NDN Blog

Powerful and wildly-successful institutions sometimes act like teenagers or addicts, unable to recognize their own self-destructive behavior. This year’s top two examples are Toyota and Goldman Sachs – but the administration and Congress are vulnerable as well to the kind of self-inflicted downward spiral that captured those two industry leaders

Toyota invested decades to develop a sterling reputation for safety and quality, and then squandered this brand not by accident, but by myopic design: In a benighted chase for higher profits, Toyota’s top brass demoted vehicle safety from its long-time perch as the firm’s number one operational measure, to number four. Everyone inside the firm got the message – and now consumers around the world have as well. So, Toyota will spend years working to reclaim part of the worldwide market share it carelessly threw away.  

Goldman Sachs may pay an even greater price. It, too, spent a long time building a world class reputation that married extraordinary market acuity with honest dealing. The self-immolation of that brand may have begun with its principals’ decision to jettison their partnership and become a publicly-held company. This shift in the firm’s legal organization allowed them to cash in, but it also transformed Goldman’s business and culture. Its flagship business of investment banking – giving advice and assembling financing for mergers, buyouts and takeover – contracted so sharply that in recent years, it has accounted for just 10 percent of firm revenues.  In its place, Goldman became a giant hedge fund that creates and trades exotic financial products for its clients and itself.  What we know now is that once the top brass’s financial positions were no longer tied to the firm’s long-term value, as it would be under a partnership, a seemingly insatiable drive for huge, short-term profits led them to create products which they simultaneously hawked to their largely institutional clients of pension funds, endowments, banks and other financial institutions, while itself taking financial positions against the very same products.

Coming back will be harder for Goldman Sachs than for Toyota.  Toyota has to reengineer its operations – a serious challenge – in order to restore the core position of safety and quality.  But automobile recalls are routine, even if the extent and reasons in Toyota’s case were not; and several years from now, a reconfigured Toyota could be back on top. But Goldman faces years of civil suits by government regulators, their own shareholders and their former clients, as well as possible criminal charges. And Goldman faces the same treatment in other countries – starting with Greece and other European governments that bought Greece’s bonds after Goldman allegedly helped to hide some of the country’s fiscal problems, with financial maneuvers much like those employed by Enron in its final desperate year. Based on what has happened to other firms that found themselves caught up in extended legal problems, the most important costs to Goldman may not be the legal fees, fines and settlements, but the “distraction factor.” For years, its top executives will be absorbed in defensive moves and stratagems to beat the various raps – while their rivals at other firms focus on the shifts in markets and the economy that can presage large changes. And this doesn’t even count the herculean task of rebuilding a brand that now stands for both self-dealing and double-dealing. 

Without realizing it, administrations, congresses and political parties also can turn self-destructive. The GOP brand in economic stewardship, for example, certainly suffered serious damage from the policies of a Republican President and Congress that ultimately culminated in the worst economic crisis since the 1930s. Yet, even with 60 percent of the country still blaming the Bush administration for the bad economic times, and the public directing their outrage at Wall Street, Washington Republicans remain committed to a “strategy” of stopping the Obama administration from reforming Wall Street.  

Then there’s the matter of the national debt. Eighteen months ago, in this blog, I warned that the Wall Street meltdown was only the first stage of an extended crisis. Stage two was the deep recession triggered by the financial meltdown; and stage three would be the fiscal crises created by the bailouts and stimulus used to address the first two stages. That has all come to pass; the open question is how self-destructive our response will be. We pulled the financial system back from a collapse that would have ushered in another Great Depression, with only a normal quota of self-inflicted wounds – like letting Goldman and JP Morgan Chase claim full payment on deals with AIG which the taxpayers rescued, and not forcing them and other bailed-out institutions to use their new, taxpayer-financed capital to expand lending to businesses. The American brand is successful pragmatism: Figure out what needs to be done, and then go do it. What needs to be done now to defuse the ticking bomb of our fast-rising national debt is to reconfigure the tax system so it produces more revenues while leaving the economy more efficient – think of tax simplification that jettisons lots of special interest tax breaks – and reshape current entitlement spending not only for elderly people, but also the “entitlement” programs for influential industries and for districts and states whose members of Congress have risen to the leadership. 

If we cannot get past our current partisan warfare, the United States in a few years could find itself in Toyota’s place, with a tainted brand and smaller political market share. Our Treasury bills and bonds are unlikely to ever default, as Greece nearly did this week (and still could do, if the bailout fails in any important way). But the normal politics-of-least-resistance will never reconfigure taxes or reshape spending. Instead, it will lead us to a place where we have to pay out more and more to attract foreign buyers for our debt, and those higher interest rates could consign the American economy to years of very slow growth. That’s what can happen to a great nation blind to its own self-destructive behaviors.

In a global economy, even the world’s largest economy by a factor of three (that’s us, compared to Japan and China) cannot by itself ensure job opportunities for everyone and healthy incomes gains for everyone who works hard and well. We may wish it were otherwise, but the United States and the forces of globalization now share control over America’s economic path. The challenge is to work with those forces to benefit average Americans, and to exercise the global leadership required to ensure that other countries work with us to promote the growth and stability of the global system. This part of the progressive agenda has many elements, including efforts to advance open trade in ways that help average workers, steps to promote innovation and protect the rights of American innovators around the world, and responsible regulation of finance while promoting free flows of global capital.

In one way or another, just about every economic activity in America is touched by global forces, whether it’s the operations of foreign companies, investors, innovators, consumers, or governments. We’re still the world’s largest economic actor by a long shot; but the global economy has grown too large, complex and fast-changing for even us to dominate, much less direct. Let’s start with trade. Twenty years ago, 18 percent of all the goods and services produced in the world were traded across national borders – today, in a global economy two-thirds larger (adjusted for inflation), one-third of everything produced anywhere is traded – some $20 trillion worth per-year. Most of this rapid increase is tied to the explosive modernization of China and other large developing countries, and the fast-expanding consumption of their people.

