Economy

NDN Board member and Ask.com founder Garrett Gruener appeared on MSNBC's Dylan Ratigan show today to discuss his Los Angeles Times op-ed on taxes (the freeze frame is not Garrett).

We obviously completely agree with Garrett's sentiments; everyday Americans have to do well for the whole economy to do well. His full LA Times op-ed can be found here.

Ezra Klein's Blue Sky series on job creation features Rob this week:

We face daunting short-term and long-term challenges, if we truly intend to restore strong, broadly shared growth. And it all begins with jobs. For the short term, there’s the serious problem of creating jobs for the 8.5 million Americans who have lost theirs since the housing bubble burst and the financial system melted down. But remember that the American job-creating machine slowed sharply during the expansion of 2002-07, when the rate of private-sector job creation fell by half compared with the expansions of the 1980s and 1990s. So for the long term, we face an even larger task in rebuilding the capacity of American businesses to create jobs, in both good and bad times.

Short-term fixes

We have to address directly the forces that destroyed twice as many jobs as were lost during any previous postwar recession. One issue is substandard demand. The administration stimulus stopped the hemorrhaging but could produce only a modest turnaround. The next step entails grappling with the largest factor continuing to dampen demand -- the continuing decline in housing prices that makes every homeowner – 70 percent of Americans -- poorer every month.

Keep Americans in their homes

The best lever to blunt this “negative wealth effect” is to restore normal rates of home foreclosure, still running three times their typical rate with no end in sight. Attempts to get banks to help with subsidies have largely failed, because few bankers will extend new credit to people who couldn’t keep up with their past loans. Only government can assume that risk, as it does for students with no assets. We should create a new, temporary federal loan program modeled on student loans to help homeowners in trouble. Like student loans, these 10-year loans would carry a subsidized interest rate, and interest payments could be deferred for two years while job creation recovers.

Address the mismatch between jobs and skills

It won’t help much to promote demand if most unemployed Americans and involuntarily part-time workers lack the skills to fill the new jobs. It’s a big, complicated problem that policymakers can begin to address by recognizing the following mismatch: As American businesses have integrated information technologies throughout their operations, about 40 percent of American workers remain effectively IT-incapable. For starters, we can give community colleges grants to keep their computer labs open and staffed in the evenings and on weekends -- $300 million per year would do it -- so any adult can walk in and receive computer and Internet training at no charge.

Reduce the cost to business of creating new jobs

Large multinational U.S.-based corporations account for nearly one in five U.S. jobs. They also hold about $1 trillion abroad accumulated from their foreign earnings. We can create more than 1 million jobs quickly by providing a steep, temporary tax cut on a share of those funds that the corporations could then bring back home, if they first expand their current U.S. workforce by at least 5 percent.

Bridging the short- and long-term problems with jobs

Another direct way to induce businesses to create more jobs also involves cutting their costs to do so. The administration took a good step in this direction by temporarily reducing the employer-side of the payroll tax for new jobs filled by long-term jobless people. Now we should expand that measure to cover all new jobs. And since job creation is a long-term structural problem as well, it’s time to also consider basic payroll tax reforms. We can permanently reduce the cost of creating new jobs by phasing out the payroll tax, starting with the employer side, once we identify an equally secure revenue stream for Social Security and Medicare.

Boost savings for investment

A value-added tax is the top candidate: A 6.5 percent VAT on everything except housing, health care and education could replace the employer side of payroll taxes. In the bargain, it also would boost savings and let us reduce our dependence on foreign funds. Most Americans should be held harmless or nearly so by this tax shift, since the VAT would only offset current payroll taxes that come directly out of their wages. 

Address energy security and climate change

We can replace a good part of the rest of the payroll tax with a carbon-based fee, which would help address our energy and climate challenges. Most economists agree that a fee on energy based on its carbon content is the most effective way we have to reduce greenhouse gases. By adjusting energy prices based on each fuel’s impact on the climate, we can put in place the incentives that innovators need to develop climate-friendly fuels and technologies, and that businesses and households need to adopt them. A carbon-based fee or tax also would gradually reduce our dependence on foreign oil, another clear win. And again, this tax shift would leave most Americans no worse off financially -- and everyone would benefit from progress on energy security and the climate.

