The Economic Outlook for the Election and Beyond, and How Who Wins Could Change It

The Economic Outlook for the Election and Beyond, and How Who Wins Could Change It

September 7, 2016

With nine weeks to go, the economic conditions for the election are set — modest growth, low inflation, and continuing job gains. A few Wall Street forecasters rate the odds of a 2016 recession at one-in-three; but unless a major shock wrenches the economy off its present course, bet with Janet Yellen and Ben Bernanke on the economic expansion continuing into next year.

The tougher question is what economic conditions will confront the new president and the rest of us in 2017 and 2018? Since the fourth quarter of 2015, the economy has grown at an annual rate of less than one percent, and business investment has declined at a three percent annual pace.

Consumer spending and home sales could lift growth and investment next year, if the healthy income growth of the last three years continues. But much of those income gains come from the unusually strong job growth of those years; and with unemployment now below five percent, job creation almost certainly will moderate soon.

If jobs gains lessen next year, healthy income gains will depend on a turnaround in the economy’s disappointing productivity record. A modern economy cannot stay strong indefinitely without strong productivity growth to fuel incomes, demand, profits, and investment. Its recent record explains our slow growth: Productivity gains averaged just .6 percent per year from 2011 to 2015, and even those small gains turned negative in the first half of 2016.

This represents a major change: Productivity increased at an average rate of 2.8 percent per year through Bill Clinton’s second term and remained strong at 2.6 percent per year from 2001 to the financial collapse in 2008. Moreover, it recovered quickly in 2009 and 2010, reaching 3.2 percent per year. Unless productivity recovers again in 2017, wages and incomes could stall and the economy could stagnate in the next President’s first or second year in office.

Yet, the economic debate this year has mainly focused on overall growth rather than productivity. Most economists — Ben Bernanke, Paul Krugman, Larry Summers and Kenneth Rogoff, among others — pin the slowdown in GDP growth on higher savings and the associated weaker spending. So, most economists have called for renewed fiscal stimulus here and for much of the world. They’re right; but the outlook for incomes and investment would be more encouraging if the fiscal stimulus focuses on recent meager, or even negative, productivity gains — and their impact on growth.

Americans are in luck — assuming the pollsters are right that Hillary Rodham Clinton will vanquish Donald Trump. While Clinton has not offered an explicit program to boost productivity, her economic and social policy proposals include the three essential elements of such a program. First, improve overall market conditions for all industries; second, promote innovation through the development and broad use of new technologies, materials, and ways of doing business; and third, give workers access to the skills they need to operate effectively in a more innovative economy.

The big play to improve the efficiency of all U.S. industries and businesses is Clinton’s commitment to expand public investments in infrastructure by $275 billion over five years. Unsurprisingly for Hillary, her program covers every conceivable form of infrastructure. There are new investments not only for roads, bridges, public transit, rail freight, airports, seaports, waterways, dams, and wastewater systems.

Her proposals also cover 21st century infrastructure networks, including a smart electric grid, advanced oil and gas pipeline systems, and universal access to 5G broadband and Next Generation wireless. Since virtually every enterprise and employee depends on these systems every day, her proposals should enable most firms and workers to carry out their business more efficiently.

As stimulus, these infrastructure improvements amount to $55 billion per year, or just three-tenths of one percent of GDP. Fortunately, Clinton’s program includes other measures that also should bolster productivity. To promote innovation, she pledges to scale up federal investments in basic research and development through the NSF, the NIH, the Energy Department and DARPA, across areas from high performance computing and green energy, to machine learning and genomics.

Always a pragmatist, Clinton also has plans to promote the commercialization of advances in R&D through grants for private accelerators and reforms to expand access to capital by the young businesses that play a prominent role in innovation.

Finally, Clinton has a serious program to help Americans upgrade their skills. Computer science training would be available for all high school students, and foreign-born students who complete a U.S. masters or Ph.D. degree in a STEM field would automatically receive green cards to stay and work in the United States.

