NDN Blog

Some end of the day reading:

TNR's Zubin Jelveh covers an element of something I wrote about last week - political attacks on the stimulus for being a negative factor on growth. Unfortunately, this attack comes from a conservative economist who should know better. 

The WSJ says the International Energy Agency sees good news in that oil demand will remain relatively low, even as growth picks up. Generally, growth is associated with higher oil prices, which can be economically troublesome (or worse), but this time efficiency policies are saving the day. Renewed growth with low energy prices is just what the doctor ordered. 

And David Leonhardt writes that, even as bad as things look, we just don't know that the economy won't boom again soon. He says an economy transforming innovation we don't know about could come along soon, which is a fair point. So let's do the things we know encourage innovation: upgrading worker skills, R&D funding, creating competition, valuing IP, and more. (All of these are especially applicable to climate-friendly technologies.)

Simon and Rob have weighed in quite a bit this morning on what the elections mean for the country and the Obama agenda. As they both stress, the biggest thing this election means is that focusing on an economic plan for the country must be the top priority. What's important to note is that this is nothing new. NDN has been arguing since 2006 that the volatility in the electorate was due to economic conditions. Exit polls from that year bear the argument out, even though most pundits at the time thought Iraq was the key issue. Here's NDN's analysis of 2006 exit polls:

-  The economy was the most important issue.  The exit poll asked voters if they considered various issue important in deciding their vote.  If you add up those  who responded - where issues were extremely, very, or somewhat important - the economy comes out number one.

Table 1: Which issue was most important?

Issue	Extremely Important	Very Important	Somewhat Important	Total
Economy	39%	43%	14%	96%
Corruption	41%	33%	18%	92%
Iraq	35%	32%	21%	88%
Terrorism	39%	33%	20%	82%
Moral Values	36%	21%	20%	77%

-  Economy Crucial in Battleground States.  The economy played a critical role in the key battleground states that decided the election.  In these areas the results could not be clearer: the economy was the number one issue.  The exit poll asked voters in key swing states about Iraq and the Economy.  In each swing state more voters thought the economy was either "extremely important" or "very important" in their decision over who to vote for their senator.

Table 2: Economy vs Iraq in Key Senate Races

	Economy	Iraq
Missouri	83%	62%
Montana	82%	65%
Ohio	83%	66%
Pennsylvania	81%	68%
Virginia	82%	69%

All this in much better economic times, so it comes as no surprise that exit polls from yesterday show that the economy was the dominant issue. Barack Obama continues poll much better on economic issues than do Republicans (according to a recent Pew poll, 57 percent of Americans are optimistic Obama's policies will improve the economy) and, as Simon pointed out, Republican solutions such as tax caps were voted down in two states last night. So there's little to make me believe that conservative economics is making a comeback and little to make me believe that the cheap populism of Glenn Beck (and his mentee Hoffman in NY-23) works either.

What is clear to me is that the most catastrophic thing for nervous Democrats could do before 2010 is believe that either are paths to success. The fact is that Democrats have a phenomenal historic record on the economy, and Republicans delivered eight years of wage stagnation, median income decline, and exploding health care and energy costs. Focusing on policies that address this issues, which are at the heart of the struggle of everyday Americans, is the key to victory when the polls really matter. 

Yesterday, Paul Krugman wrote that the stimulus is working in textbook fashion, but is too small to tackle the employment challenge:

Not that long ago the U.S. economy was in free fall. Without the recovery act, the free fall would probably have continued, as unemployed workers slashed their spending, cash-strapped state and local governments engaged in mass layoffs, and more.

The stimulus didn’t completely eliminate these effects, but it was enough to break the vicious circle of economic decline. Aid to the unemployed and help for state and local governments were probably the most important factors. If you want to see the recovery act in action, visit a classroom: your local school probably would have had to fire a lot of teachers if the stimulus hadn’t been enacted.

And the free fall has ended. Last week’s G.D.P. report showed the economy growing again, at a better-than-expected annual rate of 3.5 percent. As Mark Zandi of Moody’s Economy.com put it in recent testimony, “The stimulus is doing what it was supposed to do: short-circuit the recession and spur recovery.”

But it’s not doing enough.

Suppose that the economy were to keep growing at 3.5 percent. If that happened, unemployment would eventually start falling — but very, very slowly. The experience of the Clinton era, when the economy grew at an average rate of 3.7 percent for eight years (did you know that?) suggests that at current growth rates we’d be lucky to see the unemployment rate fall by half a percentage point per year, meaning that it would take a decade to return to something like full employment.