A long-term fix: Blunt the impact of globalization on jobs in good times

The main structural force holding down job creation and wage progress is a basic feature of globalization. Since its onset in its 1990s, full-bore globalization has driven the creation of tens of thousands of new businesses around the world. In the same period, moreover, the spread of IT and Internet-based ways of doing business has driven companies everywhere to become more efficient. Both developments have intensified competition, which in turn has reduced the ability of companies to pass along their cost increases in higher prices. The good news is that this development holds down inflation, here and around the world. The bad news is that when this intense competition collides with rising costs, businesses have to cut other costs -- and they start with jobs and wages. That’s why job creation slowed so much in the 2002-07 expansion.

Slow health-care cost increases

The most important factor driving up U.S. business costs is steady 6 percent to 8 percent annual increases in their health-care costs, through good and bad times. Since globalization isn’t going away, we have to blunt these fast-rising costs for both businesses and individuals. If there’s any doubt, consider the following: By 2016, an average-income American family should expect to spend one-third of its annual income on health care, including their own and their employers’ costs for their insurance, the family’s out-of-pocket expenses, and taxes they pay for Medicare and Medicaid.

The president’s health-care reforms include small-scale versions of most of the available ways to slow these costs. Now we need to scale them up and add a few more that didn’t survive the political gantlet last time. To begin, we should strengthen the emphasis on preventive care and ramp up the investments in health-care IT. For Medicare and Medicaid, the shift to reimbursements based on a treatment’s value can be accelerated and expanded, along with the scope and authority of the new board that will give Congress recommendations on how to cut Medicare costs.

The two parties also have to begin talking about the most difficult reforms advanced by the other. Democrats should consider malpractice reforms much more far-reaching than the limited experiments in the president’s bill. And Republicans should rethink some form of public option, targeted to places where one or two insurers constitute an effective monopoly or duopoly. Finally, both sides can unite behind a campaign to use mobile devices to alert people with chronic diseases -- heart disease, diabetes, Alzheimer’s and so on, which claim up to 70 percent of health-care costs -- to follow their treatment regimens.

Put together these measures -- to stabilize housing prices, reduce the costs for businesses to create new jobs, establish a path for better workers to prepare for jobs in an idea-based economy, and slow the increases in health-care costs that eat away at jobs and wages -- and the economy should once again generate jobs and upward mobility for everyone willing to work for it.

NDN has long argued that the key issue in the upcoming election is having plan for the future of the economy. While much of that debate is happening at the national level and on cable news, all politics is local, and the next month and a half will see many candidates discuss their plans for the economy.

Candidate for Florida's 25th Congressional District Joe Garcia has produced such a plan. Like all such plans (the good ones anyway) it fuses important local issues, including expanding the Port of Miami, with national ones. Joe's plan is heavy on provisions that benefit small business including tax cuts, loans, and health care tax cuts; emphasizes worker skills by investing in community colleges and providing tuition tax breaks for higher education and professional training; promotes investment in renewable energy; and has provisions to slow foreclosures and keep people in their homes. It also weighs in on extending the tax cuts for everyday Americans (he's in favor), and strongly supports the Colombia Free Trade Agreement, an important economic boost for a regional economy so closely tied to Latin America.

Joe's plan is available here. If you've seen other such plans that are worth discussing, feel free to pass them along. In the next month and a half, it's important that candidates of both parties offer plans for America's economic future; I look forward to seeing more realistic plans from members of both parties.

NDN Advisory Board member Garrett Gruener published an op-ed in the Los Angeles Times this morning on the Bush tax cuts:

I'm rich; tax me more

Congress should let the Bush tax cuts expire for the wealthiest Americans and use the additional tax revenues that are generated to invest in infrastructure and research.

By Garrett Gruener

5:39 AM PDT, September 20, 2010

I'm a venture capitalist and an entrepreneur. Over the past three decades, I've made both good and bad investments. I've created successful companies and ones that didn't do so well. Overall, I'm proud that my investments have created jobs and led to some interesting innovations. And I've done well financially; I'm one of the fortunate few who are in the top echelon of American earners.

