Economy

An economic slowdown is now here – one we repeatedly cautioned would come – so even the Federal Reserve is downgrading its forecast. Alas, the United States isn’t alone. The prospects for Europe look even worse, especially with their largest banks so heavily invested in the bonds of EU member countries still skirting the edge of sovereign debt defaults. And now China faces the cross pressures of trying to boost their weakening exports while letting some of the air out of their own housing and financial bubbles. That will spell serious problems for China’s four state megabanks, whose loans keep much of Chinese industry afloat. We’ll be lucky to come out of this dismal environment with just another year of slow growth and high unemployment. 

So, with the midterm elections coming on, most Americans have one question for their elected officials and those hoping to replace them: What decisive steps are they prepared to take to rescue this economy? Remarkably, the answer from much of the GOP opposition seems to be, repeal part of the 14th Amendment and stop Muslims from building a mosque in downtown Manhattan. Of course, there’s also lots of finger-pointing about the economy, including the audacious claim that the fault for the high unemployment lies in the Administration’s economic policies, especially the stimulus.    

Since that claim has some popular traction, and even support from a handful of muddled conservative economists, let’s test it with the hard data from the Bureau of Labor Statistics.  

From December 2007 to July 2009 – the last year of the Bush second term and the first six months of the Obama presidency, before his policies could affect the economy – private sector employment crashed from 115,574,000 jobs to 107,778,000 jobs. Employment continued to fall, however, for the next six months, reaching a low of 107,107,000 jobs in December of 2009. So, out of 8,467,000 private sector jobs lost in this dismal cycle, 7,796,000 of those jobs or 92 percent were lost on the Republicans’ watch or under the sway of their policies. Some 671,000 additional jobs were lost as the stimulus and other moves by the administration kicked in, but 630,000 jobs then came back in the following six months. The tally, to date: Mr. Obama can be held accountable for the net loss of 41,000 jobs (671,000 – 630,000), while the Republicans should be held responsible for the net losses of 7,796,000 jobs.  

So, when some of those GOP candidates change the subject from unemployment to treacherous immigrants, they actually may know precisely what they’re doing.

Some Democrats may take satisfaction from these data; but that won’t be enough for most voters, not while Democrats still control the White House and Congress. The opposition may get away with silence about what they would do to bring down unemployment – apart, of course, from the traditional GOP catechism of tax cuts. But Democrats will have to lay out a more serious program if they hope to convince America to keep them in power.  

So, here’s a four-part program for Democrats to take to the voters. First, create jobs by expanding an Administration initiative already in place: Deep cuts in the payroll tax for employers who expand their workforce. Second, shore-up the weak housing market and stabilize falling home prices with a long-overdue, new initiative: A loan program for homeowners with mortgages in trouble, modeled on federal student loans, to bring down foreclosure rates. Third, prepare tens of millions of Americans for the jobs the economy will begin to create once it’s back on track: Provide grants to community colleges to fund free computer training for any American adult who walks in and asks for it. And fourth, put in place some long-term deficit reduction to head off higher interest rates when the economy does begin to expand again.  Rolling back the Bush tax cuts for higher-income folks is a beginning, but it should be paired up with serious spending restraints. The best place to start is health care: Slow down Medicare and Medicaid cost increases with much stricter and more comprehensive versions of the cost-containment measures already enacted in the President’s health care reforms.  

That would be a real program that the parties could debate in the fall campaigns – and if the Democrats prevail, they could run on its results in 2012.

Rob was on CNBC’s Squawk on the Street today to discuss unemployment benefits. Rob argues that the duration of unemployment is at a record high because we are not creating jobs and there is a mismatch of skills, debunking a survey suggesting that unemployment benefits are an incentive to stay out of work.

It was a good moment for America's economy and children yesterday, when @SpeakerPelosi tweeted: "I will be calling the House back into session early next week to save teachers' jobs and help seniors & children #FMAP." Now that the Senate has passed the $26 billion package of teacher funding and state aid, the House is all set for a special session to ensure passage of the funding in time to keep teachers in the classroom. 

