NDN Blog

The inconvenient truth that lies behind this week's White House jobs summit is that there are no magic bullets for an economy thrown over the cliff by a huge financial crisis.  Even with all of our stimulus, bailouts, tax breaks and special Fed lending programs, job losses continue to mount, dampening investment and overall demand.  That's not all: Despite the administration's efforts to stem home foreclosures, they continue to rise and so pull down more mortgage-backed securities and their derivatives, which in turn also dampens business lending and jobs.  We're also seeing mounting losses in commercial real estate, propelled by higher vacancy rates and more tenants simply unable to pay their rents, which are driving up failures by the banks which lent out the money to develop those buildings.  Those failures also eat away at demand, investment and jobs.

And we're still highly vulnerable to more damaging shocks.  So, stock markets around the world fell sharply this past week when one of the world's largest commercial real estate companies, the government-owned Dubai World, announced that it couldn't pay its lenders.  For many, Dubai World's problems raised the scary possibility of sovereign debt defaults, which would be another blow to financial institutions around the world, which hold most sovereign debt.  And nations aren't the only sovereigns whose bonds could be in trouble: The largest real estate bubble and worst recession in 80 years could also compromise the debt status of the world's seventh largest economy, the state of California. 

While large fiscal and monetary stimulus will always help an economy in free fall - we saw that in the modest rebound in third quarter GDP - the number of Americans working could continue to fall for at least another year, because the economy had serious problems with job creation before the crisis hit.  After the 2001 recession, the briefest and mildest on record, the number of people working continued to slump for two years; and over the course of the 2002-2007 expansion, American businesses created jobs at less than half the rate of the previous two expansions.

So, the country has a serious problem with jobs, one which requires serious responses.  A little more stimulus can play a role here, especially targeted to state governments whose labor forces are being squeezed between their falling revenues and balanced budget requirements.  The cure for the private sector will have to involve stronger and more permanent measures that can directly reduce the cost to businesses of creating new jobs.  Here's a start:  Exempt from payroll taxes the first $3,000 to $5,000 of wages paid in each of the first two years to new hires by firms that expand their work forces. Since it would be a permanent measure that would reduce social security revenues, we should pay for it and use the new revenues to make the social security trust fund whole.  We can do that by enacting a small "Tobin tax" on financial market transactions, equal to, say, one-quarter of one percent of the value of trades, and pressing other major countries to do so as well.  James Tobin, the Nobel laureate who first proposed such a tax for currency trades, noted it could help reduce destabilizing currency speculation.  Given the recent crisis, slowing down speculation seems like the right medicine for stocks and bonds today.  And at such a low rate, it shouldn't affect long-term investment, especially if other financial-center countries go along.  And if we don't take strong measures, we will almost certainly find ourselves grappling with serious problems with job creation for many years. 

The high economic anxieties that most Americans felt six months ago may have faded, but count me among economists who are still very concerned.  Sure, the last GDP report came in at 3.5 percent, and the next one should show comparable gains.  Virtually all of those gains, however, come from the temporary stimulus and unusual inventory corrections.  Once those factors run their course – mid-2010 for the stimulus and maybe earlier for inventories – a second dip down becomes very possible, and it could be even worse than the first.  And the main reason we remain so vulnerable is the series of political stumbles which have left largely unchanged many of the forces that drove us off the cliff.

Just today we learned that new residential construction fell again last month, while home foreclosures continue to rise.  It could hardly be otherwise: Washington has still done little to address the pressures from falling home prices colliding with rising mortgage payments, even though they were the largest single factor in the financial meltdown. We did warn that the government’s housing plan wouldn’t work:  A small government benefit to encourage banks to offer better terms to strapped homeowners couldn’t overcome the basic rule that anymore facing foreclosure becomes a poor credit risk, and banks don’t refinance mortgages for poor credit risks.  So, as jobs have continued to disappear and incomes fall, foreclosures continue to rise.  We could still declare a brief moratorium on foreclosures while putting in place some measures that might actually work – for example, directing Fannie Mae, which we taxpayers now own, to provide better terms to strapped homeowners whose mortgages are held there.

