Economy

The draft report from the Bowles/Simpson Deficit Commission has some good ideas in it, and it has some that are less good, and there's plenty of analysis on both to go around.

Instead of rehashing everything others have said, I'll focus on one aspect that needs to be left out of both this commission and future reports: "example" cuts. These cuts tend to have four main characteristics: they are spending cuts (show me a report with example tax increases), they focus on the federal government itself, they are in the discretionary budget, and they are arbitrary. They are problematic for a number of reasons:

1. They don't actually reduce deficits in a meaningful way - The only example cuts that exceed one billion dollars in savings in 2015 are eliminating 250,000 contractors ($18.4 billion), cutting the federal workforce by 10 percent ($13.2 billion), and freezing federal non defense compensation for three years ($15.1 billion). (More on these in point 2.) The seven other points are ticky-tack. The meat of our structural deficit problems lies in growing defense and entitlement costs - namely Medicare, which means healthcare - and a shortage of revenue.
2. They unnecessarily demonize the federal government and weaken it, a self reinforcing cycle - While there is valid disagreement about the appropriate role of the federal government, once a role is agreed upon, partisans of all stripes can agree that role should be properly supported and properly monitored for efficiency; no more, no less. Making the government more efficient is of course a good idea. Reducing the role of contractors is a great idea, but it bears pointing out that the role of contractors rose in part because of cuts to the actual federal workforce. Arbitrarily cutting staff and resources to set an example sets the wrong example - I'd prefer a government that sets an example of competently achieving the job its citizens have asked. When it doesn't, people lose faith in government, something I trust the public servants on the deficit commission want to avoid.
3. They cheapen the hard decisions that need to be made to actually reduce the deficit - One of the example cuts is "reducing unnecessary printing expenses." It's hard to find anyone in the country who doesn't agree that unnecessary printing is unnecessary. Unfortunately, deficit reduction isn't that easy - try getting everyone to agree about unnecessary weapons systems, Medicare benefits, or taxes. That's why they're called hard choices. When we cheapen them, we allow others to advance ideas veiled as deficit reduction that don't actually reduce the deficit.

The beauty of this draft is that it does take a stab at hard choices, and its writers are to be commended for that. I look forward to an end product whose only examples are of meaningful deficit reduction.

Most of Washington is stuck "in what we call the reality-based community … people who believe that solutions emerge from your judicious study of discernible reality. That's not the way the world really works anymore. … When we act, we create our own reality.”  Karl Rove, 2004.

Rove’s famous comments came to mind this week as President Obama and his political rivals launched new policy offensives.  Hop-scotching across Asia, the President nudged the center of U.S. foreign policy towards international economic interests and concerns.   From Delhi and Jakarta to Seoul and Tokyo, he has focused on the predominant economic realities that inform the decision-making of our major allies and competitors.  In the process, he has begun to recast our critical relationships around issues that allow the United States to draw on its greatest advantages, a market four times larger than China’s, and our capacity to develop the advanced technologies and business methods driving modernization across the world. 

Back in Washington, congressional Republicans launched their own offensive, trumpeting their plans to use their majority in the House of Representatives and expanded numbers in the Senate.  But their agenda seems to draw less on the hard realities that drove most of those who went to the polls two weeks ago -- jobs and incomes – than on the full-throated ranting of the more extreme elements in their political base.  As if saying so will make it so, they are uniting around non-negotiable demands to repeal health care reform, cut taxes for high-income people, and slash domestic spending in unspecified ways.

These dueling offensives recall the 1990s even more than the Bush era.   Bill Clinton came to office on the heels of the collapse of global communism, and so happily refocused American foreign policy on international economic matters.  Barack Obama was less fortunate, with two wars and worldwide economic turmoil dominating his early foreign policies.  But less than two years later, the Iraq conflict is winding down, the Afghan war has a new course, and global markets are more stable.  So for now, he can concentrate on the economic concerns -- currency values, trade barriers, debt, and worldwide demand – that once again are central factors in our real relations with other nations.  And as in the 1990s, real movement on these international issues can help build a foundation for the progress on jobs and incomes at home that dominates the President’s domestic agenda.  

