A 21st Century Economic Strategy for America

What Washington Should Understand and Do to Create Jobs

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. 

Mr. Brooks, Mr. Bentham and Mr. Hume On Innovation and Policymaking

David Brooks has authored a somewhat amusing column on the future of innovation policy in the United States. He tells a story of Mr. Bentham and Mr. Hume, each of whom has a distinct approach to innovating toward solutions to major governing challenges. Bentham, the expert, designs complex, wonk informed solutions to the challenges of the day, while Hume, the underachiever, admits that he has no idea how such things work, and just tries to create markets that do the job for him. Here's Brooks' conclusion:

I've introduced you to my friends Mr. Bentham and Mr. Hume because they represent the choices we face on issue after issue. This country is about to have a big debate on the role of government. The polarizers on cable TV think it’s going to be a debate between socialism and free-market purism. But it’s really going to be a debate about how to promote innovation.

The people on Mr. Bentham's side believe that government can get actively involved in organizing innovation. (I've taken his proposals from the Waxman-Markey energy bill and the Baucus health care bill.)

The people on Mr. Hume's side believe government should actively tilt the playing field to promote social goods and set off decentralized networks of reform, but they don't think government knows enough to intimately organize dynamic innovation.

So let's have the debate. But before we do, let's understand that Mr. Bentham is going to win. The lobbyists love Bentham’s intricacies and his stacks of spending proposals, which they need in order to advance their agendas. If you want to pass anything through Congress, Bentham's your man.

In all fairness to Congressional efforts, it's important to note that both Health Care and Energy/Climate legislation include the market based, low government involvement ideas that Brooks/Hume seems to prefer – health care in an exchange and climate in a market based carbon pricing regime.  

The truth is that it’s not as if the Bentham-esque details of reform proposals are some sort of new arrival to policymaking; rather, many are sought to counter decades of policies that benefit incumbents. For example, fossil fuels are still massively out-subsidized compared to clean technology, so of course clean tech advocates should fight for theirs. (Many policy intricacies obviously still do help incumbents – climate legislation does give permits away to energy intensive industries as opposed President Obama’s desired 100% auction.)   

Rather, the question for Brooks is: Who will make Mr. Hume's case? I feel for Brooks, I want his debate to happen now (Can Mr. Hume have Glenn Beck's pulpit?), and I'm all for elegant policymaking. I'm also pretty sure Brooks is right that complexity is going to win because legislating is complex. And the likeliest outcome is that Mr. Hume isn't even going to make it to the table. What I know for certain is that Brooks can't possibly be implying that this Republican Party is capable of assuming the role of Mr. Hume. That would be a party worth having.

Getting China to Play Ball on Balanced Growth and More from the G-20

Writing in the Financial Times about the four things that stood out to him about the G-20 Summit, Philip Stephens points first to "China’s, albeit reluctant, embrace of multilateralism:"

Beijing is at last owning up to the fact that it is a leading actor on the global stage. A year or so ago, China was still clinging on to an essentially passive role in international affairs. Western injunctions for it to act as a responsible stakeholder in the multilateral system were met with protestations that such demands were premature: China was still a developing country, and it prized non-interference above western concepts of mutual dependence.

The global economic crisis upended that strategy by showing that Beijing cannot detach its domestic from its international interests. True, China has had a good crisis, demonstrating that it can continue to grow while the west is in recession. But the collapse of its exports has served as a potent reminder of the inextricable ties woven by globalisation.

This interdependence is taken for granted in western capitals. For Beijing it carries the uncomfortable implication that states have a legitimate interest in the framing of others' domestic policies.

This interdependence led to, as Stephens points out, China's headline grabbing climate change announcement, an important marker on the road to Copenhagen. Frankly though, that work by China, in the interplay between domestic and international politics, was a fairly easy calculation. China has already made a strategic decision to develop a home-grown renewable energy industry, this was a logical move.

Rather, the heavy lift for China will come in the commitment to balanced growth from the G-20. China’s consumers are notoriously reticent to, well, consume. And it's virtually entirely due to policy. As Michael Pettis, a professor at Peking University, writes in the New York Times:

The Chinese save such a high fraction of their income largely because of long-standing policies aimed at promoting and subsidizing domestic investment and manufacturing.

These policies inevitably require households to foot the bill, primarily through sluggish wage growth, low interest rates on their bank deposits, an undervalued currency and a weak social safety net. Since total savings is just the difference between what is produced and what is consumed, subsidizing producers at the expense of household consumers necessarily causes savings to rise.

Since, as NDN's Rob Shapiro writes, there is little chance of the U.S. bailing the world out of the great recession, there is, as Pettis says, a scary possible outcome to rebalancing:

As the U.S. rebalances its economy toward higher savings rates, China has no choice but to rebalance toward higher consumption rates. This can happen either because of a sharp pick-up in consumption growth or, more likely, a sharp slowdown in GDP growth. I worry that China will find it difficult to generate the kind of consumption growth that will take up some of the American slack, and we may be locked into a period during which the world adjusts by growing more slowly.

