Posts Tagged ‘Robert J. Shapiro’

« Older Entries

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.

Tags: , , , , , , , , , ,
Posted in Economy, Globalization, Political Strategy | Comments Off

Taxes and the Art of the Possible

Wednesday, December 8th, 2010

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

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

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

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

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

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

Tags: , , , , , , ,
Posted in Economic Strategy, Economy, Political Strategy | Comments Off

Lesson in Economics for the National Deficit Commission

Wednesday, October 27th, 2010

The French statesman Georges Clemenceau famously called war “too serious a matter to entrust to military men”; and in the same spirit, national budgets in a democracy are too important to leave to economists.  But no sensible government would wage war without listening to generals and admirals, and the National Commission on Fiscal Responsibility and Reform — aka the National Deficit Commission — would be equally well served to consider basic economics more carefully.  This week’s leaks from the Commission include reports that its members are leaning towards cutting back the deductions for mortgage interest and employer health insurance payments.  This approach could certainly raise a lot of money in the short run.  But for an economy suffering as ours is from weak demand, a fragile housing market, and a decade of slow hiring and income gains, these proposals are economically illiterate.

Listen up, National Deficit Commission.  This is the wrong time — maybe the worst time — to target the mortgage deduction.  Falling housing values have been the single largest force holding down consumer demand, and with it investment and growth, because their decline leaves the 70 percent of Americans who own their homes poorer.  That has created a classical, negative wealth effect which dampens spending.  On top of that, these falling housing values sharply raise the ratio of most people’s debts to their assets, moving most people to reduce their debt.  And that has meant fewer large purchases and less credit-card buying.

Cutting the mortgage interest deduction would only intensify these dynamics, because the value of that deduction is incorporated or “capitalized” in housing prices.  When prospective home buyers try to figure out whether they can afford the monthly payments on a particular house, they naturally factor in the value of the deduction.  Buyers are willing to pay more than they would without the deduction — and sellers demand more than they could without it.  Reduce the deduction, and buyers will be able to afford less, sellers will have to accept less, and housing values will fall further.

There are reasonable arguments for paring back this deduction, since it channels so much investment into housing.  Of course, that’s its explicit intention, so home ownership can be part of the American dream.  And yes, a smaller deduction would raise considerable revenues.  But doing it would inescapably further drive down housing values, and doing it now could lock in years more of slow economic growth.

This is an equally ill-timed moment to cut back the deduction for employer-provided healthcare insurance.  Once again, there are reasonable arguments for rethinking this deduction, but shrinking the deficit under current conditions isn’t one of them.  Limit this deduction for employers, and hiring costs will go up at a time when job creation is already historically weak.  Worse, the change would raise the cost of retaining people working today, creating new pressures for more layoffs.  The Commission may be talking about taxing workers, not businesses, on some share of the value of their employer-provided health insurance.  That seems no more sensible economically at this time, since it would reduce most people’s after-tax incomes at a time when their consumer spending is historically weak. 

The truth is, this is not the time for any short-term deficit reduction.  We tried fiscal tightening in 1937, at the early signs of recovery from the Great Depression, and it bought us four more years of slow or negative growth.  Japan tried it too in the mid-1990s, during the early stages of their recovery from a financial meltdown, and it set off another half-decade of economic stagnation.  Now Britain’s new conservative-coalition government is trying budget austerity, and the results almost certainly will be similar. 

Yet, it also would be foolish for the Commission to squander this rare public support for deficit reduction, so long as its members focus on the long term and consider the economic fallout from their various brainstorms.  The place to begin is with the two forces driving the long-term deficits — prospective, fast-rising entitlement spending, and taxes that raise sufficient revenues only when the economy booms.  On the spending side, Social Security could be the relatively easy part, because its budget gap remains comparatively small for many years — if Americans are prepared to accept smaller benefits down the line.  Experts figure, for example, that we could close one-third of that gap by using the CPI for the elderly, rather than the higher overall CPI, to calculate future cost-of-living adjustments.  And much of the rest of the problem would fade away if we tied the annual increase in people’s initial benefit to a combination of wage gains and inflation, rather than just wage gains.   

The harder part involves Medicare and Medicaid costs.  As with Social Security, the main difficulty lies not in figuring out how one could slow annual cost increases in health care, but rather in marshalling majority support for such measures.  In fact, the President’s health care reform already included a catalogue of approaches to slow the growth of medical costs, albeit on a limited scale or in weak form.  The Commission could urge Congress to scale up and strengthen those measures.  If those reforms work, they not only would generate large budget savings down the line.  The same approaches also would support jobs and incomes, since fast-rising health care costs have significantly slowed job creation and wage progress.

The Commission purportedly has agreed to use additional revenues to close one-third of the long-term deficit.  Assuming that additional taxes would go into effect only once the economy fully recovers, higher taxes for wealthy Americans would raise revenues without severely damaging demand, since they don’t spend nearly all that they earn.  The same idea could even be applied to industries which, by economy-wide standards, earn abnormally high profits.  By this measure, the leading candidate is finance.  A small tax on financial transactions, for example, would raise substantial revenues for the deficit with little adverse effect on the overall economy if other advanced countries follow suit — and Germany, France and the United Kingdom all have indicated interest.

And if the Commission wants to tackle broader tax reform, the top candidate should be a carbon-based fee on energy.  A tax on greenhouse gas emissions not only would restore U.S. leadership on climate change.  It also could turbo-charge the development and deployment of green fuels and technologies, a potential source of exports; and reduce our dependence on foreign oil and the consequent distortions in our foreign policy.  And if Congress set a carbon tax high enough to sharply reduce CO2 emissions, a good share of the revenues could go to reduce payroll taxes, spurring job creation and income gains. 

These approaches may not satisfy the balance-the-budget-at-all-costs crowd.  But sound deficit reduction requires a larger economic frame.  At a time of serious economic stress and frustration, the National Deficit Commission should embrace real economic thinking.

Tags: , , , , , , , , , ,
Posted in Economic Strategy, Economy, financial reform, Globalization | 1 Comment »

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.

Tags: , , , , ,
Posted in Economic Strategy, Economy, Globalization | Comments Off

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.

Tags: , , , , , , , , ,
Posted in Economy, Finance, Globalization | Comments Off

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.

Tags: , , , , , , , , , ,
Posted in Finance, Jobs | Comments Off

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.

Tags: , , , , , , , ,
Posted in Economic Strategy, Finance, financial reform, Globalization, Uncategorized | Comments Off

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.

Tags: , , , , , , , , , , , , , , , , ,
Posted in Economy, Jobs, Stimulus | Comments Off

The New Dominos as the Economic Crisis Enters its Latest Phase

Wednesday, 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.

Tags: , , , , , ,
Posted in Economy, Finance, Globalization, Politics | Comments Off

Cutting Payroll Taxes to Create Jobs

Thursday, 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.

Tags: , , , , , , , , ,
Posted in Economic Strategy, Economy, financial reform, Globalization, Jobs | Comments Off

« Older Entries