Appropriately, the President chose the world’s most economically-consequential region, Asia, to quietly launch his new foreign-policy offensive.  His agenda began with new commercial openings and investment arrangements with India and with Indonesia, two of the world’s fastest-growing and most protected large markets.  Next, he turned to the G-20 summit in Seoul, where he fended off Chinese criticism of our monetary stimulus and called for measures to address the global imbalances that set the stage for the 2008 global meltdown.   He will wind it up in Japan, the world’s third largest economy, where he will lead discussions on currency, trade and economic growth at the Asia Pacific Economic Cooperation forum.   Whatever the outcomes of all of these meetings and agreements, the President is subtly shifting the focus of American influence to the real matters that drive our relationships with most other countries. 

Back home, economic reality for many of the President’s opponents – John Boehner is a lonely exception – is being redefined by the likes of Glenn Beck and Rush Limbaugh.   Somehow, hundreds of billions of dollars will be cut from the budget without touching the defense programs and entitlement benefits which account for most spending.  Next, all of the Bush tax cuts must be extended forever, even in the face of the GOP’s sky-is-falling rhetoric on the deficits.   And any compromise on the tax cuts in the lame duck session, before they expire on December 31st, is off-the-table – despite GOP attacks on the President for allegedly fostering “economic uncertainty.”  Prominent Republicans this week also attacked the Federal Reserve’s “quantitative easing” program to support growth, as if the prescription for jobs and incomes in a weak economy is to end monetary as well as fiscal stimulus.   Ironically, this last offensive echoes China’s position that the new Fed policy will make U.S. exports “unfairly competitive.” 

These implacable opponents’ latest gambit involves the debt ceiling, which will come up in the early months of next year.  Some Republicans in both the House and Senate now threaten to block this normal procedure on the principal that’s already too high for their comfort, while others propose to let it go through only if the President agrees to $300 billion in budget savings – again without specifying any real cuts they would support.  This one is dangerous even as just a threat, since any serious suggestion that the United States might find itself legally unable to pay the interest on its’ Treasury notes and bonds would sharply drive up interest rates.  In the real world, that would cut off the fragile recovery and possibly send the entire world economy into a tailspin. 

Politics always involves a good deal of posturing and shenanigans.  But these escapades, at this moment, have real consequences, not least of all for millions of struggling Americans who apparently hope that divided government will restore their jobs.  By definition, divided government can produce the results that voters want only through reasonable compromise.  And much as when Newt Gingrich and his fantasy-fueled followers took power, if the radicals leading the offensive this time continue to deny that fact, they too will find themselves bested by a reality-based president. 

Under Secretary of State for Economic, Energy, and Agricultural Affairs Robert Hormats will speak about global economic challenges on Monday, November 15at NDN. The speech will follow President Obama's ongoing trip to Asia. More details to come - click here to RSVP.

In an America more connected to other regions of the world, economic integration is seen as a political plus. In yesterday's Wall Street Journal, Peter Wallsten writes:

Nationally, anxiety is rising over free trade. But the idea has become central in the race to represent a majority-Hispanic congressional district in South Florida, where the candidates are looking for a cultural connection to voters with family ties in Latin America.

The fight, waged largely over Spanish-language airwaves, is taking place in a Miami-area district that is home to one of the country's largest populations of Colombian-Americans. Support for the proposed U.S.-Colombia Trade Promotion Agreement is considered as much a point of ethnic pride as a boon for business.

Republican David Rivera recently aired a radio ad calling it "shameful" that Democrat Joe Garcia had raised money with the help of House Speaker Nancy Pelosi, who had "scorned us" by blocking the trade agreement's passage in 2008.

Mr. Garcia responded with a Spanish-language radio ad featuring a retired Colombian senator calling him a friend.

The sniping escalated last week, as Mr. Rivera appeared to claim an endorsement from the government of Colombia-only to have officials in Bogotá declare their neutrality in the race.

The skirmishes over the free-trade pact reflect one facet of Miami's complicated ethnic politics.

Republican-leaning Cuban-Americans are the biggest ethnic bloc in Florida's 25th Congressional District. But an influx of Democratic-leaning and independent Colombian-Americans over the past decade has helped transform the district, which now has a nearly equal number of Republican and Democratic voters.

Florida is home to 281,000 Hispanics of Colombian origin, the largest concentration in the country, according to the Pew Hispanic Center.

