Economy

In today's Financial Times, Edward Luce contrasts the reality of British Prime Minister David Cameron's austerity plans with the GOP's "Pledge." He describes Cameron's plans as "medicine" and the GOP's "Pledge" as sugar, and quotes Simon Rosenberg:

In the build-up to the UK election in May, David Cameron’s Conservative party made little bones about the fact that Britain was heading into an “age of austerity”. In his “contract with voters” that Mr Cameron issued before polling day, he observed: “We know how unhappy you are and how doubtful you are that anyone will achieve anything or change anything.”

The contrast with the Pledge to America the Republicans issued last week as the basis for their midterm election campaign could not be sharper. One party offered the 21st century equivalent of “blood, sweat and tears” – admittedly watered down as polling day approached. The other parodied Pangloss’s hope that “all will be for the best in the best of all possible worlds”.

Nowhere in the Republican pledge was there acknowledgement of the painful decisions that all Americans must confront to avert disaster. Nor was there even a hint of admission that Republicans bore at least equal responsibility for the low regard in which all politicians are held in America, as they are in Britain. Instead of medicine, there was sugar...

In contrast, John Boehner, the Republican leader in the House of Representatives, flanked by the “Young Guns”, only one of whom is younger than Mr Cameron, promised to maintain all the tax cuts that George W. Bush instituted, never raise any taxes again in any shape or form, and do all this while restoring America’s budget to balance.

All of which might have been plausible were it to have spelt out the draconian spending cuts that would therefore be necessary to bring the budget back to surplus. But it declined to do so. Instead it ring-fenced more than three-quarters of the US federal budget – social security, Medicare and defence spending – and promised to impose caps on the remaining, “discretionary” portion of it.

In numerical terms, the $320bn the party has specified in spending cuts over the next decade is dwarfed by the $4,000bn in tax cuts that it promises – all on top of the current double digit budget deficit.

Simon Rosenberg of the NDN, formerly known as the New Democratic Network, says the idea that this would result in a budget surplus comes from the “Harry Potter school of economics”.

If implemented, the pledge would bring about a crisis in US sovereign creditworthiness. In the name of the founding fathers it would jeopardise the dollar. Which leads us to one of two conclusions. Either the Republican Party believes what it is saying, in which case it has no further useful intellectual contribution to make. Or else it thinks the US electorate is intellectually challenged and will mistake this fantasy for a plan.

Last week the NBER announced the recession ended in June, 2009.  The good news is we have been in a recovery for 15 months though we may not always have felt it.  The bad news is not only that the jobs have been slow to return but that policy makers have used an unprecedented amount of powder.  On the monetary side, the fed cut rates to zero and also added to its formerly pristine balance sheet over a trillion of distressed securities.  On the fiscal front, the US deficit as a percent of GDP, at 10%, is far above what most economists consider sustainable.  Over time we need to return to historic norms but withdrawing stimulus too quickly could trigger another recession.  If only there was another source of capital to drive the recovery forward!  Fortunately there is: trillions of private capital sitting on the sidelines.  If we can coax it out of hiding, not only can we support the current economy but we can begin to build the next one.

Fifteen months into the current recovery one of its most notable features is how much it resembles the old one.   The two pillars of the Bush economy, banking and housing (with some help from the government) are still at the core of our economy and policy focus  Social networking has emerged as a new growth avenue for the Internet but technology stalwarts like Microsoft and Google have watched their growth slow.  Despite much talk about a clean economic revolution by me, President Obama and many others, clean jobs have been slow to materialize and regulated utilities and traditional energy companies still dominate the energy landscape.  While we have seen glimpses here and there of the next economy in IPOs from Tesla Motors and A123 Batteries, their products have yet to go mainstream.  In short, we are waiting for the Next Economy.

This endurance of the old and tardiness of the new is noteworthy given the depth and breadth of the Great Recession.  The 1982 recession dramatically deindustrialized the US economy, leveling steel companies and manufacturers alike, but paved the way for the services heavy, technology driven economy that took its place.  The 2001-2002 recession leveled a huge swath of the telecom and dot com sectors but paved the way for healthy growth once the industry consolidated.  Reforms of the banking system combined with financial engineering paved the way for the housing boom of the 2000s even if that boom proved unsustainable.  Yet the far deeper 2008-2009 recession while triggering numerous foreclusures and some closure of banks has not yet ushered in a successor.

