Globalization

Globalization- Weekly Roundup, June 21, 2011

The G20 Summit for Agricultural Ministers is meeting in Paris today.  Luckily, on the East coast of the U.S. we are six hours behind Paris so there is already plenty of news.  Below are some highlights and key issues:

  • FOOD SECURITY.  The main reason for this meeting is to discuss ways to combat volatile food prices and rising levels of hunger.  According to recent U.N. statistics:
    • "...although the world would need to produce 70 per cent more food by 2050 to feed its population, agricultural production was expected to slow to 1.7 per cent a year in the decade to 2020."
  • The continued debate over using farmland for biofuels or crops; is it exacerbating rising food prices and thereby world hunger?  Or is it a necessary component of combating global warming that will actually stimulate food production by boosting agricultural investment?  This blog by Caroline Henshaw for the Wall Street Journal details the arguments on both sides.

 Some U.S. Industries on the 3FTAs:

The three free trade agreements with South Korea, Panama and Colombia are being vigorously opposed by the United Steelworkers.  Their letter to Congress can be found here.  Their position is:

"These three FTA’s will undermine our economic recovery, further decimate American manufacturing and jobs and deepen the economic insecurity and devastation faced by workers across the country."

On the other hand, major dairy groups support the measures.  The CEO of the National Corn Growers Association, Mr. Rick Tolman also spoke out in support of the FTAs, saying:

"Developing new markets for our country’s agricultural products will help our sector lead the nation in economic growth and international competitiveness.”

On globalization and health:

  • Yanzhong Huang recently published an article for the Council on Foreign Relations on the globalization of food safety issues, especially as it relates to China.  Continuing on the theme, the FDA fears that spending cuts will threaten its ability to ensure food safety.

Globalization, human rights, and business:

  • Ulrike Mast-Kirschning with Deutsche Welle interviewed John Ruggie, professor of international affairs at Harvard Law School and the UN secretary general’s special representative for business and human rights on his "guiding principles" for protecting human rights in a globalized economy, which the UN Human Rights Council recently endorsed.  The interview can be found here and the full text of Ruggie's guiding principles here.

According to Edward Glaeser's Bloomberg article, even in today's globalized internet age spatial proximity still matters, as evidenced by many companies moving back to the big cities despite all their electronic innovations that allow them to do so much remotely.  Glaeser's article explains why.

And finally, even baseball, long considered to be America's pastime is becoming more globalized as well.

Globalization 2.0 and the Rise of the Rest

International economic conferences like the one I attended in Rio a few weeks ago can be a little tedious, when experts debate their latest econometric models.   Yet, I sat up and listened intently when an IMF official remarked, almost as an aside, that the world’s emerging economies would account for 48 percent of global GDP this year.   That means that by 2013 or so, developing countries will produce a majority of the world’s output.   Since the 1980s, globalization has proceeded largely along the lines of American capitalism.   These developments herald the beginning of Globalization 2.0, which will present entirely new challenges to the American economy. 

Experts will quibble over the numbers.  The IMF used “purchasing power parity (PPP)” to produce its numbers, adjusting each country’s official GDP data for its relative cost of living before converting it into US dollars.   However, the same pattern holds if we measure each country’s GDP simply in U.S. dollars at current exchange rates.  By that measure, the share of global output coming from the advanced economies – that’s us, plus Western and Northern Europe, Canada, Japan and Australia -- has fallen from more than three-quarters a decade ago to somewhere between 60 and 65 percent today.   Most of that decline has come out of the economic hide of Europe and Japan.  Still, our ability to shape globalization in our own economic image -- from opening up everyone else’s borders to U.S. investors and strictly protecting intellectual property rights, to the dollar’s role as the world’s reserve currency – grows weaker, year by year.

The evidence is all around us.  China and India scuttled the Doha multilateral trade round, an outcome unimaginable a decade ago when they and most developing nations were much more willing to accept our judgments about the global economy.   From Latin America to Africa and parts of Asia, the recent efforts of the international “Financial Action Task Force” to crack down on money laundering and terrorist financing have been openly flouted.   And the international financial system’s rules for dealing with sovereign debt defaults, which for decades ensured generally fair compensation for foreign lenders to developing nations, have been openly mocked and discarded by such countries as Argentina and Ecuador.  If those nations’ approach were to spread in Europe’s festering sovereign debt crisis – still a remote prospect -- it would destabilize German and French banks with awful consequences for the United States, and dampen future foreign funding for poorer developing nations.  

