Economy

The American economy has long been touted as the most innovative in the world, and American innovations have contributed broadly to domestic and global prosperity. The Great Recession and an increasingly competitive global economy make it imperative that the United States does more than ever to foster innovation and the creation and growth of new companies. Investing in innovation and the success of the American people must be a cornerstone of our strategy to create prosperity in the 21st century, idea-based economy.

In its recently released Innovation and Entrepreneurship Agenda, the New Democrat Coalition discusses innovation's central role in creating American prosperity. The agenda lays out a set of principles, mated with specific policies, for fostering innovation. 

On Wednesday, June 16, NDN will host a speech by Congressman Ron Kind (WI-3), Vice-Chair of the New Democrat Coalition and Co-Chair of the NDC Task Force on Innovation and Competitiveness. Kind will speak about the value of innovation to the American economy and the recently released New Dem Agenda for Innovation and Entrepreneurship. Kind will be joined by NDN President Simon Rosenberg.

June 16 @ 12pm
NDN - 729 15th St NW, First Floor
Washington, DC 
Click here to RSVP 
A live webcast will begin at 12:15

A dangerous and infectious economic idea is spreading around the world. Last week, the liberal majority in the House of Representatives rejected efforts to inject a little more stimulus into the economy; and across much of Europe and Asia, presidents, prime ministers, parliaments and congresses are calling for tighter budgets. Many economies face serious problems these days; and one of the more troubling among them is the simplistic view of many public officials that their still weak economies need a strong dose of fiscal discipline. What they ought to worry about are the odds of another economic downturn and a chance that we all may face a second financial crisis. 

Here at home, we know from the most recent data that American businesses aren’t hiring new workers in any real numbers, nor are banks lending most classes of businesses much new capital.  All this tells us that the 2009 stimulus, which has just about run its course, was not enough to restore healthy, self-sustaining growth. Yet, most politicians still don’t appreciate how damaging fiscal stringency can be for an economy that remains too weak to generate decent job creation or business investment. They may have to rediscover the lesson that FDR and his top advisers learned back in 1937, when federal belt tightening sent the barely-recovering U.S. economy back into deep recession.

In a strong economy, a big dose of additional deficit spending may well crowd out private investment, push the Fed to raise interest rates, and create significant long-term costs for taxpayers who will have to finance the additional debt forever. But it’s obvious that this economy is still very far from being strong. The Fed, for example, will never raise rates under current conditions – a mistake which, as Fed Chairman Ben Bernanke has noted, was the lesson of 1930-1932. Under these conditions, additional spending for initiatives which also make sense in themselves can actually increase private investment and long-term growth, which in turn would substantially reduce the long-term financing costs of the additional debt. 

The current political passion for tight budgets, already in full play in Germany and Britain, may have been triggered by the sovereign debt crisis unfolding in Greece and, perhaps soon, across much of southern Europe. Yet, the ultimate sources of most sovereign debt crises are weak productivity and flagging competitiveness. Add an irresponsible government willing to run unsupportable deficits and loose monetary policies, instead of taking the difficult steps required to address the underlying problems, and a sovereign debt default becomes a real possibility. But the United States isn’t facing Greece’s dilemma, and neither are Germany or Britain. And the best policies to maintain the confidence of international investors even as our own national debt rises rapidly are measures to further bolster our underlying productivity and competitiveness.  That will be especially true if the European Union’s plan to address Greece’s sovereign debt problem fails – as it almost certainly will – and the ensuing chaos triggers new worldwide financial meltdown. At a minimum, the falling value of Greek bonds, along with those of Portugal, Spain, Hungary and Italy, will further slow our own recovery and growth, making premature deficit reduction even more damaging.  

Still, while the stimulus helped temper the 2008-2009 recession and hastened its end, it was never enough to restore healthy growth to an economy twisted out of shape by a historic housing bubble and then cracked open by a systemic financial meltdown. So, the administration and Congress need to do now what should have been done in 2009 to address the forces that drove the crisis. For example, Americans won’t start consuming again at the levels needed to drive jobs and investment until they stop feeling poorer, and that will still require measures to bring housing foreclosures back to normal levels and stabilize housing prices. Moreover, so long as foreclosures remain abnormally high, our banking system’s holdings of mortgage-backed securities and their derivatives will continue to deteriorate – and the continuing losses will keep banks from restoring normal business lending. The administration’s program of subsidies for banks to refinance troubled mortgages didn’t work, so we need stronger medicine. Here’s one approach:  Since the government now owns Fannie Mae and Freddie Mac, which continue to hold a decent share of the nation’s mortgages, Congress can direct them to help bring down foreclosures by renegotiating and refinancing the troubled ones in their portfolios.

