NDN Blog

Rebuilding a National Consensus for Economic Reform

The Washington politics around America’s economic policies has become dysfunctional. In Barack Obama’s first 18 months, the broad support for Democrats expressed in the 2006 and 2008 elections, the big congressional majorities they produced, and the public’s loud demand for change from the Bush era were enough to enact major stimulus, followed by health care and financial reforms. The full-throated stimulus, both monetary and fiscal, halted the economy’s sickening slide towards depression, but they were not enough to ignite strong, self-sustaining growth. So now, with the economy stuck in a holding pattern of high unemployment and slow growth, and GOP attacks dominating new-media airwaves and bandwidth, most Americans’ patience with the Democrats’ economic management has worn very thin. The national consensus for strong action on the economy has unraveled, and the administration finds itself unable to enact additional measures.  

Last week, Simon, Jake Berliner and I sounded an alarm in a new NDN memo: If we hope to salvage the next decade, we will need a new policy and political framework. For the long-term, this strategy should focus on two powerful structural changes now reconfiguring the economy, globalization and the spread of information and Internet technologies. Even more urgently, however, Congress needs to address the jobs crisis.  

There’s no use in fooling ourselves that anytime soon, healthy job creation will kick in on its own. The economic mistakes of the last administration took care of that: Financial crises always lead to recessions that are unusually deep and job-destroying; and those steep downturns typically are followed by unusually shallow and slow recoveries. And the destructive forces that drove the original crisis are still with us. A prime reason that business lending and investment remain weak, for example, is that our large, financial institutions still hold hundreds of billions of dollars in the same financial instruments that brought on the crisis. Household spending also remains weak, and persistent high unemployment isn’t the only reason. In addition, home values continue to sputter and foreclosures are still running several times their normal levels, eating away at the financial security and economic well-being of most Americans.  

NDN’s new prescription calls, first, for tough love: It’s time to level with Americans about what precisely is happening with their economy, in order to “create a public logic for sustained new public and private investment in the years ahead.” Then, we turn to five steps which Congress could take this year to help jump-start new job creation, now. 

  • Provide more federal funds to state and localities, so American students and their parents don’t face the prospect of 300,000 fewer teachers in classrooms this fall, and comparable downsizing for police and other local and state agencies.
  • Reduce the cost for companies to create more jobs by cutting the payroll tax.  A cut on the employers’ side would directly spur job creation, while a cut on the workers’ side would do it more indirectly, by expanding demand. These payroll tax cuts should go unfunded for one year, providing a little more stimulus, and then we should pay for them by phasing in a carbon fee. A carbon fee would also represent the most serious step to address climate change ever undertaken here – and it would stimulate more jobs by spurring the development and adoption of low-carbon technologies.
  • Enable more Americans to gain the knowledge and skills required for most new jobs, especially the computer and Internet-related skills needed to perform well in workplaces dense with those technologies.  A big, first step: Federal grants to community colleges to keep their computer labs open and staffed on evenings and weekends, so any adult can walk in and receive free instruction.
  • Help to re-stabilize house values by bringing down home foreclosure rates. Until the housing market returns to more normal conditions, most Americans will feel less well-off, stifling normal consumer spending. Falling home prices also make it harder for many people to move to where work is available or wages higher. The first step here: Create a new federal loan program for lower- and middle-income people whose mortgages are in trouble.
  • Jumpstart new business formation, because so many of the economy’s new jobs are created by young businesses. And don’t start from scratch – we can use current SBA, EDA and other agency programs to create new “acceleration centers” that could bring together entrepreneurs and venture capitalists, connect new startups with opportunities provided through the government’s new green economy and export initiatives, and then connect job seekers with those companies.

We can put millions more Americans back to work. All that’s lacking is the national will to address the factors and forces now blocking it. If the President spends the month of August working to rebuild that will, Democrats could enact a serious jobs agenda in September and October – and do a lot better in November than anyone’s polls suggest today. 


The full memo, entitled "Towards a New Economic Strategy for America – Steps We Can Take in 2010" by Simon Rosenberg, Rob Shapiro and Jake Berliner, is available here.