No country can roll back this kind of global economic development.  Experts expect China and India alone to account for 40 percent of worldwide growth over the next several years – that used to be our role – with other emerging economies accounting for another 30 percent.   Chinese, Indian and Brazilian multinationals will contest with our own for global market shares, and use their home field advantages to good effect – for them.  And on the model of the purchase of IBM’s PC division by the Chinese firm Lenovo, emerging market multinationals will begin to claim a real share of our own domestic markets by buying up our companies.   

We have our own advantages, especially in developing and applying new technologies, materials and production processes; adopting new ways of financing, marketing and distributing goods and services; and coming up with new ways to manage the workplace and organize a business.  But the rise of the developing world will inescapably intensify the dark side of Globalization 1.0, especially pressures on job creation and wages.  U.S. job losses from direct off-shoring could become less of a problem, since the new prosperity and rapid modernization of developing economies drive up their wages and other costs.   But the squeeze on job creation and wages that we’ve seen for the past decade, as intense global competition collides with fast-rising health care and other costs for U.S. employers, almost certainly will become more fierce.   

The policy imperative here is to reduce the cost of creating new jobs.  We can start right now by cutting the employer’s side of the payroll tax.  And so long as the economy remains weak, we shouldn’t try to replace those revenues.  As we recover, we can replace the foregone revenues from lower payroll taxes through a new, carbon-based energy fee, a tax shift with the extra benefits of driving greater energy efficiency and addressing climate change.  A second step we can take to address the impact of Globalization 2.0 on American jobs would involve expanding and strengthening the cost-saving provisions of the President’s health care reforms.  Under the new model of globalization as under the old one, the inescapable fact is that we  simply cannot restore strong job creation until we slow the rate of increase in medical insurance costs for both businesses and the rest of us.  

Globalization- Weekly Roundup, June 15, 2011

The latest on "the rise of the rest": curbing inflation in India and China, the effort to keep IMF leadership in European hands, business ventures courting Latin American online audiences and Indonesia's globalization vision

There have recently been troublesome indications in some of the world's fastest-growing economies: rising inflation coupled with slowing growth in India and the central bank in China raising the reserve ratio for the 6th time this year to counter its own inflation problems...if there are two stories about it in the New York Times on the same day (the links to which are embedded above) it's probably worth keeping an eye on.

A new development in the race to suceed Dominique Strauss-Kahn as managing director of the IMF has further exemplified the European countries' willingness to try every tool at their disposal to keep management out of the hands of non-Europeans.  With the Bank of Israel governor and India's candidate now both removed from the running and the Mexican candidate as a self-described "long-shot candidate" behind the French favorite, it is likely that their efforts will be successful.

Portada, a leading source for Hispanic marketing and advertising news and resources, published an interesting analysis article on whether it makes sense to invest in ventures targeting global Latin American audiences. (Hint: their short answer is yes.)  For example, the rationale behind many companies' decisions to invest in such firms:

“the Hispanic and Latin American audience online has gotten to critical mass and continues to grow rapidly. It has substantial buying power but is underserved..."- Greg Sands, Managing Director of Sutter Hill Ventures, 2006

And:

...Spain’s Grupo Prisa’s Paul Westhorpe, Managing Director Global Digital Sales & Strategy, assert[ed] that by 2015 Prisa expects 70% of its digital revenues to come from the U.S Hispanic market and Latin America.

The Jakarta Globe wrote a very blunt article on Monday on why the globalization genie can't be put back in the bottle.  Below is the President of Indonesia's statement on how countries should be responding:

...the solution is for business leaders to work with government to  drive growth through innovation and push for greater economic openness.

He also expresses a need for Asian governments not to revert to short-term thinking and protectionist policies.

On modernizing policies to keep up with globalization: women's empowerment, ending protectionism, skill-building and worker protection programs

Arnab Chakraborty with India Blooms reports on U.S. Consul General Elizabeth A. Payne's belief that efforts towards women's empowerment are imperative to keep up with globalization and the challenges it brings.  Below is an excerpt from the article on the main areas of women's empowerment that she believes must be focused on:

...three prime areas demanding immediate attention as they are necessary requisites for empowering women in all spheres of society, namely – education, economic self-sufficiency and political voice.