America can generate good jobs and rising incomes for average families only by working with this historic expansion of worldwide trade. Progressives should be committed not only to equip American workers and companies with what they need to compete in a global trading system, but also to open markets here and around the world, especially in services and agriculture. The first commitment involves many of the initiatives described in earlier essays, including access to free IT training, health care reforms to reduce business costs, and tax reforms to make American companies more competitive. 

In exchange, progressives should push to conclude the Doha trade round to open foreign markets in services, where U.S. companies excel, to negotiate fair, free trade status with burgeoning economies such as Korea and, in time, with Japan; and to hold China and other fast-growing emerging markets to their WTO promises to open their markets. In all of these cases, American firms and workers would gain, because our markets already are far more open than most others in the world. And there’s no one else who can lead effectively here, since no other country has as much leverage with the holdouts in the EU and the developing world. 

America’s greatest exports are its new ideas, whether they’re embodied in new software code, breakthrough pharmaceuticals and medical devices, new business services, genetically-enhanced foods, new forms of entertainment, or the latest-generation equipment. In fact, America’s unique role in globalization is being the world’s largest source of economic innovations and the testing grounds for adopting them on a large scale. To be sure, innovators come from every part of the globe; but for the last generation, American inventors, entrepreneurs and companies have dominated the development of most (not all) critical new technologies and new ways of doing business. And the effective application of new ideas is the principal source of most of the competitive edge American companies retain in many global markets.

To help keep all of this going, our new economic plan has to actively spur continuing economic innovation through tax reforms, a larger federal commitment to basic research, and by maintaining the healthy competitive pressures that spur innovation and their broad adoption.  In this context, too, American workers need access to the skills required to use these innovations and perform effectively in workplaces dense with advanced technologies. These steps not only can help average families succeed as new ideas unfold; they also support America’s place as the world’s largest domestic market for innovations, which in turn will spur additional investments to develop their next generation. 

A progressive economic program should include two initiatives in this area. First, since innovation is the essence of our competitive advantage in the world, we need a no-holds-barred campaign to cajole or coerce every other nation to respect the intellectual property rights of American innovators and companies. In addition, we need to reclaim the global leadership we exercised in the 1990s in addressing climate change by enacting measure to fix a strict and environmentally-appropriate price on carbon emissions, preferably with a carbon-based tax that recycles its revenues in other tax cuts. This would not only be part of America’s responsibility for broad economic leadership, it also could spur to a dramatic degree American companies to develop new, climate-friendly fuels and technologies, and then broadly adopt them.

A progressive economic plan also has to take serious account of the global financial system. American companies are the world’s largest foreign direct and portfolio investors, with operations and other investments spread across the developing and advanced world. The United States is also the world’s largest single recipient of direct investments by foreign companies and portfolio investments by foreign funds and governments. So, we have an enormous stake in a healthy and stable financial system, here and around the world. And in the wake of the recent meltdowns, the central issue here is how best to regulate finance, here and around the world. 

Based on the recent crisis, the basic terms of regulation seem clear. First, require that all financial institutions hold more capital, relative to their investments, and adjust those stricter capital requirements for the riskiness of a bank or fund’s portfolio. That should help end their risky practice of making huge wagers, for example in asset derivative or interest rate futures, using almost entirely borrowed funds. Second, make sure that every transaction in finance, involving any kind of instrument, occurs on a public exchange or through a publicly-chartered clearinghouse. That can ensure that every trade or purchase is transparent and subject to the same disclosure and soundness rules. Third, end self-dealing compensation practices that just encourage the most risky wagers, for example by paying out bonuses long before anyone knows whether the transaction will actually work out. And none of these sensible changes would impede the free flow of investment and money – in fact, they should enhance America’s premier position in the global capital system.

The good news here is that the regulatory plans passed by the House and being considered this week in the Senate both contain versions of these three basic changes. The bad news is that they’re all weaker than needed – so, it’s up to progressives to strengthen them.

That leaves the sticky matter of “Too Big to Fail,” or what to do about funds or banks whose failure could trigger another broad crisis. We have two alternatives: Break them up, so no bank or fund can jeopardize the stability of the entire financial system. In its’ favor, there is little evidence of real economic benefits derived from the huge size of the institutions that dominated the sector before the crisis, much less the even greater size of the behemoths that dominate it now. Many conservatives like this approach, from Alan Greenspan to Mervyn King (he runs the Bank of England), because it avoids the alternative, which would be a new process to take over the investment activities of any large player at the first sign of trouble. Either way, the plan should reject out-of-hand the current, reckless GOP position: No prophylactic break-ups, no new process to take them over when they’re in trouble, and no future bailouts. That would be a formula for a global depression the next time that big finance implodes.  

There’s more to consider as well for a progressive plan to help Americans make the best of globalization, from sensible immigration reforms to measures to help recognize asset bubbles before they get out of hand. In one way or another, we will return to those issues later, along with some others. For now, we conclude this four-part series hopeful that somewhere out there, in Washington or beyond, there is a growing recognition that now is the time for progressives to rethink our national economic approach and reconfigure the economic agenda. 