In a memo released a week ago Friday, NDN called for the passage of these provisions:

Aid States and Localities and Extend Crucial and Expected Benefits 

As Education Secretary Duncan has warned, America’s students and their parents across the country could find as many as 300,000 fewer teachers in our classrooms this fall. Similar, involuntary downsizing is affecting countless other local and state government funded jobs, including police and others responsible for our public safety. Congress must relieve those pressures by providing more assistance to states and localities. In addition, important benefits, similar to unemployment insurance, must be extended, so long as there is just one job opening for every five unemployed workers. The economic payoff of preserving those jobs and extending those benefits, in terms of both employment and overall demand, will be significant. Moreover, recent polling shows that the American people strongly support these steps.

Simon also sent a letter to the Hill specifically calling on the Senate to pass the education funding, and NDN applauds this progress to both aid the economy and ensure students receive the education they've been promised. 

On Friday, Dr. Christina Romer, Chair of the Council of Economic Advisors, blogged on the second quarter GDP numbers:

Today’s report shows that real GDP, the total amount of goods and services produced in the country, grew at a 2.4% annual rate in the second quarter of this year, the fourth straight quarter of positive growth.  Growth in the first quarter was revised up to 3.7%, meaning that growth has averaged over 3% for the first half of 2010.  This solid rate of growth indicates that the process of steady recovery from the recession continues.  Nevertheless, faster growth is needed to bring about substantial reductions in unemployment.  Much work clearly remains to be done before the U.S. economy is fully recovered.  The comprehensive data revisions released with the report provide further evidence of just how severe the recession has been: the fall in GDP between 2007:Q4 and 2009:Q2 was 4.1%, making this the deepest recession since 1947.

...

Moderate, sustained GDP growth is a vast improvement over the terrible declines in GDP of late 2008 and early 2009, and reassuring given the turbulence in financial markets following debt problems in Europe.  However, growth is below the rapid rate of increase needed to bring the unemployment rate down quickly.  For this reason, it is essential that Congress take the additional targeted actions that the President has recommended to further stimulate growth and job creation, such as increased lending and additional tax cuts for small businesses, aid to state and local governments to prevent the layoffs of hundreds of thousands of teachers, firefighters, and police, and tax credits to promote energy efficiency and clean energy manufacturing.

Passing the modest provisions that Dr. Romer lays out at the end of her post is of the highest importance. A week ago Friday, NDN published a paper about this and other near-term downpayments on a longer-term agenda. Additionally, we strongly encourage members of the Senate to vote in favor of the state aid package coming up tonight.

The Washington politics around America’s economic policies has become dysfunctional. In Barack Obama’s first 18 months, the broad support for Democrats expressed in the 2006 and 2008 elections, the big congressional majorities they produced, and the public’s loud demand for change from the Bush era were enough to enact major stimulus, followed by health care and financial reforms. The full-throated stimulus, both monetary and fiscal, halted the economy’s sickening slide towards depression, but they were not enough to ignite strong, self-sustaining growth. So now, with the economy stuck in a holding pattern of high unemployment and slow growth, and GOP attacks dominating new-media airwaves and bandwidth, most Americans’ patience with the Democrats’ economic management has worn very thin. The national consensus for strong action on the economy has unraveled, and the administration finds itself unable to enact additional measures.  

Last week, Simon, Jake Berliner and I sounded an alarm in a new NDN memo: If we hope to salvage the next decade, we will need a new policy and political framework. For the long-term, this strategy should focus on two powerful structural changes now reconfiguring the economy, globalization and the spread of information and Internet technologies. Even more urgently, however, Congress needs to address the jobs crisis.  

There’s no use in fooling ourselves that anytime soon, healthy job creation will kick in on its own. The economic mistakes of the last administration took care of that: Financial crises always lead to recessions that are unusually deep and job-destroying; and those steep downturns typically are followed by unusually shallow and slow recoveries. And the destructive forces that drove the original crisis are still with us. A prime reason that business lending and investment remain weak, for example, is that our large, financial institutions still hold hundreds of billions of dollars in the same financial instruments that brought on the crisis. Household spending also remains weak, and persistent high unemployment isn’t the only reason. In addition, home values continue to sputter and foreclosures are still running several times their normal levels, eating away at the financial security and economic well-being of most Americans.  