Washington also gave financial institutions hundreds of billions of tax dollars without ever requiring them to get rid of their toxic assets and reboot credit to businesses – and so, they largely didn’t.  Now, as foreclosures continue to rise, they face more losses from the mortgage-backed securities and their derivatives they still hold.  Those losses will continue to limit the credit flows needed to keep the economy going once the stimulus fades.  And that doesn’t factor in the increasing pressures on financial institutions from growing problems with commercial real estate. 

And by the way, oil prices are up to $80 per-barrel again and headed higher if the dollar continues to weaken.  You may have forgotten, but it was the run-up in oil price in 2007 that actually triggered the recent recession, with the financial crisis coming a little later and making it so much worse.  If oil prices keep on rising now, on top of weak credit flows and anemic consumer spending, and the economy heads down again, its trajectory could well be even worse this time, since it will come in the context of already weak demand and high unemployment. 

This possibility brings us to Washington’s largest failure of all – okay, the second largest after its astonishing incompetence dealing with the financial bubble and bust.  Throughout the last expansion, Washington sat on its hands as jobs continued to disappear for two years after the 2001 recession ended, and then finally began to grow but at less than half the rates seen in the 1990s and 1980s.  This political failure means that we now face double-digit unemployment for a long time, even if we manage to avoid returning to recession.

At least the administration and Congress finally are noticing the jobs problem.  What we don’t know is whether they’ll do anything effective to address it.  They have real options here.  For example, for the short-term, they can provide more money to states squeezed by falling revenues and balanced-budget requirements, so the states can keep their teachers, police and other employees working.  An even better idea would be to jumpstart new job creation by exempting the first few thousand dollars of wages from payroll taxes.  And they could pay for it with a small, Tobin-type tax on financial transactions.  

What really scares me and some other economists, however, is the possibility of another large shock to the financial system.  For example, while it’s not likely, we could see a sudden collapse in the markets for securities backed by commercial mortgages.  The real nightmare on Wall Street, however, is an international crisis that suddenly drives up the dollar’s value.  That would present terrible problems, since much of the near-record profits being reported by Goldman “We’re doing God’s work” Sachs and others come from nearly a trillion dollars in complicated financial plays that depend on a weak dollar.

If this somehow should come to pass, Washington’s incapacity to deal effectively with the recent crisis will create very scary scenarios.  At a minimum, even President Obama’s legendary skills of persuasion won’t be enough to convince the public to bail out Wall Street a second time. It’s may not be too late, however, for the administration and the Fed to privately jawbone Wall Street to reduce this new risk exposure – and ours. Whether they’re willing to accept smaller bonuses, which usually come with less risk, could be a good test of whether they deserve to ever be rescued again.

Health care reform advocates often point out that the costs of reform should be weighed against the costs of doing nothing.  Unfortunately, that’s very hard to do, since our health care and tax arrangements mask those costs so well.  I suspect that if middle-class Americans had a better grasp of what health care really costs them, and how those costs are shaping their economic futures, the public response might well recall the tax revolt of the 1970s.

These are my thoughts, at least, reading a new piece from Eugene Steuerle, a tax economist at the Urban Institute with a knack for collecting data that can help us see the world in fresh ways.  From the data Steuerle presents, we can calculate that within just five or six years, the average middle-class family will have to devote nearly one-third of its income to health care costs.  That’s right: one-third.  According to the CBO, the average family will earn $54,000 a year in 2016, when a moderate-priced family policy will cost $14,700.  Employers will pay much of that insurance bill for most middle-class families; but that’s just a mask, since those employer payments come out of people’s wages, not a company’s profits.   In real effect, a middle class family’s earnings in 2016 will come to $68,700 ($54,000 + $14,700), of which $14,700 or 21.4 percent will go for health insurance.  And that won’t be their only health-related costs.  Their co-payments and other uninsured expenses, on average, will come to another $5,100.  They’ll also be paying taxes to help cover other people’s health care – 2.9 percent of their cash wages for Medicare ($1,566), plus perhaps $750 more in federal and state income taxes for Medicaid and for Medicare costs not covered by the 2.9 percent payroll tax.  Add up all of that, and it comes to $22,116, or 32.2 percent of the middle-class family’s adjusted income of $68,700.