However, the cornerstone is tuition-free access to public colleges and universities for all young people from families earning $125,000 or less, and tuition-free access to community colleges for anyone. To complete her productivity agenda, Clinton should expand her community college program and give all working adults the real ability to improve their skills, through no-cost access to two training courses per year at community colleges.

From the other side, Trump offers virtually nothing. He says that he, too, would increase federal spending on infrastructure. But his tax promises would balloon federal deficits by upwards of $700 billion per year, leaving no room to upgrade infrastructure, much less promote basic R&D or expand access to higher education and worker training.

His massive deficits also would crowd out business investments in new technologies and new enterprises. Trump’s program, in short, would virtually guarantee that the American economy stagnates, or worse.



The U.S. Economic Debate Gets a Failing Grade at the IMF

March 9, 2011

At the private conference this week convened by the International Monetary Fund (IMF), 30 world-class economists talked for two days about “Macro and Growth Policies in the Wake of the Crisis.” Their discussions provided a reality test for the current economic debate in Washington, and the last decade of U.S. policymaking flunked. Economic ideology not only blinded American policymakers to the seeds of a financial crisis that never had to happen; it also has led to wrong-headed responses for both the short-run and the long-term.

While the United States and other advanced countries embraced large-scale stimulus in 2008 and 2009 to avoid a global depression, the panelists pointed out that the world’s advanced economies are now moving in the opposite direction, without regard for the consequences. Across a group of economists who normally argue over every assumption and decimal point, a genuine consensus emerged that the American and European economies remain too fragile today to successfully absorb major deficit cuts.

While congressional Republicans wield a meat axe over the budget, and many Democrats would apply a scalpel, nearly all of the economic notables gathered at the IMF concluded that additional spending and tax breaks would be much more sensible. The 2009 and 2010 stimulus programs came in for plenty of criticisms, especially for their emphasis on tax breaks for households:  The financial meltdown and deep recession left most households with so much debt relative to their incomes that much of the stimulus just went to reducing their debt loads. Household debt today is considerably lower; but it hasn’t fallen as far as most people’s assets, because the value of their principal asset, their homes, has kept on declining month after month. This time, the experts agreed, any stimulus should be better targeted, for example through investment tax breaks and spending on education and infrastructure.

To be sure, there were repeated calls for a long-term “fiscal consolidation” program, which is how economists describe entitlement reforms and other measures that can limit a nation’s public debt to a reasonable share of its GDP. But they weren’t encouraged by what they’re hearing out of Congress, where politicians regularly conflate the need for long-term deficit reduction with a short-term opportunity to roll back the size of government. Nowhere is this confusion more obvious, several noted, than in a misguided focus on cutting current discretionary appropriations. And particular scorn was heaped on calls for cuts in education and infrastructure investments, which economists have long promoted as the best way to support future expansion and provide a lifetime of healthy social returns.

The most stinging critique, however, was reserved for the years of policy and business misjudgments which brought on the financial crisis and ultimately triggered the worst recession in 80 years. Starting with the opening remarks by Dominique Strauss-Kahn, the head of the IMF, a long line of economic luminaries laid out how policymakers here and in Europe misunderstand the very nature of modern financial capitalism. Again, there was rare unanimity for the view that markets today, which work so well in allocating resources, lack the means and the information to recognize bubbles and evaluate the economic risk of complex financial instruments.

Nor do policymakers have the excuse that this challenge represents something new. Hundreds of savings and loans went under in the 1980s, because financial markets couldn’t evaluate risk very well. Moreover, the 1990s saw three bubbles slowly take shape and then explode, first in Japan, then across much of East Asia, and finally in the Nasdaq tech sector. Yet, policymakers at the White House, the Federal Reserve, the Treasury and their counterparts across Europe sat by placidly, just a few years later, as leading financial institutions recklessly accumulated enormous leverage for financial instruments based on an obvious bubble and whose riskiness they couldn’t begin to assess.

