A 21st Century Economic Strategy for America

The American economy has long been touted as the most innovative in the world, and American innovations have contributed broadly to domestic and global prosperity. The Great Recession and an increasingly competitive global economy make it imperative that the United States does more than ever to foster innovation and the creation and growth of new companies. Investing in innovation and the success of the American people must be a cornerstone of our strategy to create prosperity in the 21st century, idea-based economy.

In its recently released Innovation and Entrepreneurship Agenda, the New Democrat Coalition discusses innovation's central role in creating American prosperity. The agenda lays out a set of principles, mated with specific policies, for fostering innovation. 

On Wednesday, June 16, NDN will host a speech by Congressman Ron Kind (WI-3), Vice-Chair of the New Democrat Coalition and Co-Chair of the NDC Task Force on Innovation and Competitiveness. Kind will speak about the value of innovation to the American economy and the recently released New Dem Agenda for Innovation and Entrepreneurship. Kind will be joined by NDN President Simon Rosenberg.

June 16 @ 12pm
NDN - 729 15th St NW, First Floor
Washington, DC 
Click here to RSVP 
A live webcast will begin at 12:15

In December, NDN made the decision that the most appropriate term to describe the last decade was as a lost decade for everyday Americans. I blogged on this topic on December 3 and published a white paper on December 17 entitled, A Lost Decade for Everyday Americans.

Since that time, the lost decade narrative has been discussed in a variety of other sources. On Saturday, Neil Irwin in the Washington Post covered the lack of job growth over the last decade:

It was, according to a wide range of data, a lost decade for American workers. The decade began in a moment of triumphalism -- there was a current of thought among economists in 1999 that recessions were a thing of the past. By the end, there were two, bookends to a debt-driven expansion that was neither robust nor sustainable.

There has been zero net job creation since December 1999. No previous decade going back to the 1940s had job growth of less than 20 percent. Economic output rose at its slowest rate of any decade since the 1930s as well.

Middle-income households made less in 2008, when adjusted for inflation, than they did in 1999 -- and the number is sure to have declined further during a difficult 2009. The Aughts were the first decade of falling median incomes since figures were first compiled in the 1960s.

Paul Krugman called the decade a “Big Zero,” and yesterday, the New York Times editorialized on the need for the next decade to avoid looking like Japan’s Lost Decade and worried that not enough is being done to avert such a scenario. 

Thankfully, 2009 ended better than it began. Economists talk about green shoots of recovery taking hold. Consumer confidence has improved. Equity markets have soared. But for all the progress, the American economy remains extremely vulnerable.

To understand those economic risks, it is worth considering Japan’s experience in the 1990s. A bursting housing bubble there sparked a banking crisis that was followed by a decade of economic stagnation.

The Japanese government lacked the resolve to do what was necessary. It failed to fix its banks and stopped its early fiscal stimulus before recovery had taken hold, leaving the economy all too vulnerable to outside shocks, including the Asian currency crisis and the dot-com collapse in 2001. Japan’s annual growth rate — which had averaged 4 percent since 1973 — slowed to less than 1 percent, on average, from 1992 to 2003.

While obvious, it bears repeating that American economic policy must, first, account for fact that the last decade was already lost for everyday Americans, and, second, do everything to avoid another one. The economic, social, and political consequences of back-to-back lost decades would be catastrophic, and such a scenario is a legitimate possibility. 

The Wall Street Journal recently published this fascinating graphic (h/t Bill Easterly):

Energy and ICT are truly dominant as this decade comes to a close, and the three largest banks are (with HSBC's headquarters move to Hong Kong)  now based in China. Certainly global competition will only continue to intensify over the next decade. I'd venture a guess that the chart in 10 years will include more Asian companies and perhaps more from Latin America (and fewer from Europe). Will it include an energy company whose business relies on alternatives, or will fossil companies continue to dominate? Will state-owned enterprises continue to grow? Will one be the biggest company in the world? 

NDN President Simon Rosenberg just sent out this note alerting people to the release of a new paper from NDN:

In recent weeks, policymakers in Washington have begun to take a new look at the American economy and the increasing struggle of everyday people in this new era of globalization. 

To help inform this conversation, NDN will be releasing a series of targeted "white papers" over the next few months designed to highlight particularly significant aspects of this important debate.  

We proudly release the first in this series, A Lost Decade for Everyday Americans.  This new paper, written by Jake Berliner, Deputy Policy Director of NDN’s Globalization Initiative, makes the point that over the last ten years the typical American family has seen their incomes decline; and, that for many, economic hardship had come long before the recent recession began. 