Deficit anxieties also shouldn’t stop us from taking serious steps to help reboot job creation. The best course would be measures that can reduce the cost to businesses of creating those new jobs, so let’s cut in half the payroll taxes that employers pay on new employees. And since slow job creation was a serious problem for several years before the financial meltdown, there are good grounds for making this change permanent. But since the long-term trajectory of our deficits and national debt does matter, we should also take steps to pay for this change once the economy recovers. And perhaps the best way to offset the costs of lower payroll taxes for employers, two or three years from now, would be to phase in a new carbon-based energy fee, which also happens to be the most effective way to reduce the greenhouse gas emissions driving climate change.

In the meantime, the administration also can lay the groundwork to restore long-term fiscal sanity by addressing the two big forces driving large U.S. deficits even before the world’s current problems. There’s no mystery about what those forces are – sharply-rising health care costs and substantial cuts in the tax base. The political challenge is to leave the deficit alone until the economy regains its strength, while building a new national consensus for greater revenues and much stronger steps to contain health care costs.

All else equal, I consider myself a pretty strong believer in balanced budgets. Here’s the thing, all else isn’t equal in the short term. As David Leonhardt writes in the New York Times, unemployment is at a 27 year high, and there’s a proposal moving through Congress to help address this in a responsible, economically literate manner. Leonhardt’s column explains why it’s a no-brainer.

A highlight, but the full column is worth a read:

There are two arguments for more stimulus today. The first is that, however hopeful the economic signs, the risk of a double-dip recession remains. Financial crises often bring bumpy recoveries. The recent troubles in Europe surely won’t help.

The second argument is that the economy has a terribly long way to go before it can be considered healthy. Here is a sobering way to think about the situation: If the next four years were to bring job growth as fast as the job growth during the best four years of the 1990s boom — which isn’t likely — the unemployment rate would still be higher in 2014 than when the recession began in late 2007.

Voters may not like deficits, but they really do not like unemployment.

Looking at the problem this way makes the jobs bill seem like less of a tough call. Luckily, the country’s two big economic problems — the budget deficit and the job market — are not on the same timeline. The unemployment rate is near a 27-year high right now. Deficit reduction can wait a bit, given that lenders continue to show confidence in Washington’s ability to repay the debt.

As a result, Congress does not have to choose between the problems. It can pass the jobs bill, putting people back to work, and even pass a separate bill to help struggling states. History has shown that state aid, which prevents layoffs of teachers, emergency medical technicians and other workers, is the single most effective form of stimulus.

Additionally, yesterday in Pittsburgh, President Obama gave perhaps his best economic speech yet. Coupled with the recently released National Security Strategy, the President has given a pretty clear sense as to where his administration is headed on the economic front. 

Again, a highlight, but read the whole speech:

In the immediate future, this means doing whatever is necessary to keep the recovery going and to spur job growth.  But in the long term, it means recognizing that for a lot of middle-class families -- for entire communities, in some case -- a sense of economic security has been missing since long before the recession began. 

Over the last decade, these families saw their income decline.  They saw the cost of things like health care and college tuition reach record highs.  They lived through a so-called economic “expansion” that generated slower job growth than at any prior expansion since World War II.  Some people have called the last 10 years “the lost decade.” [note: for background on the lost decade, read "A Lost Decade for Everyday Americans"]

So the anxiety that’s out there today isn’t new.  The recession has certainly made it worse, but that feeling of not being in control of your own economic future -- that sense that the American Dream might slowly be slipping away -- that’s been around for some time now.  And for better or for worse, our generation of Americans has been buffeted by tremendous forces of economic change.  Long gone are the days when a high school diploma could guarantee a job at a local factory -- not when so many of those factories had moved overseas.  Pittsburgh, a city that once was defined by the steel industry, knows this better than just about anybody.  And today, the ability of jobs and entire industries to relocate where there’s skilled workers and an Internet connection has forced America to compete like never before. 