While Steuerle is concerned – rightly so – about provisions in health care reform that will treat people with the same incomes differently, depending on the rules the legislation applies to employers, I’m more incensed about the current, raw deal for middle-class Americans.  Why should an average family expect to pay one-third of its income in 2016 on a health care system which, in that same year, should claim only 16 percent of our GDP?   The biggest part of this puzzle lies in the fact that most of the costs are roughly the same for most people, regardless of their income.  The worker earning $68,700, a manager who makes $100,000, and the company’s CEO who earns $1 million all will pay the same $14,700 for their families’ health coverage. Their out-of-pocket expenses do rise with income but not by very much; and while the manager and CEO pay more Medicare taxes than our average worker, they all pay at the same 2.9 percent rate.  There also are other factors which reduce the burden on other groups – and so tacitly increase it for those middle-class families.  For example, people on Medicare and Medicaid bear much lower insurance costs, although they also pay relatively more for their out-of-pocket expenses; and families without children pay relatively less for both insurance and out-of-pocket expenses.

Whatever the causes, the data show clearly that health care costs have become a core economic issue for middle-class Americans.  Unless we can contain them, and over time even reduce them, realistic prospects of upward mobility for most middle-class families will simply slip away.   Health care, in short, has to be an essential part of a new economic strategy.

The last political upheaval over the economic prospects of the middle class began with Proposition 13 in California and went on to fuel a conservative realignment that held sway for a quarter century.   The next one may well have begun already with these unsustainable health care costs.  President Obama, whose talent for reading the American mood equals Ronald Reagan’s, has tried to respond quickly with several reasonable ideas for cost containment.  His proposals went nowhere when healthcare providers and insurers countered by, in effect, threatening to withhold people’s care.  The next time, this issue will be recast in terms that everyone understands – people’s real incomes – and the results could be very different.

NDN Globalization Initiative Chair Dr. Robert J. Shapiro, former Under Secretary of Commerce for Economic Affairs in the Clinton Administration, issued the following statement on today's new unemployment data: 

"The new unemployment data are sober reminders of the costs that tens of millions of American pay when their government ignores the country’s economic challenges.  We saw throughout the expansion of 2002-2007 how globalization is weakening our job-creating capacity, yet no action was taken or new policies formulated.  We also saw  the financial markets unravel in 2008, and how most of our leaders largely dismissed it until it threatened to overwhelm the entire economy.  Now the collateral damage from ignoring that crisis and our underlying problems with job creation are pushing unemployment towards record, postwar levels.  The United States needs a new economic strategy that will actively prevent another financial crisis and actively support both the capacity of American businesses to create new, 21st century jobs and the efforts of American workers to gain the skills to excel in those jobs."

You might not know it from what passes for economic commentary on cable TV, but the U.S. economy remains pretty sick.   Last week's report of 3.5 percent GDP growth in the third quarter seemed like cause to celebrate - until you looked more carefully at the data and saw that virtually all of the upside came from temporary government stimulus.  As the head of a revered British firm told a crowd of fellow CEOs in Washington the same day, "if we gave that many drugs to a dead man, he'd dance too."    The next day, the report on personal incomes showed consumption continuing to slump, along with incomes.  In coming months, the media and the administration will trumpet more reports of "good news" which actually will provide little comfort to most American businesses and households.   GDP may grow even faster in the fourth quarter as the stimulus continues to run its course and businesses stop cutting inventories that already are down to the bone.   After that, we could yet face a second dip down, a possibility raised last week by Harvard economist Martin Feldstein.

We could even face more upheaval in financial markets already growing giddy again.  In fact, Nouriel Roubini, the NYU economist who warned us in 2006 and 2007 that the end of the housing bubble could wreck the financial markets, now sees a new bubble forming from trillions in new investments by financial institutions playing the declining dollar off of other currencies.  Moreover, he also sees an inevitable bust coming, with devastating new costs.  He's certainly correct that currency plays are very risky, since exchange rates can turn unexpectedly on a dime.   That's actually a variant of what happened to the Long Term Credit Management fund in the late-1990s.  The big bets placed by that single fund, and the liabilities of its Wall Street investors, nearly brought down the financial system.  What's happening now is on a much bigger scale, and the underlying system is a lot more vulnerable.