Both Mr. Rivera, a state House member, and Mr. Garcia, a former state utility commissioner and former Obama administration energy official, are Cuban-American and eager to reach out to local Colombians.

"There's no other issue where a Cuban-American elected official can show non-Cuban Hispanics that he somehow understands and relates to then, and that it's not all about Cuban issues," said Juan Zapata, a Colombian-American and Republican state legislator who lives in the district.

Full article here.

In 2008, NDN argued that President Bush introduced the Colombia FTA in a manner designed for failure precisely so it could be used as a political football to target the Colombian-American community in Florida. While the legacy of that political decision is still with us, it is also clear that the politics of the Colombia FTA aren't as cut and dry as Washington conventional wisdom might hold.

There has been a good deal of chatter and hand-wringing lately about the Ryan Lizza New Yorker piece which tries to tick-tock how cap and trade went off a cliff.  Yet for those of us who are biased towards what we can do outside the Beltway and from the bottom-up, it seems like a good time to review some of the strategic actions we can take that don't just depend on Congressional kumbaya alone.

Here is a short memo laying out 5 supplemental but decidedly big strategies -- all of which are compatible with continuing the fight for a comprehensive climate bill. 

To borrow a construction from the Sherlock Holmes mysteries, there’s a dog that hasn’t barked in this election.  In a campaign dominated by the economy, Republicans have never invoked some version of Ronald Reagan’s devastating query from 1980, “Are you better now than you were four years ago?”  It turns out, there’s good reason for their reticence:  By every basic economic measure – GDP growth, corporate profits, business investment, the stock market, incomes, wages, and jobs – Americans actually are quite a bit better off now.  That’s the inescapable conclusion after comparing the economy’s performance over the first six-to-seven quarters of Barack Obama’s presidency with its performance during the last six-to-seven quarters under George W. Bush.  

Let’s start with overall growth.  The Bureau of Economic Analysis (BEA) tells us that from January 2009 through June 2010, the first six quarters of the Obama presidency, the country’s real GDP grew by more than 2.8 percent.  That may not be strong growth by the standards of the Clinton or Reagan eras.   But it leaves Americans considerably better off compared to the last six quarters of George W. Bush’s term, when the economy’s output shrank by 2.1 percent. 

Business leaders complain a lot that President Obama unfairly bashes them.  Yet, the data suggest that they should thank him, because American business is clearly a lot better off under Obama.  The BEA reports that corporate profits grew 62 percent in the first six quarters of his term, rising from an annual rate of $995 billion in the first quarter of 2009 to $1,425 billion in the second quarter of 2010.  That’s a complete turnaround from the last six quarters of Bush’s term, when the annual rate of corporate profits fell 34 percent, from $1,501 billion to $995 billion.  It’s the same story for gross domestic investment by American businesses, which fell at an annual rate of 14.2 percent over the last six quarters of the Bush presidency, but has turned around under Obama to increase by 17.5 percent over his first six quarters. 

Given this record, it’s no wonder that American investors also are much better off today.   Standard & Poors reports that over the first 21 months of the Obama presidency, their benchmark index, the S&P 500, rose more than 46 percent, from 805.22 to 1,176.19.  The healthy gains under Obama have wiped out the miserable record of the last 21 months of the Bush presidency, when the S&P 500 sank 43 percent, from 1,495.4 to 850.1.

Political scientists say that the most powerful economic measure, for affecting elections, is what happens to people’s incomes.  The BEA has issued six quarters of personal income data since Obama took office.  Again, the contrast is clear.  From January 2009 through June 2010, the real per capita income of Americans rose 0.7 percent, from $32,780 to $33,009.  That’s not much, but it’s nearly twice the gains seen over the last six quarters of the Bush presidency, when real per capita income rose 0.4 percent, from $32,681 to $32,810. The hourly wage data from the Bureau of Labor Statistics (BLS) tell the same story.   Adjusted to 2010 dollars, hourly wages over the first 19 months under Obama increased 1.0 percent, from $22.45 to $22.67.  Again, that’s not great progress, but it’s considerably stronger than the wage gains over the last 19 months of the Bush presidency, when the real hourly wage grew 0.7 percent, from $22.18 to $22.33.

