Posts Tagged ‘Globalization’

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The Truth about Job Creation under Obama and Bush

Wednesday, November 16th, 2011

Everyone knows that unemployment is high today and unlikely to fall by much soon. Yet, a longer view of the official jobs data would startle most people, including virtually everyone in the media. Nearly three years into Barack Obama’s presidency, his record on private job creation has actually been much stronger than George W. Bush’s at the same point in his first term. Whatever the public perception, the real record provides strong evidence for both the relative success of Obama’s economic program and how hard it now is for American businesses to create large numbers of new jobs — as they did once so effortlessly, and without political prodding.

Let’s go to the numbers reported by the Bureau of Labor Statistics (BLS). In the first 33 months of George W. Bush’s presidency, from February 2001 to October 2003, the number of Americans with private jobs fell by 3,054,000 or 2.74 percent. Perhaps Americans were too distracted by Osama bin Laden to pay attention, or everyone was lulled by the dependably strong job creation of the 1980s and 1990s.  Whatever the reason back then, Americans are certainly paying attention to jobs now. Yet, few seem to have noticed that Barack Obama’s jobs record has unquestionably been much better. In the first 33 months of his presidency, from February 2009 to October 2011, private sector employment fell by 723,000 jobs or 0.66 percent. That means that over the first 33 months of the two presidents’ terms, jobs were lost at more than four times the rate under Bush as under Obama. 

To be fair, new presidents shouldn’t be held responsible for job losses or job gains in the first five or six months of their administrations.  Bush’s signature tax cuts, for example, weren’t enacted until June 2001; and while Congress passed Obama’s signature stimulus program earlier in his term, it didn’t take effect for several more months. But the story is the same when we start counting up jobs without the first five months of each president’s term. The BLS reports that from July 2001 to October 2003 under Bush’s program, U.S. businesses shed 2,167,000 jobs, or about 2 percent of the workforce. Over the comparable period under Obama’s policies, from July 2009 to October 2011, American businesses added 1,890,000 jobs, expanding the workforce by 1.75 percent. In fact, private employment in Bush’s first term didn’t begin to turn around in a sustained way until March 2004, 38 months into his term. By contrast, private employment under Obama started to score gains by April and May of 2010, 14 to 15 months into his term.

The same dynamics have played out with manufacturing workers. While they have taken a beating under both presidents, they suffered much harder blows under Bush than Obama. Setting aside, once again, the first five months of each president’s term, the data show that under Bush, 2,141,000 Americans employed in producing goods lost their jobs by October 2003, a 9 percent decline. Under Obama, job losses in goods production totaled 183,000 over the comparable period, a 1.0 percent decline.

Public perceptions, especially of Obama’s record, may be skewed by the collapse of the jobs market in the months before he took office. In the final, dismal year of Bush’s second term, from February 2008 through January 2009, American businesses laid off an astonishing 5,220,000 workers, 4.5 percent of the entire private-sector workforce. Obama and the Fed managed to staunch the hemorrhaging. But the huge job losses in the year before he took office have become a political hurdle which Obama must overcome before he can take credit for putting Americans back to work.

Apart from the obvious disconnect between conventional wisdom and what actually has happened with jobs, the data also speak to certain features of the labor market and the policies we use to affect it. For example, both presidents began their terms with large fiscal stimulus programs, backed up by more stimulus from the Federal Reserve. So, the record now shows clearly that when the economy is depressed, spending stimulus has a more powerful effect on jobs than personal tax cuts.

Beyond that, why couldn’t either president restore the much stronger job creation rates of the 1990s and 1980s? Obama’s economic team can point to the long-term effects of the 2008 housing collapse and financial crisis, especially the impact of four years of falling home values on middle-class consumption. But another factor also has been at work here, one which contributed mightily to the slow job creation under both presidents, and will similarly affect the next president.

The tectonic change from strong job creation of the 1980s and 1990s to the current times is, in a word, globalization. From 1990 to 2008, the share of worldwide GDP traded across national borders jumped from 18 percent to more than 30 percent, the highest level ever recorded. Intense, new competition from all of that additional trade has made it harder for American businesses to raise their prices, as competition usually does. That’s why inflation has remained tame for more than decade, here and nearly everywhere else in the world. The problem that American employers have faced — and still do — is that certain costs have risen sharply over the same years, especially health care and energy costs. Businesses that cannot pass along higher costs in higher prices have to cut back elsewhere, and they started with jobs and wages.