For nearly the last decade, I've paid income taxes at the lowest rates of my professional career. Before that, I paid at higher rates. And if you want the simple, honest truth, from my perspective as an entrepreneur, the fluctuation didn't affect what I did with my money. None of my investments has ever been motivated by the rate at which I would have to pay personal income tax.

As history demonstrates, modest changes in the tax rate for wealthy taxpayers don't make much of a difference if the goal is to build new companies, drive technological development and stimulate new industries. Almost a decade ago, President George W. Bush and his Republican colleagues in Congress pushed through a massive reduction in marginal tax rates, a reduction that benefitted the wealthy far more than other taxpayers.

We were told the cuts would accelerate business growth and create jobs. Instead, we got nearly a decade of anemic job growth, stagnating wages, declining incomes and high inequality.

The supply-side, trickle-down economic policies of the last decade benefitted people like me, but the wealth didn't trickle down. So while we did quite well, people who live from paycheck to paycheck didn't.

When inequality gets too far out of balance, as it did over the course of the last decade, the wealthy end up saving too much while members of the middle class can't afford to spend much unless they borrow excessively. Eventually, the economy stalls for lack of demand, and we see the kind of deflationary spiral we find ourselves in now. I believe it is no coincidence that the two highest peaks in American income inequality came in 1929 and 2008, and that the following years were marked by low economic activity and significant unemployment.

What American businesspeople know, and have known since Henry Ford insisted that his employees be able to afford to buy the cars they made, is that a thriving economy doesn't just need investors; it needs people who can buy the goods and services businesses create. For the overall economy to do well, everyday Americans have to do well.

Now that the Bush tax cuts are about to expire, Republicans are again arguing that taxes should remain low for the wealthy. The idea is that this will spur people like me to put more capital to work and start more ventures, which will create new jobs, power the economy and ultimately produce more tax revenues. It's a beguiling theory, but it's one that hasn't worked before and won't work now.

Instead, Congress should let the Bush tax cuts expire for the wealthiest Americans and use the additional tax revenues that are generated to invest in infrastructure and research. "Invest" is the right word. Putting money into infrastructure — such as roads, bridges, broadband, the smart grid and public transit — as well as carefully chosen research initiatives provides a foundation for future growth. As important, it puts funds in the hands of those who will spend them, generating demand that will pull us out of our economic crisis and toward a new cycle of growth.

No one particularly enjoys paying taxes, but one lesson we should have learned by now is that for the good of the country, we need to tax people like me more. At a minimum, we need to return to the tax rates of the Clinton era, when the economy performed far better. Simply taxing the wealthiest 2% of Americans at the same rates they were taxed before the Bush tax cuts could reduce the national deficit by $700 billion over the next 10 years. Remember, paying slightly more in personal income taxes won't change my investment choices at all, and I don't think a higher tax rate will change the investment decisions of most other high earners.

What will change my investment decisions is if I see an economy doing better, one in which there is demand for the goods and services my investments produce. I am far more likely to invest if I see a country laying the foundation for future growth. In order to get there, we first need to let the Bush-era tax cuts for the upper 2% lapse. It is time to tax me more.

Garrett Gruener is the founder of Ask.com, chief executive of Nanomix, the co-founder and director of the venture capital firm Alta Partners and a member of the advisory board at NDN, a center-left think tank in Washington.

Examining recently released census data, the Wall Street Journal today describes a “Lost Decade for Family Income,” in which median household income fell and poverty increased dramatically:

The [census] bureau's annual snapshot of American living standards also found that the fraction of Americans living in poverty rose sharply to 14.3% from 13.2% in 2008—the highest since 1994. Some 43.6 million Americans were living below the official poverty threshold, but the measure doesn't fully capture the panoply of government antipoverty measures.

The inflation-adjusted income of the median household—smack in the middle of the populace—fell 4.8% between 2000 and 2009, even worse than the 1970s, when median income rose 1.9% despite high unemployment and inflation. Between 2007 and 2009, incomes fell 4.2%. 

The income decline and poverty increase are not just about the recession. They are critical features of America’s lost decade. The article continues:

The bureau said that the drop in income in the recent recession, so far, wasn't much different from those recorded in the early 1990s and early 2000s recessions, and was actually smaller than the 6% drop recorded in the deep recession of the early 1980s.

