NDN Blog

This morning, as President Obama releases his budget, it's clear that his strategy is one best labeled "cut and invest." Jackie Calmes in The New York Times describes it:

The budget reflects Mr. Obama’s cut-and-invest agenda: It creates winners and big losers as he proposes to slash spending in some domestic programs to both reduce deficits and make room for increases in education, infrastructure, clean energy, innovation and research to promote long-term economic growth and global competitiveness.

The president is unveiling his budget to emphasize one of the winners: He will do so on Monday morning during a visit to a middle school and technology center in Baltimore.

Among the losers are programs that Mr. Obama has supported, even expanded, in the past: Popular programs for home-heating aid to poor families and for community services block grants would be cut in half, and a multi-state Great Lakes cleanup project would lose a quarter of its money compared to 2010.

Pell grants for needy college students would be eliminated for summer classes, and graduate students would start accruing interest immediately on federal loans, though they would not have to pay until after they graduate; both changes are intended to help save $100 billion over 10 years to offset the costs of maintaining Pell grants for 9 million students, according to administration officials.

Officials contrast the administration’s budgetary approach with that of House Republicans, who are voting this week to slash the current year’s spending by much larger amounts, sparing few programs from cuts and increasing spending on none.

“The debate in Washington is not whether to cut or to spend,” said a senior administration official on Sunday, speaking on condition of anonymity to brief reporters on the budget in advance of Mr. Obama’s Monday announcement of the spending plan. “We both agree we should cut. The question is how we cut and what we cut.”

There are some cuts that should be obvious, and the President outlined them in his State of the Union. Eliminating fossil fuel subsidies, for example, starts the list of corporate welfare that should be phased out. For more on a cut and invest strategy, I recommend reading Dr. Robert Shapiro's paper from 1997 entitled, "Cut and Invest to Grow." As the strategy around the budget becomes clearer over the coming days, it will ring familiar.

The underpinning for much of the Clinton era economic strategy, "cut and invest" is even more important now, following 8 years of economic and fiscal mismanagement coupled with a recession that was tough on the fiscal picture. No one should miss the irony in OMB Director Jack Lew's White House Whiteboard talk today, when he notes that there was a budget surplus last time he held that job.

For more on the budget, please join NDN and the New Policy Institute this Friday, as Rob Shapiro leads a discussion with budget expert Stan Collender, Brookings' William Gale, and AEI's Kevin Hassett.

In his weekly address, President Obama previews the release of the budget on Monday:

For more on the budget, join us on Friday, February 18 for a discussion with economists and budget experts and on Tuesday, February 22 as National Economic Council Deputy Director Jason Furman discusses the President's vision for winning the future.

The release of President Obama's budget on Monday marks an important moment in the debate about the economic and fiscal future of the United States. Americans of all points of view will be looking to this budget to understand the specifics of the President's approach to the great challenges of the day, from a competitive, global economy of the 21st century, to the need to accelerate innovation and growth, to long-term debt.

On Friday, February 18, NDN and the New Policy Institute will host a group of economic and budget experts to discuss these matters.

Robert J. Shapiro, Chair, NDN Globalization Initiative

Stan Collender, Partner, Qorvis Communications and author, Capital Gains and Games

William Gale, Senior Fellow, Economic Studies, The Brookings Institution

Kevin Hassett, Senior Fellow and Director of Economic Policy Studies, The American Enterprise Institute

The event will be held from 12-1:30 pm at NDN/NPI headquarters - 729 15th St NW, First Floor.
Lunch will be available. Click here to RSVP.

I hope you will join us for this important discussion.

On Tuesday, February 22, NDN and the New Policy Institute will host Dr. Jason Furman, Assistant to the President for Economic Policy and the Principal Deputy Director of the National Economic Council, for an important discussion of the Obama Administration’s economic strategy. The conversation will focus on President Obama’s budget and efforts to "Win the Future" in the competitive, global economy of the 21st century. Dr. Furman will deliver brief remarks and NDN Globalization Initiative Chair Dr. Robert Shapiro will lead a discussion.

The event will be held from 12-1:15pm at NDN/NPI headquarters – 729 15th St NW, First Floor.
Lunch will be available. Click here to RSVP.

I hope you will join us for this important event.

The Wall Street Journal today reports possible signs of the beginnings of a return for the housing market:

Cash Buyers Lift Housing

Bargain Hunting Boosts Prices in Depressed Cities; Broader Asset Rebound Spreads

Buyers in markets around the U.S. are snapping up homes in all-cash deals, betting that prices are at or near bottom and breathing life into some of the nation's most battered housing markets.