Jobless Benefits, Deficits, and the Art of Washington Compromise

The President will sign another $33 billion extension of unemployment benefits this week, and this is only the beginning of a debate almost certain to produce some uncomfortable moments for both parties. For now, the Republicans have embraced the more shameless position. Their new talking points tell us that the economy cannot afford any new measures that would increase the deficit – a very long way from Reaganomics, indeed. But all this comes on top of the previous GOP story line that the slow economy and high jobless rate prove that the President’s economic program has failed. With no evidence that global investors have any qualms at all about U.S government debt – if they did, the market yield on Treasury bills wouldn't hover around one-third of one percent – the slow economy they use to blame Obama should be entirely able to absorb more deficit spending without problems. It’s true that consumer spending and business investment remain weak, and American companies aren’t creating many new jobs. But even most GOP economists concede that the combination of the 2009 stimulus package and two years of near-zero interest rates from the Fed  explain why we moved from monthly job losses of a half million or more to small monthly gains, and from output contracting at a 4 to 5 percent rate to output growing again moderately. 

But it’s not enough to produce a healthy expansion, because economies hit by financial meltdowns need stronger and different medicine than easy fiscal and monetary policies. So, while Democrats are right that an economy as weak as this one won’t be harmed by another modest dose of deficit spending, it also won’t help the overall economy much. That’s because it doesn’t touch the underlying forces holding down growth and jobs, which are the same forces that drove the crisis. To begin, high unemployment isn’t the only or most powerful force holding down consumer spending. Americans aren’t spending like they used to, mainly because the sharp fall in housing markets has left most of us a lot poorer than a few years ago. And there’s no relief in sight while home foreclosures continue to run at several times their normal rates, further depressing housing prices.  

There’s a similar story behind business investment, which still lags because nearly two years after the crisis peaked, the financial institutions that dominate business lending remain weak. The Paulson and Geithner Treasuries both rejected not only the original TARP plan to buy up the sick assets held by those institutions – which admittedly would have been hard to carry off successfully – but also calls to take over failing banks, remove those assets from their balance sheets, and sell off new, healthy entities. Since they also didn’t come up with another way to sequester the junk from the rest of the system, financial institutions are still saddled with hundreds of billions of dollars in bad assets and derivatives. And with the housing market still driving down the value of many of the mortgage -backed assets that remain on the books of the big banks – and sovereign debt markets in Europe also looking perilous – financial institutions are still writing down losses and hoarding capital for the next storm.   Again, monetary and fiscal stimulus – or austerity for that matter – can’t solve the problem.  

In the face of these daunting difficulties, much of Washington has decided to yell about deficits. Even so, they can’t quite get their stories straight. Republicans unwilling to let the deficit rise by $33 billion for one year to give jobless Americans a little more assistance, insist nevertheless that Congress reenact the Bush 2001 and 2003 tax cuts for high-income Americans, set to sunset this year, at a cost to the deficit of $750 billion over 10 years. And quite a few Democrats who point out that abrupt austerity measures could easily hurt a slow economy still won’t consider extending those tax cuts for even a year or two.  Neither side can have it both ways.   

If Republican really believe that temporary increases in the deficit are dangerous, they should be leading the fight to roll back those tax cuts. And if Democrats really believe that cutting the deficit in a slow economy is dangerous, they should be calling on the President to preserve the same tax cuts. However, between the contradictions on both sides may well lay the seeds for a sensible, Washington compromise.

While economists may argue about the effects on a slow economy of temporary increases in spending or tax incentives, they generally still agree that once the economy is healthy, the large deficits now forecasted for years to come will begin to displace private investment and drive up interest rates. At a minimum, that should mean no new, permanent tax cuts or spending programs. So, here’s the compromise: Extend the Bush tax cuts for high-income Americans for two years, at a cost of $75 billion, and match it with $75 billion over two years in additional assistance to the states, now facing the prospect of laying off tens of thousands more police, teachers, and other public servants. And if that’s too brazen for the deficit hawks, add a measure or two that would raise $150 billion over the following three to five years. In a spirit of shared pain, Republicans could begin by agreeing to a small fee on financial transactions that normally would make them blanch. In return, Democrats could pledge to limit increases in non-defense discretionary spending to inflation minus one percent, for five years. All it really requires is a burning desire by Republicans to hold on to the Bush tax cuts, matched by a heartfelt yearning by Democrats to preserve the jobs of as many public employees as possible. Who knows: If it works, it could be a first step towards a much broader agreement on serious, long-term deficit reduction.

Update, July 23: For more on this topic, please read the new NDN memo: Towards A New Economic Strategy - Steps We Can Take in 2010.

The Economy is Slowing Down – Alas, Much as We Expected

Recent polls have left most Democrats discouraged, even if their loss of public confidence reflects economic weaknesses largely beyond their control. Life in politics is often unfair, and today Americans seem to both blame President Obama for economic developments that were not his doing and discount his real accomplishments in other areas. The White House’s misstep here, however, has been its persistent short-term optimism about the economy, since the basic shape and force of the current economic undertow were entirely predictable – and actually predicted by a number of us.  