But there is a difference this time: In the prior three recessions, incomes fell after years of upswing, then resumed growing once the downturn ended. The decline this time comes on top of a long period in which incomes stagnated even through the recovery of 2003 to 2007.

This additional, distressing evidence is part of what we at NDN described as "A Lost Decade for Everyday Americans" in a paper released in December of 2009. As we argue in that paper, it’s impossible to understand the economic condition of everyday Americans today or the virulence of the Great Recession without understanding the stagnating wages, declining median income, zero private sector job growth, and rising costs that hit American households over the last decade.

Additional important news on the economy this week:

• A report released by the Joint Economic Committee finds that worsening income inequality, in large part precipitated by policies of the Bush Administration, may have been a root cause of the Great Recession. It also finds that, under Bush, everyone’s economic situation got worse. Again, more evidence of the Lost Decade.

• Building on Lori Montgomery’s Washington Post coverage of Mitch McConnell’s plan to increase deficits by $4 trillion over the next decade, the Economist’s “Politics in America” blog takes down Mitch McConnell’s view of taxation.

• On the legislative strategy on the Bush tax cuts, Congressional leadership would do well to listen to The New Republic’s Jon Chait. It should also encourage its membership to read this poll, this poll, this poll or this poll. And then there are this poll and this poll, too. (They all say similar things: the politics of this issue are good for the majority.)

• The Senate passed a bill to cut taxes and provide loans for small businesses. 

• Ben Smith at POLITICO explores how TARP, despite the reality of its success, is politically unpopular. Foreign Policy blogger and Tufts University professor Dan Drezner writes that TARP is an exception rule that good policy leads to good politics, mainly because people don't know how good TARP actually was. Let me suggest a slightly different interpretation than ignorance. TARP wasn’t bad policy in a narrow sense – policymakers placed a large, successful bet on the future prosperity of the financial industry that saved the country from a depression – but it was incomplete policy and bad politics to everyday Americans in that, on taking dramatic action to halt and repair the damage on the financial side, we started and stopped at TARP. With almost a quarter of outstanding mortgages still underwater and the financial standing of millions of households still in disastrous shape from the meltdown of the housing and financial markets, the American people might have liked to have seen a commensurate bet placed on their futures. (Hence the refrain, “Where’s my bailout?”)

• And, Chinese currency and economic issues are back, having never really gone away.

Today’s poll from The New York Times tells the story of a country focused solely on frustration over the bad economy. Jobs and the economy, added together, are the top concern of 60% of Americans. (No other issue comes close to those figures, including the budget deficit, which sits at 3 percent.)

Additionally, the poll write-up reinforces the notion that we have discussed at NDN, neither party is where it wants to be right now:

The findings suggest that there are opportunities and vulnerabilities for both parties as they proceed into the final seven weeks of the campaign.

A case for Republicans: Voters are remarkably open to change, even if they are not sure where Republicans will lead them. Most Americans, including one-third of those in the coalition that elected Mr. Obama, now say he does not have a clear plan to solve the nation’s problems or create jobs. Democrats remain highly vulnerable on the economy.

A case for Democrats: They are seen as having better ideas for solving the country’s problems. The public steadfastly supports the president’s proposal to let tax cuts expire for the wealthiest Americans. And far more people still blame Wall Street and the Bush administration than blame Mr. Obama for the country’s economic problems.

Voters have a darker view of Congressional Republicans than of Democrats, with 63 percent disapproving of Democrats and 73 percent disapproving of Republicans. But with less than two months remaining until Election Day, there are few signs that Democrats have made gains persuading Americans that they should keep control of Congress.

So, while neither party is where it wants to be right now, there is good in this than bad for the President and his party. The American people are still far more with him than the alternative, they just angry and frustrated, and rightfully so. It’s also inarguable that the President’s ideas have been far better then the opposition's, and the truth is borne out in the polling.

Additionally:

The president’s overall job approval rating is 45 percent, with 47 percent disapproving. On the economy, his rating is worse, with 41 percent approving and 51 percent disapproving. When asked whether Mr. Obama has a clear plan for solving the nation’s problems, 57 percent responded that he did not, yet twice as many give him more credit than Republicans for having a plan.

