Globalization Initiative

In his weekly address, President Obama says he went to Asia in large part to help create economic prosperity:

As we emerge from the worst recession in generations, there is nothing more important than to do everything we can to get our economy moving again and put Americans back to work, and I will go anywhere to pursue that goal.

That’s one of the main reasons I took this trip.  Asia is a region where we now buy more goods and do more trade with than any other place in the world – commerce that supports millions of jobs back home.

Watch the whole video:

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.

Newsweek just released a poll of American and Chinese attitudes toward innovation and their respective economies. The write-up leads with this telling anecdote:

Only a slight breeze blew across the plains of Inner Mongolia on a recent afternoon, but the giant turbines at the Huitengxile Wind Power Field were spinning steadily. This facility, 200 miles northwest of Beijing, has 550 turbines churning out enough juice to power a small city, and inside a monitoring station, plant manager Zhang Jianjun points to a wall chart showing the 11 different suppliers of the high-tech windmills. Four are Chinese companies, but when Zhang is asked to pick his favorite, his nationalism is trumped by a desire for quality. "General Electric," he says, citing its reliability. "I'm excited when all of the turbines are working."

The poll says some pretty basic things: Americans think the recession has hurt innovation and both Chinese and Americans think innovation will be more important than ever to the U.S. economy. The poll however goes onto cite some interesting and curious dynamics.

Here are results asking Chinese and American parents what skills their children need to drive innovation:

This slide says a few things to me. First, the grass is always greener. Our education system is prized for its ability to teach creative approaches to problem solving, while that of China is maligned for a lack of doing so and generally prizes technical and math skills. While I certainly acknowledge that Americans could use more math and computer skills (see www.ndn.org/skills), it's clearly our creativity and ability to thrive in competition that has made us successful.

Here are results from asking Americans and Chinese how they would invest a week's pay:

Again, curious, that Chinese say they would invest, while Americans say they would save, when the behavior tends to be the opposite. I'm not sure what this means - other than perhaps people are constantly being told that behavior that they are not partaking in is desirable. I know it's hard to watch cable news without hearing that Americans have too much debt. 

What the poll ultimately says to me is that the national conversation on innovation is long overdue. This poll, conducted by BSG and commissioned by NDN in 2007, shows Americans understanding the nature of innovation and the globalized economy better than some give them credit for. That said, policymakers and pundits could probably do a better job filling in the blanks. 

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.

Today saw two nudges forward for U.S. trade policy, which has been at a standstill for quite a while now. First, Senate Finance Committee Chairman Max Baucus delivered a major speech calling for a new U.S. trade policy. From Senator Baucus' speech:

“It’s time for a new blueprint on trade,” said Baucus. “And this blueprint must focus first and foremost on Asia. We must open key Asian markets, and key markets around the world, to U.S. exports. In these difficult economic times, American jobs, American workers and America’s economic growth depend on it more than ever before. ”

Moving Forward with a New Blueprint on Trade

John F. Kennedy said:

“We must trade or fade.” 

When President Kennedy said those words almost 50 years ago, the United States was pulling out of a recession. Even as the engines of growth sputtered back to life, unemployment remained high. In response, the President proposed a bold plan to revive the U.S. economy and put Americans back to work. 

In 1962, President Kennedy proposed domestic stimulus measures, such as tax cuts and more robust unemployment insurance. And President Kennedy also looked outward. He did not react to the difficult economic times by pulling back from a strong trade agenda. Instead, he pushed forward. He believed that export driven growth would utilize idle capacity, help maintain our balance of payments, and build bridges to key allies around the world.

Once again, the economy demands leadership. And the fundamental truth that President Kennedy espoused then holds just as true today. We must trade or fade.

In addition, Ed Luce writes in the FT about the words of Lee Kuan Yew, the former prime minister of Singapore who recently met with President Obama:

“You guys are giving China a free run in Asia,” [Lee] told Fred Bergsten, the director of the Peterson Institute for International Economics. “The vacuum in US policy is enabling the Chinese to make the running.”
...

“It is really important to understand just how badly the US is screwing itself on trade,” said Mr Bergsten. “By having an inactive trade policy, others are rushing to fill the vacuum.”

Mr Obama will have to deal with Beijing’s sensitivities following his recent decision to impose import duties on Chinese tyre imports, in addition to more familiar disputes over China’s lack of protection for intellectual property rights and its allegedly under-valued exchange rate.

But Washington’s lack of leadership will be most keenly felt at Apec at the weekend. “You’ve got Asian countries engaged in negotiations throughout the region and the world – over 16 [trade] negotiations completed,” said Steve Schrage at the Centre For Strategic and International Studies.

“In contrast, you’ve got a United States where there are questions about a jobless recovery, and our free-trade agreement efforts are stalled.”

White House officials have hinted that Mr Obama may be open to such a move which, they say, could help rekindle US economic leadership in Asia.

“Contrary to conventional wisdom we are not inactive,” said a senior official.