This is not a case of the partisan hooey bandied about, that the President’s stimulus “failed.” Regardless of what he might have done in early 2009, the U.S. economy could not have avoided a long, deep recession – nor, without heroic action could we have escaped the slow recovery now disappointing many Americans. What we got is the basic shape of recessions triggered by financial meltdowns and the recoveries that eventually follow them. Yes, the crisis grew out of years of regulatory and economic-policy neglect, mainly by the Bush crew. But once it arrived, there was never a realistic prospect that $800 billion of new spending and tax cuts over two years would produce a big, V-shaped bounce back, as it might have if this were just part of a normal business cycle. But all of that fiscal stimulus, on top of even more powerful easy Fed policies, did stop the slide into a Depression and finally pushed us into a slow recovery.  

We also know why the stimulus couldn’t do more than that – or, more precisely, why it’s in the nature of a financial crisis to take years for an economy to recover fully. To begin, financial meltdowns leave most households markedly poorer in ways that ordinary business cycles don’t – what’s your house worth today? – and that makes most people less eager to spend for years. So, as the stimulus has wound down, retail sales have stumbled in both of the last two months – in fact, the only people spending like most Americans used to are the very wealthy, who still have more money than they know what to do with. And most others, even if they are inclined to spend, have a hard time getting credit because a financial meltdown also leaves lenders much weaker. It also shouldn’t surprise anyone that this reluctance to lend extends to most businesses, keeping investment weak.  

Moreover, these developments are unfolding in an economy that had serious problems before the meltdown and everything that followed. The recession has drawn people’s attention to a decade-long problem: American business’ capacity to create new jobs, even when growth is strong, has weakened markedly. In the Bush expansion of 2001-2007, we produced less than half as many new jobs as we did during comparable periods of the 1982-1989 expansion and the 1992-2000 expansion. And when the economy turns down these days, it also sheds jobs at a prodigious rate. More than 3 million jobs were lost in the 2001 recession and its aftermath, which was six times the job losses, relative to the decline in the GDP, seen in previous recessions. Much of the same happened this time, as the recent recession cost nearly 8 million jobs. In fact, the jobs losses have been so large and so persistent that they’ve put independent downward pressure on the economy, eating away further at investment and consumer spending.  

On top of all this, the potential for a second financial crisis, or a second round, is out there. The problem this time begins in Europe, where governments struggling with unproductive economies and large and fast-mounting deficits are having trouble finding global investors to finance their new bonds. It started in Greece and is spreading to Portugal, Spain and perhaps beyond; and while the EU says it will bail them out if the worst comes, the markets continue to bid down the value of their debt. The rub here is that nearly all of that debt is held by financial institutions still weakened from the last crisis, especially French and German banks which, for example, hold $630 billion just in Spanish government bonds. Even if those bonds, along with Greece’s and Portugal’s, skirt a formal default , their declining value is driving some major European banks to the edge – much as the plummeting value of mortgage-backed securities two years ago destroyed Lehman Brothers, Bear Stearns, Merrill Lynch and AIG. And if large European institutions fall, their counterparties on Wall Street will be left holding tens of billions of dollars in obligations no longer worth much. This scenario is still far from likely, but it remains quite possible that we could find ourselves back where we were in late 2008.

The good news is that if another crisis comes, the administration will have more tools to deal with it, as Congress is on the verge of passing some decent financial reforms. They might need those new powers, because congressional Republicans seem committed to blocking anything the President proposes, whatever the cost to the American economy. And whether or not the administration finds itself facing another economic crisis, or merely has to deal with a stagnant job market and meager wage gains, the luxury of large Democratic margins will soon be gone. In either case, President Obama will have to reclaim center stage and mobilize American opinion in ways that force his opponents to concede to sensible measures – much as Bill Clinton did after the Democrats’ 1994 setback and Ronald Reagan did after the big GOP losses in 1982. If the President can pull that off, he can still build a serious and successful economic legacy.

In Promoting Universal Broadband, Less Truly is More

The right national policy isn’t always hard to figure out. Take broadband. As broadband becomes increasingly important for most Americans seeking access to economic opportunities and public information, it’s obvious that universal broadband service is an appropriate goal for public policy. Not only are most job openings today posted only online, so is most information about health care, government services, education, and most personal services. Perhaps more important, the ability to do most jobs depends increasingly on a person’s knowledge and capacity to perform well in workplaces dense with broadband and information technologies, which in turn people can greatly facilitate when using broadband is part of their daily lives.