The good news for the Democrats right now is that they have the ability to increase their standing with the American people, and the path is very clear: they must convince the country they have a plan for the economy. The President has a strong case to make about what his administration done over the last two years, and that it’s all been part of a plan to fix an economy with serious problems that have been playing out for the last decade. The next month and a half are all about making the American people believe that he has a plan for the future and his opponents have one that just doesn’t work.

For the Republicans, they have to step up if they really want to take advantage of this poor economy, which means they too have to offer a serious economic plan for the country. It's something the American people don't think they've done yet. 

On the second anniversary this week of Lehman Brothers’ spectacular collapse, it’s instructive – okay, frustrating and dispiriting – to see what our policymakers learned from it. Based on what unfolded then and the trillions of dollars lost, you would expect that even conservatives could now acknowledge that unregulated financial markets are not always an optimal arrangement. But that’s not how it has worked out. By now, everyone also should recognize that when markets crack-up, government is the only game in town to contain the damage and head off a repetition. Yet as a rule, conservative Washington still doesn’t see that. And by now, when virtually everyone should appreciate the dangers of over-leveraging, policymakers across the political spectrum still don’t fully get that either.

It matters, because all of this leaves the U.S. and global economies exposed to another financial crisis and the truly terrible economic costs that would accompany it.  

This is a period, it seems, when simple-minded political ideology regularly trumps economics.  After a succession of gruesome financial meltdowns over 20 years – in Japan, Sweden, East Asia, Spain, and now America and Europe – the leading ideology still offers knee-jerk reverence for markets unfettered by public standards or rules. Those now poised to take over at least one house of Congress wouldn’t support even the tame financial regulation approved earlier this year. That’s despite the fact that the new law forgoes setting common standards, rules or other meaningful regulation of most trading in large blocks of asset-backed derivatives. Those are the precise transactions which proved to be so dangerous for Bear Stearns (RIP), Lehman Brothers (RIP), Merrill Lynch (RIP), AIG and the rest of us. Just as it was before Lehman and the rest imploded, most investors and regulators still won’t know which banks are carrying out those large trades, what those trades consist of, and how heavily they borrowed to complete them.

The still-reigning ideology also won’t tolerate regulation to stop flash trading, which allows a handful of giant institutions to see incoming orders a few milliseconds before ordinary investors, and repeatedly has triggered huge, sudden share price declines. It also won’t countenance regulation of so-called “dark pools” or private deals between firms to move large blocks of securities without anybody else knowing about it. As the world learned painfully two years ago, markets that aren’t transparent become vulnerable to devastating panics when an outside shock hits them. We haven’t even been willing to direct the big banks to divest themselves of the same risky assets that crushed Lehman two years ago.    

We’re not doing much better with international regulation. This week’s news from Basel was a new agreement among the major countries to “triple” the capital reserves that banks hold against future losses. But market insiders know that these standards, along with parallel ones in our own financial reforms, won’t hold off another crisis. As the always-rigorous Martin Wolf of the Financial Times put it, “tripling almost nothing does not give one much.” The punch line is that the lame new standards don’t even take full effect until 2019. It is little wonder that bank shares rallied when the “tough” new standards were announced.

So at least until the next global meltdown, risky derivative and dark pool transactions, as well as continuing rounds of flash trading, will continue to depend on out-sized leverage and unfold beyond the purview of most investors and regulators.

There’s a final irony. The only reason that investors let banks get away with such low capital reserves, high leverage and risky transactions is that the banks and everyone else knows that if the worst happens, governments will bail them out. At the same time, the same financial institutions and their ideological fellow-travelers in Washington won’t stand for new rules that would meaningfully reduce the likelihood of another eventual bailout. That’s as good an example as any of socializing risk for private gain, and a convincing demonstration that Wall Street and much of Washington learned little from the economy’s near-death experience two years ago, this week.

Should the government have bailed out Lehman Brothers? Rob explains how the Lehman collapse, which triggered the global financial meltdown, should have been an actively managed dissolution similar to Bear Stearns and General Motors.