If we do dodge Roubini's latest bullet, the bad news eventually will run its course - though it probably will take at least another year, and longer than that for employment to recover.  By that time, it will be more obvious that we don't have a national strategy to avoid another boom-and-bust cycle and produce sustained gains for most people.   It's hard to face, but the Treasury and Congress have to give up their comforting assumption that the handful of financial institutions which dominate our capital markets are driven to behave in ways that ultimately produce good times for everyone.  In some periods, markets do work nearly as well as that - from the latter 1950s and through the 1960s, for example, and again in the latter 1980s and through the 1990s.  At other times, distorting new conditions bound the system, and markets go a little haywire.  That's what unfolded in the latter 1920s and through the 1930s, again in the 1970s, and now it's happening again.  So it's time to retire the economic strategies of the last 25 years or so, which relied on efficient markets to drive those who run its largest institutions to work their will for everyone else's benefit. 

What we need now is a new debate over the terms of a new economic strategy.  One place to begin is by limiting some of the risks taken by institutions that dominate critical markets, which the rest of us also depend on.  It's hard to do, because it's very difficult to even measure and monitor those risks.  It also means effectively limiting the profits available to the society's richest companies, and how often does that happen?

A greater challenge will involve facing up to the way that the fast-evolving global economy has undermined our capacity to create jobs and deliver rising incomes for most people.   It's not about sending jobs to China.  Rather, it's about how hard it's become for many companies, facing intense competition from tens of thousands of new foreign and domestic businesses created in globalization, to raise their prices when their cost go up.  So as their health care and energy costs have marched up, they've cut other costs - starting with jobs and wages.  And whenever this crisis and downturn truly end, the intense competitive pressures that indirectly eat into the American incomes will be as strong as ever.  

The debate has to begin with the recognition that in this period at least, markets won't cure these problems.  If we truly want to restore steady wage gains, there will be no way to avoid serious government steps to slow future cost increases in health care and energy. A new strategy also has to acknowledge our only certain competitive edge in a global economy.  In the country where the idea-based economy took hold first, our companies and workers still do better than most of their counterparts elsewhere in developing powerful new innovations, adopting them across the economy, and adapting them to their own particular circumstances.   We have to generously fund both the seeds and the infrastructure of innovation.  And we should help everyone develop the flexibility demanded to operate effectively in innovation-dense workplaces, by funding universal opportunities for people to upgrade their skills and education every year.

Today, NDN issued the following press release:

Statement from Dr. Robert J. Shapiro, Chair of NDN’s Globalization Initiative, on new economic data released by the Commerce Department:

“While this week’s news on the economy growing in the third quarter is welcome, most of those gains came from the President’s stimulus, so we’re still a long way from a self-sustaining recovery.  And today’s news of falling personal incomes last month and a sharp downturn in consumer spending shows how hard this recession has been for most Americans,” said Shapiro, former Under Secretary of Commerce for Economic Affairs in the Clinton Administration. “These developments come on top of what happened to most people in the last expansion – when their wages stagnated even as the economy was growing.  Political leaders in Washington shouldn’t let wishful thinking cloud their planning for 2010 – the economy still needs help, and the American people need a government prepared to make serious long-term investments in their future prosperity.”

Beyond the public’s view, major players in the climate change debate are reassessing their options.  In fact, as the prospects of Congress approving a cap-and-trade system fade, discussion is shifting to “Plan B.”

One reason is that the version of cap-and-trade which just barely passed the House of Representatives a few months ago, the Waxman-Markey bill, made so many concessions to polluting interests that its support among environmentalists has eroded badly.   Here’s one indicator of just how weak the bill is:  When it passed the House, bond ratings for coal companies improved – a remarkable development given that coal-generated electricity is the single largest source of greenhouse gas (GHG) emissions.   In the Senate, progressives are said to be determined to oppose any legislation that ends up as weak as Waxman-Markey.   And the moderates and conservatives who make up a majority of the Senate remain wary of climate-change engineering in a cap-and-trade form, since it would both raise energy prices for average Americans and make those prices more volatile for business.   The upshot is that the prospects of corralling 60 votes for the Kerry-Boxer cap-and-trade bill in the Senate have faded to nearly zero.  