NDN’s new prescription calls, first, for tough love: It’s time to level with Americans about what precisely is happening with their economy, in order to “create a public logic for sustained new public and private investment in the years ahead.” Then, we turn to five steps which Congress could take this year to help jump-start new job creation, now. 

• Provide more federal funds to state and localities, so American students and their parents don’t face the prospect of 300,000 fewer teachers in classrooms this fall, and comparable downsizing for police and other local and state agencies.

• Reduce the cost for companies to create more jobs by cutting the payroll tax.  A cut on the employers’ side would directly spur job creation, while a cut on the workers’ side would do it more indirectly, by expanding demand. These payroll tax cuts should go unfunded for one year, providing a little more stimulus, and then we should pay for them by phasing in a carbon fee. A carbon fee would also represent the most serious step to address climate change ever undertaken here – and it would stimulate more jobs by spurring the development and adoption of low-carbon technologies.

• Enable more Americans to gain the knowledge and skills required for most new jobs, especially the computer and Internet-related skills needed to perform well in workplaces dense with those technologies.  A big, first step: Federal grants to community colleges to keep their computer labs open and staffed on evenings and weekends, so any adult can walk in and receive free instruction.

• Help to re-stabilize house values by bringing down home foreclosure rates. Until the housing market returns to more normal conditions, most Americans will feel less well-off, stifling normal consumer spending. Falling home prices also make it harder for many people to move to where work is available or wages higher. The first step here: Create a new federal loan program for lower- and middle-income people whose mortgages are in trouble.

• Jumpstart new business formation, because so many of the economy’s new jobs are created by young businesses. And don’t start from scratch – we can use current SBA, EDA and other agency programs to create new “acceleration centers” that could bring together entrepreneurs and venture capitalists, connect new startups with opportunities provided through the government’s new green economy and export initiatives, and then connect job seekers with those companies.

We can put millions more Americans back to work. All that’s lacking is the national will to address the factors and forces now blocking it. If the President spends the month of August working to rebuild that will, Democrats could enact a serious jobs agenda in September and October – and do a lot better in November than anyone’s polls suggest today. 

The full memo, entitled "Towards a New Economic Strategy for America – Steps We Can Take in 2010" by Simon Rosenberg, Rob Shapiro and Jake Berliner, is available here.

The Bush Tax Cuts of 2001 and 2003 were the largest pieces of economic policy from the last decade, one in which median household incomes declined and wages stagnated. As such, and for a panoply of other reasons, the portions of the tax cuts for the highest tax brackets should be allowed to expire. Steven Pearlstein and Ruth Marcus in the Washington Post both take a look at these dynamics today.

Pearlstein writes that the anti-tax dragon needs to be slain (and does a bit of the slaying):

It is the refusal to put any tax increase on the table that has impeded much-needed reform of the tax code and rendered impotent a bipartisan commission charged with figuring out how to rein in the budget deficit.

And it is the tax bugaboo that stands in the way of an investment agenda to match the global challenges we face.

If Obama fails to alter the political dynamic and finally slay the anti-tax dragon, it's game over for his economic agenda.

And Marcus writes about the illiteracy displayed by conservatives on tax policy:

At a breakfast with reporters the other day, Minnesota Gov. Tim Pawlenty, one of the GOP's rising stars and a more-likely-than-not 2012 presidential candidate, was asked what his reaction would be if the president's debt commission were to recommend a mix of spending cuts and tax increases.

"Not good," Pawlenty said. "I don't think the argument can be credibly made that the United States of America is undertaxed compared to our competitors." Actually, the United States is on the low end in terms of the overall tax burden -- 28 percent of gross domestic product in 2007, according to the Organization for Economic Cooperation and Development, compared with an average of 36 percent in the 30 OECD countries. Only South Korea, Mexico and Turkey were lower.