Yet, these misjudgments weren’t universal: The financial meltdown was limited to the advanced economies, while much of the developing world learned the painful lessons of the 1997-1998 Asian financial crisis. So, their policymakers imposed new limits on leverage, and their financial institutions passed on investing in the toxic assets that brought down the U.S. and European economies. That’s why, at least for now, the developing economies have become the engine of global growth.

The Great Depression produced a large sheaf of institutional reforms which have helped the world avoid a repeat ever since. Yet, the Nobel Laureates and other experts gathered this week by the IMF also agreed that the United States and Europe have yet to undertake comparable reforms that would make another global financial crisis less likely. If we don’t, they warned, another financial crisis almost certainly will befall America and Europe in the foreseeable future.



Deficits Matter — But Right Now, Not So Much as Stimulus

February 23, 2011

The conventional Washington wisdom is that the key to economic policy today is deficit reduction for 2011, and battles over spending cuts almost certainly will dominate our politics for the next several months. This so-called wisdom is the economic-policy equivalent of snake oil.  Britain and Germany both tried it, and now both are struggling with significant slowdowns. The U.S. recovery remains modest, and the tax stimulus passed last December is the main reason why our economy should be able to take the fiscal drag from spending cuts without stumbling — and might well pick up if we forgo significant reductions. Don’t take my word for it — just look at recent economic data.

 The most important signals are coming from finance and housing, the two areas that ignited the financial meltdown of 2008–2009 and the deep recession that followed. The Federal Reserve knows the real story, which is why it pumped another $200 billion into the long end of the bond market early this year. The Fed’s goal is to keep long-term interest rates low so housing and business investment can pick up. Well, it’s not working, at least not yet. John Mason, a Penn State economist, has sifted through the latest banking data and found, as expected, that the cash assets at commercial banks increased by some $280 billion since early January. Here’s the rub: Only one-third of that increase shows up on the balance sheets of American banks, while two-thirds are logged to the accounts of foreign-owned banks operating here.

The second round of the Fed’s “quantitative easing” program has made foreign banks here cash flush, but they aren’t serious lenders to American businesses or consumers. The main business of these foreign-owned banks is to keep credit flowing for the American operations of their big corporate customers from back home. As for our own banks, loans and leases generated by the 25 largest U.S.-chartered banks dropped by $50 billion since the New Year, mostly in shrinking consumer lending. The loan portfolios of the rest of the U.S. banking system expanded a little, but not in residential lending or commercial real estate, which each declined by more than $20 billion. More important, overall commercial bank lending is contracting. The big banks also dumped $67 billion in Treasury securities since the first of the year, while smaller U.S. banks expanded their Treasury holdings nearly as much. The big banks know what they’re doing: They sold to take their profits as Treasury rates inched up. 

The data on business investment since January 1, 2011, aren’t out yet, but the trend isn’t very bullish. Business investments (not including inventories) grew throughout 2010. But their rate of growth has slowed since mid-year, from gains of over 17 percent in the second quarter of 2010 down to 10 percent in the third quarter and down again to 4.4 percent in the fourth quarter. That trend closely tracks the winding down of the 2009–2010 stimulus, which was largely spent out by mid-year. Consumer spending has been rising since the end of 2009 — again, thanks largely to the stimulus — but the increases have been too modest to drive strong gains in business investment or jobs.

The main reason why consumer spending remains pretty weak, even with the big stimulus, is housing. Once again, you can take the Fed’s word for that. The primary asset of most Americans is their homes — the bottom 80 percent of U.S. households hold 40 percent of the total value of all U.S. residential assets, compared to just 7 percent of the total value of all U.S. financial assets. And the value of those residential assets continues to fall. According to the latest data, housing prices fell another 0.5 percent last December and stood 2.4 percent below their levels a year earlier. That’s why 27 percent of all single family homes with mortgages today are worth less than their outstanding mortgage loans. And the most powerful force driving down those home values are the home foreclosures which have been rising steadily since 2008 — and are expected to increase another 20 percent this year. The Fed’s latest $200 billion quantitative easing was designed to revive housing and business investment. But that can’t happen when two-thirds of it is taken up by foreign-owned banks to meet the weekly credit needs of foreign-owned companies here.