From China to India to Europe, other nations have already realized this.  They’re putting a greater emphasis on math and science, and demanding more from their students.  Some countries are building high-speed railroads and expanding broadband access. They’re making serious investments in technology and clean energy because they want to win the competition for those jobs. 

So we can’t afford to stand pat while the world races by.  The United States of America did not become the most prosperous nation on Earth by sheer luck or happenstance.  We got here because each time a generation of Americans has faced a changing world, we have changed with it.  We have not feared our future; we have shaped it.  America does not stand still; we move forward.

I find myself in Stockholm, an old capital city of a small economy animated by the drive of ingenious entrepreneurs and the extraordinary global success of more native companies than any other nation its size, from Ikea and Erikson to the Tetra Laval packaging giant and the Axel-Johnson conglomerate. Sweden’s economic drive and success are predicated on an acute understanding of the particular demands that globalization imposes on most business enterprises. So, Sweden seems an appropriate place to think about the special difficulties that American economic policymakers face. The United States has been economically dominant for so long that we too easily overlook how unforgiving global competitors and investors can be when our parochial politics produce simplistic fixes for complicated challenges. 

Exhibit One is one of the final actions by the House of Representatives before its Memorial Day recess. The majority, convinced that they’ve found a new, economic wedge issue, passed legislation to strip our most successful global companies of a “tax break” which allegedly encourages them to “ship jobs overseas.” The provision in question lets U.S. multinationals defer paying the U.S. corporate tax on the profits of their foreign subsidiaries until those profits are formally transferred back to the U.S. parent company. The claim that this provision leads Microsoft, Google, Amgen or General Electric to ship jobs abroad is an appealing slogan, but it’s one with no real economic foundation in a global economy.  

The slogan and the policy behind it depend on what is, at best, a nostalgic view of how companies actually operate in global markets. In the 1970s and 1980s, U.S. companies that went global did so by setting up production facilities in places with lower costs – wages, real estate, construction and so on – and then shipping the products produced there back home or to their major markets in Europe. That shift in production was a big factor in the hemorrhage of manufacturing jobs back in the 1970s and early 1980s.  But the truth is, the globalization of the last 20 years has changed most of that.

First, our international advantages now come not from producing standard goods more cheaply in other places, but from developing and applying new ideas to the creation and production of countless goods and services. That’s why our globally competitive industries today are no longer automobiles and steel, but the companies that create and provide goods and services based on new intellectual property – from Internet content and infrastructure, and software and advanced IT hardware, to pharmaceuticals and biotech, business services and entertainment. Moreover, the critical, idea-based services that these industries rely on, along with the idea-based headquarter services that all global companies depend upon, remain firmly entrenched in the United States. That tells us what the rest of world knows all too well: In a global economy, America’s core economic advantage is simply that we perform these idea-based operations better than anyone else.

The result confounds the basic proposition that “tax deferral” costs American jobs. As a stream of recent research has demonstrated, increases in investment and jobs by the foreign subsidiaries of U.S. global companies no longer come out of investment and jobs at home. Instead, as those foreign subsidiaries expand, mainly to serve foreign markets, their demand for and use of those idea-based, headquarter services expands too. So, the data and the operations behind them now show that increases in jobs and investment by foreign subsidiaries are now accompanied by increases in investments and jobs by the parent companies back home. For all of these reasons, raising the tax burden on American companies with foreign operations would reduce investment and job creation not only in abroad, but here at home as well.  

It’s true that American multinationals, especially in manufacturing, hemorrhaged jobs again over the last decade in the face of globalization. But most of those jobs have been lost to domestic outsourcing, as companies increasingly turn to other U.S. firms for services such as maintenance, legal and accounting advice, and so on. The culprit here is the fast-rising financial burden of providing health care and pension benefits, especially in a competitive global economy that makes it much harder to pass along those costs in higher prices. Raising the tax burden on the foreign earnings of U.S. multinationals won’t begin to touch this daunting challenge.    