For a background on this series on a New, Progressive Economic Strategy, please read:

• A New, Progressive Economic Strategy, Part 1
• A New, Progressive Economic Strategy, Part 2: Spending Reforms
• A New, Progressive Economic Strategy, Part 3: Tax Reform

The most dispiriting feature of this year’s economic debates, apart from their fierce partisanship, is the absence of a broad and encompassing view of what the American economy needs. In this series of essays, we’re laying out a new, progressive strategy to advance the central goal of economic policy – namely, to ensure ample job opportunities, strong and widespread income gains, and upward mobility for most people. The previous two blog-essays described, first, a series of initiatives to equip businesses and workers with much of what they need to succeed economically, and second a new approach to contain the growth of federal spending so we can control long-term budget deficits. This week, in part 3, we turn to taxes. The challenge is to rethink and reconfigure the federal tax system, so we can raise the revenues we need in ways which reinforce job creation and income gains.  

Progressives should approach this challenge in three ways, covering in turn corporate taxes, personal income taxes, and energy taxes. The first step involves ending the major corporate tax subsidies for influential industries, much as our spending initiative would end large, industry-specific spending subsidies. These corporate tax entitlements range from tax breaks crafted for oil, gas and wind energy producers, and special inventory rules for certain exporters (and not for U.S. firms producing the same products for the American market), to billions of dollars in privileged treatment for insurance companies, credit unions, and housing developers. Ending these and other corporate tax breaks could not only set back influence-peddling for a while and simplify the corporate tax code; it also would raise a boatload of new revenues. Half of those new revenues should go to deficit reduction, while the other half goes to lower a corporate tax rate that’s currently one of the world’s highest. To the modest degree that the lower corporate taxes in Europe and East Asia encourage American multinationals to shift more of their operations abroad, this approach should help create more conditions for domestic job creation.  And we can amplify this effect with a measure described earlier in this series, sharp cuts in the payroll taxes of employers who expand their overall workforce and payrolls. In any case, ending tax subsidies for influential interests will make the entire economy more efficient, because companies that never qualified for special treatment would no longer have to compete at a disadvantage with tax-protected companies for capital and skilled workers.  

Next, progressives should apply a similar and more sweeping approach to the personal income tax. The current, staggeringly complicated system is unsalvageable. Nearly 43 percent of all households pay no income taxes at all; and few of the 90 million households that do pay income tax can figure out their own liability. The responsiveness and accountability of a democracy can erode quickly when government is financed by a system that doesn’t affect more than two-fifths of the people and isn’t understood by the rest. The current income tax also is plainly unfair:  Since different forms of income and spending are taxed differently, people with the same incomes, but earned or spent in different ways, bear very different tax burdens.   

Progressives should make a clean sweep of this entire mess by creating a single personal exemption of $100,000 to $150,000 that would supplant all current personal deductions, from mortgage interest and child care expenses to capital gains and employer-provided health insurance. In one swoop, between 84 percent and 95 percent of all families would owe no income taxes, and the system would return to its origins, when it affected only the very well-to-do. The affluent also would claim the $100,000 to $150,000 exemption, plus an unlimited deduction for new retirement savings. But every other dollar would be taxed at 25 percent rate, regardless of whether the taxpayer earned or received it as salary, dividends, stock options, the “carried interest” of hedge and private equity fund managers, foreign royalties, or lottery winnings. This is progressive tax simplification with a vengeance.  

Of course, a 25 percent tax on the income of only a small share of Americans will produce much lower revenues than the current system; and taking most people off the income tax could create powerful new pressures for more spending, if they know they won’t have to pay anything for it.  So a new tax has to take the place of the income tax for most people; and the best candidate is an 8 percent to 10 percent value-added tax (VAT) that would cover everything people consume, except home purchases and rent, medical care, educational costs, and energy. Since the VAT would fall only on what people consume, not on what they save, it should have the same economic effect as the unlimited deduction for new retirement saving for higher-income people.  Together, these provisions come close to eliminating taxes on new savings, enabling the country to finance more of its own investment and deficits without borrowing hundreds of billions of dollars a year from China, Japan, and Middle Eastern oil states. And the Earned Income Tax Credit can be scaled up to offset the cost of the VAT for lower-income families.  

We exempt energy from the VAT, because energy is the focus of a third major tax reform, the enactment of a carbon-based tax to address climate change. Economists have long favored this approach over a cap-and-trade program, mainly because cap-and-trade creates more volatility in energy prices, which in turn harms the overall economy and weakens the incentives to develop new climate-friendly fuels and technologies. A direct, carbon-based tax, which will adjust the prices of different forms of energy in direct proportion to their harmful effects on the climate, makes more sense economically and environmentally. The last question for progressive tax reform is what we do with the $200 billion a year in new revenues which a serious commitment to address climate change would generate. Since the point of climate policy is not to make people poorer, but only to induce everyone to use less climate-damaging forms of energy – most notably, phasing down coal – the answer is to recycle the carbon-tax revenues through other, progressive tax cuts.  One obvious candidate is payroll tax cuts, which would further reduce the costs for businesses of creating new jobs or raising the pay of existing jobs.

How much of these carbon-tax revenues could ultimately go to cutting payroll taxes, and how much might be reserved for deficit reduction, will depend on how successful we are in the other parts of this economic plan. If progressives can unwind special-interest spending and tax subsidies, contain health care costs, and put in place a broad VAT, the vast majority of carbon-tax revenues can go for tax cuts. Yet, the final results of all of these changes will also depend on how well we navigate the final issues for this plan, involving our role in the global economy. Those matters, including financial regulation, will be the focus of part four, next week.

For background on this series on a New, Progressive Economic Strategy, please read:

• A New, Progressive Economic Strategy, Part 1

• A New, Progressive Economic Strategy, Part 2: Spending Reforms

You don’t have to be a Nobel economist to see that the United States needs a new economic plan if we hope to restore what once seemed part of the American birthright – ample job opportunities, strong and widespread income gains, and broad upward mobility. Last week, we sketched a package of initiatives to equip businesses and workers with the resources and incentives that such a strategy requires. This week, in part 2, we turn to a more general condition for sustained economic progress, a plan to control long-term deficits and national debt.  