One irony here is that the Obama health care reform should relieve some of the pressure on jobs, by slowing medical cost increases. The administration’s energy program, still stalled in Congress, also might slow fuel cost increases, at least over time. So, if he does win reelection in the face of high unemployment, there is a reasonable prospect of stronger job creation in his second term than in his first one — or in either of George W. Bush’s terms.

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What the Obama-Hu Meetings Can Mean for the U.S. Economy

Wednesday, January 19th, 2011

Barack Obama and China’s President Hu Jintao have genuinely important economic matters to talk about this week, even if there’s little prospect for any agreements that could materially improve our own economy anytime soon. But President Obama can –– and certainly will –– use these meetings to hammer home his long-term priorities for the U.S.-Sino relationship. And so long as Hu continues to see the United States as the “indispensable nation” for China’s economic development –– Hu’s own words –– a U.S. President’s priorities matter. And in acknowledging China’s increasing success in the global economy, the President can also remind Americans why they have to raise their own economic game –– and how his domestic policies can help them do just that.

A few of these discussions may produce quick benefits. For example, Obama will press Hu on China’s lax enforcement of the intellectual property (IP) rights of American companies in the Chinese market. A lot of Americans still see such enforcement as a parochial issue for a few big pharmaceutical and software outfits. It’s true that Chinese producers regularly try to rip off U.S. patented drugs, mainly for third-world markets; and until recently even the Beijing government used a pirated version of Windows. But there’s much more at stake here for us. The fact is, the only promising, long-term strategy that the global economy offers the United States today depends on our outsized national capacity for developing and adopting economic innovations –– from new products and technologies, to new ways of financing, marketing and distributing goods, and new ways of organizing a business and running a workplace. IP rights in the world’s second largest market, then, affect everything from movies, machine parts and genetically-enhanced foods, to computer slates, Internet business processes, and nanomachines.

China already is legally obliged to protect the IP rights of American companies inside China under the rules of the World Intellectual Property Organization. So, Obama will press Hu to actually meet those obligations; and since China has recently begun to build its own R&D establishment, it’s an area where China’s interests and ours are beginning to align. The truth is, this is ultimately non-negotiable for the United States. But it also should prove to be a small price for China to pay for a solid economic relationship with the country that is not only one of its largest markets, but also its leading source of foreign direct investment into China –– including new technologies and business methods that are at issue in IP enforcement.

There’s less prospect of real progress on nudging China to revalue its currency, a recent hot-button issue for some prominent members of Congress. A stronger renminbi certainly would appear to be in our interest, since it would cut the price of U.S. exports inside China and raise the price of their exports inside the United States. In practice, it probably would make little difference to our economy. A stronger renminbi mainly would help companies in places which produce the same things as domestic Chinese companies –– places like Bangladesh and Thailand, not Michigan or Alabama. Yes, it would shave the price of U.S. products inside China –– but it would do the same for the products of our Japanese and European competitors.

Anyway, Hu has no intention of taking major steps in this area. Chinese leaders have always approached the value of their country’s currency as a matter of national sovereignty –– and the truth is, we don’t react very well either when China or the government of any other country criticizes U.S. monetary policies. And even if Hu approached this matter less dogmatically, it wouldn’t change that fact that the cheap renminbi is a critical part of the country’s basic strategy for strong, export-led growth; or that Hu and his fellow leaders see the success of that strategy as a lynchpin of their own political legitimacy. And while it won’t be mentioned this week, China’s long-term goal in this area is to claim for the renminbi part of the U.S. dollar’s role as the world’s reserve currency, which at our expense would help insulate the renimbi itself from future pressures to revalue.

Obama may get a more receptive hearing when he presses Hu to engage with the United States –– and the rest of the world –– on climate change. Both men know very well that China is now the world’s largest greenhouse gas emitter. That’s mainly because China has the world’s most ambitious program for building new electricity-generating plants; and since its only significant domestic energy source is coal, that’s what those plants run on. Hu also knows that the world will address this threat sooner or later –– and when they do, China cannot afford to sit on its hands. Obama’s challenge is the same one he faces with many Americans –– come up with a strategy that will raise the price of fossil fuels without imposing serious costs on the economy. Here at home, the answer to that riddle is a carbon-based tax with the revenues recycled for tax cuts in other areas. For China, Obama’s approach will have to be more subtle –– for example, intimating about a future agreement to promote joint ventures by U.S. and Chinese companies to develop and sell new alternative fuels and climate-friendly technologies.