The recent House action actually could be even more damaging than these developments suggest. The reason that our tax system has provided this tax “deferral,” for nearly as long as we’ve had a corporate income tax, is that America is nearly the only major country that taxes its businesses on their worldwide income, regardless of where it’s earned.  Britain, Germany, Japan, China and nearly everyone else of economic consequence have “territorial” tax systems that tax international companies only on the profits they earn within each nation’s own borders. On top of our distinctive “worldwide” tax system, we also now find ourselves with nearly the highest corporate tax rate of any major economy. So, without deferral, America’s globally successful industries would face a much higher tax burden than their European or Asian rivals. And that would mean lower rates of return for U.S. companies, which in turn would lead to less investment, less innovation, and ultimately fewer U.S. jobs.  

Ending deferral could not only cost tens of thousands of American jobs. It also could create an illusion that Congress has already done what it has to, in order to create more jobs. The slowdown in U.S. job creation has emerged as a very serious, new challenge over the last decade.  But the way to address it has to begin with recognizing the real sources of the pressures on jobs in a global economy. The problem is not efforts by businesses to build a global presence, which after all is a fundamental part of global success. Rather, part of the real issue here lies in the American economy’s increasing and distinctive reliance on ideas rather than physical assets to create value. This historic development puts a big economic premium on people’s ability to operate effectively in workplaces and factories dense with the information technologies that create and manage ideas and information. The reasonable response to that, again, is not higher taxes on foreign-source earnings, but a new domestic program of grants to community colleges to provide free computer and Internet training to any adult who walks in and asks for it. The pressures on jobs and wages also now come, as suggested earlier, from the fast-rising costs for business of providing health care coverage. The answers to that lie in serious measures to contain the pace of medical cost increases. The President’s recent health care reforms contain a number of modest steps in this area, and the Congress would do American workers a genuine service by strengthening and expanding them.

After all that the American people have endured in the last two years, surely it’s time to resist the siren call of facile slogans and easy answers, and become truly serious about both jobs and globalization.

Waves of new immigrants often spark economic anxiety and cultural discomfort, as well as occasional violence and wide-net crackdowns, on the Arizona model. Even here, a nation comprised almost entirely of immigrants and their descendents, we’ve seen these reactions not only in recent times but also a century ago, when waves of poor immigrants from Europe arrived here. With a hundred years’ distance, however, we can now see that those early waves of immigration were generally associated not with economic dislocation and national decline, but with extraordinary economic boom times and America’s emergence as the world’s leading economy. And for much the same reasons as a century ago, recent evidence indicates that the economic effects of the current waves of immigration are also largely positive. 

The New Policy Institute (NPI) asked me to review all of the available data and economic studies of recent U.S. immigration. With my colleague Jiwon Vellucci, we found, to start, that more than one-third of recent immigrants come from Europe and Asia, while less than 57 percent have come from Mexico and other Latin American nations. The popular portrait of recent immigrants is off-point in other respects as well. While more immigrants than native-born Americans lack high school diplomas, equivalent shares of both groups have college or post-college degrees. That finding should make it unsurprising that 28 percent of U.S. immigrants work as managers or professionals, including 38 percent of those who have become naturalized citizens or the same share as native-born Americans. 

Many Americans would probably acknowledge that their concerns about immigration lie principally with those who are undocumented. No one likes being reminded that the world’s most powerful nation hasn’t figured out how to effectively police its own borders. But the data also show that these undocumented people, who account for 30 percent of all recent immigrants, embody some traditional values much more than native-born Americans. For example, while undocumented male immigrants are generally low-skilled, they also have the country’s highest labor participation rate: Among working-age men, 94 percent of undocumented immigrants work or actively are seeking work, compared to 83 percent of the native born. One critical reason is that undocumented immigrants are more likely to support traditional families with children: 47 percent of undocumented immigrants today are part of couples with children, compared to just 21 percent of native-born Americans.

The evidence regarding the impact of immigration on wages also turns up some surprising results. First, there’s simply no evidence that the recent waves of immigration have slowed the wage progress of average, native-born American workers. Overall, in fact, the studies show that immigration has increased the average wage of Americans modestly in the short-run, and by more over the long-term as capital investment rises to take account of the larger number of workers. Behind those results, however, lie winners and losers – although in both cases, the effects are modest. Among workers, the winners are generally higher-skilled Americans: For example, when a factory or hotel hires more low-skilled workers, demand also increases for the higher-skilled people who manage those workers or carry out other professional tasks for an enterprise that’s grown larger. 