Bringing down the trillion dollar-plus annual deficits now projected for the next decade is straight-forward conceptually – you cut federal spending, raise taxes, and do both in ways that promote faster growth and so further increase revenues and further reduce spending. Moreover, serious steps to reduce these deficits should be a clear goal for progressives, so long as it’s phased-in a few years from now when the economy is stronger. Once the economy recovers from the neglect and mistakes of the Bush administration and those who ran Wall Street, the current trajectory of massive deficits will push up interest rates and slow investment, incomes and growth. Tolerating these long-term deficits, then, would consign average Americans to another lost decade economically – and perhaps even worse, lay the toxic foundations for another crisis. 

In practice, serious deficit reduction is always a difficult business, since who wants to pay higher taxes or accept fewer benefits? The challenge is to rethink and reconfigure federal spending and taxes, so we can channel spending and raise revenues in ways which reinforce job creation and income gains, and so help families and businesses prosper. This week, we focus on the spending reforms; next week, we will rethink taxes.  

Progressives should approach this challenge in three ways. First, end not only earmarks but their larger and more permanent version, the major subsidy programs for influential industries. These subsidies arbitrarily tilt the economy towards companies with political clout and so reduce the jobs and wealth the economy is capable of producing. These industry entitlements range, for example, from much of the farm program which ends up raising food prices, and export promotion efforts that give selected exporters artificial advantages without affecting the overall trade deficit, to the below-market fees for mineral rights and other natural resources. Make a clean sweep of these ongoing taxpayer bailouts, and we could save between $100 billion and $150 billion per-year.  

The second area involves the inescapable reforms of individual entitlements. Unlike industry entitlements, these programs serve clear and compelling social interests. As the boomers begin to retire, however, these programs in their current forms will become plainly unsustainable. Social Security reforms are the more manageable part, analytically and politically. The program’s long-term deficit would melt away, for example, if Congress enacted three fairly modest adjustments: Shift the pension’s annual cost-of-living adjustment to reflect the actual inflation recorded by the Bureau of Labor Statistics for the elderly people who receive it; link increases in the retirement age to increases in life expectancy for those age 65 and over; and tax all of the benefits of retirees with incomes above the national average. And all of these changes reflect the progressive values of fairness.

Fixing Medicare and Medicaid is much tougher. As this year’s wrenching debate over health care reform demonstrated, nothing inspires greater public anxiety than changes in the arrangements which people consider matters of life and death. Yet, the current arrangements are also plainly unsustainable, especially as boomers enter the phase of their lives when heart diseases and cancers, the most common and expensive conditions to treat, become much more common. The general path is clear: We need reforms that go considerably beyond this year’s changes to substantially slow the rates of increase for all health care costs. 

By taking this broad approach, we can not only preserve Medicare but also produce large economic dividends. First, smaller annual increases in health care costs will reduce pressures on businesses to hold down wages. That’s just what happened in the 1990s, when the shift to HMOs produced several years of much slower health care inflation, and average incomes grew more than 2 percent annually, after inflation. Moreover, slower health care costs also will help the overall economy. Since other advanced countries produce health care outcomes comparable to our own at less cost, our additional spending is flagrantly inefficient, stealing wealth and jobs from more economically-productive areas.  

Happily, this year’s health care debate aired a catalog of strategies to help contain these costs without compromising the quality of care; and the bill, as enacted, provides a credible beginning for a more extended process to control future increases. The insurance exchanges should reduce costs in the individual and small-group insurance market, and the investments in IT should help slow costs across the system. Both can be expanded and beefed up. The new law also begins to move the Medicare program from volume-based payments to reimbursements based on the value of the treatments. That can be substantially strengthened as well. This year’s reforms also create a new advisory board to propose new ways to cut Medicare costs, with a process to fast-track the recommendations through Congress. Eventually we can apply this kind of arrangement to all of health care.  

Finally, both parties will have to accept the most difficult changes advanced by the other.  Democrats will have to live with taxing a share of the value of employer-provided coverage, along with serious malpractice reforms. And Republicans will have to accept a public option, in order to introduce real competition for insurers in areas where one or two of them comprise an effective monopoly or duopoly.

Looking out several years, these reforms for industry and individual entitlements should be able to pare several hundred billion dollars per-year from our structural national deficits. And if that’s not enough, there’s still a third area of large, potential savings in defense spending. For a start, eliminate any weapon system that the Pentagon says it doesn’t need or want. These programs have become geographic entitlements, sustained to keep taxpayers dollars flowing to the districts of those who sit on the defense appropriations subcommittees. That’s hardly a sufficient reason to weaken a broad plan with the promise of restoring economic opportunities and prosperity for average Americans.

Read Part 1 of a New, Progressive Economic Strategy here.

Looking out onto the smoky, endless skyline of Seoul, Korea, I think about our two nations’ similar economic paths, from abject underdevelopment to world-class modernization and wealth. In the 19th century, there was one place in the world that managed to move all the way up from low-income to high-income, and that was the United States. From 1870 to 1970, another society, Japan, managed the same achievement. Now, one other society will make the same great leap from 1960 to 2030 or so, and it will be Korea. If you doubt it, consider that since 1960, the real per capita income of Koreans has grown 37-fold, and the country’s real GDP has expanded up 50-times. They’ve managed it in much the same way we did – making huge, sustained investments in education and infrastructure; sustaining a voracious work ethic animated by meaningful jobs open to anyone able to perform them; adopting astute policies that support native businesses but also expose them to foreign competition from more advanced rivals; and setting global ambitions for the nation’s economy. 