Of course, Pawlenty is hardly alone in his tax delusions. Senate Minority Leader Mitch McConnell proclaimed the other day that the Bush tax cuts actually raised money. "There's no evidence whatsoever that the Bush tax cuts actually diminished revenue," the Kentucky Republican told Brian Beutler of the Web site TPMDC. "They increased revenue, because of the vibrancy of these tax cuts in the economy."

Here's some evidence. Tax revenue fell from 21 percent of GDP in fiscal 2000 to 17.5 percent in 2008. (I'm leaving out the recession-induced plunge, to under 15 percent this year and last.)

Here's more evidence - a CBPP analysis of causes of deficits in the coming years:

It's pretty clear that the American people's money can be better spent to spur economic growth than on tax cuts for the wealthy. More on this to come...

On July 27, NDN will host the United States' Ambassador to the Organization for Economic Cooperation and Development (OECD), Karen Kornbluh. Ambassador Kornbluh, who previously served as Senator Barack Obama's Policy Director and as Deputy Chief of Staff at the Treasury Department, will discuss recent research on youth unemployment and what the US is doing at the OECD to address the high levels of youth unemployment brought on by the Great Recession.

Across the vast majority of advanced industrialized economies, youth unemployment is far higher than unemployment in the general population. The OECD reports that in 2009 youth employment dropped more than employment for low-skilled workers, and, according to a Pew study released in February, 37% of the American millennial generation, those 18-29 years old, are unemployed or out of the workforce, "the highest share among this age group in more than three decades."

Extended unemployment following college graduation can have long-lasting career and life implications. Additionally, there exists great uncertainty as to how the advanced industrialized economies will create the jobs of the 21st century that can deliver prosperity to this emerging generation.

Ambassador Kornbluh will be joined by Dr. Robert Shapiro, Chair of NDN's Globalization Initiative and former Under Secretary of Commerce for Economic Affairs.

Ambassador Karen Kornbluh on "Jobs for the Future"
Tuesday, July 27 @ 12pm
NDN - 729 15th St NW, First Floor
RSVP  |  A live webcast will begin at 12:15pm

I hope you will join us for this important discussion.

The economy today is finally no longer shedding jobs, but as millions of out-of-work Americans know, businesses are creating new jobs at only an anemic rate.  The recent failure by Congress to pass a "jobs bill" with modest and economically-necessary provisions illustrates that, despite all of the disturbing economic data to the contrary, there is not yet broad consensus and policy and political framework for doing more to stimulate job creation.

In a memo released today entitled, "Towards A New Economic Strategy for America - Steps We Can Take in 2010," we argue that the American economy, in addition to facing dramatic cyclical economic weakness in the Great Recession, is going through large structural changes that call into question the ability of traditional strategies to drive broad-based prosperity. The memo reviews the structural and cyclical forces holding down U.S. job creation and presents a political and policy framework for addressing them in the near term. We argue that America needs a long-term economic strategy, and, that as a down payment on such a strategy, Congress should pass the following five provisions as soon as possible:

• Aid States and Localities and Extend Crucial and Expected Benefits

• Cut Payroll Taxes to Stimulate Demand and Create Jobs

• Provide the Existing Workforce with Free IT and Internet Based Skill Training Through our Community College System

• Create a Housing Stability Loan Program

• Create Local Jobs and Innovation Centers

The full memo is available here.

The President will sign another $33 billion extension of unemployment benefits this week, and this is only the beginning of a debate almost certain to produce some uncomfortable moments for both parties. For now, the Republicans have embraced the more shameless position. Their new talking points tell us that the economy cannot afford any new measures that would increase the deficit – a very long way from Reaganomics, indeed. But all this comes on top of the previous GOP story line that the slow economy and high jobless rate prove that the President’s economic program has failed. With no evidence that global investors have any qualms at all about U.S government debt – if they did, the market yield on Treasury bills wouldn't hover around one-third of one percent – the slow economy they use to blame Obama should be entirely able to absorb more deficit spending without problems. It’s true that consumer spending and business investment remain weak, and American companies aren’t creating many new jobs. But even most GOP economists concede that the combination of the 2009 stimulus package and two years of near-zero interest rates from the Fed  explain why we moved from monthly job losses of a half million or more to small monthly gains, and from output contracting at a 4 to 5 percent rate to output growing again moderately. 