Finally, we come to jobs. A few months ago, I calculated that 92 percent of all private-sector job losses in this period occurred under Bush or during the first six month of Obama’s term, before his policies took effect.   Even if we don’t draw that fine distinction and compare the jobs record of the President’s first 19 months in office with the last 19 months under his predecessor, Americans again are clearly better off under Obama. BLS reports that total non-farm employment in September of this year was 130.2 million or 2.0 percent lower than the level in January 2009.  That’s a marked improvement from the much sharper job losses over the last 19 months under George W. Bush, when total non-farm employment shrank 3.5 percent from 137.7 million to 132.8 million jobs.

There is no doubt that Americans are disappointed and angry that the jobs and incomes picture hasn’t improved more.  But elections involve choices.  How the early-term Obama economy stacks up against the late-term Bush economy may help explain why, as my NDN colleague Simon Rosenberg has acutely argued, we may not be headed for a GOP wave this November.  At least, it’s now obvious why Republicans aren’t asking Americans if they’re better off now than they used to be.  The mystery is why more Democrats aren’t using Ronald Reagan’s famous question to frame their own campaigns.

The International Monetary Fund held its annual Washington meeting last weekend, so I spent a balmy Sunday discussing the potential pitfalls for the U.S. and world economies.  I attended as one of two American representatives on the IMF’s advisory board for the Western Hemisphere; and in that group and beyond, almost no one could see a clear path to worldwide prosperity.  Yet, few delegates seemed open to their own countries accepting any costs to enhance the prospects of global growth or even to protect the world from another meltdown.  

The weekend’s favorite topic was the slow growth unfolding in the United States, Europe and Japan – too slow, that is, for the large developing countries that depend on us to buy their exports and so support their employment.  The upshot is new concerns about a “currency war” breaking out in the developing world, and perhaps beyond.  Already, many countries are intervening to keep their currencies relatively cheap and so make their exports more price-competitive than their neighbors.  Of course, the only certain way for a country to keep its exports competitive is to produce better goods and services than its rivals.  But that can involve reforms in investment, education and business-formation policies, all much harder to pull off politically than temporarily managing an exchange rate.  The catch is that when everyone tries to keep their currencies cheap at the same time, no one ends up better off – and the next step is protectionism.  If that sounds far-fetched, consider that one of the first orders of business in the new Congress will be legislation to punish Beijing for its cheap currency by slapping new tariffs on Chinese imports. 

Forgotten in all these machinations is the supporting role that artificially cheap currencies played in the financial crisis.  The strong dollar, compared to almost everyone else’s currencies, made Americans outsized consumers of everyone else’s exports – in 2007, U.S. imports totaled $2.2 trillion, or more than the entire GDP of all but five countries.  But most of the dollars we spent on imports came back here, since the United States is the only place where dollars are the legal currency to buy stocks or companies.  Those dollars helped swell the liquidity that financed the reckless leveraging by mortgage lenders and Wall Street, which all came crashing down in 2008.  And when economists today say we have to redress “global imbalances” to avoid another crisis, they’re talking about the same dynamics.  Yet, today’s competitive currency devaluations put us right back on the same path.

 The weekend’s next favorite topic was the current political fashion for tight budgets, especially in the advanced countries.  Since those are the same countries with slow growth, the talk turned to technical moves by the Federal Reserve and perhaps other major central banks – so-called “quantitative easing” -- to expand credit even as interest rates already are near zero. This cheap new credit, of course, could someday be the kindling for the next bubble.  

Moreover, it was hard to find anyone at the meetings who believes that the financial reforms taken thus far, here and around the world, are enough to avoid another meltdown.  The good news is that the Financial Stability Board – that’s a rule-setting body for the major central banks – is set to issue another set of requirements for big finance, which will go well beyond what anyone else has done so far.

Of course, it’s unlikely that the world’s big banks will accept significant restrictions from the FSB, following their success in watering down new limits everywhere else.  And even if they did, those rules won’t help contain the current flash point in the global capital system, the sovereign debt problems of Greece, Spain, Portugal and Ireland.  A default by Spain, for example, would leave major French and German banks insolvent.  They also would be unable to meet their obligations to U.S. and British banks, setting the stage for another financial meltdown.   Now, even if Greece goes down, as most financial experts privately expect, Spain and the rest may still avoid the worst.  But if the worst does happen, the EU-IMF contingency bailout program might well not stem the tide.  At least, that’s the current judgment of global investors, who have bid down the prices for Greek, Spanish, Portuguese and Irish bonds to levels near those before the EU and IMF announced their program months ago. 