These issues also give Obama the opportunity to drive home his case for new public investments at home –– in education and training, for example –– to expand America’s modest comparative advantage in fielding a workforce that can adapt easily to new technologies and business methods. This week’s meetings also could provide a platform to highlight his tax incentives for businesses, so they can make the investments required to better compete with Japanese and European companies in the Chinese market. And any meaningful U.S.-Sino discussions on climate change will dovetail nicely with the administration’s calls to expand R&D in this area, and so establish a more commanding position for the United States –– with or without China –– in global markets for green fuels and technologies.

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Why the Value of Your House Moved Global Markets This Week

Thursday, August 26th, 2010

This week’s housing news was a primer on globalization. U.S. existing home sales fell 27 percent in July, twice as sharp a drop as Wall Street analysts said to expect. (Of course, they’re the same geniuses who didn’t see their own meltdown coming; didn’t expect the long, deep recession that followed; and couldn’t figure out that the recovery would be slow and halting.) Right away, our stock markets sunk by one to two percent — no surprise there — but we weren’t alone. On Wednesday morning, the financial news led with “European Stocks Drop on Dismal U.S. Home Sales Data” and “Most (Asian) Stocks Fall Amid Speculation on U.S. Home Sales Report.”

Why does a bad report on American home sales rattle investors a half-world away? To be sure, housing is an important piece of every U.S. recovery. And the world pays close attention to ours, since we remain by far both the world’s largest market for imports and the place where most foreign multinationals maintain their subsidiaries. This time, however, there’s more at stake. Housing is both a lynchpin for a full recovery from the financial crisis that pushed most of the world to the brink of depression; and the key to something better than our current stumbling expansion.

The link to finance is straightforward. Everybody remembers how Wall Street’s largest institutions swooned or crashed when the end of the housing bubble brought down hundreds of billions of dollars in mortgage-backed securities and the credit default swaps that backed them up. But when Washington stepped in to rescue most of them, it took out its own risky bet that a housing recovery would quickly stop the bleeding. So we never seriously considered what Sweden did so successfully in the early 1990s — and what we did ourselves to resolve the S&L crisis: Take over an insolvent Bear Stearns, AIG or Merrill Lynch, pull out the weak and failed assets, and sell the still-healthy stuff to new investors who would promptly reopen the institution under a new name. And the bailouts didn’t even require that these institutions put their books back in order by getting rid of the most risky housing-based assets which they still held.

The catch is that if the housing market continued to deteriorate — as it did — more of those assets would decline in value or fail outright. Those losses, current and prospective, leave finance much less willing to lend to most other companies. And that means that strong business investment, which is a critical part of all healthy expansions, this time will follow a housing recovery, not lead it.

There’s more at stake in the current housing market than the pace of business investment. Some 70 percent of U.S. households are homeowners, which makes housing values the most important piece, by far, of most Americans’ wealth and economic security. So, the sharp drop in those values has made most of Americans poorer than they had been; and, unsurprisingly, people who feel poorer tend to spend much less. The health of the housing market, in short, now directly affects both business investment and consumer spending, and with them the outlook for the entire U.S. recovery.

It’s little wonder that world markets reacted badly to this week’s dismal U.S. housing report. Beyond the 27 percent drop in existing home sales — and one day later, sales of new homes also fell sharply — nearly one-third of the houses that did sell were “distressed” properties. That means they were either in foreclosure or sold for less than their outstanding mortgages. Average home prices did inch up a little bit, but the only reason was that the end of the temporary tax credit for first-time homebuyers led to a particularly sharp fall in their purchases, which normally involve lower-priced homes.

Nor are there signs of a real housing recovery anytime soon. Foreclosures are still running at four times their normal levels — and nothing drives down a neighborhood’s housing prices and slows down sales more than nearby homes in foreclosure. On top of that, supply continues to way outpace demand: At current rates of home sales, it would take over a year to clear all of the homes already on the market today.

If we don’t take serious steps to finally turn around these conditions, the United States and much of the rest of the world will be looking at a weak expansion, or worse, for several more years. One measure that could have a powerful effect would be steps to bring foreclosure rates down to normal levels. For example, congressional Democrats could advance a new program modeled on student loans for homeowners with mortgages in trouble. Homeowners who qualify could borrow the funds they need to stay in their homes, at a low interest rate, with no interest due the first year so long as they stay in the homes for at least two more years.