Enter private capital.  For the next economy to really take shape, we need not government but private capital and companies to begin investing.  Private companies and investors have the money.  The top three banks are currently sitting on a half trillion in unused cash according to banking analyst Richard X. Bove.  And the Fortune 500, having survived the recesssion in most cases (in contrast to earlier recessions) are sitting pretty with non cash firms holding about one trillion in cash in their treasuries.  Institutional investors have even greater sums stashed in cash that they could be using to buy corporate bonds or equities to fund investment in new plant and equipment. And trillions more in money lie offshore where it could be tempted by the right economic opportunities in the United States.  This combined powder is much greater than anything Congress or even the Fed could deploy.  The question is, what is holding it back?

A number of things:

First, tight banking supervision.  Banks, Bove explains, are currently constrained by regulators and stringent standards from making loans.  The recent downturn took its toll on credit scores, length of employment, assets and other credit indicators.  Supervisors and banks must agree on a middle ground that is tighter than in 2007 but realistic given today's different economic reality.

Second, excessive energy regulation.  The major sectors and regions to boom over the last half century have unifomrly been those that benefited from thoughtful liberalization.  Liberalization can be carried too far as it was in banking in the last decade.  However, the examples of Eastern Europe, China, Japan, Latin America as well as sectors in the west from banking in the 1980s in Lond to telecom in the 1990s in the United States are conclusive.  The highly regulated electricity sector is a bar to innovation today and only by creating a modern 21st century architecture can we usher in a clean economy (the focus of NDN's Electricity 2.0 initiative.)

Third, legal uncertainty.  The Obama Administration needs to commit itself to stable regulatory policies.  The extralegal nature of measures taking during the crisis for example, necessary as they may have been, are a long term deterrent to investment of capital.  More broadly, the Administration and Congress should lay out a long term agenda to provide regulatory certainty and visibility to investors.

Fourth, risk.  The government can help manage risk in a way the private sector cannot.  The Administration is correct in seeking to use comparatively limited quantities of public funding to leverage far greater quantities of private funds.  Its infrastructure bank proposal, for example, far from being a vehicle for government spending, as portrayed by oppontents, is in fact a way to leverage private funds.  Similarly, a green bank structured to provide a government guarantee to money advanced by the private sector, would give a huge boost to capital intensive clean economy investments

Finally, fear.  The Administration as it enters its third year needs to reassure the public that normalcy is returning to the economy.  Congress should do the same.  Policymakers will have more opportunities to advance good ideas with a healthy economy than they will ever have in the midst of crisis.  Accordingly, the Administration and Congress need to put the crisis behind it in their rhetoric and articulate an economic plan and message that is both forward looking and above all positive.

The US faces longer term challenges that require a variety of long term measures but in the short term the challenge is clear. 

The private capital is out there and the Next Economy is waiting.  It is only a matter of connecting the two.

As President Obama focuses this week on education, criticism has escalated regarding the levels of government assistance for the fastest-growing segment of American higher education, the private for-profit colleges, universities and institutes. From 1995 to 2008, the student bodies of private for-profit institutions increased from 240,000 to 1.8 million, a jump of 750 percent. With my Sonecon colleague, Dr. Nam Pham, I just completed an extensive study of how much support government provides to the three major types of institutions – private for-profit, public, and private not-for-profit – and the results for students. Drawing on the database of the National Center for Education Statistics, we found that most of the current criticisms of private-for-profit higher education are misplaced. They actually receive much less taxpayer support, per-student; they provide greater access to higher education for students from low-income and minority backgrounds, and they often produce better results than traditional schools.  

For idea-based economies like our own or those in Western Europe and Japan, building a workforce comprised of people with advanced skills and education has become a critical factor in global competition. And for individual workers, access to higher education is their most important ticket to long-term prosperity. Americans with bachelor degrees, for example, currently earn 83 percent more than high school graduates. Such stark differences have spurred the recent, rapid increases in the numbers of young Americans pursuing higher education. Over the last two decades, the number of students attending post-secondary institutions soared from 14.3 million to 19.6 million; and the even more rapid expansion of private for-profit colleges and universities accommodated nearly 30 percent of that increase.  

