Economy

With the world’s stock and bond markets thoroughly roiled by Greece’s sovereign debt problems, it’s only natural to ask the perennial question, how does it affect us? The outlines of the crisis are certainly familiar. As I have warned for more than a year, governments around the world would inevitably face serious fiscal problems dealing with the daunting debts accumulated from the huge bailouts for the financial meltdown and the large stimulus programs for the subsequent deep recession. In countries that began with large deficits and national debts, such as Greece, Portugal, Spain and Italy, those fiscal stresses have become very serious. Here, in the United States, we’re just beginning to hear calls for deficit reductions. If recent history is any guide, we will ignore the problem for several more years, until voters finally demand that Washington take action.  

Greece has no time to wait, despite the violent protests there against budget austerity. Greece is also burdened with a relatively weak and uncompetitive economy, so it cannot generate strong growth to help ease the budget stresses. Moreover, the organization of the Eurozone has acted like a straight-jacket, denying Greece, along with other member-nations with high and fast-rising public debts, two standard strategies to boost competitiveness and help them grow out of this mess. Greece can’t depreciate its currency to make its exports cheaper in foreign markets, since it shares the Euro with many other countries uninterested in a sharp depreciation that would leave them poorer. Greece also can’t cut its interest rates to spur domestic investment and attract capital from other EU countries, since the European Central Bank (ECB) sets the interest rates for everyone in the Euro area.

That’s why Greece has been headed for a default on its government bonds. The hitch is that a default would shatter the EU’s grand myth, that their (partial) economic confederation enhances the efficiency and competitiveness of its members enough to protect them from such crises. Moreover, if the EU stood by as Greece sank, international investors would dump the public bonds of other debt-burdened EU countries, starting with Portugal, Spain and Ireland. All of this would drive down the value of the Euro, especially relative to the currencies of the EU’s two major trading partners, the United States and China. By the way, that’s both bad and good news for us. A stronger dollar would make our exports more expensive in Europe, undermining the President’s hopes of relying on exports to help drive growth at home.  But a stronger dollar, along with the threat of a sudden crisis for the Euro, also draws more foreign capital to the United States, which helps keep our interest rates low.

So far, the EU and the IMF (prodded by us with promises of a large U.S. financial contribution) have headed off a Greek default by unveiling a $1 trillion bailout plan, consisting mainly of loans and a pledge by the European Central Bank to accept Greek bonds as collateral for loans to the European banks that buy those bonds from the Greek government. The fund is big enough to rescue Portugal and Spain as well, a smart move since serial debt defaults pose the greatest danger of all.  

The announcement of the plan strongly recalls the original TARP bailout. Both plans were pulled together hastily to signal government’s determination to head off a collapse. In both cases, the signal is more important than the actual plan, since neither plan makes much economic sense. The EU plan depends, first, on taxpayers across northern Europe agreeing to shoulder much of the costs to rescue Greece and, second, on Athens following through with deep spending cuts and sharp tax increases that are bitterly opposed by most Greeks. Even if all of that comes to pass, the plan has more fundamental flaws. It purports to respond to Greece’s public debt crisis by expanding the debts of Greek and other European banks, as well as other EU governments – as if international investors will generously overlook Europe piling up debt even faster than today. And if Greece does follow through on the draconian austerity measures contemplated in the plan, its economy will sink further, requiring even more public debt. In short, the EU plan is a fantasy; and Greece and Europe will face another round of this debt crisis not very long from now. 

The improbable shape of the EU bailout does recall our own, original TARP plan. Just as the EU bailout does nothing to address Greece’s lack of competitiveness, the TARP in its various versions never addressed the forces and factors that drove our financial crisis. So, 20 months later, our large banks are still not strong enough to resume normal lending to American businesses. Their continuing vulnerability also makes Europe’s current debt problems even more serious for us.  Greek bonds – along with the bonds of Spain, Portugal, Ireland and Italy – are held mainly by financial institutions. German and French banks are the most exposed, but ours are in the mix as well.  Those bonds have been declining in value for weeks, taking their toll on bank balance sheets. A formal default by Greece would hit all of them; and serial defaults by Greece, Portugal and then Spain – and possibly Italy – would trigger another worldwide financial crisis.