There is another cloud forming on the economy’s horizon, and that’s rising energy prices. The uprisings in the Middle East have rattled oil markets, and oil prices are up 25 percent since Thanksgiving. Four of the last six U.S. downturns were triggered by oil price shocks, including the first phase of the 2007–2009 recession. If the revolutions stop at Libya, they shouldn’t have any major economic effects on our economy.  But if they spread to the really big producers like Iran and Saudi Arabia, an economy still beset by weak business investment, falling housing prices, and fragile consumer demand could take a big hit. The most positive news is that last December’s tax stimulus — which, by the way, doesn’t include the Bush tax cuts, since they were already in place — should bolster consumer and business spending later this year. The only reasonable conclusion is that the last thing the American economy needs right now is more spending cuts.



The Pitfalls of Economic Nostalgia

December 15, 2010

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

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

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

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

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

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

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



The Mid-Term Elections and the Failure, Yet Again, of Trickle-Down Economics

November 3, 2010

This week’s seismic shift in the Congress will not change the problems facing its members and the President. This is the third consecutive election to bring large losses for the party in power, all for the same reason. For a decade, neither party has been able to deliver the rising incomes and economic security that matter most for average Americans. For all of the stark differences between the Bush and Obama presidencies, these economic results and the political outcomes that have followed are less surprising than one might think. That’s because the Obama administration, despite its rhetoric and efforts, finds itself backed into a version of the same, failed trickle-down economic model that its predecessor embraced openly.

Yes, the last two years of Democratic dominance produced small gains in jobs, especially compared to the massive job losses at the close of Bush’s term, and modest gains in incomes compared to stagnating wages under the Republicans. Like his predecessor, however, Obama now presides over an economy that continues to produce much greater gains for those at the top. While most Americans are struggling, corporate profits are up sharply, and the stock market has recovered all of the ground it lost in the financial crisis and its aftermath. Perhaps most galling, Wall Street is preparing to hand out another round of mega-bonuses, dismissing the fact that they were the ones who brought down the economy for everyone else, and that the average people who bailed them out aren’t sharing in their private boom.

Most Americans accept, at least intuitively, that the financial bailout ultimately saved everyone from a much worse economic fate. But the public’s anger tells us that voters also sense that Wall Street’s rapid return to good times wasn’t accidental. They’re right: Once again, Washington made the restoration of big profits for Wall Street the lynchpin for a broader recovery. The key was the administration’s decision, once further stimulus to directly support average people seemed to be off-limits, to embrace the indirect approach of massive, ongoing monetary stimulus. Its principal element was open access at the Fed for big finance to borrow funds at near-zero interest rates, which the administration’s economic team hoped would jumpstart business investment and large consumer loans.

In practice, Wall Street didn’t use much of more than $1 trillion in nearly-free money to expand business lending. With consumer spending sidelined by high unemployment and the still-falling housing market, demand for business loans remained slow. Moreover, once the big financial institutions were safely bailed out, they used their unlimited and nearly-free funds from the Fed to buy U.S. and foreign government securities and other safe instruments, generating the large profits that now fund their bonuses.

This trickle-down approach has been further amplified by the Fed’s “quantitative easing” program. That’s their latest effort — the second time in two years — to get the trickle going by buying up to $1 trillion in nearly any long-term assets that Wall Street wants to unload. It hasn’t worked yet: Last week, the report on third quarter GDP showed that most of the tepid, 2.0 percent growth came from inventory buildup, while final sales slumped. So long as the trickle doesn’t reach most Americans, the Fed’s efforts won’t work politically either.

In fact, there were alternatives — and there still are. A more effective approach, for both the short and long terms, would link immediate new spending and tax reductions for most Americans with long-term entitlement changes to control deficits down the line. Given the scale of the economy’s current troubles, this is an opportunity for the administration to think big — for example, a multi-year payroll tax holiday and new light rail systems for the nation’s 30 largest metropolitan areas; new research initiatives on the scale of the moon shot for green fuels and technologies and medical breakthroughs; or free tuition at public colleges for students from families earning less than $120,000, an approach now in place at Harvard and other elite universities.