Read the paper here on the NDN website.

Best regards,
Simon Rosenberg
President, NDN

From the introduction:

To ensure the success of the economic strategy the government adopts next year, it is imperative that the plan accounts for and explains the underlying economic weakness that affected everyday Americans in the years prior to the Great Recession. As this paper illustrates, this past decade in America has been a lost decade for ordinary Americans.

Marked by stagnating wages, declining median household income, rising living costs, abnormally slow job creation, and then capped by the destruction of many trillions of dollars in personal wealth held in housing and stocks, the decade has left most everyday Americans worse off than they were ten years ago. Too little of our national dialogue has focused on the intense struggle of everyday people prior to the Recession, yet understanding that struggle is critical to formulating an adequate response to this great economic challenge.

Read on.

The White House press office informs us that:

the Vice President will hold a roundtable discussion on this Administration’s commitment to enforcing laws against the piracy of intellectual property.  The Vice President will be joined by Attorney General Eric Holder, Homeland Security Secretary Janet Napolitano, Commerce Secretary Gary Locke, FBI Director Robert Mueller, USSS Director Mark Sullivan, as well as CEOs from major media conglomerates, union representatives, legal experts and other government officials.  This White House meeting is the first of its kind, and will bring together all of the stakeholders to discuss ways to combat piracy in this rapidly changing technological age.  

Here at NDN, we've long believed in the need to protect America's intellectual property, one of the key's to our economic strength in the modern idea-based economy. Dr. Rob Shapiro's paper, The Idea-Based Economy and Globalization: The Real Foundations of American Prosperity in the 21st Century, points out that:

In 1984, the market value of the physical assets of the top 150 U.S. public companies – their “book value” – accounted for 75 percent of the total value of their stocks. A firm was worth nearly what its plant, equipment and real estate could be sold for. By 2004, the book value of the top 150 U.S. corporations accounted for 36 percent of the total value of their shares. Nearly two-thirds of the value of large companies now comes from what they know and the ideas and relationships they own.

With that fact in mind, it is easy to see why ensuring that our IP is adequately protected is an important priority for policymakers.

Martin Wolf in the FT sums up nicely the big problem with China’s currency practices:

At the conclusion of a European Union-China summit in Nanjing last week, Wen Jiabao, the Chinese premier, complained about demands for Beijing to allow its currency to appreciate. He protested that “some countries on the one hand want the renminbi to appreciate, but on the other hand engage in brazen trade protectionism against China. This is unfair. Their measures are a restriction on China’s development.” The premier also repeated the traditional mantra: “We will maintain the stability of the renminbi at a reasonable and balanced level.”

We can make four obvious replies to Mr Wen. First, whatever the Chinese may feel, the degree of protectionism directed at their exports has been astonishingly small, given the depth of the recession. Second, the policy of keeping the exchange rate down is equivalent to an export subsidy and tariff, at a uniform rate – in other words, to protectionism. Third, having accumulated $2,273bn in foreign currency reserves by September, China has kept its exchange rate down, to a degree unmatched in world economic history. Finally, China has, as a result, distorted its own economy and that of the rest of the world. Its real exchange rate is, for example, no higher than in early 1998 and has depreciated by 12 per cent over the past seven months, even though China has the world’s fastest-growing economy and largest current account surplus.

Do these policies matter for China and the world? Yes, is the answer. Mark Carney, governor of the Bank of Canada, notes in a recent speech, that “large and unsustainable current account imbalances across major economic areas were integral to the build-up of vulnerabilities in many asset markets. In recent years, the international monetary system failed to promote timely and orderly economic adjustments.”* He is right.

What we are seeing, as Mr Carney points out, is a failure of adjustment to changes in global competitiveness that has unhappy precedents, notably during the 1920s and 1930s, with the rise of the US, and, again, during the 1960s and 1970s, with the rise of Europe and Japan. As he also notes, “China’s integration into the world economy alone represents a much bigger shock to the system than the emergence of the US at the turn of the last century. China’s share of global gross domestic product has increased faster and its economy is much more open.”

Moreover, today, China’s managed exchange rate regime is quite different from those of other big economies, which was not true of the US when it rose to prominence. Thus, China’s managed exchange rate is shifting adjustment pressure on to other countries. This was disruptive before the crisis, but is now worse than that in this post-crisis period: some advanced countries, notably Canada, Japan, and the eurozone, have already seen big appreciations of their currencies. They are not alone.