In truth, the support for a cap-and-trade system always has been limited largely to a handful of sources. There are two large environmental groups – the Natural Resources Defense Council (NRDC) and the Environmental Defense Fund (EDF) – wedded to the notion of dressing up a regulatory cap on emissions with market-based trading in the emissions permits, and the Wall Street institutions eager to get a piece of all that trading and the speculation and derivatives it would throw off.  In addition, a few large energy companies with major business lines in trading energy futures have been active supporters, as have some other companies confident they can exact the kinds of special exemptions for themselves that ultimately hobbled Waxman-Markey.   Even that limited base has been shrinking:  Wall Street support has become a big negative in the current political context, and there are reports that in the wake of Waxman-Markey, NRDC is now internally divided over the basic strategy.

With the fate of cap-and-trade in the Senate pretty much sealed – in effect, cap-and-trade’s third successive rejection by the Senate -- the debate behind the scenes is moving to the alternatives.   The two leading options are direct EPA regulation of GHG emissions or a revenue-neutral carbon tax.  The courts recently held that EPA already has the authority to regulate GHG emissions, and the eclipse of cap-and-trade will shine a new spotlight on this approach.  The alternative is one which a good share of the environmental community, most economists, and climate-change leaders like Al Gore have all supported:  Apply a tax to energy based on its carbon content, and recycle the revenues as cuts in payroll or other taxes.  Given how economically costly direct regulation can be – and the uncertainties about what such regulation would look like under the next conservative president, compared to our present liberal one -- its prospect could quickly expand support for a carbon tax program.  That approach also has the virtue of a successful record:  While Europe’s cap-and-trade system has yet to reduce European GHG emissions, Sweden’s 15-year experiment with carbon-based taxes cut the country’s emissions sharply even as its economy grew 50 percent larger. 

For its supporters, a carbon tax is simple, transparent, and produces a steady price for carbon which businesses can use to plan large investments in developing and adopting more climate-friendly fuels and technologies.  To its opponents, it’s just another tax.  That objection should be at least partly neutralized by recycling the revenues through other tax cuts – if the debate remains reasonable.  In the end, environmental and business leaders, and ultimately the White House, will have to defend a carbon-based tax against the forces of politics as usual, which in this time seem dominated by the power of entrenched interests and the partisan politics of just-say-no-to-everything.  If we can’t manage that, we may well lose the best chance in a generation to take serious action to defend he climate our children and grandchildren will inherit. 

It was an auspicious week for the touchy issues surrounding executive pay.  One after another, President Obama’s pay czar, Kenneth Feinberg, announced new restrictions for AIG executives; Goldman Sachs was reported to be putting aside $23 billion this year’s bonus pool, the largest anywhere, ever; and Elinor Ostrom from Indiana University shared the Nobel Prize in economics for her breakthrough work on how large companies organize themselves, often in ways that encourage executives to put their own financial interests before those of the shareholders.   

Starting with Goldman, it’s obvious that a sheaf of annual bonuses each equal to 10 or 20 times what an average American earns in his or her entire lifetime, coming from a firm which recently received huge, direct and indirect taxpayer-funded assistance, is certain to spark outrage.   That reaction isn’t misplaced, and there’s a sensible response to it based on the core tenets of capitalism which we will get to shortly.   There are other serious matters at stake here, too.   In particular, how does a financial services firm like Goldman Sachs earn such huge profits in difficult times?  And since the operations of Goldman and a few others like it matter so much to the economy – which is why they got their federal assistance – how do the arrangements which produce such huge bonuses affect those operations and thereby the rest of us?   The answers suggest that even as Goldman’s top executives and traders put away enough for a royal retirement, their decisions could lay the foundation for future financial turmoil that would leave the rest of us a lot poorer.  

We didn’t need this latest and most conspicuous instance of greed at Goldman to know that the compensation provided to the uppermost echelons of American business is out of control.  Since 1990, the pay of American CEOs has jumped from 90 times the average workers’ pay to 250 times – compared to 15 to 30 times for British, French and Japanese CEOs.   Nobel Laureate Ostrom’s work helps us understand why:  CEOs name their own top executives and strongly influence who ends up on their boards of directors – and consequently on the committees that set the terms for all of their compensation.  How much they decide to pay themselves, therefore, is essentially limited by the intersection of their own avarice and any vestigial sense of shame they might have.   And the shame is pretty easy to dispose of, since the terms of their compensation are rarely disclosed publically.