This G-20 seems to have been more successful than many would have thought, but the real crux of the global economic recovery may lie in getting the world's rising powers to connect their people to the global marketplace. As China adjusts to the responsibilities that come with others having a stake in their domestic economic policies, it will inevitably do what everyone else does: balance that responsibility with domestic politics. (Perhaps Chinese leadership will see fit to develop a social safety net in the form of universal healthcare; all the socialists are doing it these days.)

More from the G-20:

20 heads are better than 7 – NYT: Global Economic Forum to Expand Permanently

FT: World Leaders to Expand G20 Powers:

Rich countries will agree to give up 5 per cent of the total voting shares to be distributed to under-represented countries, including rapidly growing emerging economies such as China. The aim is to increase the legitimacy of these institutions. The leaders have agreed to put aside disagreements over the representation in the governing bodies of these institutions.

Lula – Rising powers doing their part (let them do more by concluding Doha):

Policies adopted by countries in the Global South have created tens of millions of new consumers, who will drive the recovery of the global economy.

WSJ Environmental Capital blog - Fossil-fuel subsidies to be phased out in the "medium run."

Developing countries—many of the same ones that are demanding that rich countries underwrite their transition to a clean-energy economy—spent $310 billion in 2007 to subsidize fossil-fuel consumption, the International Energy Agency says.

Stop spending so much to keep gasoline, diesel, and electricity artificially cheap, in other words, and you’ll have the cash to promote clean energy at home.

Is America Surrendering Clean Technology Leadership to China?

Experience shows that an important key to growing a vibrant renewable energy sector is a strong domestic market. Germany’s feed-in tariffs have helped it become a world leader in solar energy production. China has long been focusing on building their domestic renewable energy industries, and just announced they are upping their efforts to build domestic renewable demand. 

From the AP's coverage of the U.N. Summit on Climate Change:

Chinese President Hu Jintao said his nation will continue to take "determined" action. He laid out new plans for extending China's energy-saving programs and targets for reducing "by a notable margin" the "intensity" of its carbon pollution — carbon dioxide emission increases as related to economic growth.

He said China would greatly boost its forest cover, "climate-friendly technologies" and use 15 percent of its energy from renewable sources by 2020.

That 15 percent renewable energy by 2020 sounds like a Renewable Electricity Standard. It also sounds similar to the one in the ACES bill that passed the House in June, which mandates 20 percent renewables by 2020, but that generally allows for 5 percent of that to come from energy efficiency (which it undoubtedly will, as efficiency is way cheaper than renewables). In fact, the ACES standard can be weakened even further, all the way down to 12 percent renewables in some cases.

So now China's ahead of the United States, and, even if we pass ACES as is, will have a comparable or slightly stronger RES in an economy whose energy use (and therefore said sector) will grow much faster over the next decade than America's will. We'll have the price signal that cap and trade offers, but it’s not nearly as strong as it could be. (China is unwilling to agree to cap emissions and certainly won't ahead of the U.S.) 

Much of the opposition to domestic climate change regimes comes of the idea that American action on climate without China going along hurts the U.S. economy and does nothing to slow climate change. Now, basically the opposite could play out. With China stepping up on an RES and limited movement from the U.S. Congress toward passing a strong climate bill, some Americans seem willing to let China take a leadership role on perhaps the most pressing global governance challenge of the young century and develop an export-capable renewable energy sector that passes ours, thereby surrendering a high potential economic sector to world's most important rising power.

NDN Backgrounder: Ahead of the G-20, the Future of the Global Economy

With the G-20 approaching next week, I'm pleased to present this backgrounder on some of NDN's most important thinking on the changing global economy. We are at a decisive moment in the global economic debate - a truly international recession rife with structural imbalances, climate change, and a U.S. - China trade spat are all likely to be at the top of the agenda. Here are some of our recent thoughts on these and many other important economic issues.