So, it matters that last year, for example, only 46 percent of African-American and 48 percent of Hispanic households had broadband service, compared to two-thirds of white households.  

It’s also not hard to figure out how to close those gaps and achieve universal broadband service by the end of the decade, the stated goal of President Obama and nearly everyone else. Start with what we know about how personal computers and dial-up Internet became ubiquitous. The key lay in two singular forces: Scientific advances increased the usefulness of these technologies, and those advances and market competition helped drive down their prices. These same forces already have driven the spread of broadband, in less than a decade, from essentially zero to nearly two-thirds of all American households.   

There’s often a hitch, of course, and this time it comes from recent technological advances which could sharply drive up broadband prices, especially the wild popularity of video applications which gobble up bandwidth at 100 to 1,000 times the rate of text applications such as email. Facing a quantum jump in demand for bandwidth, the nation’s Internet Service Providers (ISPs) find themselves with two choices: Increase their long-term investments in broadband infrastructure by huge amounts, which someone will have to pay for – $300 billion to $350 billion over 20 years, by the FCC’s reckoning – or let Internet congestion slow down everything in their customers’ online lives. Since the second option isn’t acceptable to almost anyone, the new public policy question at the heart of the drive to achieve universal broadband has become, how can the ISPs pay for the additional investments without hiking broadband prices so much that digital divides become permanent?

This problem is further complicated by outside efforts to convince the FCC and the Congress to set new rules directing how the ISPs should charge for broadband. Such rules could effectively require that the additional costs be added to the flat monthly fees everyone now pays for broadband service. But a new study out this week shows that the outcome of the fight over these rules will likely determine whether we achieve universal broadband anytime soon or, in the alternative, find ourselves stuck for a long time with digital divides that leave millions of lower-income Americans offline. The study, issued Monday by the Georgetown University Center for Public Policy and Business – and written by Kevin Hassett and myself – simulates a number of ways to pay for the additional investments and measures the impact of each on the path to universal broadband.

First, we asked what happens if the additional costs are passed through in the monthly flat fees that everyone currently pays.  Since broadband is already a nearly “mature market,” with new users joining at a slower pace than before, this approach would translate into monthly fees in the range of $70 per-month. While a number of factors affect whether people adopt broadband service, cost is the largest – and especially for lower-income people who unsurprisingly are most sensitive to cost increases. So, we can expect that a pricing system which forces ISPs to pass along their additional investment costs in higher fees for everyone would push universal broadband far into the future – and that’s just what our simulations found. By 2020, nearly one-fifth of African–American and Hispanic households would still be without broadband service. In fact, broadband fees would likely be so high that 15 percent of white households also would be offline at the end of the decade.

The alternative approach comes from another striking phenomenon seen here and around the world: A relatively small share of all broadband users – 10 to 20 percent, tops – account for the vast majority of the new pressures on bandwidth.  These are people who watch scores of videos online every day, spend hours in multi-player online game worlds, or use broadband to watch HD television shows and movies. This fact can shape a new pricing strategy: Pass along most of the additional costs to those who consume vast amounts of bandwidth or the content providers transmitting extremely high bandwidth offerings. There is no reason why broadband should remain an “all-you-can-eat for one price” facility, especially if it means raising prices so much that millions of people have to give it up.

We simulated what would happen if broadband providers passed along 80 percent of their additional investment costs in higher prices to the 20 percent high-bandwidth users and their content providers, with the remaining 20 percent of those costs borne by the rest of us. This approach puts the United States back on a rapid path to universal broadband: By 2019, all racial, ethnic and income groups should find themselves within one or two percentage points of universal adoption.

A word to the wise at the FCC:  Do not consider any rules which, however inadvertently, might force the nation’s broadband providers to stick to their current, “one-price (or two) fits-all” pricing approach. When it comes to promoting universal broadband and regulation, it turns out that less truly is more.


The Importance of Blaming the Right People for the Wall Street and Gulf Disasters

This year’s notorious Supreme Court decision on campaign finance found that corporations have the full rights of individuals, at least in that area. The truth is, most of us do approach big companies as if they were people – and then, when those companies wreak havoc on the country, no one can be found to hold accountable. Congress can pass new regulations, but that’s little consolation to the victims. Anyway, both the Wall Street meltdown and the Gulf spill unfolded not only because regulation was lacking, but because enforcement was lax where regulations did exist. In both cases, we see signs of “regulatory capture,” with the SEC and the Minerals Management Service applying existing regulations in ways which, at a minimum, permitted the persistent risks that eventually led to disaster. In the quest for accountability, there also inevitably will be lawsuits. But that may not produce real accountability either. The companies may not survive to pay any judgments; and when they do, the costs fall to shareholders. The executives whose decisions brought on the crisis are left unaccountable – a moral hazard of the first degree – and the rest of us are left unsatisfied. 

