21st Century Agenda for America

Understanding the Lost Decade for Jobs and Incomes

UPDATE: For more on NDN's Lost Decade narrative, read the new NDN White Paper entitled, "A Lost Decade for Everyday Americans."

With the White House Forum on Jobs and Economic Growth getting underway, now is a good time to note that the problem isn’t just jobs. As we’ve long argued and the Wall Street Journal pointed out recently, the last decade has been a lost one for everyday Americans. First, we generally note that, even as GDP and productivity surged, household income didn’t keep up. In fact, the average household income took more than a $2000 loss during the Bush presidency. 

A second point, illustrated by the Wall Street Journal, is that private sector employment has basically not grown in a decade.

It is difficult to understand how bad this recession has been without fully understanding the pre-recession weakness of the American consumer caused by dropping incomes and higher costs. NDN’s Dr. Rob Shapiro – who is at the White House Forum right now – has agued that structural dynamics in the American economy have broken down its job creation and wage growth capability. For NDN’s latest thinking on these important issues, please consult:

Obama's Speech Clearly Defines His View of America's Role in the World

I enjoyed this latter section of the President's speech last night. It is perhaps the clearest holistic indication to date of his view of America's role in the world:

As President, I refuse to set goals that go beyond our responsibility, our means, or our interests.  And I must weigh all of the challenges that our nation faces.  I don't have the luxury of committing to just one.  Indeed, I'm mindful of the words of President Eisenhower, who -- in discussing our national security -- said, "Each proposal must be weighed in the light of a broader consideration:  the need to maintain balance in and among national programs."

Over the past several years, we have lost that balance.  We've failed to appreciate the connection between our national security and our economy.  In the wake of an economic crisis, too many of our neighbors and friends are out of work and struggle to pay the bills.  Too many Americans are worried about the future facing our children.  Meanwhile, competition within the global economy has grown more fierce.  So we can't simply afford to ignore the price of these wars.

But as we end the war in Iraq and transition to Afghan responsibility, we must rebuild our strength here at home.  Our prosperity provides a foundation for our power.  It pays for our military.  It underwrites our diplomacy.  It taps the potential of our people, and allows investment in new industry.  And it will allow us to compete in this century as successfully as we did in the last.  That's why our troop commitment in Afghanistan cannot be open-ended -- because the nation that I'm most interested in building is our own.

Now, let me be clear:  None of this will be easy.  The struggle against violent extremism will not be finished quickly, and it extends well beyond Afghanistan and Pakistan.  It will be an enduring test of our free society, and our leadership in the world.  And unlike the great power conflicts and clear lines of division that defined the 20th century, our effort will involve disorderly regions, failed states, diffuse enemies.

So as a result, America will have to show our strength in the way that we end wars and prevent conflict -- not just how we wage wars.  We'll have to be nimble and precise in our use of military power.  Where al Qaeda and its allies attempt to establish a foothold -- whether in Somalia or Yemen or elsewhere -- they must be confronted by growing pressure and strong partnerships.

And we can't count on military might alone.  We have to invest in our homeland security, because we can't capture or kill every violent extremist abroad.  We have to improve and better coordinate our intelligence, so that we stay one step ahead of shadowy networks. 

We will have to take away the tools of mass destruction.  And that's why I've made it a central pillar of my foreign policy to secure loose nuclear materials from terrorists, to stop the spread of nuclear weapons, and to pursue the goal of a world without them -- because every nation must understand that true security will never come from an endless race for ever more destructive weapons; true security will come for those who reject them. 

We'll have to use diplomacy, because no one nation can meet the challenges of an interconnected world acting alone.  I've spent this year renewing our alliances and forging new partnerships.  And we have forged a new beginning between America and the Muslim world -- one that recognizes our mutual interest in breaking a cycle of conflict, and that promises a future in which those who kill innocents are isolated by those who stand up for peace and prosperity and human dignity. 

And finally, we must draw on the strength of our values -- for the challenges that we face may have changed, but the things that we believe in must not.  That's why we must promote our values by living them at home -- which is why I have prohibited torture and will close the prison at Guantanamo Bay.  And we must make it clear to every man, woman and child around the world who lives under the dark cloud of tyranny that America will speak out on behalf of their human rights, and tend to the light of freedom and justice and opportunity and respect for the dignity of all peoples.  That is who we are.  That is the source, the moral source, of America’s authority.

Since the days of Franklin Roosevelt, and the service and sacrifice of our grandparents and great-grandparents, our country has borne a special burden in global affairs.  We have spilled American blood in many countries on multiple continents.  We have spent our revenue to help others rebuild from rubble and develop their own economies.  We have joined with others to develop an architecture of institutions -- from the United Nations to NATO to the World Bank -- that provide for the common security and prosperity of human beings.

We have not always been thanked for these efforts, and we have at times made mistakes.  But more than any other nation, the United States of America has underwritten global security for over six decades -- a time that, for all its problems, has seen walls come down, and markets open, and billions lifted from poverty, unparalleled scientific progress and advancing frontiers of human liberty. 