One possible silver lining could emerge if Mr Obama puts his weight behind the Transpacific Partnership – a group of small Apec members that hopes to set up open trade in the region.

The theme of the Baucus speech and Lee's warnings are the same: doing nothing means moving backward. A legacy of the Bush years, during which he talked big about trade but produced few results, the standstill on economic liberalization, especially in Asia, will hopefully be reversed quickly, aided by the popularity of President Obama that Luce cites. That said, China is quickly moving to usurp American economic leadership in Asia, and it's clear that America cannot stand by idly. Completing Doha and liberalizing trade in Asia will have to be cornerstones of a 21st century American economic strategy that allows our workers and businesses to compete globally.

This week's elections and news that unemployment has reached 10.2 percent have renewed the national focus on the importance of the economy. NDN has long argued that the economy is the central issue driving the volatility of the American electorate and continues to write and advocate on the need to create a 21st century economic plan for America. Below, please find some recent and longstanding NDN narrative and analysis on the impact of the changing economy to American politics and policy:

• Sifting Through the Economic Messages From the Elections Last Night by Simon Rosenberg, 11/4/2009 - Exit polls show that the most important factor to voters is the economy, as the old, 20th century economy is not working for everyday Americans anymore. To have electoral and governing success, policymakers must make a the creation of a new, 21st century economy their central focus. 

• What Washington Should Understand and Do to Create Jobs by Dr. Robert J. Shapiro, 10/8/2009 - Even the term "jobless recovery" understates how dire America's economic situation is, as the economy now faces structural problems to create jobs and wage growth. With no silver bullet in sight, policymakers must set their sites on creating an agenda and conversation around long-term, broad based prosperity. 

• The Key to the Fall Debate: Staying Focused on the Economy by Simon Rosenberg, 9/3/2009 - The summer months were not good ones for Democrats, but Rosenberg argues that there is a roadmap for how they can get back on track: staying relentlessly focused on the economy and the struggle of every day people.  

• Noticing and Solving the Problem with Jobs and Wages by Dr. Robert Shapiro, 7/23/2009 - The ability of the American economy to create jobs and wage growth, even in times of productivity and GDP growth, has broken down. Policymakers must adjust to this new economic reality.

• Not Taking the Presidential Eye Off the Economic Ball by Simon Rosenberg, 7/2/2009 - The economy is the singular dominant issue in American politics today, and the administration must craft a response to that, understanding that few want a recovery that takes America back to the Bush economy.

• Should We Try to Save the Damaged Brands? by Simon Rosenberg, 4/30/2009 - Rosenberg asks if these mainstay, now troubled American brands - AIG, Chrysler, Citi, GM - can be saved by being propped up by the government or if their brands are permanently insolvent.

• Time to Face the Facts: The Economy Probably Won’t Get Better For Quite a While by Dr. Robert Shapiro, 4/9/2009 – Shapiro's most recent economic analysis says that the economy could be stuck in the Great Recession for long period of time, and that a v-shaped recovery is unlikely.

• Spend? Save? The debate continues by Simon Rosenberg, 2/11/2009 - Building on a previous post, Rosenberg follows the growing debate about whether American families should be focusing on saving.

• The Utter Bankruptcy of Today's Republican Party by Simon Rosenberg, 1/28/09 - Rosenberg argues that Republican opposition to the economic recovery package represents the ideological bankruptcy of the party.

• A Stimulus for the Long Run by Simon Rosenberg and Dr. Robert Shapiro, 11/14/2008 – This important essay lays out the now widely agreed-upon argument that the upcoming economic stimulus package must include investments in the basic elements of growth for the next decade, including elements that create a low-carbon, energy-efficient economy.

• Back to Basics: The Treasury Plan Won't Work by Dr. Robert Shapiro, 9/24/2008 - As the financial crisis unfolded and the Bush Administration offered its response, Shapiro argued that, while major action was needed, the Treasury's plan would be ineffective.

• Keep People in Their Homes by Simon Rosenberg and Dr. Robert Shapiro, 9/23/2008 – At the beginning of the financial collapse, NDN offered this narrative-shaping essay on the economic need to stabilize the housing market.

• Making the Struggle of Every Day People the Central Focus of the National Debate by Simon Rosenberg, 8/17/2008 - As the 2008 presidential campaign entered a crucial phase, Rosenberg argued that political leaders must focus on raising the wages and incomes of Americans.

• Poll: Economic Strategies and Globalization conducted by Pete Brodnitz, Benenson Strategy Group, 11/8/2007 - This poll of attitudes toward the economy and globalization found that Americans understand the modern nature of globalization, want government to give them the opportunity to succeed through investment, and believe innovation is a key strength of the American economy. Americans also saw the economy getting much worse, and they were right, as the recession officially began just a month later.

• The New Landscape of Globalization: The Real Foundations of American Prosperity in the 21st Century by Dr. Robert Shapiro, 6/20/2007 – Shapiro offers this forward-looking paper on the state of globalization, the structural problems facing the American economy, and a road map to prosperity in this new economic era.