The losers are generally the lower-skilled workers who have to compete for jobs with recent immigrants. But studies also show that immigration reform might well take care of most of those effects. Following the 1986 immigration reforms, for example, previously-undocumented immigrants experienced big pay boosts – as much as 15 or 20 percent –  and immigrants who already had legal status saw hefty wage gains, too. But the reforms also led to higher wages for lower-skilled native-born Americans. One reason is that undocumented people who gain legal status can move more freely to places with greater demand for their skills, reducing their competition with native-born people with similar skills. More important, their new legal status confers certain protections such as minimum wage and overtime rules. Today, about one-fourth of low-skilled workers in large American cities are paid less than the minimum wage, including 16 percent of native-born workers, 26 percent of legal immigrants, and 38 percent of undocumented workers. Ending the ability of unscrupulous employers to recruit people to work for less than the minimum wage would not only raise the incomes of those currently paid less than the minimum wage. It also would ease downward pressures on the wages of other lower-skilled Americans, which comes from the below-minimum wage workers. This process is something we have refered to as "closing the 'trap-door' under the minimum wage."

Looking again at immigrants generally, recent research also shows a strong entrepreneurial streak, with immigrants being 30 percent more likely than native-born Americans to start their own businesses. Nor are immigrants the fiscal drain that’s commonly supposed, at least not in the long term. In California and a few other states, immigrants today do entail a net, fiscal burden, principally reflecting the costs of public education for their children. But studies that use dynamic models to take account of the lifetime earnings of immigrants – most of whom arrive here post-school age and without elderly parents to claim Social Security and Medicare – show substantial net fiscal gains at the federal, state, and local levels.

Political disputes are rarely settled by facts. Nevertheless, it’s reassuring to see that the humane and progressive approach to immigration is also a policy likely to produce good economic results for almost everyone.

For more information, please read: The Impact of Immigration and Immigration Reform on the Wages of American Workers by Robert J. Shapiro and Jiwon Vellucci. 

Cross-posted at the Huffington Post

Last night, on the "Rachel Maddow Show" (of all places for this to happen), Rand Paul said that he wasn't necessarily comfortable with the government telling private businesses how to deal with race. Specifically, he didn't seem particularly favorable to desegregating lunch counters. 

Pretty much everyone is rightfully offended by this sentiment. The question of whether or not it is an overreach of government to desegregate lunch counters is long settled. What still exists is the sort of economic libertarianism that drives one to Paul's conclusion. 

Paul's beliefs about constrained government – one so limited that it can't enforce basic rules that serve the good of society – translate on the economic front into a free market responsible for virtually everything. In this case – theoretically – if the market was not amenable to segregated lunch-counters, people would stop buying food at segregated diners, and the hidden hand would have cured racism. 

What we know from actual experience is that, in some parts of this country, things just did not work that way. Cultural norms allowed discriminatory practices for generations until the federal government stepped in.

It seems obvious, but it's worth saying: there are lots of other important functions the free market can't fulfill. We look to the government to provide infrastructure, schools, national defense, public health and emergency services, etc. One of the best parts of living in a modern, advanced industrialized nation is that life doesn't have to be nasty, brutish, and short. And with the protection and services of organized government come certain responsibilities for the private entities that enjoy said benefits.

Is there a legitimate debate about the proper role of government in the economy and our everyday lives? Of course. And the ideological consistency of Paul and other libertarians has its attractions, especially when contrasted with the Republican party, which wants "liberty" in some places (taxes) and the heavy hand of government in others (the bedroom). 

But the fact is that, as America enjoys its place as the one true global superpower, we no longer have the luxury of a government that sits idly by and allows the free market to solve every problem, whether of civil rights or economic prosperity. While competition and markets have been key to allowing the innovation that has driven American prosperity, so too have crucial pieces of government investments. From decisions over two centuries to build a world-class Navy capable of allowing the U.S. to be a titan of global commerce, to Eisenhower's National Highways, to the creation the Internet, to preventing a second Great Depression, key, responsible government actions have not only not impinged on our economic freedoms, they have enabled the prosperity that has made us not just free, but truly great.