Some of the public’s outrage about both crises probably stems from people’s assumption that large companies do operate like people, at least in respecting broad social norms. So, we expect our bank to be concerned about our personal finances, a view implicitly encouraged by the sketchy form of the neoclassical economics that dominates public discourse. In an abstract world of the perfectly efficient market, that market constrains banks to offer us goods and services that serve our interest; in the real world, our banker’s retail job is simply to sell us his bank’s products based on how profitable they are to that bank. And even when we recognize the difference, we assume our bank won’t abuse our trust, because the law will prevent it and, anyway, educated people just don’t act that way.

Similarly, whether or not Gulf residents expected oil companies to share their concerns about their regional environment – and many certainly did have those expectations – the market was supposed to ensure that the risk of incurring $20 billion or more in liability costs would prevent reckless operations of deep-water rigs. For how this works in the real world, think of Toyota: Like Toyota, BP adopted a calculus in which cost-saving measures outweighed those risks; and in deep-water drilling, that often involves less stringent safety systems and standards. So, even as BP was fined much more often than its rivals for deep-water rig safety violations, BP shareholders enjoyed years of higher returns.

If we can’t depend on regulation or potential liability to stop reckless corporate decisions, it’s time to focus less on the corporate “person” and more on the actual people who make those reckless decisions. The laws of corporations have long shielded a company’s decision makers from personal liability for corporate decisions, based once again on the idealized view that market competition will reliably drive executives to make decisions based on their shareholders’ best interest. But economists have long recognized – it’s called the “agent-principal problem” – that the interests of executive decision makers (the agents) can diverge sharply from those of the shareholders (the principals). And how those executives are rewarded for their decisions can make that divergence very wide and deep if, as with both Wall Street and BP, they can earn huge bonuses for steps that boost short-term earnings even when the decisions that generate those earnings eventually bring down the company. While Paul Volcker and a few others have called for a ban on such compensation schemes, Congress has bowed to Wall Street protests, in a form of “legislative capture” as dangerous as its regulatory counterpart.  

The result are nearly perfect conditions of moral hazard for America’s top executives, especially in critical areas like finance and energy, where their moral hazard can be most dangerous to the rest of us. Since moral hazard affects the top decision makers, perhaps more than their institutions more generally, the Wall Street and Gulf disasters suggest that it’s time to revise the limited personal liability provisions of the corporate form: The government should be able to sue executives personally for decisions that turn very bad for the rest of us – involving costs of, say, at least $25 billion – when those decisions entail risks that rise to a standard of negligence. This change could even be part of broader tort liability reform. But whether it is or not, it’s time to pierce the veil of the corporate “person” and get to the real people whose personal interests repeatedly lead them to embrace risks that end up harming tens of millions of others. 

Memo to the President: Resist a Simpleminded Push to Cut Budget Deficits Now

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

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

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

The current political passion for tight budgets, already in full play in Germany and Britain, may have been triggered by the sovereign debt crisis unfolding in Greece and, perhaps soon, across much of southern Europe. Yet, the ultimate sources of most sovereign debt crises are weak productivity and flagging competitiveness. Add an irresponsible government willing to run unsupportable deficits and loose monetary policies, instead of taking the difficult steps required to address the underlying problems, and a sovereign debt default becomes a real possibility. But the United States isn’t facing Greece’s dilemma, and neither are Germany or Britain. And the best policies to maintain the confidence of international investors even as our own national debt rises rapidly are measures to further bolster our underlying productivity and competitiveness.  That will be especially true if the European Union’s plan to address Greece’s sovereign debt problem fails – as it almost certainly will – and the ensuing chaos triggers new worldwide financial meltdown. At a minimum, the falling value of Greek bonds, along with those of Portugal, Spain, Hungary and Italy, will further slow our own recovery and growth, making premature deficit reduction even more damaging.  

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

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

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

Some Hard Truths About Globalization and Jobs

I find myself in Stockholm, an old capital city of a small economy animated by the drive of ingenious entrepreneurs and the extraordinary global success of more native companies than any other nation its size, from Ikea and Erikson to the Tetra Laval packaging giant and the Axel-Johnson conglomerate. Sweden’s economic drive and success are predicated on an acute understanding of the particular demands that globalization imposes on most business enterprises. So, Sweden seems an appropriate place to think about the special difficulties that American economic policymakers face. The United States has been economically dominant for so long that we too easily overlook how unforgiving global competitors and investors can be when our parochial politics produce simplistic fixes for complicated challenges. 