For unlike the great powers of old, we have not sought world domination.  Our union was founded in resistance to oppression. We do not seek to occupy other nations.  We will not claim another nation’s resources or target other peoples because their faith or ethnicity is different from ours.  What we have fought for -- what we continue to fight for -- is a better future for our children and grandchildren.  And we believe that their lives will be better if other peoples’ children and grandchildren can live in freedom and access opportunity.  (Applause.)   

As a country, we're not as young -- and perhaps not as innocent -- as we were when Roosevelt was President.  Yet we are still heirs to a noble struggle for freedom.  And now we must summon all of our might and moral suasion to meet the challenges of a new age. 

In the end, our security and leadership does not come solely from the strength of our arms.  It derives from our people -- from the workers and businesses who will rebuild our economy; from the entrepreneurs and researchers who will pioneer new industries; from the teachers that will educate our children, and the service of those who work in our communities at home; from the diplomats and Peace Corps volunteers who spread hope abroad; and from the men and women in uniform who are part of an unbroken line of sacrifice that has made government of the people, by the people, and for the people a reality on this Earth.

Brownstein Focuses On Containing Health Care Costs

Over the weekend, the Atlantic's Ron Brownstein penned an important piece on the cost containment measures in health care reform legislation released by Senator Harry Reid. The consensus amongst economists that he talked to is that Reid did a pretty good job. 

When I reached Jonathan Gruber on Thursday, he was working his way, page by laborious page, through the mammoth health care bill Senate Majority Leader Harry Reid had unveiled just a few hours earlier. Gruber is a leading health economist at the Massachusetts Institute of Technology who is consulted by politicians in both parties. He was one of almost two dozen top economists who sent President Obama a letter earlier this month insisting that reform won't succeed unless it "bends the curve" in the long-term growth of health care costs. And, on that front, Gruber likes what he sees in the Reid proposal. Actually he likes it a lot.

"I'm sort of a known skeptic on this stuff," Gruber told me. "My summary is it's really hard to figure out how to bend the cost curve, but I can't think of a thing to try that they didn't try. They really make the best effort anyone has ever made. Everything is in here....I can't think of anything I'd do that they are not doing in the bill. You couldn't have done better than they are doing."

Gruber may be especially effusive. But the Senate blueprint, which faces its first votes tonight, also is winning praise from other leading health reformers like Mark McClellan, the former director of the Center for Medicare and Medicaid Services under George W. Bush and Len Nichols, health policy director at the centrist New America Foundation. "The bottom line," Nichols says, "is the legislation is sending a signal that business as usual [in the medical system] is going to end."

Of course more could be done to cut costs, more can always be done, and I'd imagine that even after a reform bill is passed, we'll still have to come back to the cost question relatively soon. Having said that, the Senate bill seems to make a solid effort at cutting health care costs, which have been one of the main drags on wages and job creation over at least the past decade. Containing these costs has to be a crucial part of a new economic strategy for America going forward and is the core economic logic for health care reform. The whole piece is worth a read, as is Rob Shapiro's recent blog pointing out the political ramifications of not containing healthcare costs in the years to come.

Update: Ben Smith reports that President Obama has declared Brownstein's piece "mandatory reading for all senior staff."

President Obama: Asia Trip Key for Economic Prosperity

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 Storms on the Economy’s Horizon

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.

The New Reality of Heightened Structural Unemployment

Mark Thoma, who has a new blog, ponders a "new normal" (read: higher) unemployment rate. He points to something both NDN and Thoma have been writing about: concerns of higher structural unemployment.

I expect structural unemployment to be higher than it was, particularly in the next few years. We had too many resources in housing, finance, and automobile production, and it will take time for the economy to make the necessary structural adjustments. When this is combined with continuing globalization, as well as the higher savings rate and correspondingly lower consumption expected from households in the future, both of which cause structural change within the economy, the expectation is that the new target rate of unemployment will rise above the 4 percent level it was at before the recession.

Exactly how much it will rise and for how long is hard to say. A 5 or 6 percent rate, or even somewhat higher is certainly imaginable, but getting it right is important. If policymakers target an unemployment rate that is too low, they risk causing inflation (one reason for the high rate of inflation in the 1970s is that the Fed targeted a 4 percent unemployment rate when the actual rate of normal unemployment was much higher due to structural and demographic change). If they target a rate that is too high, then they risk having people be unnecessarily unemployed in the economy.

He goes on to point to a few ideas of how to deal with this - worker training and extended unemployment benefits among them. With unemployment at 10 percent, there are massive challenges involved in bringing that level back to "normal," but, as we craft economic policy going forward, it is important to understand that we're not going back to what we had, and policy must be responsive to the new economic realities. 

NDN believes this structural change, as well as the structural changes that have de-linked GDP and wage growth, represent the great governing challenges of the day. For years we've pointed to a three part agenda to deal with these issues. This agenda includes containing health care and energy costs, accelerating innovation, and investing in infrastructure and skills, all steps that will have to be taken to create broad based prosperity in the 21st century economy. 


Health Care’s Raw Deal for Middle-Class Families

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.

Two Public Nudges Forward for U.S. Trade Policy

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.

NDN Backgrounder: Putting the Focus on the Economy and the Struggle of Everyday People

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.
  • 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.
  • 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.
  • 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. 
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