This time, we would have few policy tools left to stop a downward spiral – and Congress almost certainly would fiercely oppose another huge taxpayer bailout, especially Republicans in the midst of a populist purification process that already has purged Bob Bennett in Utah and Charlie Crist in Florida. This is still all speculative – thank goodness – but we could find ourselves with very few options to address a crisis which ultimately could lead to a Second Great Depression. Our best hope for now is that Greece and the Eurozone will somehow muddle through, much as we did in 2009.

This morning’s April jobs numbers can only be viewed as a positive development for the national economy. 290,000 jobs gained, one hundred thousand more than expected, and 231,000 of those jobs were in the private sector. The remainder is comprised of roughly 60,000 census jobs, which are serendipitously timed. Additionally, February and March jobs numbers were revised up.

According to a blog by Council of Economic Advisors Chair Christina Romer:

The job gains were spread widely across sectors. Construction, manufacturing, professional and business services, education and health, and hospitality and leisure all added jobs. Indeed, the rise in manufacturing employment of 44,000 was the largest since August 1998. One area of weakness was state and local government, which reduced employment by 6,000. Temporary help employment grew more slowly than in previous months (+26,000), suggesting that firms may be moving to more permanent hiring. The average workweek for all employees on nonfarm payrolls increased by 1/10 of an hour and is up 3/10 of an hour since December.

This is all good news – we knew the area of weakness was in state and local governments – and the federal government can and should do more to help here. (States have to have balanced budgets, so in times like these, they end up firing people – a scenario that is highly counterproductive.) The increase in work hours is also good, as that tends to precede job growth.

At the same time as this rosy jobs news, the national unemployment level rose to 9.9 percent. Confusing, right?

Well, not really. The commonly cited unemployment rate is merely one statistic of many to help us understand the employment picture, and it’s an imperfect one. If you’re not looking for a job, you don’t play into the calculation. The virulence of this recession caused many to grow frustrated and stop looking for a job – in fact this recession has seen the highest long-term unemployment (6 months or more) of any recession since the great depression. From a statistical perspective, this uptick in the unemployment rate was unavoidable and should be seen as a positive sign – those who have been out of work for a while have grown more optimistic and are therefore out there looking. 

This isn’t to say that the economy is anywhere near out of the woods – we do have lots of people out of jobs who want them, and the economy remains vulnerable to additional shocks. The Greek debt crisis could spread; the oil spill in the Gulf could get caught in the gulfstream and end up on the East coast, hampering commerce; or we could make some foolish policy decision, like stopping stimulus spending or starting a trade war. These scenarios are unlikely, however, and we can continue to hope for continued positive employment data in the future. 

Powerful and wildly-successful institutions sometimes act like teenagers or addicts, unable to recognize their own self-destructive behavior. This year’s top two examples are Toyota and Goldman Sachs – but the administration and Congress are vulnerable as well to the kind of self-inflicted downward spiral that captured those two industry leaders

Toyota invested decades to develop a sterling reputation for safety and quality, and then squandered this brand not by accident, but by myopic design: In a benighted chase for higher profits, Toyota’s top brass demoted vehicle safety from its long-time perch as the firm’s number one operational measure, to number four. Everyone inside the firm got the message – and now consumers around the world have as well. So, Toyota will spend years working to reclaim part of the worldwide market share it carelessly threw away.  

Goldman Sachs may pay an even greater price. It, too, spent a long time building a world class reputation that married extraordinary market acuity with honest dealing. The self-immolation of that brand may have begun with its principals’ decision to jettison their partnership and become a publicly-held company. This shift in the firm’s legal organization allowed them to cash in, but it also transformed Goldman’s business and culture. Its flagship business of investment banking – giving advice and assembling financing for mergers, buyouts and takeover – contracted so sharply that in recent years, it has accounted for just 10 percent of firm revenues.  In its place, Goldman became a giant hedge fund that creates and trades exotic financial products for its clients and itself.  What we know now is that once the top brass’s financial positions were no longer tied to the firm’s long-term value, as it would be under a partnership, a seemingly insatiable drive for huge, short-term profits led them to create products which they simultaneously hawked to their largely institutional clients of pension funds, endowments, banks and other financial institutions, while itself taking financial positions against the very same products.