Exhibit One is one of the final actions by the House of Representatives before its Memorial Day recess. The majority, convinced that they’ve found a new, economic wedge issue, passed legislation to strip our most successful global companies of a “tax break” which allegedly encourages them to “ship jobs overseas.” The provision in question lets U.S. multinationals defer paying the U.S. corporate tax on the profits of their foreign subsidiaries until those profits are formally transferred back to the U.S. parent company. The claim that this provision leads Microsoft, Google, Amgen or General Electric to ship jobs abroad is an appealing slogan, but it’s one with no real economic foundation in a global economy.  

The slogan and the policy behind it depend on what is, at best, a nostalgic view of how companies actually operate in global markets. In the 1970s and 1980s, U.S. companies that went global did so by setting up production facilities in places with lower costs – wages, real estate, construction and so on – and then shipping the products produced there back home or to their major markets in Europe. That shift in production was a big factor in the hemorrhage of manufacturing jobs back in the 1970s and early 1980s.  But the truth is, the globalization of the last 20 years has changed most of that.

First, our international advantages now come not from producing standard goods more cheaply in other places, but from developing and applying new ideas to the creation and production of countless goods and services. That’s why our globally competitive industries today are no longer automobiles and steel, but the companies that create and provide goods and services based on new intellectual property – from Internet content and infrastructure, and software and advanced IT hardware, to pharmaceuticals and biotech, business services and entertainment. Moreover, the critical, idea-based services that these industries rely on, along with the idea-based headquarter services that all global companies depend upon, remain firmly entrenched in the United States. That tells us what the rest of world knows all too well: In a global economy, America’s core economic advantage is simply that we perform these idea-based operations better than anyone else.

The result confounds the basic proposition that “tax deferral” costs American jobs. As a stream of recent research has demonstrated, increases in investment and jobs by the foreign subsidiaries of U.S. global companies no longer come out of investment and jobs at home. Instead, as those foreign subsidiaries expand, mainly to serve foreign markets, their demand for and use of those idea-based, headquarter services expands too. So, the data and the operations behind them now show that increases in jobs and investment by foreign subsidiaries are now accompanied by increases in investments and jobs by the parent companies back home. For all of these reasons, raising the tax burden on American companies with foreign operations would reduce investment and job creation not only in abroad, but here at home as well.  

It’s true that American multinationals, especially in manufacturing, hemorrhaged jobs again over the last decade in the face of globalization. But most of those jobs have been lost to domestic outsourcing, as companies increasingly turn to other U.S. firms for services such as maintenance, legal and accounting advice, and so on. The culprit here is the fast-rising financial burden of providing health care and pension benefits, especially in a competitive global economy that makes it much harder to pass along those costs in higher prices. Raising the tax burden on the foreign earnings of U.S. multinationals won’t begin to touch this daunting challenge.    

The recent House action actually could be even more damaging than these developments suggest. The reason that our tax system has provided this tax “deferral,” for nearly as long as we’ve had a corporate income tax, is that America is nearly the only major country that taxes its businesses on their worldwide income, regardless of where it’s earned.  Britain, Germany, Japan, China and nearly everyone else of economic consequence have “territorial” tax systems that tax international companies only on the profits they earn within each nation’s own borders. On top of our distinctive “worldwide” tax system, we also now find ourselves with nearly the highest corporate tax rate of any major economy. So, without deferral, America’s globally successful industries would face a much higher tax burden than their European or Asian rivals. And that would mean lower rates of return for U.S. companies, which in turn would lead to less investment, less innovation, and ultimately fewer U.S. jobs.  

Ending deferral could not only cost tens of thousands of American jobs. It also could create an illusion that Congress has already done what it has to, in order to create more jobs. The slowdown in U.S. job creation has emerged as a very serious, new challenge over the last decade.  But the way to address it has to begin with recognizing the real sources of the pressures on jobs in a global economy. The problem is not efforts by businesses to build a global presence, which after all is a fundamental part of global success. Rather, part of the real issue here lies in the American economy’s increasing and distinctive reliance on ideas rather than physical assets to create value. This historic development puts a big economic premium on people’s ability to operate effectively in workplaces and factories dense with the information technologies that create and manage ideas and information. The reasonable response to that, again, is not higher taxes on foreign-source earnings, but a new domestic program of grants to community colleges to provide free computer and Internet training to any adult who walks in and asks for it. The pressures on jobs and wages also now come, as suggested earlier, from the fast-rising costs for business of providing health care coverage. The answers to that lie in serious measures to contain the pace of medical cost increases. The President’s recent health care reforms contain a number of modest steps in this area, and the Congress would do American workers a genuine service by strengthening and expanding them.