Perhaps most important, the economy needs a federal loan program for families with mortgages in trouble to help stabilize housing prices by keeping foreclosure rates in check. Such a measure could short-circuit much of the “negative wealth effect” from falling housing prices, which continues to hold down consumer spending and, with it, business investment. Yet, when one loudmouth on cable TV ignited a rightwing cry against direct federal assistance to keep people in their homes, who among the Democrats had the gumption to refute him?

What approaches can we expect from the Republicans who will run the House of Representatives? Their leading proposition is to extend the Bush tax cuts, on the view that you don’t raise taxes in a weak economy — and they’re basically right. Of course, they also want to cut current spending, which would slow the economy more than restoring the Clinton-era tax rates for high-income people. The truth is, most Republicans are all talk on the deficit. Apart from Paul Ryan and his handful of true-believers, the GOP is probably no more willing today to pull back current pending for any sizable group or interest than they were under George W. Bush, when federal spending grew at the fastest rate since LBJ.

Yet, there may be opportunities to agree on something beyond the expected, temporary extension of the Bush tax cuts. President Obama can begin by going beyond trickle-down and pressing for major initiatives to directly help average Americans, including payroll tax relief and mortgage loans, linked to long-term spending reforms for the entitlement programs. If the Republicans refuse, that’s a debate the President should welcome as he prepares his run for reelection.



Broadband and American Jobs

March 3, 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.



Politicians Who Ignore the Problem with Jobs May End Up Losing Theirs

July 15, 2009

While public debate about jobs usually focuses on the unemployment rate, what matters more are the changes in the number of people still working and how many hours they’re working, because that determines how much wealth and income the economy produces. On these matters, major developments are unfolding which could play decisive roles in determining not only the economic prospects of millions of households, but also the results of the 2010 and 2012 elections. As it now stands, Democrats in 2010 will have to explain why the jobs numbers are still deteriorating, and President Obama will likely go into his reelection campaign with fewer Americans working than when he took office.

What’s been happening with jobs already has broken past records. Since this recession began — the National Bureau of Economic Research pegs the start at December 2007 — the number of Americans employed has fallen by 6.5 million, or 4.7 percent. That’s far worse than the entire, deep 1981–82 recession, when the number of people at work fell by 2.8 million, or a little over 3 percent. The current jobs numbers also are in an entirely different league from those seen in the recessions of 1990–91 and 2001, when total employment fell by just a little more than 1 percent.

The number of Americans on the job will also continue to worsen even after this recession finally ends. After the 1990–91 recession, jobs didn’t begin to come back for 13 months — and it took four more years for manufacturing jobs to increase. The pattern was even worse after the 2001 downturn, when the number of Americans working kept on falling for two more years — and for nearly five more years for manufacturing jobs. All told, we may be looking at as many as 9 million fewer Americans working than before this all began. In addition, the number of hours worked by those who have jobs also is falling more sharply than it used to. During the big 1981–82 downturn, an American worker’s average number of hours shrank 1.7 percent, and the recessions of 1990–91 and 2001 produced declines in average hours of less than 1 percent. This time, average hours on the job are down 2.4 percent already — and it will get worse before this recession ends.

These developments are yet another reason why the next expansion, when it finally comes, will be relatively weak. The main element now available to prop up a coming expansion is the President’s stimulus, which was designed to kick in mainly this fall and winter. (The only way to get stimulus out more quickly is tax cuts; but the evidence showed that Bush’s spring 2008 tax relief had little effect on this cycle, because most of it was saved.) But the stimulus is a single-shot affair, and the emerging jobs picture suggests that it’s time to design a second one. It’s also time to take more seriously mounting evidence that globalization and other developments are taking big bites out of America’s long-vaunted capacity for creating jobs. We see this evidence throughout the last expansion (2002–07), when we added new jobs at a rate barely one-third as great as during the expansions of the 1980s and 1990s. Yet, there are few signs that these developments matter much in the current political debate. For example, a central factor in our new problems creating jobs, even during expansions, has been fast-rising health care costs being borne by businesses. With those businesses facing intense global competition, as most large U.S. businesses do, they’ve found themselves unable to pass along their higher health care costs through higher prices. So instead, they cut other costs, starting with jobs.