Coming back will be harder for Goldman Sachs than for Toyota.  Toyota has to reengineer its operations – a serious challenge – in order to restore the core position of safety and quality.  But automobile recalls are routine, even if the extent and reasons in Toyota’s case were not; and several years from now, a reconfigured Toyota could be back on top. But Goldman faces years of civil suits by government regulators, their own shareholders and their former clients, as well as possible criminal charges. And Goldman faces the same treatment in other countries – starting with Greece and other European governments that bought Greece’s bonds after Goldman allegedly helped to hide some of the country’s fiscal problems, with financial maneuvers much like those employed by Enron in its final desperate year. Based on what has happened to other firms that found themselves caught up in extended legal problems, the most important costs to Goldman may not be the legal fees, fines and settlements, but the “distraction factor.” For years, its top executives will be absorbed in defensive moves and stratagems to beat the various raps – while their rivals at other firms focus on the shifts in markets and the economy that can presage large changes. And this doesn’t even count the herculean task of rebuilding a brand that now stands for both self-dealing and double-dealing. 

Without realizing it, administrations, congresses and political parties also can turn self-destructive. The GOP brand in economic stewardship, for example, certainly suffered serious damage from the policies of a Republican President and Congress that ultimately culminated in the worst economic crisis since the 1930s. Yet, even with 60 percent of the country still blaming the Bush administration for the bad economic times, and the public directing their outrage at Wall Street, Washington Republicans remain committed to a “strategy” of stopping the Obama administration from reforming Wall Street.  

Then there’s the matter of the national debt. Eighteen months ago, in this blog, I warned that the Wall Street meltdown was only the first stage of an extended crisis. Stage two was the deep recession triggered by the financial meltdown; and stage three would be the fiscal crises created by the bailouts and stimulus used to address the first two stages. That has all come to pass; the open question is how self-destructive our response will be. We pulled the financial system back from a collapse that would have ushered in another Great Depression, with only a normal quota of self-inflicted wounds – like letting Goldman and JP Morgan Chase claim full payment on deals with AIG which the taxpayers rescued, and not forcing them and other bailed-out institutions to use their new, taxpayer-financed capital to expand lending to businesses. The American brand is successful pragmatism: Figure out what needs to be done, and then go do it. What needs to be done now to defuse the ticking bomb of our fast-rising national debt is to reconfigure the tax system so it produces more revenues while leaving the economy more efficient – think of tax simplification that jettisons lots of special interest tax breaks – and reshape current entitlement spending not only for elderly people, but also the “entitlement” programs for influential industries and for districts and states whose members of Congress have risen to the leadership. 

If we cannot get past our current partisan warfare, the United States in a few years could find itself in Toyota’s place, with a tainted brand and smaller political market share. Our Treasury bills and bonds are unlikely to ever default, as Greece nearly did this week (and still could do, if the bailout fails in any important way). But the normal politics-of-least-resistance will never reconfigure taxes or reshape spending. Instead, it will lead us to a place where we have to pay out more and more to attract foreign buyers for our debt, and those higher interest rates could consign the American economy to years of very slow growth. That’s what can happen to a great nation blind to its own self-destructive behaviors.

In a global economy, even the world’s largest economy by a factor of three (that’s us, compared to Japan and China) cannot by itself ensure job opportunities for everyone and healthy incomes gains for everyone who works hard and well. We may wish it were otherwise, but the United States and the forces of globalization now share control over America’s economic path. The challenge is to work with those forces to benefit average Americans, and to exercise the global leadership required to ensure that other countries work with us to promote the growth and stability of the global system. This part of the progressive agenda has many elements, including efforts to advance open trade in ways that help average workers, steps to promote innovation and protect the rights of American innovators around the world, and responsible regulation of finance while promoting free flows of global capital.