After all that the American people have endured in the last two years, surely it’s time to resist the siren call of facile slogans and easy answers, and become truly serious about both jobs and globalization.

The Economics of Immigration Are Not What You Think

Waves of new immigrants often spark economic anxiety and cultural discomfort, as well as occasional violence and wide-net crackdowns, on the Arizona model. Even here, a nation comprised almost entirely of immigrants and their descendents, we’ve seen these reactions not only in recent times but also a century ago, when waves of poor immigrants from Europe arrived here. With a hundred years’ distance, however, we can now see that those early waves of immigration were generally associated not with economic dislocation and national decline, but with extraordinary economic boom times and America’s emergence as the world’s leading economy. And for much the same reasons as a century ago, recent evidence indicates that the economic effects of the current waves of immigration are also largely positive. 

The New Policy Institute (NPI) asked me to review all of the available data and economic studies of recent U.S. immigration. With my colleague Jiwon Vellucci, we found, to start, that more than one-third of recent immigrants come from Europe and Asia, while less than 57 percent have come from Mexico and other Latin American nations. The popular portrait of recent immigrants is off-point in other respects as well. While more immigrants than native-born Americans lack high school diplomas, equivalent shares of both groups have college or post-college degrees. That finding should make it unsurprising that 28 percent of U.S. immigrants work as managers or professionals, including 38 percent of those who have become naturalized citizens or the same share as native-born Americans. 

Many Americans would probably acknowledge that their concerns about immigration lie principally with those who are undocumented. No one likes being reminded that the world’s most powerful nation hasn’t figured out how to effectively police its own borders. But the data also show that these undocumented people, who account for 30 percent of all recent immigrants, embody some traditional values much more than native-born Americans. For example, while undocumented male immigrants are generally low-skilled, they also have the country’s highest labor participation rate: Among working-age men, 94 percent of undocumented immigrants work or actively are seeking work, compared to 83 percent of the native born. One critical reason is that undocumented immigrants are more likely to support traditional families with children: 47 percent of undocumented immigrants today are part of couples with children, compared to just 21 percent of native-born Americans.

The evidence regarding the impact of immigration on wages also turns up some surprising results. First, there’s simply no evidence that the recent waves of immigration have slowed the wage progress of average, native-born American workers. Overall, in fact, the studies show that immigration has increased the average wage of Americans modestly in the short-run, and by more over the long-term as capital investment rises to take account of the larger number of workers. Behind those results, however, lie winners and losers – although in both cases, the effects are modest. Among workers, the winners are generally higher-skilled Americans: For example, when a factory or hotel hires more low-skilled workers, demand also increases for the higher-skilled people who manage those workers or carry out other professional tasks for an enterprise that’s grown larger. 

The losers are generally the lower-skilled workers who have to compete for jobs with recent immigrants. But studies also show that immigration reform might well take care of most of those effects. Following the 1986 immigration reforms, for example, previously-undocumented immigrants experienced big pay boosts – as much as 15 or 20 percent –  and immigrants who already had legal status saw hefty wage gains, too. But the reforms also led to higher wages for lower-skilled native-born Americans. One reason is that undocumented people who gain legal status can move more freely to places with greater demand for their skills, reducing their competition with native-born people with similar skills. More important, their new legal status confers certain protections such as minimum wage and overtime rules. Today, about one-fourth of low-skilled workers in large American cities are paid less than the minimum wage, including 16 percent of native-born workers, 26 percent of legal immigrants, and 38 percent of undocumented workers. Ending the ability of unscrupulous employers to recruit people to work for less than the minimum wage would not only raise the incomes of those currently paid less than the minimum wage. It also would ease downward pressures on the wages of other lower-skilled Americans, which comes from the below-minimum wage workers. This process is something we have refered to as "closing the 'trap-door' under the minimum wage."

Looking again at immigrants generally, recent research also shows a strong entrepreneurial streak, with immigrants being 30 percent more likely than native-born Americans to start their own businesses. Nor are immigrants the fiscal drain that’s commonly supposed, at least not in the long term. In California and a few other states, immigrants today do entail a net, fiscal burden, principally reflecting the costs of public education for their children. But studies that use dynamic models to take account of the lifetime earnings of immigrants – most of whom arrive here post-school age and without elderly parents to claim Social Security and Medicare – show substantial net fiscal gains at the federal, state, and local levels.