• Voters Deliver a Mandate for a New Economic Strategy by Simon Rosenberg, 11/10/2006 - In analysis of exit polls from the 2006 elections, which chased Republicans from power, NDN argued that the most important factor, even in an election most thought was decided on the war in Iraq, was the economy. 

• Meeting the Challenges of the 21st Century: Crafting a Better CAFTA by Simon Rosenberg, Dr. Robert Shapiro, and Joe Garcia, 6/9/2005 - NDN calls on policymakers to face squarely a vision of how globalization can and should work, and how rapid economic liberalization, generally a positive for America and the world, must be accompanied by a commensurate investment in the economic well-being of everyday Americans, who have not seen the expected wage gains despite strong productivity and GDP growth. 

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."

In his Washington Post column today (now thankfully in the 1st section of the paper) Steven Pearlstein warns the nation's policymakers that there is no quick and easy fix for the struggling American economy:

As difficult as it is for voters and politicians to accept, government cannot -- and does not -- control our market economy. To give you a rough idea, it would be a huge accomplishment, and take a huge amount of money, for the government to stimulate the creation of a million jobs, let alone 2 million. Even that, however, would be but a fraction of the nearly 7.5 million jobs that have been lost so far in this recession.

The truth is that robust growth and job creation will happen only once we've completed the painful and disruptive process of deleveraging, restructuring and rebalancing the economy so that we consume less than we produce, and put something away for the future. The government can, and has, taken steps to smooth that process and make sure that it does not spin out of control, while providing some support for those who have lost the most. But unless we reinflate the credit bubble and the bubble economy that it spawned -- a big mistake -- there is no way to avoid an extended period of uncomfortably slow growth with uncomfortably high employment as a large, complex, dynamic market economy heals itself.

Some end of the day reading:

TNR's Zubin Jelveh covers an element of something I wrote about last week - political attacks on the stimulus for being a negative factor on growth. Unfortunately, this attack comes from a conservative economist who should know better. 

The WSJ says the International Energy Agency sees good news in that oil demand will remain relatively low, even as growth picks up. Generally, growth is associated with higher oil prices, which can be economically troublesome (or worse), but this time efficiency policies are saving the day. Renewed growth with low energy prices is just what the doctor ordered. 

And David Leonhardt writes that, even as bad as things look, we just don't know that the economy won't boom again soon. He says an economy transforming innovation we don't know about could come along soon, which is a fair point. So let's do the things we know encourage innovation: upgrading worker skills, R&D funding, creating competition, valuing IP, and more. (All of these are especially applicable to climate-friendly technologies.)

Simon and Rob have weighed in quite a bit this morning on what the elections mean for the country and the Obama agenda. As they both stress, the biggest thing this election means is that focusing on an economic plan for the country must be the top priority. What's important to note is that this is nothing new. NDN has been arguing since 2006 that the volatility in the electorate was due to economic conditions. Exit polls from that year bear the argument out, even though most pundits at the time thought Iraq was the key issue. Here's NDN's analysis of 2006 exit polls:

-  The economy was the most important issue.  The exit poll asked voters if they considered various issue important in deciding their vote.  If you add up those  who responded - where issues were extremely, very, or somewhat important - the economy comes out number one.

Table 1: Which issue was most important?

Issue	Extremely Important	Very Important	Somewhat Important	Total
Economy	39%	43%	14%	96%
Corruption	41%	33%	18%	92%
Iraq	35%	32%	21%	88%
Terrorism	39%	33%	20%	82%
Moral Values	36%	21%	20%	77%

-  Economy Crucial in Battleground States.  The economy played a critical role in the key battleground states that decided the election.  In these areas the results could not be clearer: the economy was the number one issue.  The exit poll asked voters in key swing states about Iraq and the Economy.  In each swing state more voters thought the economy was either "extremely important" or "very important" in their decision over who to vote for their senator.

Table 2: Economy vs Iraq in Key Senate Races

	Economy	Iraq
Missouri	83%	62%
Montana	82%	65%
Ohio	83%	66%
Pennsylvania	81%	68%
Virginia	82%	69%

All this in much better economic times, so it comes as no surprise that exit polls from yesterday show that the economy was the dominant issue. Barack Obama continues poll much better on economic issues than do Republicans (according to a recent Pew poll, 57 percent of Americans are optimistic Obama's policies will improve the economy) and, as Simon pointed out, Republican solutions such as tax caps were voted down in two states last night. So there's little to make me believe that conservative economics is making a comeback and little to make me believe that the cheap populism of Glenn Beck (and his mentee Hoffman in NY-23) works either.

What is clear to me is that the most catastrophic thing for nervous Democrats could do before 2010 is believe that either are paths to success. The fact is that Democrats have a phenomenal historic record on the economy, and Republicans delivered eight years of wage stagnation, median income decline, and exploding health care and energy costs. Focusing on policies that address this issues, which are at the heart of the struggle of everyday Americans, is the key to victory when the polls really matter.