In one way or another, just about every economic activity in America is touched by global forces, whether it’s the operations of foreign companies, investors, innovators, consumers, or governments. We’re still the world’s largest economic actor by a long shot; but the global economy has grown too large, complex and fast-changing for even us to dominate, much less direct. Let’s start with trade. Twenty years ago, 18 percent of all the goods and services produced in the world were traded across national borders – today, in a global economy two-thirds larger (adjusted for inflation), one-third of everything produced anywhere is traded – some $20 trillion worth per-year. Most of this rapid increase is tied to the explosive modernization of China and other large developing countries, and the fast-expanding consumption of their people.

America can generate good jobs and rising incomes for average families only by working with this historic expansion of worldwide trade. Progressives should be committed not only to equip American workers and companies with what they need to compete in a global trading system, but also to open markets here and around the world, especially in services and agriculture. The first commitment involves many of the initiatives described in earlier essays, including access to free IT training, health care reforms to reduce business costs, and tax reforms to make American companies more competitive. 

In exchange, progressives should push to conclude the Doha trade round to open foreign markets in services, where U.S. companies excel, to negotiate fair, free trade status with burgeoning economies such as Korea and, in time, with Japan; and to hold China and other fast-growing emerging markets to their WTO promises to open their markets. In all of these cases, American firms and workers would gain, because our markets already are far more open than most others in the world. And there’s no one else who can lead effectively here, since no other country has as much leverage with the holdouts in the EU and the developing world. 

America’s greatest exports are its new ideas, whether they’re embodied in new software code, breakthrough pharmaceuticals and medical devices, new business services, genetically-enhanced foods, new forms of entertainment, or the latest-generation equipment. In fact, America’s unique role in globalization is being the world’s largest source of economic innovations and the testing grounds for adopting them on a large scale. To be sure, innovators come from every part of the globe; but for the last generation, American inventors, entrepreneurs and companies have dominated the development of most (not all) critical new technologies and new ways of doing business. And the effective application of new ideas is the principal source of most of the competitive edge American companies retain in many global markets.

To help keep all of this going, our new economic plan has to actively spur continuing economic innovation through tax reforms, a larger federal commitment to basic research, and by maintaining the healthy competitive pressures that spur innovation and their broad adoption.  In this context, too, American workers need access to the skills required to use these innovations and perform effectively in workplaces dense with advanced technologies. These steps not only can help average families succeed as new ideas unfold; they also support America’s place as the world’s largest domestic market for innovations, which in turn will spur additional investments to develop their next generation. 

A progressive economic program should include two initiatives in this area. First, since innovation is the essence of our competitive advantage in the world, we need a no-holds-barred campaign to cajole or coerce every other nation to respect the intellectual property rights of American innovators and companies. In addition, we need to reclaim the global leadership we exercised in the 1990s in addressing climate change by enacting measure to fix a strict and environmentally-appropriate price on carbon emissions, preferably with a carbon-based tax that recycles its revenues in other tax cuts. This would not only be part of America’s responsibility for broad economic leadership, it also could spur to a dramatic degree American companies to develop new, climate-friendly fuels and technologies, and then broadly adopt them.

A progressive economic plan also has to take serious account of the global financial system. American companies are the world’s largest foreign direct and portfolio investors, with operations and other investments spread across the developing and advanced world. The United States is also the world’s largest single recipient of direct investments by foreign companies and portfolio investments by foreign funds and governments. So, we have an enormous stake in a healthy and stable financial system, here and around the world. And in the wake of the recent meltdowns, the central issue here is how best to regulate finance, here and around the world. 

Based on the recent crisis, the basic terms of regulation seem clear. First, require that all financial institutions hold more capital, relative to their investments, and adjust those stricter capital requirements for the riskiness of a bank or fund’s portfolio. That should help end their risky practice of making huge wagers, for example in asset derivative or interest rate futures, using almost entirely borrowed funds. Second, make sure that every transaction in finance, involving any kind of instrument, occurs on a public exchange or through a publicly-chartered clearinghouse. That can ensure that every trade or purchase is transparent and subject to the same disclosure and soundness rules. Third, end self-dealing compensation practices that just encourage the most risky wagers, for example by paying out bonuses long before anyone knows whether the transaction will actually work out. And none of these sensible changes would impede the free flow of investment and money – in fact, they should enhance America’s premier position in the global capital system.