Continuing the fight against protectionism: a new statement from India's Minister of Labour and Employment on why labor standards are no excuse for enacting protectionist trade policies (as well as India's plans for instituting programs on skill building and protection for workers)

 

End Opec Now

The OPEC cartel that meets in Vienna today has thrived in its 50-year history. First ignored, then despised for using the "oil weapon" on the West, and ultimately granted a strange legitimacy due to age, it has assumed all the trappings of an international organization. This week's meeting of Mahmoud Ahmadinejad 's Iran, Muammar Gaddafi's Libya and Hugo Chavez' Venezuela to fix quotas, for example, will take place not in Gaddafi's tent but in a sumptuous building on the Helferstorferstrase in Vienna. Press is likely to report not on why oil prices are set by a cartel of the world's worst leaders but rather on whether oil quotas are modestly adjusted to cover wells out of order since the Libyan revolt

Unfortunately, the cartel's victims have not fared as well. OPEC has over the last century engineered a massive transfer of wealth from the rest of the world to its rulers. At key junctures, it has used the "oil weapon" to destabilize the global economy as with the 1970s oil shocks, the 1980s debt crisis triggered by soaring oil bills and the 2008 financial collapse (when it cut quotas with prices over $100). Less well known is the role of oil price spikes in stoking misery and instability in developing countries. The final victims have been the people of the oil states themselves who have not shared in the wealth enjoyed by a few while seeing democracy pushed indefinitely into the future.

Adam Smith famously observed "Seldom do businessmen of the same trade get together but that it results in some detriment to the general public." Based on a long history of economic study, today cartels are illegal in virtually all developed countries. The question with OPEC, therefore, is not why it is bad but why has it survived. During the first Gulf war in 1991, the US and its allies saved Saudi Arabia, liberated Kuwait and dictated peace terms to Iraq. Yet after the war, all three countries continued as prominent OPEC members. In 2002 we invaded Iraq again, this time overthrowing Saddam Hussein. But rather than insisting that Iraq leave OPEC, the United States actually became a de facto OPEC member through the provisional Iraq authority.

The superficial answer to this question of why OPEC has persisted is it has successfully claimed sovereign immunity. Unlike a private cartel -- hundreds of which have been prosecuted by the Justice Department since 1990, OPEC is comprised of governments that happen to set quotas for oil. But this argument is weak. The 1976 Foreign Sovereign Immunity Act contains an exception to immunity in the case of governments engaging in commercial activities. The real reason that OPEC has survived is a lack of US resolve to break it up. In 2007 and 2008, the House and Senate passed legislation that would have forced the Justice Department to go after OPEC. However, a veto threat from President Bush prevented final passage of the legislation.

There is an equally strong case for trade action against OPEC, made compelling by Senator Frank Lautenberg. The WTO unequivocally prohibits quota-based cartels except in the rare case of conserving resources or national security and of the 12 OPEC members, five are WTO members and 3, observers. Yet to date, the US Trade Representative has not filed an action.

These tools alone might suffice to end OPEC. But the ratcheting up of US engagement in the region recently creates a new opportunity to break the cartel.

The Middle East -- the geographic center of OPEC -- is clearly undergoing fundamental change. Not only, of course, did the US midwife democracy in Iraq, we remain the guarantor of security of Saudi Arabia, Kuwait and the UAE, and are now also supporting the rebels in Libya. The expanded US and EU role in the region provides an opportunity to make a simple case to all parties. US and more broadly EU support must be contingent on a timeline for withdrawal from OPEC.

In short, the conditions exist to end OPEC. We only need resolve. Here is a plan forward. By July 4th, Congress should pass legislation revising the FSIA to strip OPEC of any hint of sovereign immunity. The US Trade Representative should immediately begin studying action against the OPEC countries in the WTO. The Obama Administration should make it clear to parties we aid in the Middle East they need to plan to transition out of OPEC. We can end OPEC but only if we act. Time is of the essence due to the tenuous state of the global recovery.