Cash buyers represented more than half of all transactions in the Miami-Fort Lauderdale area last year, according to an analysis from real-estate portal Zillow.com. In the fourth quarter of 2006, they represented just 13% of deals. Meanwhile, downtown Miami prices rose 15% in 2010 from a year earlier, according to the Miami Downtown Development Authority.

The percentage of buyers in Phoenix paying cash hit 42% in 2010—more than triple the rate in 2008, according to Raymond James's equity research division.

Nationally, 28% of sales were all-cash transactions last year, according to the National Association of Realtors. The rate was 14% in October 2008, when the trade group began tracking the measure.

The jump in real-estate purchases made with cash is another sign of the revival of animal spirits in the U.S. economy.

The Dow Jones Industrial Average rose 69.48 points Monday, or 0.6%, to 12161.63, and the Standard & Poor's 500-stock index rose 8.18 points, or 0.6%, to 1319.05.

Monday's announcements of $13 billion in acquisitions lifted stocks on hopes of more deals, share buybacks and dividends as companies regain momentum in an improving economy.

The two stock indexes have soared more than 80% since early March 2009.

The Federal Reserve reported that Americans increased their use of credit cards in December for the first time since August 2008, showing that consumers are getting less skittish about opening their wallets. Investors also were soothed Monday by encouraging signs in Egypt, including last weekend's reopening of banks.

Residential real estate has been slower to bounce back than stocks, but the presence of apparent bargains is luring in newly confident buyers.

A housing recovery is crucial because homes are the single largest asset for many Americans. When housing values collapsed following a decade of declining median income, everyday Americans saw their wealth evaporate. This news on housing is - hopefully - a sign of improvement in the balance sheets of American households.

The plan out of the House GOP to cut around $40 billion from domestic agencies in the next few months ($32 billion net, but an $8 billion addition for the Pentagon and Veterans Affairs) would be laughable, except cuts like this are no laughing matter. There's a simple reality at foot here: these cuts have nothing to do with putting America on sound fiscal footing, nothing at all. Furthermore, they have nothing to do with job creation.

The nation's fiscal picture is clear - growing Medicare costs are the largest contributor to our long-term fiscal problems. Yet the plan out of the House does not address these costs. (The House did that the other day, by attempting to exacerbate healthcare costs by repealing the Affordable Care Act.)

Additionally, the economic problems facing the country mainly stem from a shortage of demand in the economy. Pulling roughly $40 billion out of the domestic economy removes demand from the economy. It's not yet clear where exactly the $40 billion would come from, but it is likely that some of it comes from programs that either have strong multiplier effects on the overall economy or are the engines of future economic growth. These cuts, especially, must be fought.

By commonly held metrics, these cuts do not contribute to growth or put the nation on a meaningfully better fiscal path. Because of these two facts, it is incumbent on their proponents to explain why they matter. Changing a "culture of spending," as Rep. Paul Ryan purports to do, is not real economic policy. Conservatives clearly hold a faith that less government is better. They should be asked to make that case when they propose such cuts, instead of getting to hide behind a vale of fiscal responsibility or economic literacy.

The revolt in Egypt is being driven by disaffected middle-class youth angry about the lack of economic opportunity. Likewise, in Tunisia, unemployment and high food prices were at the core of the people's complaint with their government. Such is generally the case - economic stagnation leads to political unrest.

In America, too, the economy drives political volatility. Upset about 10% unemployment, the American electorate threw out the Democratic House of Representatives in 2010; in 2006 and 2008, declining household incomes and an economic collapse led Americans to push Republicans from power. While American political angst is delivered differently - at the ballot box and not in the streets - the economy, again, creates political change.

This analysis may seem simple, but it's factual - political scientists have found a strong correlation between income and both Presidential approval rating and congressional seats won in mid-term elections. Political volatility is an inevitable result of a bad economy, and the volatility is generally accompanied by anger. People feel a bad economy and get angry about whatever they didn't like to begin with-they just do it louder.

This isn't to say that there aren't other issues that matter to citizens; there are. Egyptians were furious that Mubarak planned for his son to succeed him.  Healthcare, civil rights, immigration, and fiscal issues, to name a few, are important to Americans. But the economy is like no other political issue because it's not just about sharing values or agreeing with a candidate's principles. "The economy" actually means the real quality of life enjoyed by a country's people. When people's economic well-being declines, when opportunity no longer presents itself, the body politic gets angry, and that anger is manifested politically. In dictatorships, governments get overthrown; in democracies, they get voted out. If the Egyptian economy were thriving, Mubarak would likely still be in control of Egypt. And if the American economy were thriving, we'd have seen far less volatility in the last three elections, less angst about deficits and debt, and likely no Tea Party. (We'd be in the 1990's, when items such as school uniforms topped the agenda.)