China’s currency practices are hurting the United States far less than developing nations and the eurozone, amongst others, and the US government knows it. Two things are mind-boggling to me: why other countries don’t stand up to the Chinese more (I’m glad many have avoided the all-too-easy protectionist route, because that could be a disaster, but am not sure the current dialog on rebalancing is going to move the ball enough), but, more importantly, how the Chinese could possibly think that currency manipulation is a good long term strategy. Sure, it helps exports, and the CCCP has basically made a massive political bet on dramatic GDP growth based on exports, but it doesn’t have to be this way. 

For a so-called socialist country, China is barely one at all. The domestic social safety is virtually non-existent, and as badly as the U.S. needs to expand healthcare coverage, China needs to much more. A social safety net would lessen the incredibly high savings rates that Chinese operate with (because they have no choice), in turn giving China’s people a greater ability to consume, a positive outcome for both the Chinese economy and the rest of the world.

In America these days, it’s popular to agonize over the amount of money we owe China. But China is saving because it has to, not because it wants to. As the saying goes, when you owe the bank $100,000, the bank owns you, but when you owe the bank $1.6 trillion, you own the bank. (For more on this, read Christopher Hayes’ recent article in The Nation.)

At last week’s Jobs Summit, President Obama said he’ll consider any good idea to create jobs.  I heard him say it, and I believe him.  His speech yesterday at the Brookings Institution offered some decent, standard approaches, including more infrastructure spending and tax breaks for small businesses.  The President would be well-served to cast his policy net a bit wider.  Since the Great Recession began, the economy has shed an astounding 7.3 million private-sector jobs – and based on the last two recoveries, businesses could continue to cut back their labor forces for another year or longer.  The President and Congress can create more government jobs whenever they like, for example by giving states an additional $50 billion or so targeted to jobs.  But finding the right lever to get private companies to hire more people than they would otherwise is a lot harder. 

The most direct and sensible approach is to somehow reduce the costs of hiring for companies.  The unsurprising catch is that the incentives required to get them to hire a million or more new people, whom otherwise they wouldn’t have hired, are very expensive.  So, most serious jobs proposals would either drive up our already-mammoth deficits or require a significant new tax.  

Most, but not all, because there is one approach I know of that wouldn’t cost taxpayers anything.  The foreign subsidiaries of America’s multinational companies currently hold offshore an estimated $1 trillion in past earnings, because our tax laws defer the U.S. corporate tax on those earnings until the parent companies bring them back to the U.S. parent company.  The challenge is to leverage these funds for job creation at home, by creating a strong incentive for them to bring back a share of those earnings tied to a requirement that they use the funds to finance new hires.  It’s the closest thing to “found money” that this administration and Congress will ever find. 

We actually tried this once before, in a fashion, and it worked reasonably well.  In 2004, Congress slashed the corporate tax on such “repatriated” earnings for one year, from 35 percent to 5.25 percent, and IRS data show that it increased net inflows of those earnings by $312 billion, including $252 billion by U.S. manufacturers.  The 2004 law also told companies they had to use the new funds they brought back to, among other things, finance new workers, new investment, or pay down domestic debt.  Recent surveys found $73 billion of the repatriated earnings went to create or retain jobs, $75 billion for new capital spending, and $39 billion to pay down domestic debt.   Here’s the free lunch: In the short run, the temporary program raised $34 billion in new federal revenues.  And it may not even have reduced revenues over the long-term, or not by much, since without the tax break, most U.S. multinationals keep their foreign-source earnings abroad indefinitely, or at least until they can be used to offset domestic losses for tax purposes. 

We can estimate what would happen if we tried this approach again.  A recent analysis I did with AEI’s Aparna Mathur found that such a policy could bring back $420 billion in foreign-source income now held abroad.  And if the program were targeted again in the same way as in 2004, it could mean $97 billion for new employment, or enough to create or save 2.6 million jobs over two years, as well as $101 billion for new capital spending, enough to produce long-term wage gains of 1.3 percent.  

Skeptics will claim that most companies would use their repatriated funds in other ways, such as stock buy-backs; and since money is fungible, the government couldn’t stop them.  Two academic studies built models which inferred that this happened last time; but there’s no real evidence that companies evaded the restrictions, and a recent academic survey suggests that most did follow the law.  Even if some didn’t, we can tighten the restrictions this time.  We could allow multinationals to bring back offshore earnings for one or two years and pay just 5 or 10 percent corporate tax on them here, so long as they use those funds only to create new, net jobs or increase their net investment.  That means they would have to not only hire new people, but expand their overall workforces. It might just help businesses create between 1 million and 2 million new jobs while actually reducing the deficit, which seems like the kind of new idea the President is looking for.