The Cost of Playing Games with the Full Faith and Credit of the United States

I spent last week in Rio attending a meeting of the IMF’s advisory board for the Western Hemisphere — and returned this week to Washington for the latest round of threats and charges over raising the U.S. debt limit. The contrast was, at once, disturbing and farcical. At the IMF meeting, former finance ministers, prime ministers and other ex-economic policy officials tried to unravel the grim implications for all of us if (when) Greece, Portugal or, in the worst case, Spain is forced to default on their sovereign debts. Back in Washington, congressional Republicans laid out their terms for not driving the United States into a voluntary default on its sovereign debt. Perhaps holding onto a child-like faith that bad things don’t happen to the United States, under God, they spelled out terms which everyone knows will never be accepted by President Obama and a Democratic Senate. The irony is that the GOP gambit of holding out a potential debt default if they don’t get their way could, in itself, make long-term control over deficits much harder.

The reason lies in the powerful influence of worldwide investors on our interest rates. Thankfully, global capital markets still have confidence that our two political parties can settle this dispute on reasonable terms, and that in time the United States will regain control over its deficits and debt. We know that confidence is still there, because the interest rates and yields on U.S. Treasury bills, notes and bonds all remain near historic lows. If there were real doubts about our capacity to control long-term deficits, those interest rates would be rising as investors demanded higher returns to offset the risk that we’ll fail. This confidence makes sense, because we succeeded at the same task twice before, in the 1980s and again in the 1990s. It took several years of squabbling and compromise, but President Reagan and a Democratic House agreed to raise taxes, cut defense and reduce Medicare and Medicaid spending in the 1980s — and the same pattern played out again a decade later with President Clinton and, first, a Democratic House and then a GOP one. That combination of revenues, defense and health care was, and remains today, inevitable, since those are the only pieces of fiscal policy big enough for cuts and reforms that can make a significant difference for deficits.

But neither Reagan nor Clinton faced opponents prepared to hold the full faith and credit of the United States hostage to their own partisan approach to the deficit. To make this gambit appear respectable, House Majority Leader Cantor even claimed last week that major players on Wall Street had assured him that a U.S. default would be a matter of economic indifference. The only explanation is that Mr. Cantor, without realizing it, was talking to short-sellers getting ready to bet billions that U.S. stocks and bonds might crash — as they will if we actually do default.

Happily, worldwide investors are probably correct that the likelihood of a U.S. debt default is still very, very small. If it ever came close to that, the real players on Wall Street would face down the U.S. Congress. But cutting it close may turn out to be very expensive, too.

Let’s perform a small thought experiment. A Tea-Party infused GOP takes us to the edge of default and then pulls back. A really close call, however, would almost certainly make worldwide investors nervous. They would begin to question whether our politics truly are up to the task of dealing with our deficits, so they add a small risk premium to our interest rates. Let’s say — and this would be optimistic in this scenario — that short-term rates on Treasury bills go up one-half of a percentage-point; medium-term rates on Treasury notes rise three-quarters of a percentage-point, and long-term rates on U.S. bonds increase by 1.25 percentage-points.

Now, let’s be optimistic again and assume that Congress and the President eventually agree to cut the 2012 deficit by 10 percent — $108 billion off of the current projection of $1.081 trillion. That will leave a 2012 deficit of $973 billion to be financed. The small increases to interest rates would add about $7 billion just to the first-year interest costs of the 2012 deficit. And that’s just the beginning: All publicly-held Treasury bills also have to be refinanced in 2012 — nearly $2 trillion worth at last count. The tiny 0.50 percentage-point increase in those rates would add another $10 billion to next year’s interest costs. That comes to $17 billion in extra interest costs in just the first year, and just on publically-held debt. Those premiums would become embedded in those interest rates, adding much more to our interest costs, year after year, as additional deficits have to be financed and some $7 trillion in publicly-held Treasury notes and bonds come due for refinancing. A single refinancing of that current stock of publicly-held Treasury notes and bonds, with the new risk premiums, would add more than $50 billion, per-year, to interest costs. And the actual risk premiums demanded by global investors could be significantly higher than we assume here, and so that much more expensive.

These incremental increases in interest rates also wouldn’t be confined to U.S. Treasury rates; they would be transmitted immediately to other interest rates, from mortgages to credit cards. That means the expansion would further slow, American incomes and the government’s revenues would grow less, and, lo and behold, the deficits would be even bigger.