This turbo-charged expansion of private for-profit higher education isn’t serendipitous. The share of post-secondary students attending private for-profits rose from less than 2 percent to nearly 10 percent, because these institutions established certain powerful advantages. To begin, they can finance their expansion through capital markets, a more secure channel than appealing to governments and alumni as public and private not-for-profit institutions have to do.  Furthermore, new rules from the Department of Education in 1994 required strict accreditation of institutions accepting students with federal loans and grants, and many private for-profits responded by upgrading their facilities, faculties and course offerings. As young upstarts, many private for-profit institutions also are more eager and willing to adopt new, cost-effective technologies, especially online learning to scale up their enterprises. Perhaps most important, private for-profit institutions moved to meet the burgeoning economically-driven demand for higher education by emphasizing career-track programs to prepare students for jobs in particular fields, rather than a more traditional liberal arts education.

Private for-profit colleges and universities especially attract those who historically have had the least access to more traditional institutions, enrolling disproportionate numbers of students from low-income and minority families. Looking across all four-year institutions, we find that lower-income students make up nearly two-thirds of those attending private for-profit colleges and universities, compared to just over one-third of those at public and private not-for-profit institutions. Minorities also comprise more than half of the student bodies at private for-profits, compared to one-third at private not-for-profit and public institutions. This focus on those with traditionally little access to higher education appears to be quite successful: The graduation rates for four-year institutions with predominantly lower-income students are 55 percent for private not-for-profits, compared to 39 percent for private not-for-profits and 31 percent for such public institutions. Similarly, across four-year institutions with predominantly minority student bodies, graduation rates are 47 percent at the private for-profits, compared to 40 percent at their private not-for-profit counterparts and 33 percent for public institutions.

The current political fight, however, is not over results, but access to government support, with many critics charging that the private for-profits absorb disproportionate taxpayer assistance. It’s no coincidence that that these criticisms escalated recently, while tight government budgets squeeze many public institutions and a weak economy puts new pressure on the endowments and gift-giving for private not-for-profits. Once again, the data from the National Center for Education Statistics refute the critics. All three types of institutions get both direct support through government appropriations, grants and contracts, as well as indirect support through government student loans and grants. But across all four year institutions, private for-profits and their students receive an average of $2,394, per-student, in all forms of government support, compared to $7,065 per-student for the private not-for-profits and $15,540 per-student for public institutions. The same pattern holds across two-year institutions, though with smaller gaps. 

The biggest differences involve direct support through government appropriations, grants and contracts. Focusing again on four-year colleges and universities, private for-profits actually pay more in taxes than they receive in such direct support. By contrast, four-year private not-for-profit colleges and universities receive an average of $4,765 per-student in direct support, and public institutions collect $13,240 per-student.    

Government is more even-handed in its indirect support through student loans and grants.  Students attending four-year private for-profits receive an average of $2,416 in loans and grants from all levels of government, compared to $2,300 per-student for those attending four-year public or private not-for-profit institutions. Students at private for-profits, on average, do receive larger federal grants and loans than other students – and significantly smaller loans and grants from state and local governments. These differences reflect the historic mission of federal student loan and grant programs to help low-income students, who predominate at many private for-profits. It’s also true that students from private for-profits are more likely to default on these loans. That’s also not unexpected, since students from low-income families have fewer family resources to help pay them off, especially at first.

No one would blame traditional private and public institutions from trying to claim as much support as possible from taxpayers. Yet, on a strict per-student basis, private for-profit institutions already receive only a small share of what other institutions receive from government. And in less than a single generation, the private for-profits have created a new pathway to economic opportunity for millions of people with traditionally limited access to American higher education. At a time when what we know determines both what we earn and how effectively we compete in global markets, the United States can ill afford to shortchange the fastest-growing segment of American higher education. 

Echoing comments he made yesterday at a National Journal forum on the Workforce of the Future, Washington Post business columnist Steven Pearlstein argues that the business community should fear the rising power of Senator Jim DeMint and his ilk far more than Democrats:

For all you in the business community who are rooting for a Republican victory in the November elections, a bit of unsolicited advice: Be careful what you wish for.

You're probably thinking that with Republicans in control of one or both houses of Congress, business will be back on top again, setting the agenda, rolling back the socialist tide and forcing an anti-business administration into a humiliating retreat.

In reality, what you'll get is political paralysis for the next two years, and quite possibly longer than that....