Worse yet, it’s far from clear that growth will continue at this rate. The effects of the stimulus will build over time — it’s still likely to create or save a total of around three million jobs — but its peak impact on the growth of G.D.P. (as opposed to its level) is already behind us. [more on that here] Solid growth will continue only if private spending takes up the baton as the effect of the stimulus fades. And so far there’s no sign that this is happening.

The absolutely massive challenge that Krugman highlights is made even worse by this fact, often cited by Rob Shapiro: In the 2002-2007 expansion, private employment grew at less than half the rate, relative to growth, as it did in the expansions of the 1980s and 1990s. This means that Krugman’s projection of a decade for how long it would take to return to full employment could very well be optimistic.

The reason is that a lot of the unemployment we’re seeing isn’t just a standard lag, it’s structural. Take a look at this graph, posted by Mark Thoma:

What this says is that over 2% of the non-institutional adult population has been unemployed for over six months, an unprecedented number. As Brad DeLong points out, “long-term unemployment has a way of turning into structural unemployment.” America needs a strategy to fix this dynamic, or we're looking at a lot of people who are basically out of the workforce permanently.

This week, EPI released some polling getting at the very core of the political problem around the economy - Americans feel as though the government has been responsive to the needs of banks and Wall Street, not them. Tom Edsall covers the poll in the Huffington Post and includes this slide from the poll results:

The article goes on to argue that the American people have gotten it about right - quoting James Galbraith who says:

"In relative terms, the perceptions are dead-on: the big winners so far are the bailed-out bankers. Meanwhile on the jobs and housing front, things get worse," says University of Texas economist James Galbraith. "You can make an argument that everyone has been helped by the fact that the economy hasn't collapsed even more completely," Galbraith added, but that does not "cut any ice with the population at the moment. What they see is that a top-down bailout works on the top and doesn't go very far down. And they are right."

This sense, true or not, is a massive political challenge that must be addressed over the next year. We've written a lot about the need to adjust rhetoric to be responsive to the struggles of everyday people. This, by the way, doesn't mean some sort of populism, it means having a big conversation about a 21st century economic strategy for America that focuses on broad-based prosperity.

The American people have a better understanding for the global economy than most in Washington give them credit for - as evidence, take a look at this NDN poll released in November of 2007, just before the recession began. Not only did Americans know that the economy was in very bad shape, they understood the shape of the global economy and America's advantages therein.

The economy seems to have moved out of the horrible, horrible ditch, but significant problems remain. White House Council of Economic Advisors Chair Christina Romer says:

Data released today by the Commerce Department show that real GDP grew at an annual rate of 3.5 percent in the third quarter of the year.  This is in stark contrast to the decline of 6.4 percent annual rate just two quarters ago.  Indeed, the two-quarter swing in the rate of growth of 9.9 percentage points was the largest since 1980.  Analysis by both the Council of Economic Advisers and a wide range of private and public-sector forecasters indicates that the American Recovery and Reinvestment Act of 2009 contributed between 3 and 4 percentage points to real GDP growth in the third quarter.  This suggests that in the absence of the Recovery Act, real GDP would have risen little, if at all, this past quarter.

After four consecutive quarters of decline, positive GDP growth is an encouraging sign that the U.S. economy is moving in the right direction.  However, this welcome milestone is just another step, and we still have a long road to travel until the economy is fully recovered.  The turnaround in crucial labor market indicators, such as employment and the unemployment rate, typically occurs after the turnaround in GDP.  And it will take sustained, robust GDP growth to bring the unemployment rate down substantially.  Such a decline in unemployment is, of course, what we are all working to achieve.

The administration deserves lots of credit for the Recovery Act and stopping Great Depression II. The stimulus has created significant growth, and the really good news is that personal consumption grew by 3.4 percent, indicating that some consumers are back in the game. That said, recent history indicates that employment is going to take a long time to come back, and we're probably a ways off from an era of renewed broad-based prosperity. 

Via Calculated Risk, here’s what Council of Economic Advisors Chair Christina Romer had to say last week in testimony before the Joint Economic Committee about how the stimulus has and will impact growth in the near term:

In a report issued on September 10, the Council of Economic Advisers (CEA) provided estimates of the impact of the ARRA on GDP and employment. ...

These estimates suggest that the ARRA added two to three percentage points to real GDP growth in the second quarter and three to four percentage points to growth in the third quarter. This implies that much of the moderation of the decline in GDP growth in the second quarter and the anticipated rise in the third quarter is directly attributable to the ARRA.