That’s the math. Even if congressional Republicans don’t mean it, the political games they’re playing today with a U.S. debt default, purportedly in the name of fiscal responsibility, could make U.S. deficits and debt even more unmanageable, and U.S. prosperity more problematic.

A New, Progressive Economic Strategy for America

Full essay linked here in pdf form.

A New, Progressive Economic Strategy for America

By Dr. Robert J. Shapiro
Chair, NDN Globalization Initiative
April, 2010

Written over a series of weeks in April 2010, the following four pieces lay out a new economic strategy for America that creates broad-based prosperity and addresses the America's great economic challenges in the era of globalization. Dr. Robert J. Shapiro, the Chair of NDN's Globalization Initiative and former Under Secretary of Commerce for Economic Affair, describes an ambitious yet practical agenda for addressing the struggle of everyday Americans, getting the nation's fiscal house in order, reforming the tax code, and reclaiming American leadership and competitiveness in the global economy.

Shapiro's strategy is optimistic, in that it views the American economy as uniquely positioned for success in the age of globalization. However, if we lack the political will to implement Shapiro's necessary reforms and squander the opportunities presented us, we could find ourselves marveling at economic miracles around the world and left waiting for one of our own.

-Jake Berliner
Deputy Policy Director, NDN Globalization Initiative
May, 2011

A New, Progressive Economic Strategy, Part 1

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

A New, Progressive Economic Strategy, Part 3: Tax Reform

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

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

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

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

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

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

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

 

A New, Progressive Economic Strategy, Part 4: The Global Economy

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

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

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

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

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

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

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

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

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

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

That leaves the sticky matter of "Too Big to Fail," or what to do about funds or banks whose failure could trigger another broad crisis. We have two alternatives: Break them up, so no bank or fund can jeopardize the stability of the entire financial system. In its' favor, there is little evidence of real economic benefits derived from the huge size of the institutions that dominated the sector before the crisis, much less the even greater size of the behemoths that dominate it now. Many conservatives like this approach, from Alan Greenspan to Mervyn King (he runs the Bank of England), because it avoids the alternative, which would be a new process to take over the investment activities of any large player at the first sign of trouble. Either way, the plan should reject out-of-hand the current, reckless GOP position: No prophylactic break-ups, no new process to take them over when they're in trouble, and no future bailouts. That would be a formula for a global depression the next time that big finance implodes.  
There's more to consider as well for a progressive plan to help Americans make the best of globalization, from sensible immigration reforms to measures to help recognize asset bubbles before they get out of hand. In one way or another, we will return to those issues later, along with some others. For now, we conclude this four-part series hopeful that somewhere out there, in Washington or beyond, there is a growing recognition that now is the time for progressives to rethink our national economic approach and reconfigure the economic agenda. 

 

Economic Connectivity to the Arab World as a National Security Imperative

One of the most important causes of the Arab Spring was a lack of economic opportunity. In his speech yesterday, the President articulated his administration's policy for helping foster prosperity in the region:

Now, even as we promote political reform, even as we promote human rights in the region, our efforts can’t stop there.  So the second way that we must support positive change in the region is through our efforts to advance economic development for nations that are transitioning to democracy. 

After all, politics alone has not put protesters into the streets.  The tipping point for so many people is the more constant concern of putting food on the table and providing for a family.  Too many people in the region wake up with few expectations other than making it through the day, perhaps hoping that their luck will change.  Throughout the region, many young people have a solid education, but closed economies leave them unable to find a job.  Entrepreneurs are brimming with ideas, but corruption leaves them unable to profit from those ideas. 

The greatest untapped resource in the Middle East and North Africa is the talent of its people.  In the recent protests, we see that talent on display, as people harness technology to move the world.  It’s no coincidence that one of the leaders of Tahrir Square was an executive for Google.  That energy now needs to be channeled, in country after country, so that economic growth can solidify the accomplishments of the street.  For just as democratic revolutions can be triggered by a lack of individual opportunity, successful democratic transitions depend upon an expansion of growth and broad-based prosperity.

So, drawing from what we’ve learned around the world, we think it’s important to focus on trade, not just aid; on investment, not just assistance.  The goal must be a model in which protectionism gives way to openness, the reigns of commerce pass from the few to the many, and the economy generates jobs for the young.  America’s support for democracy will therefore be based on ensuring financial stability, promoting reform, and integrating competitive markets with each other and the global economy.  And we’re going to start with Tunisia and Egypt.