Here is the hard political reality: You can't expect to support and finance political candidates who preach that government is menacing and wasteful, that public employees are incompetent and corrupt, that taxes are always too high and destroy jobs, and then turn around and expect that the government will respond to your demands to hold down the cost of health care, or fund basic research, or provide good schools, efficient courts and reliable transportation systems.

The New York Times' David Leonhardt joins the ranks of those, including his conservative colleague Ross Douthat, who've examined the GOP's Deficit-cut Pledge and found it lacking.

Ezra Klein covers Congressional Budget Director Doug Elmendorf's testimony before the Senate Budget Committee, at which Elmendorf says the extension of the Bush tax cuts would hurt the economy and decrease incomes.

The new NBC/Wall Street Journal Poll has made a lot of new already - Simon talks about that here. One of the most interesting questions asked is how acceptable voters feel a potential outcome of the election would be. On the outcome

The Tea Party influences the Republican Party to become more conservative on fiscal issues.

50 percent find it acceptable, while 30 percent find it unacceptable. This result begs a number of questions - namely, what does "conservative on fiscal issues" mean? However, it is clear that there is still room to create a more complete understanding of the actual GOP and tea party positions on fiscal issues.

On Fox Business News, Rob explains his idea to repatriate multinational companies' foreign earnings with a tax break, and tie it to new job hires.

As the debate over the future of the nation's economy continues, there are a few pieces worth taking a look at from this morning and over the weekend.

The New York Times editorial page did what a number of commentators have already done, disassembled the GOP's "Pledge to America:"

Extravagant promises and bluster are the stuff of campaign rhetoric, but the House Republicans' "Pledge to America" goes far beyond the norm...

THE BUDGET DEFICIT The Republicans' central claim is that they will be able to reduce the budget deficit, while cutting taxes deeply and making marginal cuts in spending. That pledge is impossible to keep. There is no chance of reducing the deficit without tax increases. The budget has been chronically short of revenue since the start of the Bush-era tax cuts, and more indiscriminate cutting will only dig the hole deeper.

Cutting the deficit will also require curbs on the government's biggest and most popular entitlement programs - Medicare, Medicaid and Social Security, collectively 40 percent of the budget. Ditto military spending, another 20 percent. Yet Republicans pledge to shield seniors, veterans and the troops from spending cuts.

In his weekly address, the President says the GOP's "Pledge" is an echo of a disastrous decade we can't afford to relive.

Also over the weekend, NDN Globalization Initiative Chair Dr. Robert Shapiro was prominently quoted in a Washington Post piece about foreign profits of U.S. based multinational corporations.

Congratulations to Ed Miliband, who defeated his brother David to lead the British Labour Party. Mr. Miliband faces a tall task in defeating a conservative austerity push led by Prime Minister David Cameron.

And, in addition to its ongoing trade spat with Japan and currency issues with the U.S. and much of the rest of the world, China has imposed a tariff on U.S. poultry.

NDN has long made two arguments 1) That the last 10 years were a lost decade for everyday Americans, the understanding of which is imperative to understanding the virulence of the great recession, and that 2) the inability of America's political leaders to create a plan that made globalization work for all Americans was the central source of volatility in the American electorate. The Atlantic's Ron Brownstein makes that case today: 

A Lost And Volatile Decade

AMERICANS FEEL THE GROUND BENEATH THEM CRACKING AS THE ECONOMY CONVULSES.

by Ronald Brownstein

Saturday, Sept. 25, 2010

During the transition from the agricultural era to the Industrial Age in the late 19th century, America suffered through a generation of political instability and volatility.

The political hallmarks were narrow congressional majorities and rapid shifts in control; repeated one-term presidents; and divided government, with the parties routinely splitting the White House and Congress. This turmoil (which lasted from about 1876 to 1896) was rooted in the widespread sense among Americans that neither party had convincing answers to the enormous challenges created by the shift from farm to factory.

Based on last week's release of the annual Census Bureau report on income and poverty, it appears that the U.S. is experiencing something similar again, as Americans uneasily navigate a globalized, information-based economy. Across a wide range of economic measures, the bureau report demonstrated, the past 10 years have been an utterly lost decade for many, if not most, Americans. And that helps explain why the U.S. continues to careen through so many sharp political reversals.