Yet, even these achievements by Korea in this period and by ourselves a while ago don’t guarantee future success. Korean policymakers, businesses and workers certainly all face difficult challenges. But our interest here lies in our own, future path. President Obama and Congress, beset by a series of crises, have found themselves playing the role of a fire brigade. To his genuine credit, the President reached past the fires around him to drive basic health care reforms, a remarkable exercise of presidential will even if we’re unsure of their real costs and benefits. Alas, the achievement represents only a modest piece of a larger economic strategy still waiting to be articulated and carried out, if we are to hope for a better economic future than the one being deeded to most Americans by the mistakes and dismal neglect of the preceding administration.

This is the first of three essays in which we will lay out a new economic strategy for the next decade. The last time such large ambitions were seriously attempted, they it came from conservatives led by Ronald Reagan, who also tried to surmount the emergencies of his time with broader reforms. Perhaps less than half of that attempt proved to be sound, and more than half clearly was not; but they all left long legacies. The big task for Mr. Obama and progressives today is to think and act as big as Reagan, and get at least three-quarters of it right this time.

Today, we will lay out the three basic parts of that task and begin to think through the first of them. These three economic challenges that demand basic reform are: 1) Restore real prospects for economic progress for average working Americans; 2) reclaim real, structural soundness for the government’s finances in the face of the serious social challenges we will face over the next decade; and 3) secure America’s leading role in the global economy.

The first part of this task is the most urgent politically, although not more so economically than the others. In fact, if we do not successfully address the second and third parts, the progress we make with the first will not be sustained. The essence of the first challenge is to ensure that average Americans can lead lives of economic progress and dignity. That aspiration, in turn, rests most fundamentally on restoring strong and dynamic job creation, so that everyone who wants to can not only find work, but also move up periodically to more demanding, better-paid jobs. A labor market that works this way – the kind we had in the 1950s, 1960s, and in the 1990s for a brief while – can deliver the basic elements of the American dream  through meaningful work that provides real opportunities for rising incomes and upward mobility.

Every piece of this goal is in peril today. For a decade, job creation has slowed sharply, income gains for most people have stalled, and upward mobility has become the privilege limited to the top 20 percent of Americans. We all can see the growing gap that has opened up between the skills of most Americans and the demands of most new, well-paying jobs with futures. In one way or another, those jobs all now involve advanced technologies, which themselves also displace other jobs for millions of people. Finally, we can feel the pressures that squeeze so many jobs and wages, as businesses dealing with the intense competition created by globalization also face fast-rising costs, especially for health care, energy, and pensions. 

These forces gripping American jobs and wages are all very complex, and there’s no single magic bullet to vanquish them. So, we have to take them on piece by piece. For example, most new jobs come from relatively young businesses that are expanding quickly. We can ease some of the costs of creating those jobs by reducing the employer’s payroll taxes on net, new employees and by assuming part of their health-care costs – approaches actually in place already in limited forms, in the new health care reforms and the latest jobs bill. Now, for some real innovation, let’s also require that in exchange, these businesses become staging grounds for enhancing the skills of the new workers they hire. Half of what they save on payroll taxes and health care would go for onsite training or vouchers for ongoing outside instruction, especially in the information technologies that pervade most workplaces. For everybody else, new grants to community colleges could cover the cost of keeping their computer labs open and staffed on evenings and weekends, for anyone to come by and receive free training in those technologies.

These reforms, however, won’t ease the cost pressures squeezing jobs and wages in most companies. So this plan also needs additional steps to reduce the fast-rising cost burdens on business from health care, energy and pensions. One sensible step that may seem radical by today’s cramped standards would be to lighten those pension and health care burdens by (the radical part) expanding Social Security and Medicare. Start by raising the benefits of those who continue to work beyond ages 62, 65 and 70, which will directly reduce their employers’ pension liabilities. Follow it up by the government assuming the obligations of many large companies for part of their retirees’ health care. It might amount to federally-financed “medigap,” a social provision which eventually progressives should want to extend to everyone.   

It shouldn’t surprise anyone that addressing the profound problems most Americans now face with jobs and wages won’t be cheap. Next week, we will lay out the second part of our progressive economic strategy, on how best to restore sound financing for the national government. Progressives did that in the 1990s, with some help from conservatives, and they can do it again. This time, however, we also have to tackle the looming costs of two structural challenges to our future fiscal state, namely, health care for the retiring boomers and climate change. Then, in part three, we will turn to America’s ongoing leadership in the global economy, especially with regard to our strength as the source of innovation worldwide and our central place in the global financial system.

We have a really serious problem with job creation. It’s been more than a half-year since the economy began to grow again – including several months of very strong, stimulus-fueled gains – but private sector employment continues to fall. The truth is, these results shouldn’t surprise anyone with a long memory. While businesses began to create more new jobs than they destroyed within three months of the end of the 1981-1982 recession, that didn’t happen for a full14 months following the 1991 downturn and for more than two years after the 2001 recession.

The problem this time looks even more daunting. The economy is growing, but the pace may be moderating already. That’s because this time, most Americans have lost part of their savings and part of their homes’ value, leaving them more cautious about going on the kind of spending spree that used to drive early recoveries. And when people are cautious, businesses are too – with the result they don’t hire much. To get job creation going, we have to restore confidence so people and firms will begin spending again.  

We also have to deal with a deeper problem linked to globalization. In a world with tens of thousands of new businesses created across the globe over the last decade, the resulting, intense competition forces companies to hone their efficiency and control their costs much more stringently. And when their costs for, say, health care and energy go up, they often have to cut back somewhere else – and they usually start with jobs and wages. That’s why U.S. companies created less than half as many new jobs, relative to how fast the economy grew, during the last expansion as they did in the 1990s and 1980s. To change these dynamics, we’ll have to slow the inflation in health care and energy prices. The President’s reforms enacted last week are a modest first step; but millions of jobless Americans can’t afford to wait for them to take hold.