A few weeks ago, NDN put together an analysis of House Minority Leader John Boehner's plan to increase the deficit by $4 trillion over the next decade. Today in the Washington Post, Lori Montgomery breaks down Senate Minority Leaders Mitch McConnell's plan to do the same:

Even as they hammer Democrats for running up record budget deficits, Senate Republicans are rolling out a plan to permanently extend an array of expiring tax breaks that would deprive the Treasury of more than $4 trillion over the next decade, nearly doubling projected deficits over that period unless dramatic spending cuts are made.

The measure, introduced by Senate Minority Leader Mitch McConnell (R-Ky.) this week, would permanently extend the George W. Bush-era income tax cuts that benefit virtually every U.S. taxpayer, rein in the alternative minimum tax and limit the estate tax to estates worth more than $5 million for individuals or $10 million for couples.

Aides to McConnell said they have yet to receive a cost estimate for the measure. But the nonpartisan Congressional Budget Office recently forecast that a similar, slightly more expensive package that includes a full repeal of the estate tax would force the nation to borrow an additional $3.9 trillion over the next decade and increase interest payments on the national debt by $950 billion. That's more than four times the projected deficit impact of President Obama's health-care overhaul and stimulus package combined.

And how does he propose to pay for these cuts? Well, he doesn't:

Asked how McConnell would cover the cost of his proposal, the Tax Hike Prevention Act, aides noted that he has backed a bipartisan plan to freeze spending that would save an estimated $300 billion over the next decade - a drop in the bucket compared with his $4 trillion-plus plan.

For the rest of the cash, McConnell has said he will turn to the same place as Obama: a presidentially appointed, bipartisan deficit commission that is due to issue its report in December.

"This is not going to be your typical commission that's going to issue a report, sit on the shelf and gather dust," McConnell said last month on NBC's "Meet the Press." "We'll wait for their report. And I intend, if it's a responsible report that I can support, to encourage my members to support it."

Let's remember that McConnell opposed the President's deficit commission, and John Boehner mocked the President's spending freeze. Now, these represent Republican leadership's only strategies to cut deficits. So, here's the state of play: Boehner and McConnell now own plans to increase the deficit by $4 trillion over the next decade. The President owns a commission that they opposed designed to cut deficits. In what way are Boehner and McConnell actually for fiscal balance, and on what grounds can they ever criticize the President on this issue?

Few of us are happy about the level of progress we have made in creating new jobs, new businesses and reaching the high road economic vision we all share – be it about manufacturing and job creation, small business entrepreneurship, clean energy market transformation, 21st century infrastructure, local economic development, or export expansion. 

In a new New Policy Institute paper being released today, The Acceleration Agenda, we describe a series of low-cost but high-impact steps we can take now to accelerate job creation, growth and American competitiveness. 

It’s important to note that the news is not all bad: a robust set of solutions and investments have already been deployed by the Obama Administration.  In the short-run, the Recovery Act has done its job to keep the economy from entering a free-fall and the Administration’s unheralded set of long-term “new foundation” investments in education and workforce, broadband, clean energy and so forth are seeding new ideas and industries. 

The next step is what this paper focuses on – creating the right “middleware” to better connect the dots -- linking short term and long term federal investment strategies, the public and private sectors, and innovative ideas from the top with the frontline realities of bottom-up and regional implementation. 

At the core of these ideas is a simple paradigm shift – an emphasis on nurturing bottom-up change rather than top-down dictates. The reason: federal silo'ed programs and one-size-fits-all solutions don't work as well anymore in meeting the complex challenges of the 21st century economic markets.  Growth, job creation and shared prosperity lies in creating opportunities for entrepreneurs and new businesses to find financing, lifting up new clean economy markets, and building new networks to connect innovators, suppliers and customers across traditional geographies.

To be clear: this paper does not simply call for more federal revenue-sharing with the states.  The changes we need to accelerate private-led innovation in regions and communities do not begin, or end, there.   We need new regional initiatives and distributed financing mechanisms to accelerate economic growth.  One such promising framework, the Jobs and Innovation Partnership, was recently outlined by US Assistant Secretary of Commerce John Fernandez here.

We are pleased to host Mr. Fernandez, and Entrepreneur, investor, and Ask Jeeves founder Garrett Gruener, to further discuss these issues at an event today and we invite both public and private partners to continue – and accelerate -- the conversation here.

Read the full working paper:

The Acceleration Agenda: Job Creation, Innovation and Economic Development in the 21st Century