Even so, the health care reforms being considered by Congress all involve even higher health care costs for most businesses, which would mean more job cuts even as the economy grows. No one questions that health care reform is an urgent, national priority — as are efforts to contain the risks of climate change. But we gain little except a false sense of accomplishment by enacting health-care reforms that also aggravates the new jobs problem, or climate legislation such as Waxman-Markey which cannot deliver significant reductions in greenhouse gases.

The right way to do this is to focus first on the underlying problems in the current downturn and the issues with jobs and incomes — before we take on broad and urgent reforms in other areas. The politics, if nothing else, virtually dictate it, since a growing economy that creates large numbers of new jobs and pushes up incomes is always a prerequisite for the public’s support for reforms that, one way or another, end up imposing new costs on them.



Time to Face the Facts: The Economy Probably Won’t Get Better For Quite a While

April 9, 2009

Brace yourself for a very anxious and stormy time, economically and politically, because there’s little prospect that the U.S. economy will improve for quite some time. The latest to weigh in is the Federal Reserve, whose new private forecast sees no growth in sight for the rest of this year and slow gains at best for 2010. The Fed always speaks cryptically (even among themselves). What it means is that the economy is still in free fall, with our best prospect for hitting bottom coming sometime this summer, and then bouncing around the bottom through the fall and into early winter. Why early winter? The only force out there to stop the decline is the stimulus package, which ought to kick in just about then. The Fed didn’t say so, but their view that any recovery is some time off and will be a modest one reflects the judgment – one I share – that the administration’s fixes for banking and housing aren’t up to the task.

The Fed also didn’t say so, but the outlook for much of the rest of the world at least as gloomy, since so many Asian and European economies depend on Americans to buy what they produce and on U.S. businesses to invest in their countries. That’s not in the cards for some time. Trade is falling at a 20 percent rate here, at 30 percent rates across much of Europe, and at 30 to 40 percent rates in much of Asia. This week, for example, we found out that Americans’ purchases of foreign imports in February were down $62 billion from a year earlier. That translates into tens of thousands of jobs lost in a lot of other countries (and ultimately fewer U.S. exports down the line).

The Fed’s view should be a wake-up call for the administration, which still talks about a “V” shaped business cycle, where our deep decline will be followed by a strong and sharp recovery starting late this year. V-shaped recoveries are powered by unleashing suppressed demand: People cut back until they see the light at the end of the tunnel, and then they buy everything they had put off during the recession – especially houses and other large purchases that require credit. That’s the scenario behind OMB’s risible forecast of more than 3 percent growth next year, followed by two years of more than 4 percent gains.

This misunderstands the very nature of what we’re going through, which is nothing like the other recessions of the last 50 years. This time, the economy’s circulatory system, banking and credit, isn’t working. Even if it were, American households aren’t holding back because their wages are down a bit. They’re being forced to downsize for the long term, because this crisis has wiped out 20 percent of their net worth. It’s even more serious than that, because most Americans used the fast-rising net worth they thought they had over the last decade to support their consumption. Mainly, we withdrew trillions of dollars from the once, fast-rising value of our houses so we could go on vacation, buy new furniture, and send the kids to college. We had to do that, because for the first time in more than a half-century, most people’s wages and incomes stagnated during a “strong” expansion.

The current crisis will pass eventually, even as it takes much longer and exacts much larger costs for tens of millions of people, than any downturn since the 1930s. When it does, the administration and the country will face once again the profound structural problem of the last decade – of most people’s incomes stagnating in the face of strong productivity gains, and relatively little job creation during times of strong GDP growth. Addressing that will require all of the President’s skills, because it won’t change unless we slow down rising health care and energy costs, and educate and train everyone in many of the ways we now use to prepare only the top 20 percent of us.