In the months ahead, we will hear plenty about freedom from those who claim its mantle. But right now, the great economic challenges that face the nation do not arise from the heavy hand of government in the affairs of the private sector, but instead from the potential economic catastrophe that government action is required to avert. So consider – what sort of economic stewardship would Rand Paul's ideological consistency offer us? What would he and those who agree with him have done over the last two years as the American and global economies melted down? 

There can be only one conclusion: While Paul's lunch counter libertarianism disgusts us, it is his economic libertarianism that truly imperils us.

The long-awaited climate proposal from John Kerry and Joe Lieberman (minus Lindsay Graham) is now on the table; and it’s clear already that it has no better chance of being enacted than other failed proposals before it. One informal count this past week finds 26 Senators likely to vote yes and another 11 probable supporters – a total of 37, against nearly as many “no” votes and probably no’s (32) and nearly again as many fence-sitters (31). Despite the lessons of Katrina, the global importuning of Al Gore, and the President’s pledge to solve the problem, support for steps to stabilize greenhouse gas emissions at safe levels hasn’t changed much in the last half-decade. The hard truth is, a serious climate program is unlikely to happen unless its advocates shift their legislative approach and retool their political strategy.  

You don’t have to be David Axelrod (or Karl Rove) to appreciate why. In a period of widespread economic anxiety and populist anger, congressional sponsors of climate legislation have persisted in pushing a big, new Washington fix that would raise most people’s energy costs in the near term, on the strength of promises by scientists that doing so will lessen the chances of dangerous climatic changes several decades from now – changes which scientists cannot yet specify in any detail. The cap-and-trade model long pushed by a handful of national environmental groups and adopted by Kerry-Lieberman and by Waxman-Markey in the House has other features bound to repel most Americans – especially the creation of a new, trillion-dollar financial market in federal permits to emit greenhouse gases, all to be managed and potentially manipulated by Wall Street. How many Senators are prepared to explain why the only climate plan they can come up with would raise everyone’s energy bills and yet enrich energy traders and executives at Goldman Sachs and JP Morgan Chase? 

The country and the planet need a different approach. The answer is to marry a plan to create jobs with a funding mechanism to reduce greenhouse emissions. Earlier this year, the CBO reported that the single, most powerful policy tool available to spur job creation is a sharp reduction in the employer’s side of the payroll tax, targeted to new hires who increase a firm’s entire workforce and total payroll. The catch is that since payroll tax revenues are dedicated to fund Social Security and Medicare, we have to replace the foregone revenues. We can finance this job-creating cut in payroll taxes by enacting a new, carbon-based fee which also would address climate change.   

To be sure, the new carbon fee – like cap-and-trade or, for that matter, EPA regulation – would drive up most people’s energy bills. But the cuts in the payroll tax would offset the higher energy costs from the fee, and the new jobs and higher wages spurred by the payroll tax cuts would leave most us better off, along with the planet. While the emphasis on jobs would be new, this general approach is not. Most economists and many environmentalists have long held that a fee on energy based on its carbon content is the most economically-efficient and environmentally-effective way to accelerate the development of new, climate-friendly fuels and technologies, and spur businesses and households to adopt them. Such a “tax shift” is also the long-time position not only of Al Gore, but also groups such as Greenpeace, Friends of the Earth, and the U.S. Climate Task Force (which, in full disclosure, I chair with Harvard professor and former Gore aide Elaine Kamarck). 

It’s time for climate activists to respect the priorities of most Americans. Congress should enact broad reforms to create new jobs, boost incomes, and strengthen the economy – and pay for these reforms with a new, carbon-based energy fee that would steadily drive down our use of fossil fuels and their dangerous greenhouse gas emissions.

Senator Judd Gregg's theory is below:

Gregg says Americans are frustrated with Washington and are lashing out at incumbents because of high spending and deficits. He's not the only one voicing this theory. Is he right? What is his evidence? Is spending more of an issue than high unemployment and a decade of stagnating wages and declining incomes?