posted in Economy, Finance, Globalization, Politics | No Comments »

Cutting Payroll Taxes to Create Jobs

February 4th, 2010

Looking for ways to jumpstart job creation, the White House and Senate heavyweight Chuck Schumer have both come around to the same idea, cutting the payroll taxes that employers pay on new hires. The economic sense of this idea is straight-forward: If you want to induce businesses to hire people whom, under current economic conditions, they wouldn’t otherwise take on, you have to reduce their costs of doing so. A payroll tax cut is the most direct and targeted way to reduce those costs, which is why the Congressional Budget Office found recently that it’s about the most powerful policy option available to both create new jobs and boost GDP growth.

The President and Senator Schumer have the right idea, and it should be the centerpiece of the jobs bill now making its way through Congress. In fact, they should think about this in a larger context. Payroll tax reform can be more than just one of the pieces of a package of job-friendly tax breaks for “small businesses,” and more than a temporary measure to deal with double-digit unemployment. America’s job-creating power has weakened over the past decade, creating serious reasons to approach payroll tax cuts as not merely a measure to deal with our current double-digit unemployment, but a key part of a new economic policy.

For decades, the cost of payroll taxes had no apparent effect on job creation in the United States, the economic area in which we have long led other large, advanced economies. In the 1970s, when almost nothing else went right with the U.S. economy, we created more than 21 million new net jobs. In the expansion of the 1980s, while productivity and income gains slowed, we still created more than 20 million more new jobs. And the expansion of the 1990s added 19.5 million more. This record of steady, strong job creation came to an abrupt end in the six-year expansion of 2002-2007, when we managed to create less than 11 million new jobs. So, even before the economy gave back most of those job gains in the 2008-2009 recession, American businesses in this decade were creating new jobs at just about half the rate they did in the 1980s and 1990s.

America’s vaunted job-creating machine has collided with globalization. The problem is not simply or even mainly that American businesses have been sending jobs abroad — in fact, the foreign-based workforce of U.S. multinationals has barely grown at all since 2002. The real issue is that globalization intensifies competition, which makes it harder for businesses to pass along any new costs in higher prices. The good news is that these forces keep inflation low. The bad news is that when a business’s costs do go up — most notably, for health care and energy — and competition stops them from passing along these cost increases in higher prices, they have to cut other costs. The costs they’ve been cutting are jobs and wages.

Since the chances of Congress passing health care or energy reforms that would contain those near-term costs are slim, it’s time for a new approach that directly reduces the costs to companies of creating new jobs.

So, Congress should cut the employers’ side of the payroll tax for new hires, covering the new employee’s first two years on the jobs. Over that period, most workers will pick up considerable new, job-specific skills, so employers will want to keep them on when the special tax break no longer applies to them. To prevent businesses from gaming the system, the policy also should apply only to new hires that increase both the company’s total workforce and its total payroll — safeguards already included in both the Schumer proposal and the President’s plan. Finally, under the revived pay-as-you-go rules, Congress will have to replace the foregone revenues for Social Security, perhaps even as part of a larger tax reform effort.

Payroll tax reform could be the leading edge of a renewed commitment by the administration to bolster jobs and wages. At a minimum, it’s an approach to job creation that just about everyone will understand and most Americans may well appreciate, come November. On that basis alone, a payroll tax cut should be the core of whatever Congress chooses to call its new jobs bill.

Posted in Economy, Globalization | No Comments »

The Serious Economic Measures that Congress Won’t Consider

January 20th, 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?

Posted in Economy, Finance | No Comments »

America’s Path and the Rise of the Rest

January 13th, 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.

Posted in Economy, Globalization | No Comments »

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

January 6th, 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.

Posted in Economy, Globalization, Politics | No Comments »

Two Thoughts for President Obama on his Way to Copenhagen

December 16th, 2009

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

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

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

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

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

Posted in Climate Change, Economy | No Comments »

« Older Entries