The irony is that if President Obama can put in place policies for banking and housing that would work better than what his advisors have been willing to put out there so far, the economy could recover decently early next year. Then, he could have the political capital for the rest of his agenda, which is targeted just where it should be, on health care costs, energy, and education and training. But if he doesn’t pull off the recovery, none of the rest will happen — and the Obama years could look a lot like the Bush era.



Treasury’s New Program Mixes Sound Economics and Wishful Thinking

March 25, 2009

The administration’s new program to wring the toxic assets out of the banking system is a huge bet, which, like most of the previous reforms for the current crisis, is based equally on sound economics and a good dose of wishful thinking. The truth is, it couldn’t be otherwise: We’ve never experienced this kind of crisis before, so we cannot know which reforms will actually work.

The essence of the new Treasury program is the creation of new, public-private partnerships to purchase the bad assets held by Citigroup, AIG and others. The government and private funds or other entities would each put up one-twelfth of the money to buy tranches of toxic paper, and the other five-sixths would be borrowed by the private parties with federal guarantees for their lenders. One aspect of the plan that requires a good dose of faith is that reasonable prices can be set for these assets by using auctions. This aspect assumes that a number of private parties will bid on each tranche of assets and so set a reasonable price. The hope here is that the federal guarantees for the loans to buy these assets will unlock hundreds of billions of dollars in new financing, and that could well be the case. Score one for the Treasury: They’ve found a way to create a market for these assets, something which eluded the Paulson Treasury when they proposed auctioning off assets of unknown and dubious value.

Here’s the catch: The banks now holding these assets — Citi, AIG, and so on — have already written down their value on their books. And it’s impossible to say whether these write-downs — “marking to market” in a market that hasn’t been operating — are in the neighborhood of the prices which the Treasury auctions will produce. Selling them will increase “liquidity” in the banking system, which means there will be buyers for what’s being sold. But liquidity isn’t the main problem here. The core of the financial system crisis is that many of the largest institutions look like they’re insolvent or nearly so, and so unable to use the asset side of their books to provide new flows of credit for the economy.

Here’s where the pricing of the bad assets becomes important for the rest of us. If these institutions receive roughly the same price from the auctions as they’ve already assumed in their write-downs, they’ll be as insolvent as they were before the new program. One hope underlying the program is that the assets will auction for much more than their current owners believe they’re worth, bolstering their capital. Or, alternatively, there may also be the hope that all of the financial activity involved in selling off these toxic, “legacy” assets will bolster general confidence, so that businesses will be more willing to borrow and other institutions will be more willing to lend to them. In that case, the renewed economic activity could improve conditions for the sick institutions, slowly bringing them back from the edge of bankruptcy.

Much like the Treasury’s approach to stemming foreclosures in its new housing program, this approach addresses directly the secondary problem of liquidity, in the hope that doing so will affect the essential problem, which is that these institutions are bankrupt or nearly so. The alternative which the administration so far rejects is to address the core problem directly, with transitional or brief “nationalization” — take over the sick institutions, pull out the bad assets (without having to value them), and then sell off the rest to another bank or group of investors, who would reopen it as a healthy bank that could resume lending. There are serious risks in that approach as well, both economic and political. The Republicans would surely go on a predictable tear denouncing it. More important, the market might believe that it was only the beginning of government takeovers, and pull back on a range of financial activities so far less affected by the systemic crisis. But if the current strategy doesn’t work, the only other option apart from transitional nationalization will be to ask the country to put up with an indefinite period of recession and stagnation, until the system slowly rights itself. Eighty years after the last systemic financial crisis, the option of “sit tight and wait for the markets to correct themselves”— Hooverism in a pure form — should be wholly unacceptable, both economically and politically.