From 2000 through 2009, the Census Bureau found, the median income (measured in inflation-adjusted dollars) declined by 5 percent for white families, 8 percent for Hispanic families, and more than 11 percent for African-American families. That's almost unimaginable over an entire decade. From 1991 through 2000 (again in inflation-adjusted dollars) it had risen by 13 percent for whites, 19 percent for Hispanics, and 28 percent for African-Americans.

Similarly, the total number of Americans in poverty increased by nearly 12 million in the last decade, more than obliterating the 4.1 million reduction during the 1990s. Especially troubling is that the number of poor children jumped by 3.9 million -- again, more than erasing the 2.8 million decline during the 1990s.

The findings on access to health insurance tell the same story. During the 1990s, the share of Americans without health insurance fell slightly from 14.1 percent to 13.7 percent; in the following decade, it has spiked to 16.7 percent. More than one-fifth of the working-age population (people ages 18 to 64) are now uninsured, also up steadily since 2000. The number of Americans obtaining health insurance at work during the 1990s increased by nearly 30 million; in the last decade, that number fell by nearly 10 million. (The share of Americans receiving coverage through work declined every year of George W. Bush's presidency.)

The Great Recession has vastly compounded these problems. But they were all worsening before the economy collapsed: The median income was lower, and the poverty rate and the number of uninsured were already higher in 2007 than in 2000.

Read Brownstein's whole piece here.

By now, at least three important things should be clear to all observers that the GOP's "Pledge to America"

1) It would dramatically increase the deficit over the next decade - by around $4 trillion. Call this doubling down on the Boehner plan.

2) There are no new ideas in it.

3) Even lots of conservatives think it's a joke, which would be funny, except these people seek to lead the country.

The first point is probably the most important. The Republican Party has defined the problem as spiraling deficits, a problem only exacerbated by their stated agenda.

Here's what some others had to say about it:

Jon Stewart breaks down, with video evidence, the fact that this pledge is anything but new (watch at least until 3 minutes in):

The Washington Post Editorial Page says "The GOP's 'Pledge to America': Deficits can rest easy"

Paul Krugman writes that the Pledge basically says "Deficits are a terrible thing. Let's make them much bigger."

While the spending cuts in the Pledge are not very significant, the Center on Budget and Policy Priorities describes how the cuts, like the ones in the Boehner plan, would cut things Americans really want and need. Rep. Kevin McCarthy told Savannah Guthrie this morning on MSNBC that the cuts, while not detailed in the Pledge, are going to be "across the board." 

In The New Republic, Jonathan Chait writes that the Pledge is "Déjà Vu All Over Again," Jonathan Cohn writes that it is full of lies, especially in health care and deficit reduction, and Alexander Hart, like Ezra Klein, points out that the graphs in the pledge are lies. (When you make graphs, you have to start at zero.)

Ezra Klein describes most of the ways in which the Pledge is a "bad idea" and writes that the Democrats need a plan too. He highlights Rob Shapiro's carbon-payroll tax shift idea.

Andrew Sullivan, who is just waiting for a legitimate conservative agenda to emerge, describes "the GOP's Fiscal Fraudulence."

RedState Editor in Chief Erick Erickson calls the Pledge "dreck" and says it is "Perhaps the Most Ridiculous Thing to Come Out of Washington Since George McClellan."

And Andy Roth, Vice President of the very conservative Club for Growth writes, "I want to endorse it [the pledge], but it's so milquetoast that it proves to me that these guys just aren't ready to lead."

Andy's right, this is not a document produced by a group of people ready to lead the country.

I've read the GOP's "Pledge to America" and have one early thought: If the pledge actually reduced the deficit, its authors would have added up the numbers.

It's no surprise that they didn't do the math. After all, the numbers don't work out so well for Boehner and McConnell either.

Update: A reminder about the Boehner Plan:

In early June of 1992, I sat in the living room of the Governor’s mansion in Little Rock with Bill and Hillary Clinton and a half dozen other advisors, hashing out the economic program he was preparing to take to the country. Clinton had just won the California primary and sealed the presidential nomination, but he was running third in the polls behind President Bush and Ross Perot. That afternoon was the only time I ever heard Bill Clinton doubt himself. Referring to Perot and his movement, he said quietly, “sometimes no matter what you do, a big wave just washes it all away.” President Obama and congressional Democrats face a comparable challenge today from the Republicans and their Tea Party allies, who together threaten to wash over the Democrats’ plans and hopes for themselves and the country. The critical question for Democrats is how they should respond. 