Fiscal stimulus has its greatest impact on growth around the quarters when it is increasing most strongly. When spending and tax cuts reach their maximum and level off, the contribution to growth returns to roughly zero. This does not mean that stimulus is no longer having an effect. Rather, it means that the effect is to keep GDP above the level it would be at in the absence of stimulus, not to raise growth further. Most analysts predict that the fiscal stimulus will have its greatest impact on growth in the second and third quarters of 2009. By mid-2010, fiscal stimulus will likely be contributing little to growth.

In layman’s terms, when first comes online, it adds GDP growth that wouldn’t have otherwise occurred. Then, after a time, it props the economy up at a level it wouldn’t have otherwise seen. (Romer says we’ve seen the first part, and are about to see the second part.) Here’s the thing, when the economy isn’t growing on its own but is being propped up at a higher level than it otherwise would have been due to stimulus, GDP growth will sit at basically zero. That doesn’t mean the stimulus isn’t working – the economy is producing more than it otherwise would have. 

This also means that the stimulus going offline is a “drag” - or has a negative effect - on growth as that government spending is no longer in the economy. What it doesn’t mean as that it’s making the economy worse, and it’s worth inoculating against that misunderstanding of the GDP data that will inevitably arise. Rather, it will have as measurable a positive effect on the economy in the short term and will jumpstart sustained growth (at what level is still an open question). And the investments in the elements of sustained growth – infrastructure, smart grid, energy, education, R%D, etc – will continue to pay off for many years to come.

Please join NDN on the evening of Wednesday, October 28 for an important discussion on the future of America’s involvement in Afghanistan. Leading the conversation will be two influential and knowledgeable guests: Congressman Adam Smith, the Chairman of the Subcommittee on Terrorism, Unconventional Threats and Capabilities of the House Armed Services Committee, and journalist Peter Bergen, the Co-Director of the New America Foundation’s Counterterrorism Strategy Initiative.

Congressman Smith will speak about his recent official trip to Afghanistan and Pakistan, the Congressional outlook on the report on the war prepared by General Stanley McChrystal, and the Obama Administration's strategy. Bergen, who has visited Afghanistan frequently since 1993, will discuss the definition and possibility of American success in Afghanistan.

A brief reception including drinks and light hors d'oeuvre will begin at 6:30, with the discussion beginning at 7:00pm. If you are unable to attend, a live webcast will begin at 7:00pm as well.

NDN Event Space
729 15th St. NW, First Floor
Washington, DC
RSVP | Watch the Webcast

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Paul Krugman weighs in on China’s continued policy of devaluing its currency to promote exports:

Senior monetary officials usually talk in code. So when Ben Bernanke, the Federal Reserve chairman, spoke recently about Asia, international imbalances and the financial crisis, he didn’t specifically criticize China’s outrageous currency policy.

But he didn’t have to: everyone got the subtext. China’s bad behavior is posing a growing threat to the rest of the world economy. The only question now is what the world — and, in particular, the United States — will do about it.

…

China has been keeping its currency pegged to the dollar — which means that a country with a huge trade surplus and a rapidly recovering economy, a country whose currency should be rising in value, is in effect engineering a large devaluation instead.

And that’s a particularly bad thing to do at a time when the world economy remains deeply depressed due to inadequate overall demand. By pursuing a weak-currency policy, China is siphoning some of that inadequate demand away from other nations, which is hurting growth almost everywhere. The biggest victims, by the way, are probably workers in other poor countries. In normal times, I’d be among the first to reject claims that China is stealing other peoples’ jobs, but right now it’s the simple truth.

So what are we going to do?

U.S. officials have been extremely cautious about confronting the China problem, to such an extent that last week the Treasury Department, while expressing “concerns,” certified in a required report to Congress that China is not — repeat not — manipulating its currency. They’re kidding, right?

The thing is, right now this caution makes little sense. Suppose the Chinese were to do what Wall Street and Washington seem to fear and start selling some of their dollar hoard. Under current conditions, this would actually help the U.S. economy by making our exports more competitive.

In fact, some countries, most notably Switzerland, have been trying to support their economies by selling their own currencies on the foreign exchange market. The United States, mainly for diplomatic reasons, can’t do this; but if the Chinese decide to do it on our behalf, we should send them a thank-you note.

The point is that with the world economy still in a precarious state, beggar-thy-neighbor policies by major players can’t be tolerated. Something must be done about China’s currency.