Anticipating Inflation Now Can Save Taxpayers $50-$70 Billion

March 19, 2009

The Federal Reserve yesterday announced $725 billion in new purchases of Fannie Mae and Freddie Mac securities to hold up housing finance, along with plans to buy $300 billion in Treasury securities. Before this latest program, the Fed was already running the most expansionary modern monetary policy since the Weimar Republic. On top of $2 trillion in guarantees for a broad range of private securities, the Fed has been gunning the monetary base at an extraordinary rate. Consider the following: The Fed normally expands the monetary base, which forms the basis for credit and the overall money supply, by an average of 1 to 2 percent per-month. In September and October of last year, they expanded that base by 58 percent; in November and December, they increased it another 50 percent.

The Fed was right to do all this, in a deliberate if desperate attempt to push enough juice into a severely strained and strapped financial system, to enable it to get back on its feet — or at least to not slip into a coma. It hasn’t worked so well yet, because the financial system and economy are sicker than anyone thought. And now we’re caught in a vicious circle: The financial system’s woes pushed the economy off the cliff, which then took most other economies in the world with it; and now the problems of our economy and everyone else’s are intensifying the financial system’s weaknesses.

And the Treasury is out in the markets every day selling the government’s securities, even when the Fed’s not buying. And like some titans on Wall Street, they may be making a bad bet with your money. The bet here is that inflation will be nothing to worry about for another decade; and if that’s wrong, taxpayers will pay a big price. At issue here is what’s called Treasury Inflation-Protected Securities, or TIPS, securities which pay those lending to the government a set interest rate, like any other Treasury security, but one figured off a principal amount that adjusts upward every six months to take account of inflation. At the price TIPS are now fetching, the market is betting that inflation will be nothing to worry about for another decade. And the Treasury is backing up that bet by selling TIPS at very low prices.

The market and the Treasury backing it up are almost certainly wrong this time. Here’s what may well be happening: When markets heat up or melt down, they have a tendency to assume that their conditions will persist for as far as they can see (or invest). That can explain what’s happening in the TIPs market: They’re selling at a rate and return which assume that today’s extraordinary deflation will just keep on going, for years into the future. That’s possible — but it’s very, very unlikely. The economy eventually will stop contracting; and when it does, prices will stop going down. In fact, through the booms and busts of the last 50 years, the U.S. inflation rate has consistently averaged about 2.5 percent per-year over any extended period.

Moreover, once the economy recovers this time, the extraordinary steps we’re taking to bring about that recovery will almost certainly produce strong inflationary pressures. First, we’re currently embracing the most expansionary, fiscal policy in our history (at least for peacetime), with multi-trillion-dollar deficits — and necessarily so for an economy contracting at a six to seven percent rate. And on top of that is the Fed’s unprecedented monetary expansion.

Whatever White House or congressional leaders say about education, climate or health care, the economy and the financial system, and only that, will remain the President’s central focus and task for the rest of this year and well into 2010.

Eventually we will succeed — and when we do, our wildly expansionary (if necessary) fiscal and monetary policies will extract a cost. One principal cost is almost certain to be higher than normal inflation — and that’s when the TIPS issue will bite us. If inflation is much higher five years from now than the TIPS market expects today — and you can bet on that — people who bought TIPS when everyone expected very low inflation will end up making a killing as the value of their securities is adjusted way upwards for the higher-than-expected inflation. We estimate that will cost taxpayers from $50-$70 billion in additional debt-service costs. Fortunately, there’s an easy answer: The Treasury can buy back the outstanding TIPS and reissue the debt in conventional securities. Current TIPS holders would get the current value of their securities, and taxpayers could save enough to finance an awful lot of college assistance, health care for children, or R&D in climate-friendly fuels and technologies.

At a time when nearly everywhere we turn, it costs us all billions or even trillions of dollars, wouldn’t it be satisfying to save some real money — and without raising anybody’s taxes or cutting anybody’s program?

For more information, see the new study, “The Benefits to U.S. Taxpayers from an Open Market Buyback of Treasury Inflation-Protected Securities,” at this site.