They don’t have to: We have developed a four-part program that would substantially accelerate job creation over the next several years. First, President Obama and Congress should make it cheaper for companies to hire new people. The most direct way to do that is to suspend the employer’s share of payroll taxes for new, net hires in their first year on the job – that would cover all new employees in firms that expand their total workforce and total payrolls. In the second year, the company would pay 50 percent of the employer’s payroll tax contribution. Employees who work hard for those two years will learn how to do their particular jobs especially well, which should be enough for their employers to keep them on after their payroll tax break ends.

The experts at the Congressional Budget Office found that this approach creates more jobs, per federal dollar spent, than any other. In fact, the jobs bill passed two weeks ago includes a light version of this policy, in a seven-month payroll tax holiday for hiring people who have been out of work for a while.  It’s a start; but we need a permanent program, not a temporary fix, and one that doesn’t ask people to stay jobless until they qualify.

Next, the President and Congress should help everyone become a more valuable worker. Look around: Every modern office or factory is organized around computers, the Internet and other information technologies. Yet, nearly half of people working today – and more than half of those out of work – have little or no skills to use these technologies. As we’ve argued and written before, we can help everyone become a more valued employee by providing free computer and Internet skill training – and we can do that, at relatively little cost, by providing grants to community colleges to cover the cost of keeping their computer labs open and staffed at night and on the weekends, so anyone can walk in and receive training. Here, too, the President has said it’s a good idea – so why not enact it now?  

Part three of this program involves more assistance for state and local governments to suspend their continuing layoffs of police, prison guards, firemen, sanitation workers, and other public service employees until a genuine economic expansion begins. This was a good idea for the original stimulus package, and it’s just as good an approach for a jobless recovery. And Wall Street can help pay for it with the revenues from a new tax on the bonuses for executives of financial institutions that took taxpayer money to stay afloat. We saved their jobs; now, they can help save ours.

The fourth part of our package involves the arcane structure of taxation for multinational companies. U.S. multinationals today hold some $1 trillion in financial assets outside the United States, bought with the profits they earned abroad. They keep all that money outside America, because while they’ve already paid foreign taxes on it, they have to pay additional U.S. corporate taxes when they bring those funds home. In practice, we’ll never see most of those funds under current law, since multinationals generally repatriate those profits only when they have domestic tax losses that can offset them. So, Congress at little cost could grant U.S. multinationals one year to bring home these funds and pay a much lower corporate tax rate than normal, so long as they use those funds to create jobs. This approach is the only virtually free stimulus available to us – since the funds come from overseas – and we should grab it.

These four measures won’t change the structure of this recovery or the larger economic environment in which it is unfolding. Yet, within that structure and environment, these steps could significantly enhance the job prospects of millions of Americans.

The health care reforms enacted this week are an unequivocal political triumph for President Obama. He turned back the most intense and dogged partisan campaign to stop a piece of legislation seen in this era, enhancing his own popularity and power until at least the next setback. More important, the reforms as passed constitute the most serious social-policy achievement in two generations. They not only provide a clear and secure route to insurance coverage for two-thirds of the Americans who don’t have it. The President’s reforms also end a sheaf of abhorrent insurance practices – most notably, preexisting condition clauses and lifetime coverage caps – which withhold payment for care when, as it happens, people actually need it most. The open question, however, is whether the reforms also will make the country’s health care system more sustainable by slowing its trajectory of cost increases. 

Without reforms to do so, those prospects are at once scary and unsustainable. A few months ago, I calculated how much an average, middle-class family should expect to spend on health care in 2016: The answer is fully one-third of the family’s real annual income – a level that’s unsustainable both economically and politically. 

Here’s how I figured it out. The Congressional Budget Office tells us that an average family will earn $54,000 per-year in 2016, when moderately-priced family insurance coverage will cost $14,700. Most people’s employers will pay much of that bill; but those payments come out of people’s wages, not the company’s profits. Taking this into account, a middle class family’s earnings in 2016 should come to $68,700 ($54,000 + $14,700), of which $14,700 or 21.4 percent will go for health insurance. That’s not all. Experts figure that their co-payments and other uninsured expenses, on average, will come to another $5,100 in 2016. They’ll also pay taxes to help cover other people’s health care – 2.9 percent of their cash wages for Medicare ($1,566), plus perhaps $1,500 more in federal and state income taxes for Medicaid and for Medicare costs not covered by the 2.9 percent payroll tax and for the subsidies for the uninsured under the new reforms. Add up all of that, and it comes to $22,766 or 33.3 percent of the middle-class family’s adjusted income of $68,700.

As Harvard health care expert David Cutler and others have concluded as well, the new reforms provide a credible beginning for what will still be a long and arduous process to control cost increases. Here’s how. To begin, the insurance exchanges should reduce costs in the individual and small-group insurance market, while the investments in IT should help slow costs across the system. In the largest and fastest-growing part of health care, treating the fast-rising numbers of older Americans, the reforms also include significant cost reductions in Medicare.  Perhaps most important, Medicare will move from volume-based payments to reimbursements based on the value of the treatments. In addition, the reforms create a new Medicare advisory board to propose new ways to cut costs or save expenses, tied to a process for fast-tracking the recommendations through Congress; and there are also cuts in overpayments for Medicare Advantage and other supplemental Medicare plans, as well as new measures to reduce Medicare fraud and abuse. Finally, there’s a new emphasis on prevention programs, which could significantly reduce future costs. 