Behind all of these problems, the core issue remains the persistent slow demand and growth across much of Europe, Japan and the United States.  The unavoidable fact is that the financial crisis has left countless tens of millions of households in the advanced countries poorer, and therefore reluctant to spend like they used to.  The only recourse is to help people rebuild their incomes and wealth through direct measures to stabilize housing prices (the source of most people’s wealth) and to induce employers to hire more people.   As usual, the world’s dominant economy and its President will have to take the lead.  And that, I suspect, was the main topic of discussion this past weekend at the White House, just a few blocks down the street from the IMF meetings.

Breaking down a Bloomberg article on the GOP's "Pledge" to cut spending but explode the deficit, TPM takes a look at exactly what would get cut:

1. Education

President Obama has requested over $70 billion for the Department of Education next year. A cut along the lines of what the Republicans propose would necessitate a $5 billion cut to the Pell Grant program, which assists low-income students with college tuition costs.

2. Health Care

This is where Republicans really want to do damage -- to Obama's health care reform law. But their discretionary spending cut alone would mean billions in fewer resources for the Department of Health and Human Services. Perhaps most troubling, the National Institutes of Health would take a $6 billion hit. The Centers for Disease Control would also take hundreds of millions of dollars in cuts. And the National Cancer Institute, where spending has risen by 10 percent in the past two years would see their funding cut.

3. Social Services

Congress would also have to cut money for Justice Assistance Grants -- a.k.a. state and local law enforcement. Without cuts, that's $2 billion. Republicans would take $400 million from local police forces alone.

4. Housing

Everyone knows America's infrastructure is crumbling. Part of the initial response by the Administration was an increase in funding for the Departments of Transportation, and Housing and Urban Development. Returning to 2006 levels would mean over $13 billion in lost revenue for projects under the purview of that department.

5. Revenue Collection

It's probably wrong to think that the public wouldn't support cutting funds for tax collectors. But if the government is going lean, it will probably have to lay off people who collect tax dollars, and conduct audits. That sounds great to your average frustrated tax payer. But Republicans talking about closing budget shortfalls will be working against themselves. In fact, without their help, the Treasury could lose just about as much money as it saves in non-defense, non-veteran non-senior, discretionary spending.

Sending kids to college, curing cancer, stopping disease, keeping local communities safe, and quality infrastructure are all things I'd imagine are overwhelmingly popular - not to mention necessary for the well-being of the country. No wonder the "Pledge" has a net negative rating.

The fact is that you can't get anywhere close to balancing the budget on spending cuts alone, especially out of the domestic discretionary budget. Maybe we should instead listen to NDN Board Member and Ask.com founder Garrett Gruener, who says we ought to let the Bush tax cuts for the top 2 percent expire. 

In my last post, I wrote about where the capital is that is necessary to create the next economy.  It is in private hands--those of banks, institutional investors and, as the New York Times echos today, corporations who are now sitting trillions in cash.  There is no guarantee this money will go to work anytime soon or that it will all stay in the Untied States.  Government's role post-crisis must be to coax it out of hiding by reducing uncertainty while investing in education and infrastructure--two local factors in growth where there is no substitute for government leadership--to make the US attractive to investors.

But when capital comes out of hiding, what will the next economy look like?  Today I will describe four economic trends that will shape the next economy.  The Great Recession did not reverse these trends; rather it was failure to adjust to them that precipated the crisis. 

First, small continues to beautiful as economies worldwide continue to decentralize.  Continuing a trend that began in the 1970s, over the last decade, Fortune 500 employment has been flat though their sales and profits have jumped evan allowing for the Great Recession.  Not only only do small businesses create about two thirds of US jobs as we often hear, small and medium size businesses are providing a higher percentge of jobs as the Fortune 500 continue to outsource functions and some old companies disappear.  We may regret the passing of high paid lifetime jobs at blue chip companies but that day is gone.  Overseas the dynamism in China, Vietnam and elsewhere is occurring not in large monolithic companies but in networks of smaller firms with a strong regional focus.  Chinese economic dynamism on in Guangdong province and coast, for example, appears to be yet another example of the regional development fueled by local spillovers described by Michael Porter (and decades earlier by Alfred Marshall) following liberalization.  We should not confuse liberalization with what remains of command and control.