  • The Key to the Fall Debate: Staying Focused on the Economy by Simon Rosenberg, September 3 - Huffington Post. Simon argues that in order for President Obama to reverse his and the Democratic Party's recent decline in public approval, the President must make the struggle of everyday people his primary rhetorical and governing concern.
  • The Fault Lines in the U.S.-China Relationship by Dr. Robert Shapiro, July 30 - Shapiro argues that the divisions between the world's most powerful nation and most important emerging power matter a great deal, and, while they often remain unseen, can flare up at anytime. This relationship, an adversarial symbiosis, will be crucial to the future of global prosperity and security.
  • Trade and Carbon, by Michael Moynihan, July 22 - Moynihan writes that we should be wary of using trade policy as a tool to combat climate change.
  • Shapiro Speaks on G-20, Need for Global Economic Action, April 1 - At an NDN event on "The G-20 and Beyond: Challenges Facing the Global Economy," Shapiro delivered wide-ranging comments on the global Great Recession, its causes, and the global leadership necessary to combat it. The event also featured U.S. Rep. Adam Smith, Foreign Policy magazine Editor-in-Chief Dr. Moisés Naím. 
  • U.S. Rep Adam Smith at The G-20 Summit and Beyond, April 1 - Ahead of the G-20 Summit, Smith, a Congressional leader on trade, terrorism, and international development, speaks on international trade and the need for a globally coordinated development strategy.
  • The Fallout of the Great Recession for Trade by Dr. Robert Shapiro, February 11 - Shapiro argues that the world is currently experiencing the economic symptoms of protectionism without actual protectionist measures being put in place, which could have dangerous consequences for the global economy.
  • Recovery Without E-verify and Buy American by Simon Rosenberg, February 10 - Rosenberg advocates for the removal of "Buy American" and E-verify provisions from the stimulus, provisions that will not stimulate the economy and will do more harm than good. 
Finally, here is the full video of Professor Bhagwati's talk at NDN on the future of the international economy. Well worth the watch:

New Poll: Everyday Americans Continue to Feel Economic Pain

A new Washington Post-ABC News poll says a few things about the politics of the economy that are important to know as we head into the fall. A few points:

Painful personal experiences over the past year continue to dampen the outlook of many Americans. About two-thirds of those polled say they have been hurt financially by the recession, with extensive reports that job losses and pay reductions are hitting home. 

Nearly six in 10 Americans are now concerned about job or pay losses in the coming months, little changed since February, and there has been no increase in the percentage who see the federal government's stimulus efforts as having an impact, even as the pace of layoffs has eased in recent months. 

Americans feel like their incomes have decreased because they, in fact, have. So what does this polling data mean? As Simon recently wrote:

Getting incomes and wages up in this new economy of the 21st century is in fact the most important domestic challenge facing the country, and one the American people are demanding a new national strategy for. This fall is the time for the President to make it clear to the American people that he understands their concerns, has a strategy to ensure their success in this new economy, and will make their success the central organizing principle of his Administration until prosperity is once again broadly shared.

Things may be headed that direction. The President spoke Monday about new financial regulations, and, with more and more of the funds from the stimulus being obligated everyday, it shouldn't be too heavy of a lift to increase the number of those who see the stimulus as having a positive impact.

TODAY - NDN Kicks Off New Series on the Economy w/ Jagdish Bhagwati, Robert Shapiro

Please join NDN and its affiliate, the New Policy Institute, today at noon for the kick-off a new series of events discussing the challenges facing the American and global economies. The series, coming months after policymakers confronted the most serious global economic crisis of the modern era, will examine domestic and international economic issues with the ultimate aim of envisioning a new economic strategy for the age of globalization. This event comes at a particularly important moment in this conversation as America and an increasingly important group of the world's leading economic powers prepare for the G-20 meeting in Pittsburgh later this month. 

BhagwatiJoining us today will be leading international economist Dr. Jagdish Bhagwati, Senior Fellow for International Economics at the Council on Foreign Relations, the University Professor at Columbia University, special adviser to the UN and the World Trade Organization, and author of In Defense of Globalization and Termites in the Trading System. He, along with NDN Globalization Initiative Chair Dr. Robert Shapiro, will discuss the impact of the Great Recession on international trade and the trading system, the danger of protectionism, and the path forward on the Doha Development Round. Shapiro will open the event with brief remarks and moderate a question and answer period. Both speakers will take questions from the live audience and those watching online.

Tuesday, September 8; light lunch served at 12:00pm
NDN: 729 15th St. NW, First Floor
A live webcast will begin at 12:15 p.m. ET
RSVP | Watch webcast

To learn more about the work of NDN's Globalization Initiative, which seeks to create a 21st century economic strategy for America, visit www.ndn.org. For more on NDN's affiliate, the New Policy Institute, visit www.newpolicyinstitute.org.

For some background material prior to the event, please take a look at:

Moving Toward Progress on Doha

With the G-20 in Pittsburgh just three weeks away and India hosting the world's trade ministers in Delhi, attention has again turned to the Doha Development Round. The New York Times brings good, if not a little skeptical news about the "a breakthrough" and resumption of Doha negotiations:

Trade ministers from around the world said Friday that they would resume negotiations on a stalled free-trade agreement even as it became clear that developing countries and the United States remain far apart on critical issues.

After two days of meetings in the Indian capital about how to restart the trade talks known as the Doha Development Round next year, trade ministers said they were committed to reaching a deal in 2010. But the tenor and substance of their comments suggested that few are willing to soften their stances.