But it’s not enough to produce a healthy expansion, because economies hit by financial meltdowns need stronger and different medicine than easy fiscal and monetary policies. So, while Democrats are right that an economy as weak as this one won’t be harmed by another modest dose of deficit spending, it also won’t help the overall economy much. That’s because it doesn’t touch the underlying forces holding down growth and jobs, which are the same forces that drove the crisis. To begin, high unemployment isn’t the only or most powerful force holding down consumer spending. Americans aren’t spending like they used to, mainly because the sharp fall in housing markets has left most of us a lot poorer than a few years ago. And there’s no relief in sight while home foreclosures continue to run at several times their normal rates, further depressing housing prices.  

There’s a similar story behind business investment, which still lags because nearly two years after the crisis peaked, the financial institutions that dominate business lending remain weak. The Paulson and Geithner Treasuries both rejected not only the original TARP plan to buy up the sick assets held by those institutions – which admittedly would have been hard to carry off successfully – but also calls to take over failing banks, remove those assets from their balance sheets, and sell off new, healthy entities. Since they also didn’t come up with another way to sequester the junk from the rest of the system, financial institutions are still saddled with hundreds of billions of dollars in bad assets and derivatives. And with the housing market still driving down the value of many of the mortgage -backed assets that remain on the books of the big banks – and sovereign debt markets in Europe also looking perilous – financial institutions are still writing down losses and hoarding capital for the next storm.   Again, monetary and fiscal stimulus – or austerity for that matter – can’t solve the problem.  

In the face of these daunting difficulties, much of Washington has decided to yell about deficits. Even so, they can’t quite get their stories straight. Republicans unwilling to let the deficit rise by $33 billion for one year to give jobless Americans a little more assistance, insist nevertheless that Congress reenact the Bush 2001 and 2003 tax cuts for high-income Americans, set to sunset this year, at a cost to the deficit of $750 billion over 10 years. And quite a few Democrats who point out that abrupt austerity measures could easily hurt a slow economy still won’t consider extending those tax cuts for even a year or two.  Neither side can have it both ways.   

If Republican really believe that temporary increases in the deficit are dangerous, they should be leading the fight to roll back those tax cuts. And if Democrats really believe that cutting the deficit in a slow economy is dangerous, they should be calling on the President to preserve the same tax cuts. However, between the contradictions on both sides may well lay the seeds for a sensible, Washington compromise.

While economists may argue about the effects on a slow economy of temporary increases in spending or tax incentives, they generally still agree that once the economy is healthy, the large deficits now forecasted for years to come will begin to displace private investment and drive up interest rates. At a minimum, that should mean no new, permanent tax cuts or spending programs. So, here’s the compromise: Extend the Bush tax cuts for high-income Americans for two years, at a cost of $75 billion, and match it with $75 billion over two years in additional assistance to the states, now facing the prospect of laying off tens of thousands more police, teachers, and other public servants. And if that’s too brazen for the deficit hawks, add a measure or two that would raise $150 billion over the following three to five years. In a spirit of shared pain, Republicans could begin by agreeing to a small fee on financial transactions that normally would make them blanch. In return, Democrats could pledge to limit increases in non-defense discretionary spending to inflation minus one percent, for five years. All it really requires is a burning desire by Republicans to hold on to the Bush tax cuts, matched by a heartfelt yearning by Democrats to preserve the jobs of as many public employees as possible. Who knows: If it works, it could be a first step towards a much broader agreement on serious, long-term deficit reduction.

Update, July 23: For more on this topic, please read the new NDN memo: Towards A New Economic Strategy - Steps We Can Take in 2010.