So what do regular people want? Simple: they want leaders who are responsive to their overriding concern - the economy. Oddly, this most basic political fact isn't always acted upon. Hosni Mubarak should have done more than replace his cabinet with new faces when people's complaints are about a lack of opportunity. Conversely, it's no surprise that the President's State of the Union address won high approval ratings - he talked about people's economic problems and his plan to create a better economy.

Ultimately, the politics and the policy have to meet - political leaders must have a plan for the economy and that plan must actually work. That's why, if incomes, housing values, and job prospects for everyday Americans improve before the 2012 elections, President Obama will in all likelihood be reelected. And, if other autocracies with miserable economies fail to improve in coming years, Egypt and Tunisia will mark just the beginning of a string of similar incidents of political unrest.

Update - 2/1/2011: Jordan's King Abdullah II has fired his cabinet due to protests. The New York Times reports that economic issues are driving popular discontent:

Recent demonstrations in Jordan marked the first serious challenge to the decade-old rule of King Abdullah, a critical American ally in the region who is contending with his country’s worst economic crisis in years....Banners decried high food and fuel prices and demanded the resignation of the prime minister, appointed by the king.

Cross posted on The Huffington Post.

Last night, as House Budget Committee Chair Paul Ryan offered a response to the President's State of the Union Address, he argued that government spending is hurting the economy. He talked about budget deficits and national debt. And he claimed he had ideas to fix it. Unfortunately, his solution, most comprehensively borne out in his "Roadmap," and the principles behind it exacerbate a whole slew of economic problems and have little basis in economic reality.

Let's look at Ryan's first claim - that his Roadmap reduces the deficit. It does, but not until well past the middle part of the century. According the Center on Budget and Policy Priorities:

Because of the Ryan plan's enormous tax cuts for the affluent, even the very large benefit cuts that the plan would make in Medicare, Medicaid, and Social Security - and the plan's middle-class tax increases - would not put the federal budget on a sustainable course for decades. The federal debt would soar to about 175 percent of the gross domestic product (GDP) by 2050. In contrast, most fiscal policy analysts recommend that the debt-to-GDP ratio be stabilized within the next ten years, and at a far lower level.

This contrasts directly with the Rivlin-Dominici plan, which would reduce the federal debt to 60 percent of GDP by 2020, the Bowles-Simpson plan, which would reduce the debt to 60% of GDP by 2023 and 40% by 2035, and even the plan assembled by Demos, the Century Foundation, and the Economic Policy Institute, which reduces the debt to 83% of GDP in 2020.

It is clear that Ryan's plan is not one focused on balancing the budget and reducing deficits or debt. Since Ryan is no fiscal hawk, what does Paul Ryan really care about?

The one thing the Roadmap does incredibly effectively is make dramatic cuts to popular government programs (it basically eliminates Medicare and makes sweeping cuts in Social Security). His reasoning for his massive cuts his that he claims that government spending is bad for the economy. But there is no economic logic to this either - especially right now.

I understand where Ryan's thinking comes from - in good economic times, government investment that leads to borrowing can "crowd out" private investment by raising interest rates, thereby diverting economic activity away from the private sector. This can be a legitimate concern in boom times, which is part of the reason having smaller deficits in good times is generally a good idea; a sizeable government deficit can lead to higher interest rates, which hurt the economy.

These, however, are nothing close to good economic times, and government is not driving out private sector investment and therefore not hurting job creation. How do we know this? There is virtually no inflation - economists are more worried about deflation right now - and a huge shortage of demand. Interest rates are basically the lowest they can possibly be, and the Federal Reserve keeps trying to drive them down. (That's why the Federal Reserve has gone to quantitative easing; it can't lower rates any further.)

Furthermore, it's not clear that Ryan understands the actual danger of debt, because he has effectively said he intends to play chicken with the upcoming vote on the debt limit. On this point, one cannot be any clearer - the best way to quickly explode interest rates is to ruin the full faith and credit of the United States by not increasing the debt limit. Not doing so would increase interest rates and injure the economy dramatically, a reality that fails to square with Ryan's complaints about the economic dangers of debt.