The global economic downturn, which analysts say has led to increased protectionism around the world, was a strong undercurrent to the meeting. While all the delegates said the downturn made reaching a deal imperative, some bluntly said it would be harder now to sell any trade deal back home because political leaders are especially concerned about protecting domestic farmers and businesses.

On the Doha front, the Economist opens fire on bilateral trade agreements, a hallmark of the Bush Administration's approach to trade, and one that is now pervading Asia, as being detrimental to the goal of completing important, multilateral agreements:

Some claim that the tricky issues that stand in the way of a multilateral deal can be more easily resolved when only two countries are sitting at the table. That rarely happens: in the rush to conclude an agreement, such issues are often shelved. India’s deal with ASEAN last year, for instance, put aside the poisonous question of farm trade, which was one of the deal-breakers in the Doha talks last July.

Bilateral agreements, thus, do not, on the whole, serve as stepping stones to a comprehensive global deal. On the contrary, they both distract governments from the multilateral process and offer cover for politicians’ failure to advance it. Moreover, the fear of losing favourable treatment in a bilateral agreement can deter governments from talking tough in multilateral negotiations.

If this topic even vaguely interests you, I'd recommend joining NDN this coming Tuesday as NDN Globalization Initiative Chair Dr. Robert Shapiro hosts a conversation with Professor Jagdish Bhagwati, Senior Fellow for International Economics at the Center on Foreign Relations and economics professor at Columbia University. The two will discuss the impact of the Great Recession on international trade and the trading system, the danger of protection, and the path forward for the Doha Development Round. For more on the event, and to RSVP, click here

Newt Gingrich Rips Off Ross Douthat, Messes with California

Is it just me, or does this column from today's FT by former House Speaker Newt Gingrich sound an awful lot like the one written a month ago by New York Times conservative columnist Ross Douthat?

Gingrich, like Douthat, uses California as a model for how states shouldn't manage their finances, and, like Douthat, uses Texas as a model for economic and budgeting brilliance. The only difference is that Gingrich avoids the explicit liberal and conservative name-calling that is a hallmark of Douthat's column, but even a cursory read uncovers the implicit partisanship.


California, like so many other states facing budget shortfalls, is a victim of decades of reckless spending and unsustainable budgets. It was not always like this. The Golden State’s government services and public institutions – including its prisons – were models for the country in the 1960s and 1970s. But Californian policymakers stopped planning for the future. The state’s population ballooned from 23m in 1980 to 36m in 2008, and demographics shifted dramatically due to immigration. Roads, schools and prisons built with 1975 in mind are now crumbling and overcrowded.

The narrative that Gingrich again tries to push, that always blue California is about to fall into the Pacific because it loves lefty agendas that offer profligate spending, is historically illiterate. The "Californian policymakers" about which Gingrich writes, who took the top notch services and schools California had in the 1970s and ruined them, were the conservatives who started the Reagan Revolution and the national tax revolt. They passed Proposition 13, essentially destroying the California property tax base.

I'm not going to go into the conservative destruction of California too much more; I wrote plenty about this ridiculous meme when Douthat published a column from the same set of talking points. On a serious policy note, let's just say that I agree with Gingrich that California "needs to rethink its long-term budgeting strategies," but that starts with a sensible tax code that generates the kind of revenue Californians demand, not by messing with the extremely flawed Texas model.

TODAY: Kicking Off A New Discussion Series on the Economy with Jagdish Bhagwati and Robert Shapiro

Please join NDN and its affiliate, the New Policy Institute, next Tuesday, September 8 at noon for the kick-off a new series of events discussing the challenges facing the American and global economies. The series, coming months after policymakers confronted the most serious global economic crisis of the modern era, will examine domestic and international economic issues with the ultimate aim of envisioning a new economic strategy for the age of globalization. This event comes at a particularly important moment in this conversation as America and the world's leading economic powers prepare for the G-20 meeting in Pittsburgh later this month. 

BhagwatiJoining us next week will be leading international economist Dr. Jagdish Bhagwati, Senior Fellow for International Economics at the Council on Foreign Relations, the University Professor at Columbia University, special adviser to the UN and the World Trade Organization, and author of In Defense of Globalization and Termites in the Trading System. He, along with NDN Globalization Initiative Chair Dr. Robert Shapiro, will discuss America's international economic policy, the upcoming G-20 Summit, and the future of global economic liberalization. Shapiro will open the event with brief remarks and moderate a question and answer period. Both speakers will take questions both from the live audience and those watching online.

Tuesday, September 8; light lunch served at 12:00pm
NDN: 729 15th St. NW, First Floor
A live webcast will begin at 12:15 p.m. ET
RSVP  |  Watch webcast

Background from Bhagwati and Shapiro:


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