First, we’ve asked the World Bank and the International Monetary Fund to present a plan at next week’s G8 summit for what needs to be done to stabilize and modernize the economies of Tunisia and Egypt.  Together, we must help them recover from the disruptions of their democratic upheaval, and support the governments that will be elected later this year.  And we are urging other countries to help Egypt and Tunisia meet its near-term financial needs.

Second, we do not want a democratic Egypt to be saddled by the debts of its past.  So we will relieve a democratic Egypt of up to $1 billion in debt, and work with our Egyptian partners to invest these resources to foster growth and entrepreneurship.  We will help Egypt regain access to markets by guaranteeing $1 billion in borrowing that is needed to finance infrastructure and job creation.  And we will help newly democratic governments recover assets that were stolen.

Third, we’re working with Congress to create Enterprise Funds to invest in Tunisia and Egypt.  And these will be modeled on funds that supported the transitions in Eastern Europe after the fall of the Berlin Wall.  OPIC will soon launch a $2 billion facility to support private investment across the region.  And we will work with the allies to refocus the European Bank for Reconstruction and Development so that it provides the same support for democratic transitions and economic modernization in the Middle East and North Africa as it has in Europe.

Fourth, the United States will launch a comprehensive Trade and Investment Partnership Initiative in the Middle East and North Africa.  If you take out oil exports, this entire region of over 400 million people exports roughly the same amount as Switzerland.  So we will work with the EU to facilitate more trade within the region, build on existing agreements to promote integration with U.S. and European markets, and open the door for those countries who adopt high standards of reform and trade liberalization to construct a regional trade arrangement.  And just as EU membership served as an incentive for reform in Europe, so should the vision of a modern and prosperous economy create a powerful force for reform in the Middle East and North Africa.  

Prosperity also requires tearing down walls that stand in the way of progress -– the corruption of elites who steal from their people; the red tape that stops an idea from becoming a business; the patronage that distributes wealth based on tribe or sect.  We will help governments meet international obligations, and invest efforts at anti-corruption -- by working with parliamentarians who are developing reforms, and activists who use technology to increase transparency and hold government accountable.  Politics and human rights; economic reform.

Something of a mini-Marshall plan for the region, these commerce and investment focused ideas are incredibly important in a region long isolated from the global economy and, with it, the marketplace of ideas. If we look at the greatest success stories of the early 21st century, predominantly Asian and Latin American countries, we see a pattern of connectivity to the global economy. Ending the Arab world's economic isolation should be a cornerstone of America's national security strategy.

Running on Empty: The Economics and Politics of Gasoline Prices

Mother Nature is intervening again in U.S. energy markets.  Just as falling oil prices are puncturing upward pressures on gasoline prices, prospects of serious flooding in areas of the Gulf states where refineries are concentrated has sent gas future prices soaring again.  With the economy sputtering a bit again, it’s not welcome news for the President, or for the rest of us.  But it shines a light on what actually drives the gasoline market in the United States and, by the way, refutes the energy policies of the President’s critics. And the reason it matters so much politically lies not so much in the actual price of gas, which Washington can do little to affect, as in the economy’s underlying problems with jobs and incomes.  

While speculators place bets that Mississippi Valley flooding will interrupt gasoline supplies, those supplies have played no role at all in rising gas prices over the last several months. Partisans can cry, “drill, baby, drill” all they want, but Energy Department data show that the United States has been a net exporter of gasoline since the beginning of 2010.  In short, America produces more gasoline than it consumes. From January of last year through this past February – the most current data on energy trade -- the United States exported an average of 5.5 million more barrels per-month than it imported.  And from last November through February, as prices at the pump marched up from $2.86 per-gallon to $3.20, the net trade surplus in gasoline jumped to an average of 9.8 million barrels per-month.

U.S. demand for the oil that goes into making gasoline also can’t explain rising gas prices, since our oil consumption is still about 2 million barrels per-day below the levels in late-2007, just before the onset of the 2008-2009 recession.  Yet, gasoline prices in April averaged $3.42 per-gallon, 22 percent above the 2007 average of $2.80 per-gallon.