All of this will help, but it won’t reduce the share of our average family’s income going to health care by more than a percentage-point or two. To make a bigger difference, each party will have to accept much more difficult changes advanced by its rival.  So, Democrats will have to live with taxing a good share of the value of employer-provided coverage – the only tax increase conservatives will swallow these days – along with malpractice reforms more far-reaching than the limited state-based experiments enacted this week. For their part, Republicans will have to accept a public option, the only way to introduce real competition for insurers in areas where one or two of them now constitute an effective monopoly or duopoly.

Happily, the passage of the President’s reforms this week will make such hard steps much more likely politically, if not any easier. The reason is that with these reforms, the federal government, for the first time, has accepted overall responsibility, and ultimate accountability, for the nation’s health care system. When costs continue to rise sharply, as they will, voters across the country will have Washington as a focus for their displeasure, and the next election as an effective way to express it. That political prospect will drive much more stringent steps to contain costs, as it has in every other advanced country in the world. Only it’s coming later here, which is why we now spend so much more than other countries on health care.

The bill signed today by the President is a very sound, first step towards restoring job creation. The provision to spur employers to bring on workers who have been jobless for some time by exempting those employers from payroll taxes on such new hires, is a particularly valuable policy innovation which NDN has championed for some time. But no one should tell themselves that these measures can undo the damage from the long period of economic errors and neglect before the President took office, and the consequent damage to our economy and tens of millions of families. We should carefully monitor how this measure works; and if it does help spur job creation, Congress should extend and expand the approach. Congress should also take additional steps to support working families, including universal access to instruction in using information technologies through the community college system, and temporary tax benefits for multinational companies that repatriate foreign earnings and use them to create new jobs.

With joblessness still rising despite our historically easy fiscal and monetary policies, the political chatter is full of charges that globalization, especially the role of multinational companies, is costing America millions of jobs. The facts are less clear-cut, and the impact on job creation depends substantially on whether the multinationals are American or based abroad.  

For several years, for instance, Boeing and the European multinational Airbus have been competing for a $35 billion contract to develop and build the next generation of tanker aircraft that refuel other planes in-flight. Boeing is as close to a domestic U.S. company as a large U.S. manufacturer can be these days, with 96 percent of its physical assets located here while maintaining a far-flung global network of suppliers and vendors. The face-off with Airbus pits Boeing against a division of the European Aeronautic Defense and Space Company (EADS), which maintains 96 percent of its physical assets in Germany and France while also depending on global suppliers and vendors. For years, PR flacks for both companies have claimed that each would create many more jobs than the other, if it won the DoD contract.  In practice, Boeing and Airbus will each need roughly the same number of workers, worldwide, to develop and build the new tanker; and in order to be cost-competitive, most of this work would occur at each company’s existing facilities. For an economist or a business person, this suggests that a U.S. based company would create most of those jobs here, where its physical plant is; while a European-based firm would have to produce most of the new jobs in Europe.  

Recently, I tested these assumptions when Boeing asked if my advisory group Sonecon could conduct an impartial analysis of jobs and the tanker contract. I agreed, with certain conditions. First, our study would ignore the PR claims from both sides. Second, we would focus on the new investments in plant, property and equipment provided under the contract, and construct an objective jobs estimate using historical data tracking the relationship for aircraft makers between these new investments and job creation. Finally, we would use only verified, publicly-available data, plus the two firms’ formal proposals to the Pentagon. 

In its formal submission, Airbus proposed to partner with the U.S.-based Northrop Grumman, a common arrangement for foreign multinationals competing for Pentagon contracts. Airbus’s plans also showed, as expected, that it planned to develop and produce most of the new planes at its existing facilities in Europe, with Northrop-Grumman mainly assembling it here. Furthermore, reams of government data established that U.S. subsidiaries of foreign aircraft makers are not only much less invested here than their U.S. counterparts. Those subsidiaries also generate substantially fewer new U.S. jobs for every dollar of new investment here, which means they do the more labor-intensive tasks back home.  

Whichever firm ultimately wins this contract will use a substantial share of the funds to pay outside vendors and suppliers, as suggested earlier, and these payments will also create thousands more jobs, indirectly. But there are no public data on where the myriad parts of each company’s global supply chain are located, so no one can say how many new U.S. jobs will be created indirectly by either rival in this way. We might plausibly assume that the supply chain of a U.S.-based firm is more concentrated here than the supply-chain of a European-based firm; but since we don’t have the data to test that assumption, we set it aside.

These facts and factors produced some definitive results: We found that over the 18-year life of the contract, we should expect Boeing to produce 10 times as many U.S. jobs – roughly 3,500 to 4,000 jobs per-year – as Airbus-Northrop-Grumman. In fact, since the study was completed, Northrop-Grumman pulled out of the competition, leaving Airbus to face Boeing alone.  

These findings throw additional light on other common concerns about multinational companies. Perhaps most important, as Airbus’s case suggests, new investments and job creation by a multinational in its home economy are often accompanied by new investments and jobs by its foreign subsidiaries. That’s just the way that multinationals do business. For example, when Ford or Dell build a new plant abroad, the operations of that facility will generate new business back home, including investment and jobs, because the headquarters will continue to provide its subsidiaries with more advanced services and produce the most advanced parts. That makes the economic impact of multinationals here largely “distributional.” The worldwide networks of multinational companies shift many thousands of basic service and basic production jobs abroad, while creating a smaller number of more highly-paid, more advanced service and production jobs here.

The Pentagon should award its contracts to those firms that can most credibly and efficiently produce the new systems required for American national security. That said, the impact of those contracts on job creation cannot be considered a matter of indifference, especially in a period when American businesses are capable of producing new jobs only at much lower rates than previously.