There’s a fascinating account of some of these pay packages in a current New Yorker article chronicling the efforts of Nell Minow and Robert A.G. Monks to reassert shareholder rights over these modern robber barons. Almost everywhere, most of the pay comes in stock or stock options, so they’re only liable for the 15 percent capital gains tax.  (The Goldman executives who will claim stock bonuses worth tens of millions of dollars this year will report taxable “salaries” of less than $300,000.)  And if the stock price falls under these executives’ leadership, their options contracts are often revised at a lower strike price.   These packages may also include huge “retirement” bonuses for CEOs that leave voluntarily – like the one federal contractor Halliburton gave Dick Cheney when he left to run for Vice President – and even “retention bonuses” for executives who end up in prison.  Then there are the extravagant perks.  It took public divorce proceedings against GE’s Jack Welch for shareholders to find out that on top of the many hundreds of millions of dollars Welch received in stock and salary, his friendly board had also awarded him lifetime use of the company’s 737 and helicopters; lifetime floor seats for the Knicks and lifetime box seats for the Red Sox, Yankees and the Metropolitan Opera; exclusive lifetime use of a sprawling Manhattan apartment, including fresh flowers, dry cleaning service and even the tips for the doorman; and a catalog of lifetime golf and country club memberships.   His and most other executive contracts also now include “gross-ups,” which means that the shareholders pick up federal and state taxes owed on the executives’ various perks. 

These are all examples of what economists call the “agent-principal problem,” in which the interests of agents – they’re the executives – diverge from those of the principals, who here are the owners or shareholders.  It’s pretty simple: They enrich themselves at the expense of the shareholders who they ostensibly work for – and those shareholders now include a majority of all Americans.  The simple democratic answer to all this, derived directly from the essence of capitalism, is to empower the owners by requiring that boards disclose all aspects of the compensation package of senior personnel and subject the terms of those compensation packages to mandatory shareholder votes, every year.  

Last week, I proposed this step on a CNBC business show.   The other guest predictably squawked about government control – and then the moderators also tried to dismiss the idea as “impossible.”  Come again?  Shareholders vote every year on lots of measures – check out your proxy statements.   And the mere threat that shareholders might publicly reject a CEO‘s payday should moderate the greed of at least some compensation committees.   The House passed a weak version of this proposal recently – annual, “advisory” shareholder votes on compensation.  The Senate should strengthen it with stricter disclosure requirements and an annual vote that actually decides the matter. Why, precisely, shouldn’t a company’s owners determine what their executives are paid?  And does anyone think that Goldman’s shareholders, including strapped pension plans and charitable institutions, are eager to see $23 billion in potential dividends go to the firm’s top tiers?

This particular agent-principal problem also affects the rest of us, since the stock and stock options that make up most of these compensation packages are often tied to the short-term gains associated with an executive or trader’s work, without regard to the transactions’ long-term returns.  So, hundreds of traders and executives at Goldman and other places on Wall Street have closed transactions and other deals that booked large paper profits this year – and will take home huge bonuses tied to them – but bear no consequences if those deals go sour next year or the year after and cost the shareholders billions.   These arrangements directly encourage them to take on enormous long-term risks for their firms and owners, in pursuit of the short-term paper gains that generate their own bonuses.   Since risk and return are closely related, these arrangements help explain how Goldman earned enough this year to dole out that projected $23 billion in bonuses.   And by creating such strong incentives for risky investments on a large-scale, these same arrangements were a core element of the meltdown that nearly pushed the U.S. and global economies into a genuine Depression, and cost shareholders and taxpayers trillions of dollars.    

To prevent a recurrence that could ruin almost everyone, these arrangements have to end.  J.P. Morgan Chase has said it will include new “claw-back” provisions that would reclaim part of the bonuses when a deal’s long-term returns are less than expected.   It’s a nice gesture, but it’s hardly enough.  We need laws and regulations that directly limit the risk levels of the portfolios of institutions deemed “too large to fail,” and specific, claw-back guidelines from the SEC that all public companies will have to follow.  The outstanding question is whether Congress has the cajones to force the country’s richest people and institutions to change the ways that made them so wealthy in the first place.