Most Republicans will denounce it as just another “big government program.” Yet, without a housing recovery, the alternative is not only smaller government but also a smaller economy, because businesses can’t find loans, people can’t find jobs, and most consumers can’t spend like they used to.

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Memo to the President and other World Leaders: Resist a Simpleminded Push to Cut Budget Deficits Now

Wednesday, June 9th, 2010

A dangerous and infectious economic idea is spreading around the world. Last week, the liberal majority in the House of Representatives rejected efforts to inject a little more stimulus into the economy; and across much of Europe and Asia, presidents, prime ministers, parliaments and congresses are calling for tighter budgets. Many economies face some genuine threats these days; and suddenly, one of the more prominent among them is the simplistic view of many public officials that their still weak economies now need a strong dose of fiscal discipline. What they ought to worry about are the odds of another economic downturn and a chance that we all may face a second financial crisis.

Here at home, we know from the most recent data that American businesses aren’t hiring new workers in any real numbers, nor are banks lending most classes of businesses much new capital. All this tells us that the 2009 stimulus, which has just about run its course, was not enough to restore healthy, self-sustaining growth. Yet, most politicians still don’t appreciate how damaging fiscal stringency can be for an economy that remains too weak to generate decent job creation or business investment. They may have to rediscover the lesson that FDR and his top advisers learned back in 1937, when federal belt tightening sent the barely-recovering U.S. economy back into deep recession.

In a strong economy, a big dose of additional deficit spending may well crowd out private investment, push the Fed to raise interest rates, and create significant long-term costs for taxpayers who will have to finance the additional debt forever. But it’s obvious that this economy is still very far from being strong. The Fed, for example, will never raise rates under current conditions — a mistake which, as Fed Chairman Bernanke has noted, was the lesson of 1930-1932. Under these conditions, additional spending for initiatives which also make sense in themselves can actually increase private investment and long-term growth, which in turn would substantially reduce the long-term financing costs of the additional debt.

The current political passion for tight budgets, already in full play in Germany and Britain, may have been triggered by the sovereign debt crisis unfolding in Greece and, perhaps soon, across much of southern Europe. Yet, the ultimate sources of most sovereign debt crises are weak productivity and flagging competitiveness. Add an irresponsible government willing to run unsupportable deficits and loose monetary policies, instead of taking the difficult steps required to address the underlying economic problems, and a sovereign debt default becomes a real possibility.

But the United States isn’t facing Greece’s dilemma, and neither are Germany or Britain. And the best policies to maintain the confidence of international investors even as our own national debt rises rapidly would be measures to further bolster our underlying productivity and competitiveness. That will be especially true if the European Union’s plan to address Greece’s sovereign debt problem fails — as it almost certainly will — and the ensuing chaos triggers new worldwide financial meltdown. At a minimum, the falling value of Greek bonds, along with those of Portugal, Spain, Hungary and Italy, will further slow our own recovery and growth, making premature deficit reduction even more damaging.

Still, while the stimulus helped temper the 2008-2009 recession and hastened its end, it was never enough to restore healthy growth to an economy twisted out of shape by a historic housing bubble and then cracked open by a systemic financial meltdown. So, the administration and Congress need to do now what should have been done in 2009 to address the forces that drove the crisis. For example, Americans won’t start consuming again at the levels needed to drive jobs and investment until they stop feeling poorer, and that will still require measures to bring housing foreclosures back to normal levels and stabilize housing prices. Moreover, so long as foreclosures remain abnormally high, our banking system’s holdings of mortgage-backed securities and their derivatives will continue to deteriorate — and the continuing losses will keep banks from restoring normal business lending. The administration’s program of subsidies for banks to refinance troubled mortgages didn’t work, so we need stronger medicine. Here’s one approach: Since the government now owns Fannie Mae and Freddie Mac, which continue to hold a decent share of the nation’s mortgages, Congress can direct them to help bring down foreclosures by renegotiating and refinancing the troubled ones in their portfolios.