Politicians always on the lookout for ways to stir up voters recently have lit upon the fast-growing size of America’s national debt, whether the context is health reform, unemployment benefits or the war in Afghanistan. Their concerns are usually just easy excuses for opposing basic health coverage for working people, or assistance for out-of-work families, or standing up to Al Qaeda. But if we take them at their word, we’ll find that these concerns are largely misplaced – but not entirely so.  

Moreover, ironically, progressives may have more compelling reasons to control this debt than the current crop of conservative Republicans. Since the time of Ronald Reagan, most Republican conservatives have understood well that the large deficits that pile up the national debt deny Democrats the resources to carry out new initiatives. Bill Clinton and his followers understood this dynamic when they pressed to balance the budget – and, in the process, both create the political space to expand government’s role and deny conservatives the excuse that we can’t afford it. 

Let’s go to the numbers. The total U.S. national debt today is about $12.4 trillion, and CBO expects us to add another $1 trillion a year for another decade. The combination of a high national debt that’s growing very quickly can drive up interest rates. But in strictly economic terms, our debt numbers aren’t as high as they seem. The federal government itself holds $4.5 trillion of the debt, with nearly 60 percent of it sitting in the Social Security Trust Fund – and these securities can’t be sold or traded on financial markets. That brings down the publicly-held, economically-relevant debt to $7.9 trillion. In fact, another $780 billion of that is held by the Federal Reserve, which uses its portfolio of government securities to expand or contact the money supply, and then turns back to the Treasury most of the interest it earns. 

So, the debt most worth worrying about comes to about $7.1 trillion, equivalent to a little less than half of our 2009 GDP of $14.46 trillion. Looking at the national debt as a share of GDP, as economists do, makes sense, because when that share goes up, it usually means that government deficits are growing faster than the economy that finances them. Stated a little differently, when the debt’s share of GDP rises, it usually means that the government is allocating more of the economy. To many economists, this portends slower long-term growth, because government is rarely as efficient as markets in making those allocations.  

That’s just what’s happening now. The share of GDP represented by all of our publically-held debt has risen from 40 percent just a few years ago to about 50 percent today, and it’s headed for 65 percent by 2015. But, the share is also expected to plateau from 2015 to 2020, even without Congress taking new steps to reduce the deficits. The same goes for the total or gross national debt: It comes in at about 80 percent of GDP today and is projected to reach 95 percent of GDP in 2015, where again it will roughly remain from 2015 to 2020. Such a fast-rising national debt, at least for the next five years, does suggest a less efficient economy – but maybe not, because you don’t have to also assume that no other technological or organizational advances emerge over the next few years to make us more efficient. 

Other economists have different worries: They note that historically, when a country’s debt reaches some fairly high level of GDP, investors begin to lose confidence. And when that happens, investors may demand much higher interest rates to keep buying the debt or, in extreme cases, refuse to buy any more of the country’s debt at any price. Across many countries and many years, this no-confidence trigger-level appears to lie at debt equal to 90 to 100 percent of a country’s GDP. But that’s certainly not a hard rule: Japan passed that level without experiencing a debt or currency crisis, and investors almost certainly would grant the United States and the dollar greater slack than Japan and its yen.

Others worry about the interest costs to service the government’s debt. Since, in a roundabout way, the federal government uses bookkeeping notations to “pay” the interest it owes itself, and the Fed gives back most of the interest it earns, what’s at issue here is the interest on the remaining, publically-held debt. In 2009, this debt came to about $7 trillion. Since interest rates have been low, the interest payments came to $187 billion last year, or less than 1.3 percent of GDP. 

That wouldn’t matter much economically, but for one catch: Nearly half of it was paid out to foreign investors, especially foreign governments. If Americans owned all of our national debt, the cost of servicing it would be a wash, since one set of Americans (the taxpayers) would pay another set of Americans (the bondholders). But foreigners now own 47 percent of all publically held U.S. debt – including nearly $900 billion owned by the Chinese Government (that’s more than the Federal reserve holds), $770 billion held by the Japanese Government and that nation’s investors, and another $210 billion by Middle Eastern governments and their reigning families. All of those interest payments are just deadweight losses for the U.S. economy that leave us poorer.

These foreign payments also highlight the domestic political costs of a very large national debt. For instance, the interest paid last year to foreign governments dwarfs the annual cost of the President’s health care reforms. And over the next few years, those costs will increase sharply, because the debt will go up quickly and interest rates almost certainly will be considerably higher. In 2015, for example, the Treasury expects to pay out more than $400 billion in net interest – at least half of it to foreign investors – and those payments should reach more than $650 billion by 2020. These increases in interest payments sent abroad would dwarf the cost of virtually any new social program that progressives might imagine.

Our fast-growing national debt also contains another potential trap. While a prosperous America can handle a national debt of $12 trillion or even $20 trillion a decade from now, another financial or economic meltdown on top of such debt could sink us all. America entered the 2008-2009 financial crisis and recession with an unusually small national debt, as a share of our GDP. That’s why the upcoming decade of trillion-dollar annual deficits (driven mainly by the costs of tens of millions of retiring boomers) will still leave us with a national debt smaller than our GDP. But imagine that a second meltdown requires new bailouts and new stimulus at least as great as the recent ones, but coming this time on top of existing, trillion dollar deficits. Global investors may well balk at those financing demands, producing a downward economic spiral for us all that would be very hard to stop.

This scenario isn’t hard to imagine, given Washington’s inability to agree to the financial market reforms required to avert another crisis. That leaves us with controlling the rising national debt. If the two parties don’t have the stomach to regulate Wall Street, perhaps they eventually will find their way, as Bill Clinton did, to reducing the underlying deficits.