There is a solid economic reason for this trend.  Firms grew large in the 20th century, as Nobel Laureate Ronald Coase first observed, not because of economies of scale which can exist over a keiretsu of companies or region (such as the Garment district in New York) but rather to avoid the transaction costs of contracting with outsiders.  In recent years, those transaction costs have collapsed due to email, database integration and other technologies.  During the recent crisis it was firms that remained highly vertically integrated such as GM that suffered whereas those that embraced collaborating such as Ford survived. Similarly, large bank like Citi suffered.  And, of course, it was bailing out the large companies that created the largest chore for government.

Second, and related to the first, technologies have dramatically empowered the individual--or perhaps more accurately the crowd--at the expense of elites.  From the Barack Obama campaign to political movements in other countries to the tea party insurgency within the Republican parth this summer, groups of people have allied quickly and unexpectedly at the expense of incumbents, helped by new technologies.  Accustomed to this democracy in most parts of their lives, people expect to see it in the economy.  For this reason, the bailouts of large companies, however, necessary following the financial crisis, created a cognitive dissonance that the Administration needs to escape.  There is no way we are going to redo the 1930s in the age of Twitter.  The next economy will be bottom up and leverage new technology.

Third, the next economy must leverage innovation.  The US can (and should) not compete on cheap labor.  To do so would be at best a race to the bottom that we would lose.  Nor can we compete on cheap land or raw materials--because our exchange rate prices those things equal to or greater than equivalents elsewhere.  We can compete, however, on knowledge and productivity where we excel.  No country conducts better research or has better unversities.  And no country can convert an idea into a business better than the United States.  The next economy must leverage that knowhow.  The US economy received a huge boost from our leadership in Internet technology and we need similar boost in new sectors if we are going to retain global economic leadership.

Fourth, the next economy will follow changes in laws.  The sectors where we reform regulation will be those that upgrade plant and equipment as capital flows toward new opportunities. 

Ironically, post financial crisis, one sector that has been granted a new set of rules is the financial one.  Early indications are that financial regulation while curtailing some businesses will create vast new ones.  For example, the derivative clearing houses created in the regulation are likely to spawn a whole new growth industry on Wall Street.  There is nothing wrong with a new industry per se and it is too soon to know whether Congress got it right or perhaps created a new moral hazard.  But clearly, it will form part of the next economy.  Similarly, the healthcare sector will adjust to new rules, however, it remains to be seen how a reduction in medicare and increase in medicaid will impact healthcare practice.

Perhaps the key sector in need of reform that has yet to get it is the energy sector.  Silicon Valley and savvy investors have identified clean technology and, in particular, the smart grid, electric transportation and electricity sector as one rife with opportunities.  However, the technologies fermenting in laboratories will go nowhere without meaningful reform of the electricity sector that provides virtually no way, currently, to monetize new technologies.  Reform is complicated by the large state role in electricity regulation.  (The telecom and financial sectors which boomed in recent decades solved this problem by carrying out reform at the federal level.)  Climate change legislation would have sparked a surge in energy investments, but didn't happen.

For the energy sector to become a driver of wealth and job creation, the Adminsitration needs to get behind a major bipartisan effort to upgrade our nation's outdated energy regulatory architecture.  NDN launched this drive with our Electrcity 2.0 initiative and we are glad to see more and more groups beginning to embrace what must become a central economic policy project of the next year. 

So what will the next economy look like?  It will be underweighted in housing and consumer spending reflecting the overhang of the housing crisis.  It will include a financial services component.  Ant it  will rise or fall on its embrace of innovation.   But to achieve its full potential and engage the trillions in private capital now sitting on the sidelines--money that could easily go to China or Vietnam, it will require upgrading our energy regulation.

Check out this video of Council of Economic Advisors Chair Dr. Austan Goolsbee explaining why extending the Bush tax cuts for the wealthy is a bad idea. 

I'm a big fan of visual representation, so I hope they keep using this white board.