Krugman makes an important point about beggaring thy neighbor policies on the part of major powers being unacceptable. In addition, they generally backfire. In this case, as domestic American frustration over China’s role in the global economy grows, the prospect grows of the American government taking major actions that affect China’s ability to prosper. (Which will in turn likely result in Chinese retaliation.) 

We’ve already seen a small step in this direction with the tire tariff spat, but if Americans begin to feel that China is a bad actor in the global economy – even though, as Krugman writes, most of the jobs impact is still being felt in other poor countries – both the United States and China will have tremendous problems on their hands. For China, modernity and prosperity rests on fully joining the global economic system, which means starting to better play by the rules; American policymakers face the challenge of convincing China of that.

Via Mark Thoma, Atlanta Fed Senior VP and Research Director David Altig weighs in on the high likelihood of a jobless recovery. He brings to light an interesting number on the permanence of job losses, and the whole post is a good round up what will be a very scary subject:

The percentage of employee separations labeled permanent is at a recorded high.

Underneath the usual total unemployment numbers are the reasons an individual is unemployed: You are on temporary layoff; you quit your job; you have reentered the labor market and have yet to find a job; or you are entering the job market for the first time and have yet to find a job. Or, finally, you have been permanently separated from your previous employer, who has no expectation of hiring you back.

The last category is the dominant reason for unemployment at this time. That might not seem surprising, but it actually is. Never, in the six recessions preceding the latest one, did permanent separations account for more than 45 percent of the unemployed. The current percentage stands at 56 percent as of September and appears to be still climbing:

As Dr. Rob Shapiro tells us, the concept of a jobless recovery is scary, but even worse is that the term may overstate the case. We could be in for what is technically a recovery in which the economy actually loses jobs. 

Today, Thomas Friedman writes about the "education breakdown" in America:

“Our education failure is the largest contributing factor to the decline of the American worker’s global competitiveness, particularly at the middle and bottom ranges,” argued Martin, a former global executive with PepsiCo and Kraft Europe and now an international investor. “This loss of competitiveness has weakened the American worker’s production of wealth, precisely when technology brought global competition much closer to home. So over a decade, American workers have maintained their standard of living by borrowing and overconsuming vis-à-vis their real income. When the Great Recession wiped out all the credit and asset bubbles that made that overconsumption possible, it left too many American workers not only deeper in debt than ever, but out of a job and lacking the skills to compete globally.”

This problem will be reversed only when the decline in worker competitiveness reverses — when we create enough new jobs and educated workers that are worth, say, $40-an-hour compared with the global alternatives. If we don’t, there’s no telling how “jobless” this recovery will be.

A Washington lawyer friend recently told me about layoffs at his firm. I asked him who was getting axed. He said it was interesting: lawyers who were used to just showing up and having work handed to them were the first to go because with the bursting of the credit bubble, that flow of work just isn’t there. But those who have the ability to imagine new services, new opportunities and new ways to recruit work were being retained. They are the new untouchables.

That is the key to understanding our full education challenge today. Those who are waiting for this recession to end so someone can again hand them work could have a long wait. Those with the imagination to make themselves untouchables — to invent smarter ways to do old jobs, energy-saving ways to provide new services, new ways to attract old customers or new ways to combine existing technologies — will thrive. Therefore, we not only need a higher percentage of our kids graduating from high school and college — more education — but we need more of them with the right education.

As the Harvard University labor expert Lawrence Katz explains it: “If you think about the labor market today, the top half of the college market, those with the high-end analytical and problem-solving skills who can compete on the world market or game the financial system or deal with new government regulations, have done great. But the bottom half of the top, those engineers and programmers working on more routine tasks and not actively engaged in developing new ideas or recombining existing technologies or thinking about what new customers want, have done poorly. They’ve been much more exposed to global competitors that make them easily substitutable.”

There is no doubt that our education system is badly in need of an upgrade, but we also must be cognizant of fact that much of the current workforce just does not posses the skills to succeed in the globally interconnected, idea-based economy. This isn’t just a phenomenon of this recession; everyday Americans spent much of the Bush era falling behind due to the inability of their government to respond to their struggle and find a way to make the inextricably powerful forces of globalization work for all Americans. 

In that spirit, NDN’s Rob Shapiro has proposed a program to provide free computer training to all Americans, which can be found here and recently passed the House of Representatives in H.R. 3221, the Student Aid and Fiscal Responsibility Act.