The answer to this painful riddle does not lie in supply and demand.  Rather, most of the explanation lies in the Saudi Arabian’s government’s dogged determination to keep worldwide oil prices high even as worldwide demand eases, as it has with the recent stumbles in the American, European and Japanese economies.  And the rest of the answer can be traced to the increasing ability of large financial institutions to wield enormous leverage in order to dominate futures markets in oil and gas.  

The consequent high prices are understandably frustrating to Americans who have taken steps to reduce their energy demand, assuming like all good free marketeers that lower demand will translate into lower prices.  The share of U.S. vehicle sales going to light cars is up to nearly 60 percent, and hybrids’ share has doubled in the last five years (to about 6 percent).  But for most drivers, the recent increases in gasoline prices swamp any gains in miles-per-gallon. The administration’s critics whine all of this could have been avoided, if the Administration approved more permits for offshore drilling in deep water.  But permits for shallow-water drilling are up; and in any case, the Energy Information Agency says that opening up the outer continental shelf would probably reduce gas prices by no more than 3-cents per-gallon twenty years from now. 

In the long-run, technology will have a much larger impact on future oil and gasoline prices than today’s squabbles over drilling rights or tax breaks for U.S. energy companies – that is, so long as prices remain near their current levels.  For example, the United States has enormous natural reserves in oil shale and tar sands.  If oil prices stay near where they are today, oil from shale and sands will compete quite nicely with Saudi crude – and leave little room for the rulers in Riyadh to push up prices much further.  And with another five to ten years of development, the Administration’s favored clean-energy alternatives also will likely become competitive, again if current oil prices stick.

None of this can affect the current U.S. politics of high oil and gas prices.  But what matters most politically about those prices is actually not their level at all, but how much those prices crimp spending by Americans on everything else.  In short, the politics of oil and gasoline prices depends in the end on whether people’s incomes are going up or down.  The 1990s saw a happy convergence of rising incomes and falling energy prices, underwriting a boom in both consumption and business investments to meet the increased demand.  But the Saudi dictatorship swore that they would never let that happen again, which is why we now have to live with high energy prices in the face of weakening demand.

In an industry that doesn’t much follow the laws of supply and demand, a genuine fix for gasoline prices is simply beyond the power of the President and Congress.  The only course left is the harder work of getting incomes moving up again.  And that will require, just to begin, some serious steps to stabilize housing prices, jumpstart business and job creation, and provide opportunities for adult Americans to upgrade their skills with information technologies.

Boehner's Debt-Limit Demands and No-Facts Zone

As I wrote Monday, House Speaker John Boehner gave a speech in New York on the state of the economy and our fiscal challenges. Today, the press reacted:

If you read one thing today, be sure to read the Bloomberg piece by James Rowley and Mike Dorning entitled "Boehner Builds Economic Case on Assertions at Odds with Markets, Studies."

In The Washington Post, Ruth Marcus takes a look at Boehner's lack of reality, and says he has an "incoherent, impervious-to-facts economic philosophy." Indeed.

And The New York Times Editorial Page similarly rips Boehner's speech, saying "There is no way to solve the country's fiscal ills without an accurate diagnosis and rigorous prescriptions for a cure. Mr. Boehner's speech was devoid of both."

The massive gulf in understanding between the two parties, either because of ignorance or ideology, about how the economy actually works and what drives the federal deficit, is a big reason why there's a gap between what Democrats and Republicans are willing to do. And it's why there are stories like this about the Biden-led deficit negotiations, because Republicans won't event come to the table in a serious manner. It's good that much of the media has stopped pretending that there is merely a difference of opinion; John Boehner has his own facts.

Silly Things Said Today: Boehner on the Debt Limit

Speaker John Boehner will lay out his path on the debt ceiling tonight in New York and will say the following:

"It’s true that allowing America to default would be irresponsible," he said in the excerpts. "But it would be more irresponsible to raise the debt ceiling without simultaneously taking dramatic steps to reduce spending and reform the budget process."

It's amazing how untrue this is. Debt is a problem because it can ultimately cause problems for the economy. It would be crazy to cause those problems and worse immediately by letting the United States default. I'd imagine that some of the bankers at tonight's speech will impress upon Boehner the perils his way of thinking presents to the financial markets.

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