Deficit anxieties also shouldn’t stop us from taking serious steps to help reboot job creation. The best course would be measures that can reduce the cost to businesses of creating those new jobs, so let’s cut in half the payroll taxes that employers pay on new employees. And since slow job creation was a serious problem for several years before the financial meltdown, there are good grounds for making this change permanent. But since the long-term trajectory of our deficits and national debt do matter, we should also take steps to pay for this change once the economy really recovers. And here’s the best way to do it: Offset the costs of lower payroll taxes for employers, two or three years from now, by phasing in a new carbon-based energy fee, which also happens to be the most effective way to reduce the greenhouse gas emissions driving climate change.

In the meantime, the administration also can lay the groundwork to restore long-term fiscal sanity by addressing the two big forces that created large U.S. deficits even before the world’s current problems. And there’s no mystery about what those forces are — sharply-rising health care costs and substantial cuts in the tax base. Their big political challenge is to leave the deficit alone until the economy regains its strength, while building some form of national consensus for both greater revenues and much stronger steps to contain health care costs.

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Deciphering the Crisis in Greece and Its Significance for America

Wednesday, May 12th, 2010

With the world’s stock and bond markets thoroughly roiled by Greece’s sovereign debt problems, it’s only natural to ask the perennial question, how does it affect us? The outlines of the crisis are certainly familiar. As I’ve been warning in this space for more than a year, governments around the world would inevitably face serious fiscal problems, dealing with the daunting debts accumulated from the huge bailouts for the financial meltdown and the large stimulus programs for the subsequent deep recession. In countries that began with large deficits and national debts, such as Greece, Portugal, Spain and Italy, those fiscal stresses have become very serious. Here, in the United States, we’re just beginning to hear calls for deficit reductions. If recent history is any guide, we will ignore the problem for several more years, until voters finally demand that Washington take real action.

Greece can’t wait, despite the recent violent protests there against budget austerity. Greece is also burdened with a relatively weak and uncompetitive economy, so it cannot generate strong growth to help ease the problem. Moreover, the organization of the Eurozone denies Greece, along with other member-nations with high and fast-rising public debts, two standards measures to boost competitiveness and help countries grow out of their mess. Greece can’t depreciate its currency to make its exports cheaper in foreign markets, since it shares the Euro with many other countries uninterested in a sharp depreciation that would leave them poorer. Greece also can’t cut its interest rates to spur domestic investment and attract capital from other EU countries, since the European Central Bank (ECB) sets the interest rates for everyone in the Euro Area.

That’s why Greece has been headed for a default on its government bonds. The hitch is that a Greek default would shatter the EU’s grand myth, that their (partial) economic union enhances the efficiency and competitiveness of its members enough to protect them from such crises. Moreover, if the EU stood by as Greece sank, international investors would dump the public bonds of other debt-burdened EU countries, starting with Portugal, Spain and Ireland. All of this would drive down the value of the Euro, especially relative to the currencies of the EU’s two major trading partners, the United States and China. By the way, that would be both bad and good news for us. A stronger dollar would make our exports more expensive in Europe, undermining the President’s hopes of relying on exports to help drive growth at home. But a stronger dollar, along with the threat of a sudden crisis for the Euro, also draws more foreign capital to the United States, which helps keep our interest rates low.

So far, the EU and the IMF (prodded by us with promises of a larger U.S. financial contribution) have headed off a Greek default, by unveiling a $1 trillion bailout plan consisting mainly of loans and a pledge by the European Central Bank to accept Greek bonds as collateral for loans to the European banks that buy those bonds from the Greek government. The fund is big enough to rescue Portugal and Spain as well, a smart move since serial debt defaults pose the greatest danger of all.

The announcement of the plan strongly recalls the original TARP bailout. Both plans were pulled together hastily to signal government’s determination to head off a collapse. In both cases, the signal is more important than the actual plan, since neither makes much economic sense. The EU plan depends, first, on taxpayers across northern Europe agreeing to shoulder much of the costs to rescue Greece and, second, on Athens following through with deep spending cuts and sharp tax increases that are bitterly opposed by most Greeks. Even if all of that came to pass, the plan has more fundamental flaws. It purports to respond to Greece’s public debt crisis by expanding the debts of Greek and other European banks as well as other EU governments — as if international investors will generously overlook Europe piling up even more debt than today. And if Greece does follow through on the draconian austerity measures contemplated in the plan, its economy will sink further, requiring even more public debt. In short, the bailout plan is a fantasy; and Greece and Europe will face another round of this debt crisis not long from now.