Cross-posted at The New Republic.

Policymakers and pundits who finally are worried about a "jobless recovery" should consider this: Our actual prospects are worse than that term suggests.  The initial expansion we may already be experiencing will be notable not for a lack of new jobs, as the phrase "jobless recovery" suggests, but for substantial, continued job losses.  Total employment will continue to decline for many months and perhaps as long as two years, as it did after the 2001 recession.  Nor will it be enough to aim for simply "recovery," if by that is meant a return to the conditions that preceded this recession, including unstable capital markets and stagnating real wages in the face of strong productivity gains.

The stimulus passed last February has helped to slow job losses – without it, we might well shed an additional one-to-two million more jobs.  But fiscal stimulus is a much weaker lever for creating jobs than it used to be, because of changes in the relationship between increases in economic demand (that's what stimulus does) and creating new jobs to satisfy that demand.  In the 2002-2007 expansion, private employment grew at less than half the rate, relative to growth, as it did in the expansions of the 1980s and 1990s.  So, Washington boosting demand and growth today has less than half the impact on jobs that it once did.

In the short-run, there's little we can do about this change.  Behind it lies large, structural changes, especially the emergence of more intense competition spurred by globalization, which now limits how much businesses can raise their prices when their costs increase.  The good news about this development is the low inflation that’s prevailed across most of the world for nearly two decades, or basically the time frame of modern globalization.  The bad news is that when health care and energy costs, for example, rise rapidly, businesses which can’t pass along those cost increases in higher prices have to cut other costs – and they often start with jobs and wages.  (These developments are also big factors in why wages now stagnate even as productivity increases.)

This means that the administration’s long-term economic agenda has to include serious steps to reduce how much health care and energy prices rise, or relieve business of some of the burden of those cost increases.  In short, long-term cost containment in health care and the development of alternative energy sources on a large scale both have to be part of the administration’s core economic agenda, with all of the political urgency that implies.  Otherwise – and here’s a scary thought – most Americans may fare no better economically under President Obama than they did under his failed predecessor.

There are still a few cards left to play for the shorter-term.  The most important jobs measure in the February stimulus was assistance to the states (and through them, to localities), so their own budget squeezes don’t force them to lay off so many teachers, police, and other public employees.  Their budget constraints are still growing worse – an important part, because unemployment is still rising.  The most efficient way for Congress and the President to limit additional jobs losses in 2010, then, is to provide perhaps another $100 billion in assistance to the states.

The other measure now getting attention is a tax break for businesses that create new jobs, an idea the President promoted in his campaign but which never made it into the stimulus.  Here's how it works: Businesses would receive a tax credit for the first year of payroll taxes on new employees or those moving from part-time to full-time, and a credit for half as much in the second year.  It's not very well targeted, since you end up subsidizing jobs that would have been created without any tax break.  (Keep in mind, falling employment is a net result, with some businesses adding jobs and others cutting them.)  But it is well focused on jobs, so long as we also include some conditions on those who claim it.  For example, a new business should have to be in place for at least six months before qualifying, to head off scams where people close down existing firms, reopen them, and then use all their existing employees to claim a big tax benefit.  And a firm’s total wage costs should have to rise, so employers don't just fire and rehire workers in order to qualify. 

We tried a version of this tax break in the 1970s, and most economists who've looked at it believe it did some good.  It should help again – but not as much as it did last time, because the economy's natural, job-creating dynamics are much weaker and more constrained under globalization than they were in the 1970s.

Beyond these two measures, the most important step for the administration is to set its political sights on the more difficult, long-term measures required to restore healthy and sustained job creation and wage gains – and to prepare the American people to wait a while for real results. 

The latest fight over the Decennial Census is part of a 30 years' war over efforts to count everyone in America, including immigrants, minorities and poor people.  It's become an ongoing war, because the results carry such large consequences.  The Constitution mandates a census every decade, because the founders saw a regular, state-by-state population count as the best way to determine how many seats each state gets in the House of Representatives.  Beyond that, as Washington's role has expanded, the Census provides the data used to distribute a growing slice of federal spending among the states and their cities and counties - nearly $400 billion worth these days - and to build the baselines and updates used to evaluate the effectiveness of hundreds of federal programs. 