Bill Clinton offers the best example in modern times of how doing what’s right, especially on the economy, can produce very large political rewards. First, there’s the rule that political scientists have taken from decades of economic data and election results: Reality trumps marketing. So, that June day 18 years ago, I reminded the Clintons that average incomes were lower than when Bush had taken office in 1988, and no president in the 20th century won reelection under those conditions. The second rule was all Bill Clinton’s, and it presaged the economic successes of his presidency: He said he would stick with the economic plans developed for him, based on a serious reading of what was wrong with the economy and what modern economics could teach us to do about it.

Today, our real economic conditions have a political double edge. The economy is in much better shape than when President Obama took office, but these remain deeply frustrating and even desperate times for millions of Americans. The political reality is that the frustration has overwhelmed any sense of progress on the economy. The pundits can argue over how Republicans managed to pull off their political jujitsu, in somehow shifting the debate from their own culpability for the worst financial crisis and recession in our lifetimes to the legitimacy of the steps the administration has taken to bring back the economy. By this Orwellian illogic, people’s economic problems today are somehow tied to an orthodox stimulus program to bolster sinking demand and the TARP rescue of the financial system, approaches supported at the time by virtually every conservative as well as liberal economist. In the tradition of “Ignorance is Strength” and “Freedom is Slavery,” the Tea Party-purified opposition also now calls for permanent stimulus through tax cuts while ignoring the repayment of most TARP rescue funds. And their only concession to their own loudly-stated concerns about deficits are far-fetched proposals to cut deeply into the safety net created to protect people from the worst effects of a bad economy, including unemployment benefits, Social Security, Medicare, Medicaid, and the recently-enacted health insurance guarantees. 

For everyone not running for office this year or employed by those who are, the pressing question is how this sorry debate will affect how most Americans fare over the next two years. Political opposition in democracies is often irresponsible, but those who govern don’t have that luxury. Like Clinton in 1992 and throughout his presidency, they have to resist the temptation to respond with distortions of their own. Instead, the administration has to stick with policies that could successfully nudge the economy to a better place for most Americans – and then get credit for it in the next election. 

That’s a very hard strategy to pull off. Reigniting job creation, for example, is clearly a critical part of any serious effort to drive economic recovery. The opposition points to small businesses as the source of most new jobs, and claims that raising the top marginal tax rate would disproportionately harm those same businesses. It’s more Orwellian marketing. They define “small businesses” not by their size, but as any enterprise organized for tax purposes to pass its earnings through to its owners. That does take in nearly all small LLC’s, LLP’s and subchapter-S companies. But it also covers every partnership and private-equity- owned enterprise, from Bechtel and parts of the Koch brothers’ empire, to the accounting giant PriceWaterhouseCooper and many of the holdings of the Carlyle Group. What most Americans care about here is not whether a business is large or small, or how it’s organized for tax purposes, but whether it really creates jobs. Yet, the GOP rebranding of their high-end tax cuts as job creators has driven the Democrats to respond with  their own package of new tax breaks for so-called “small businesses,” alas triggered not by the new jobs they create but by investments they would undertake on their own anyway, as soon as the economy strengthens.  

There are serious ideas developed by real economists about how to stimulate new jobs. For example, we could suspend an employer’s payroll taxes on new hires for two years, and so directly reduce the cost to create new jobs. Or we could offer American multinationals a temporary tax break on the foreign earnings they now hold overseas, in exchange for increasing their domestic workforces by 5 or 10 percent. But serious ideas are always more complicated than political slogans. So, a payroll tax holiday for new hires would also require a real plan to make up the lost revenues, and a jobs policy geared to multinationals would force progressives to retire their outdated views about how the foreign operations of U.S. companies affect American jobs. 

The Tea Party wave being amplified now by most Republicans could well drown out genuine public consideration of new steps for the economy. But what would Democrats lose by trying? Even if they end up losing 35 to 45 seats in the House and seven to nine in the Senate, President Obama and the country still need a serious plan to restore people’s incomes. Without it, the President in 2012 could find himself in the same position as George Herbert Walker Bush in 1992.