The improbable shape of the EU bailout does recall our own, original TARP plan. Just as the EU bailout does nothing to address Greece’s lack of competitiveness, the TARP in its various versions has never addressed the forces and factors that drove our financial crisis. So, 20 months later, our large banks are still not strong enough to resume normal lending to American businesses. Their continuing vulnerability also makes Europe’s current debt problems even more serious for us. Greek bonds — along with the bonds of Spain, Portugal, Ireland and Italy — are held mainly by financial institutions. German and French banks are the most exposed, but ours are well in the mix, too. Those bonds have been declining in value for weeks, taking their toll on bank balance sheets. A formal default by Greece would hit all of them; and serial defaults by Greece, Portugal and then Spain — and possibly Italy — would trigger another worldwide financial crisis.

This time, we would have few policy tools left to stop a downward spiral — and Congress almost certainly would fiercely oppose another huge taxpayer bailout, especially Republicans in the midst of a populist purification process that already has purged Bob Bennett in Utah and Charlie Crist in Florida. This is all speculative — thank goodness — but we could find ourselves with very few options to address a crisis that ultimately could lead to another Depression. Our best hope for now is that Greece and the Eurozone will somehow muddle through, much as we did in 2009.

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A New Progressive Economic Strategy, Part 4: The Global Economy

Thursday, April 29th, 2010

In a global economy, even the world’s largest economy by a factor of three (that’s us, compared to Japan and China) cannot by itself ensure job opportunities for everyone and healthy incomes gains for everyone who works hard and well. We may wish it were otherwise, but the United States and the forces of globalization now share control over America’s economic path. The challenge is to work with those forces to benefit average Americans, and to exercise the global leadership required to ensure that other countries work with us to promote the growth and stability of the global system. This part of the progressive agenda has many elements, including efforts to advance open trade in ways that help average workers, steps to promote innovation and protect the rights of American innovators around the world, and responsible regulation of finance while promoting free flows of global capital.

In one way or another, just about every economic activity in America is touched by global forces, whether it’s the operations of foreign companies, investors, innovators, consumers, or governments. We’re still the world’s largest economic actor by a long shot; but the global economy has grown too large, complex and fast-changing for even us to dominate, much less direct. Let’s start with trade. Twenty years ago, 18 percent of all the goods and services produced in the world were traded across national borders — today, in a global economy two-thirds larger (adjusted for inflation), one-third of everything produced anywhere is traded — some $20 trillion worth per-year. Most of this rapid increase is tied to the explosive modernization of China and other large developing countries, and the fast-expanding consumption of their people.

America can generate good jobs and rising incomes for average families only by working with this historic expansion of worldwide trade. Progressives should be committed not only to equip American workers and companies with what they need to compete in a global trading system, but also to open markets here and around the world, especially in services and agriculture. The first commitment involves many of the initiatives described in earlier essays, including access to free IT training, health care reforms to reduce business costs, and tax reforms to make American companies more competitive.

In exchange, progressives should push to conclude the Doha trade round to open foreign markets to services, where U.S. companies excel, to negotiate fair, free trade status with burgeoning economies such as Korea and, in time, with Japan; and to hold China and other fast-growing emerging markets to their WTO promises to open their markets. In all of these cases, American firms and workers would gain, because our markets already are far more open than most others in the world. And there’s no one else who can lead effectively here, since no other country has as much leverage with the holdouts in the EU and the developing world.

America’s greatest exports are its new ideas, whether they’re embodied in new software code, breakthrough pharmaceuticals and medical devices, new business services, genetically-enhanced foods, new forms of entertainment, or the latest-generation equipment. In fact, America’s unique role in globalization is being the world’s largest source of economic innovations and the testing grounds for adopting them on a large scale. To be sure, innovators come from every part of the globe; but for the last generation, American inventors, entrepreneurs and companies have dominated the development of most (not all) critical new technologies and new ways of doing business. And the effective application of new ideas is the principal source of most of the competitive edge American companies retain in many global markets.

To help keep all of this going, our new economic plan has to actively spur continuing economic innovation through tax reforms, a larger federal commitment to basic research, and by maintaining the healthy competitive pressures that spur innovation and their broad adoption. In this context, too, American workers need access to the skills required to use these innovations and perform effectively in workplaces dense with advanced technologies. These steps not only can help average families succeed as new ideas unfold; they also support America’s place as the world’s largest domestic market for innovations, which in turn will spur additional investments to develop their next generation.