Finally, Ryan compared America's debt situation to that of Greece, Ireland, and Great Britain. This is embarrassing, for him. The Greek and Irish debt crises are completely different animals - the Greece's problems are derived largely from being on the Euro (not an issue for us), and the Irish crisis is financial sector driven; our fiscal issues are not. In Britain, a conservative government is leading a true austerity push, and has become unpopular virtually overnight. So, Britain is an apt analogy but not in the way Ryan means. Rather, it's a warning for what would happen here if American conservatives got their way.

All told, it is hard to find the actual economics behind Ryan's world view, an odd and scary phenomenon to discover in a Budget Committee Chair. Instead, his approach to the economy begins and ends at a strong dislike for government, an odd and scary phenomenon to find in someone who works for the government.

It's no coincidence that trust in government is at an all-time low now that the size of government is at an all-time high.

-House Budget Committee Chairman Paul Ryan, in his response to President Obama

Is the size of government at an all time high? Data says no.

Government employment has been decreasing:

(courtesy of Calculated Risk)

The 21st century economy is more competitive, more technology dense, and more interconnected than ever before. With the the rise of new economic powers, it is clear that the rest of the world has raised its game, and America must raise ours. For years, NDN has advocated an economic strategy for America that does just that. The strategy must include: modernizing and controlling costs in our healthcare and energy systems, investing in infrastructure and worker skills, accelerating innovation and new business development, and engaging with the global economy. Below, please find some useful resources on these topics:

The Rise of the Rest

The Rise of the Rest: How New Economic Powers are Reshaping the Globe by Jake Berliner, 4/23/10
In this white paper, Globalization Initiative Deputy Policy Director Jake Berliner describes the rise of new economic powers and the challenges and opportunities they are presenting the American and global economies.

Crafting An American Response to the Rise of the Rest by Simon Rosenberg, 1/21/2010
In this essay written for Salon, Simon lays out three strategies for the Obama Administration to craft a comprehensive response to the new politics of the 21st Century.

Economic Strategies & Globalization by Peter Brodnitz, 11/8/07
This presentation details the results of extensive polling conducted by NDN and Benenson Strategy Group in October of 2007 on the American public's opinions about globalization and the changing economy

The Pitfalls of Economic Nostalgia by Dr. Robert Shapiro, 12/15/10 
Shapiro identifies the structural problems behind America's slowest recovery in decades, and offers new approaches to address jobs, housing values, and the stagnating incomes of middle class Americans.

Keeping the Focus on the Struggle of Everyday People: 2010 Edition by Simon Rosenberg, 1/26/2010
More than ever, we need to recognize that the lack of income growth for average families is the greatest domestic challenge facing America today, and lead a national conversation about how we can create a plan that addresses the struggle of everyday people.

A Lost Decade for Everyday Americans by Jake Berliner, 12/17/2009
In this white paper, we argue that everyday Americans are at the end of a “lost decade” and explain the still misunderstood causes of the virulence of the recession.

Investing in Infrastructure and a Clean Economy

What's Next On Climate - Five Strategies for Moving the Clean Economy by Dan Carol, 10/20/10
Efforts to pursue carbon reduction policies have not gone according to plan over the last year. Therefore, we must deploy new strategies for moving the clean economy forward. In this memo, Dan Carol lays out 5 supplemental but decidedly big strategies for doing so.

A Politics of Investment by Simon Rosenberg, 7/27/10
In an article written by Ron Brownstein, Simon argues that "The challenge for us in the next few years is creating a politics of investment during a time of potential austerity to make sure that we're ... funding the future and not the past."

Electricity 2.0: Unlocking the Power of the Open Energy Network (OEN) by Michael Moynihan, 2/4/10 In a major policy paper, Green Project Director Michael Moynihan argues that America must upgrade to Electricity 2.0, an open, distributed network, to unlock the potential of clean technology and unleash a renewable revolution.

Investing in Our Common Future: U.S. Infrastructure by Michael Moynihan, 11/13/07 
Michael Moynihan looks at the current state of public investment in infrastructure and proposes a set of measures to restore our national political will and improve funding mechanisms to rebuild and advance U.S. infrastructure.

21st Century Skills and Learning

Tapping the Resources of America's Community Colleges: by Dr. Robert Shapiro, 7/26/07 
Young Americans are increasingly adept at working with computers, but many American workers still lack those skills. Here, we propose a direct new approach to giving U.S. workers the opportunity to develop those skills.

A Laptop in Every Backpack  by Simon Rosenberg and Alec Ross, 5/1/07 
The more globally interconnected world means that Americans will need more facility with the global communications network. Therefore we believe that America needs to put a laptop in every backpack of every child.