Until this year, the fights over the Decennial Census have focused not on who should be counted - the answer has always been everyone - but on how hard the government should try to find the one to two percent of us who are often overlooked.   It matters, because people who don't return their Census forms and then avoid Census workers trying to follow up - the Bureau calls them the "undercounted" - are predominantly poor minorities, recent immigrants, and American Indians.  So, they're not distributed randomly across the states but rather concentrated in certain places - and this undercount costs those places part of their fair share of federal funds for roads, schools, medical care, parks and other things based on population.  If the count were accurate, a number of big cities and states might be a little less financially strapped. 

I follow all of this pretty closely, because as Under Secretary of Commerce in the late 1990s, I oversaw the Census Bureau planning and operations for the 2000 Census.  The fight that time was over our plans to use a huge sample - some 1 million households - to find out exactly where and to what extent the undercounts happen, and then use that information to adjust the head count and make the final results more accurate.  That was just what the National Academy of Sciences had recommended for the 1990 Census, which the first Bush White House rejected.  When the undercount grew worse that time, the Academy came back with the same recommendation for 2000.  This time, the Clinton administration approved, and the Census Bureau did it.  But between the counting and the reporting, George W. Bush took office.  The sample was discarded, and the undercount grew even worse. 

The opposition to sampling in 2000 certainly seemed to be motivated by purely political concerns that counting all minorities would cost them federal funding or even seats in Congress.  But that opposition wasn't completely shameless: They balanced their attacks on sampling with support for spending as much as we asked for to assemble the largest workforce of census counters in history and mount major advertising and civic outreach campaigns targeted to communities with large undercounts. 

It will be worse this time.  The 2010 Census planned by the Bush administration has no sample, and it's too late now for the Obama team to design and carry out one in time.  It's also almost certain that the undercount will be even larger: The numbers of recent immigrants are way up, and the advertising campaigns aimed at minorities and the outreach to civic groups have been scaled back. 

But now it's getting truly ugly.  Senator Bob Bennett, backed by the Wall Street Journal and right-wing cable TV and radio, has proposed to use the census to identify undocumented people, who would then be deliberately excluded from the count.   In more than two centuries of the U.S. Census, it has always counted whoever is physically here - "inhabitants" in the term used in the first census of 1790 - regardless of their citizenship or other legal status.  One reason is that everyone is protected by the law, so everyone should be counted in determining how many seats a state gets to write those laws.  And whether or not someone has citizenship or residency papers, they still put claims on public services which the funding for those services should reflect.    

The political and social implications of Bennett's radical idea are enormous.  California, for example, may have as many as 4 or 5 million undocumented inhabitants - exclude them and the state could lose perhaps a half-dozen seats in Congress and tens of billions of dollars in federal funds.  Texas and other states with large Hispanic populations would lose seats and funding as well.

This change also could destroy the Census process, with incalculable costs for everyone.   The Census doesn't collect any information beyond people's demographic characteristics - no names or data about their legal circumstances - and it's so fastidious about people's confidentiality that it won't share any specific data with police, the FBI, or anybody.  In 2000, for example, a form came back with a threat against the president scrawled across it - and the Census Bureau refused Secret Service demands to share the address.  (It turned out to not matter, since the respondent was safely tucked away in a state prison.)  The Bureau also knows that if the census process goes beyond demographics, tens of millions of people may assume that their information might be turned over to other parts of government, and the undercount would skyrocket.  People would begin to worry that the IRS might compare the number of people counted in a household against the number of dependents claimed,  or that child welfare services might discover that somebody is taking care of a cousin's child and disapprove of it, or, most obviously, that the Immigration and Naturalization Service would come knocking. 

The Census is the world's largest scientific exercise and provides the basis not only to allocate federal funds and seats in Congress, but also to evaluate the effectiveness of countless federal, state and local programs.  All of that would be at risk if the latest expression of anti-immigrant bias were ever to take hold of the decennial Census.