A progressive economic program should include two initiatives in this area. First, since innovation is the essence of our competitive advantage in the world, we need a no-holds-barred campaign to cajole or coerce every other nation to respect the intellectual property rights of American innovators and companies. In addition, we need to reclaim the global leadership we exercised in the 1990s in addressing climate change by enacting measure to fix a strict and environmentally-appropriate price on carbon emissions, preferably with a carbon-based tax that recycles its revenues in other tax cuts. This would not only be part of America’s responsibility for broad economic leadership, it also could spur to a dramatic degree American companies to develop new, climate-friendly fuels and technologies, and then broadly adopt them.

A progressive economic plan also has to take serious account of the global financial system. American companies are the world’s largest foreign direct and portfolio investors, with operations and other investments spread across the developing and advanced world. The United States is also the world’s largest single recipient of direct investments by foreign companies and portfolio investments by foreign funds and governments. So, we have an enormous stake in a healthy and stable financial system, here and around the world. And in the wake of the recent meltdowns, the central issue here is how best to regulate finance, here and around the world.

Based on the recent crisis, the basic terms of regulation seem clear. First, require that all financial institutions hold more capital, relative to their investments, and adjust those stricter capital requirements for the riskiness of a bank or fund’s portfolio. That should help end their risky practice of making huge wagers, for example in asset derivative or interest rate futures, using almost entirely borrowed funds. Second, make sure that every transaction in finance, involving any kind of instrument, occurs on a public exchange or through a publicly-chartered clearinghouse. That can ensure that every trade or purchase is transparent and subject to the same disclosure and soundness rules. Third, end self-dealing compensation practices that just encourage the most risky wagers, for example by paying out bonuses long before anyone knows whether the transaction will actually work out. And none of these sensible changes would impede the free flow of investment and money — in fact, they should enhance America’s premier position in the global capital system.

The good news here is that the regulatory plans passed by the House and being considered this week in the Senate both contain versions of these three basic changes. The bad news is that they’re all weaker than needed — so, it’s up to progressives to strengthen them.

That leaves the sticky matter of “Too Big to Fail,” or what to do about funds or banks whose failure could trigger another broad crisis. We have two alternatives: Break them up, so no bank or fund can jeopardize the stability of the entire financial system. In its’ favor, there’s little evidence of real economic benefits derived from the huge size of the institutions that dominated the sector before the crisis, much less the even greater size of the behemoths that dominate it now. Many conservatives like this approach, from Alan Greenspan to Mervyn King (he runs the Bank of England), because it avoids the alternative, which would be a new process to take over the investment activities of any large player at the first sign of trouble. Either way, the plan should reject out-of-hand the current, reckless GOP position:No prophylactic break-ups, no new process to take them over when they’re in trouble, and no future bailouts. That would be a formula for a global depression the next time that big finance implodes.

There’s more to consider as well for a progressive plan to help Americans make the best of globalization, from sensible immigration reforms to measures to help recognize asset bubbles before they get out of hand. In one way or another, we will return to those issues later, along with some others. For now, we conclude this four-part series hopeful that somewhere out there, in Washington or beyond, there is a growing recognition that now is the time for progressives to rethink our national economic approach and reconfigure the economic agenda.

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A New Progressive Economic Strategy, Part 2: Spending Reforms

Wednesday, April 14th, 2010

You don’t have to be a Nobel economist to see that the United States needs a serious, new economic approach if we hope to restore what once seemed part of the American birthright — ample job opportunities, strong and widespread income gains, and broad upward mobility. Last week, we sketched a package of initiatives to equip businesses and workers with the resources and incentives that such a strategy requires. This week, in part 2, we turn to a more general condition for sustained economic progress, a plan to control long-term deficits and national debt.

Bringing down the trillion dollar-plus annual deficits now projected for the next decade is a straight-forward task conceptually — you raise taxes, cut federal spending, and do both in ways that promote faster growth, and so further increase revenues and further reduce spending. Moreover, serious steps to reduce these deficits, phasing-in a few years from now when the economy is stronger, should be a clear goal for progressives. Once the economy recovers from the neglect and mistakes of the last administration and those who ran Wall Street, the current trajectory of massive deficits will push up interest rates and slow investment, incomes and growth. Tolerating these long-term deficits would consign average Americans to another lost decade economically — and perhaps even worse, lay the toxic foundations for another crisis.