Political disputes are rarely settled by facts. Nevertheless, it’s reassuring to see that the humane and progressive approach to immigration is also a policy likely to produce good economic results for almost everyone.

For more information, please read: The Impact of Immigration and Immigration Reform on the Wages of American Workers by Robert J. Shapiro and Jiwon Vellucci. 

A Plan to Create Jobs and Address Climate Change

The long-awaited climate proposal from John Kerry and Joe Lieberman (minus Lindsay Graham) is now on the table; and it’s clear already that it has no better chance of being enacted than other failed proposals before it. One informal count this past week finds 26 Senators likely to vote yes and another 11 probable supporters – a total of 37, against nearly as many “no” votes and probably no’s (32) and nearly again as many fence-sitters (31). Despite the lessons of Katrina, the global importuning of Al Gore, and the President’s pledge to solve the problem, support for steps to stabilize greenhouse gas emissions at safe levels hasn’t changed much in the last half-decade. The hard truth is, a serious climate program is unlikely to happen unless its advocates shift their legislative approach and retool their political strategy.  

You don’t have to be David Axelrod (or Karl Rove) to appreciate why. In a period of widespread economic anxiety and populist anger, congressional sponsors of climate legislation have persisted in pushing a big, new Washington fix that would raise most people’s energy costs in the near term, on the strength of promises by scientists that doing so will lessen the chances of dangerous climatic changes several decades from now – changes which scientists cannot yet specify in any detail. The cap-and-trade model long pushed by a handful of national environmental groups and adopted by Kerry-Lieberman and by Waxman-Markey in the House has other features bound to repel most Americans – especially the creation of a new, trillion-dollar financial market in federal permits to emit greenhouse gases, all to be managed and potentially manipulated by Wall Street. How many Senators are prepared to explain why the only climate plan they can come up with would raise everyone’s energy bills and yet enrich energy traders and executives at Goldman Sachs and JP Morgan Chase? 

The country and the planet need a different approach. The answer is to marry a plan to create jobs with a funding mechanism to reduce greenhouse emissions. Earlier this year, the CBO reported that the single, most powerful policy tool available to spur job creation is a sharp reduction in the employer’s side of the payroll tax, targeted to new hires who increase a firm’s entire workforce and total payroll. The catch is that since payroll tax revenues are dedicated to fund Social Security and Medicare, we have to replace the foregone revenues. We can finance this job-creating cut in payroll taxes by enacting a new, carbon-based fee which also would address climate change.   

To be sure, the new carbon fee – like cap-and-trade or, for that matter, EPA regulation – would drive up most people’s energy bills. But the cuts in the payroll tax would offset the higher energy costs from the fee, and the new jobs and higher wages spurred by the payroll tax cuts would leave most us better off, along with the planet. While the emphasis on jobs would be new, this general approach is not. Most economists and many environmentalists have long held that a fee on energy based on its carbon content is the most economically-efficient and environmentally-effective way to accelerate the development of new, climate-friendly fuels and technologies, and spur businesses and households to adopt them. Such a “tax shift” is also the long-time position not only of Al Gore, but also groups such as Greenpeace, Friends of the Earth, and the U.S. Climate Task Force (which, in full disclosure, I chair with Harvard professor and former Gore aide Elaine Kamarck). 

It’s time for climate activists to respect the priorities of most Americans. Congress should enact broad reforms to create new jobs, boost incomes, and strengthen the economy – and pay for these reforms with a new, carbon-based energy fee that would steadily drive down our use of fossil fuels and their dangerous greenhouse gas emissions.

Deciphering the Crisis in Greece and Its Significance for America

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

Greece has no time to wait, despite the violent protests there against budget austerity. Greece is also burdened with a relatively weak and uncompetitive economy, so it cannot generate strong growth to help ease the budget stresses. Moreover, the organization of the Eurozone has acted like a straight-jacket, denying Greece, along with other member-nations with high and fast-rising public debts, two standard strategies to boost competitiveness and help them grow out of this mess. Greece can’t depreciate its currency to make its exports cheaper in foreign markets, since it shares the Euro with many other countries uninterested in a sharp depreciation that would leave them poorer. Greece also can’t cut its interest rates to spur domestic investment and attract capital from other EU countries, since the European Central Bank (ECB) sets the interest rates for everyone in the Euro area.

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

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

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

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

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

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