In practice, serious deficit reduction is always a difficult business, since who wants to ask people to pay higher taxes or accept fewer benefits? The challenge is to rethink and reconfigure federal spending and taxes, so we can channel spending and raise revenues in ways that reinforce job creation and income gains, and so help families and businesses prosper. This week, we focus on the spending reforms; and next week, we will rethink taxes.

Progressives should approach this challenge in three ways. First, end not only earmarks but their larger and more permanent version, the major subsidy programs for influential sectors. These subsidies arbitrarily tilt the economy towards companies with political clout and so reduce the jobs and wealth the economy is capable of producing. These industry entitlements range, for example, from much of the farm program which end up raising food prices, and export promotion efforts that give selected exporters artificial advantages without affecting the overall trade deficit, to below-market fees for mineral rights and other natural resources. Make a clean sweep of these ongoing taxpayer bailouts, and we could save between $100 billion and $150 billion per-year.

The second area involves the inescapable reforms of individual entitlements. Unlike industry subsidies, these programs serve clear and compelling social interests. Yet, as the boomers begin to retire, these programs in their current forms are simply and plainly unsustainable. Social Security reforms are the more manageable part, analytically and politically. Social Security’s long-term deficit would go away, for example, if Congress enacted three fairly modest adjustments: Shift the pension’s annual cost-of-living adjustment to reflect the actual inflation recorded by the Bureau of Labor Statistics for the elderly people who receive the COLAs; link increases in the retirement age to increases in life expectancy for those age 65 and over; and tax all of the benefits of retirees with incomes above the national average. And all of these changes reflect the progressive values of fairness.

Fixing Medicare and Medicaid is much tougher. As this year’s wrenching debate over health care reform demonstrated, nothing inspires more public anxiety than changes in the arrangements that people consider matters of life and death. Yet, the current arrangements are also plainly unsustainable, especially as boomers reach the phase of their lives when heart disease and cancers, the most common and expensive conditions to treat, become much more common. The general path is clear: We need reforms that go considerably beyond this year’s changes that can substantially slow the rates of increase for all health care costs.

By taking this broad approach, we can not only preserve Medicare, but also produce large economic dividends. First, smaller annual increases in health care costs will reduce pressures on businesses to hold down wages. That’s just what happened in the 1990s, when the shift to HMOs produced several years of much slower health care inflation, and average incomes grew more than 2 percent annually, after inflation. Moreover, slower health care costs also will help the overall economy. Since other advanced countries produce health care outcomes comparable to our own at less cost, our additional spending is flagrantly inefficient, stealing wealth and jobs from more economically-productive areas.

Happily, this year’s health care debate aired out a catalog of strategies to help contain these costs without compromising the quality of care; and the bill, as enacted, provides a credible beginning for a more extended process to control future increases. The insurance exchanges should reduce costs in the individual and small-group insurance market, and the investments in IT should help slow costs across the system. Both can be expanded and beefed up. The new law also begins to move the Medicare program from volume-based payments to reimbursements based on the value of the treatments. That can be substantially strengthened as well. This year’s reforms also create a new advisory board to propose new ways to cut Medicare costs, with a process to fast-track the recommendations through Congress. Eventually we can apply this kind of arrangement to all of health care.

Finally, both parties are going to have to accept the most difficult changes advanced by the other. Democrats will have to live with taxing a share of the value of employer-provided coverage, along with serious malpractice reforms. And Republicans will have to accept a public option, in order to introduce real competition for insurers in areas where one or two of them comprise an effective monopoly or duopoly.

Looking out several years, these reforms for industry and individual entitlements should be able to pare several hundred billion dollars per-year from our structural national deficits. And if that’s not enough, there’s still a third area of large, potential savings in defense spending. For a start, eliminate any weapon system that the Pentagon says it doesn’t need or want. These programs have become geographic entitlements, usually sustained to keep taxpayers’ dollars flowing to the districts of those who sit on the defense appropriations subcommittees. And that’s hardly a sufficient reason to weaken a broad plan with the promise of restoring real economic opportunities and prosperity for average Americans.

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A New Jobs Program for America

Tuesday, March 30th, 2010

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

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

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

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

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

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

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

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

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

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Why Progressives Should Work to Control the Rising National Debt

Wednesday, 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.

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Broadband and American Jobs

Wednesday, 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.

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