The good news here is that the regulatory plans passed by the House and being considered this week in the Senate both contain versions of these three basic changes. The bad news is that they’re all weaker than needed – so, it’s up to progressives to strengthen them.

That leaves the sticky matter of “Too Big to Fail,” or what to do about funds or banks whose failure could trigger another broad crisis. We have two alternatives: Break them up, so no bank or fund can jeopardize the stability of the entire financial system. In its’ favor, there is little evidence of real economic benefits derived from the huge size of the institutions that dominated the sector before the crisis, much less the even greater size of the behemoths that dominate it now. Many conservatives like this approach, from Alan Greenspan to Mervyn King (he runs the Bank of England), because it avoids the alternative, which would be a new process to take over the investment activities of any large player at the first sign of trouble. Either way, the plan should reject out-of-hand the current, reckless GOP position: No prophylactic break-ups, no new process to take them over when they’re in trouble, and no future bailouts. That would be a formula for a global depression the next time that big finance implodes.  

There’s more to consider as well for a progressive plan to help Americans make the best of globalization, from sensible immigration reforms to measures to help recognize asset bubbles before they get out of hand. In one way or another, we will return to those issues later, along with some others. For now, we conclude this four-part series hopeful that somewhere out there, in Washington or beyond, there is a growing recognition that now is the time for progressives to rethink our national economic approach and reconfigure the economic agenda. 

For a background on this series on a New, Progressive Economic Strategy, please read:

• A New, Progressive Economic Strategy, Part 1
• A New, Progressive Economic Strategy, Part 2: Spending Reforms
• A New, Progressive Economic Strategy, Part 3: Tax Reform

Today, President Obama and the Departments of State and Commerce host the Presidential Summit on Entrepreneurship. The summit, which features top administration officials and private sector innovators, focuses mainly on how the entrepreneurs and business leaders in the U.S. and Muslim communities can better be linked. Take a look at the agenda here and watch the whole summit live here.

This summit is part of an important part of the administration’s outreach, which began with the President's Cairo speech, to the Muslim world. Importantly, it conveys an understanding of the power of economic connectivity to prosperity and peace. Perhaps the best resource on the topic of the power of economic connectivity and the Muslim world is Vali Nasr’s Forces of Fortune. Another resource that I highly recommend (and I might be a little biased) on the power of economic connectivity to bring people, businesses, and nations into global marketplace is a white paper I released on Friday called The Rise of the Rest: How New Economic Powers are Reshaping the Globe.

The most dispiriting feature of this year’s economic debates, apart from their fierce partisanship, is the absence of a broad and encompassing view of what the American economy needs. In this series of essays, we’re laying out a new, progressive strategy to advance the central goal of economic policy – namely, to ensure ample job opportunities, strong and widespread income gains, and upward mobility for most people. The previous two blog-essays described, first, a series of initiatives to equip businesses and workers with much of what they need to succeed economically, and second a new approach to contain the growth of federal spending so we can control long-term budget deficits. This week, in part 3, we turn to taxes. The challenge is to rethink and reconfigure the federal tax system, so we can raise the revenues we need in ways which reinforce job creation and income gains.  

Progressives should approach this challenge in three ways, covering in turn corporate taxes, personal income taxes, and energy taxes. The first step involves ending the major corporate tax subsidies for influential industries, much as our spending initiative would end large, industry-specific spending subsidies. These corporate tax entitlements range from tax breaks crafted for oil, gas and wind energy producers, and special inventory rules for certain exporters (and not for U.S. firms producing the same products for the American market), to billions of dollars in privileged treatment for insurance companies, credit unions, and housing developers. Ending these and other corporate tax breaks could not only set back influence-peddling for a while and simplify the corporate tax code; it also would raise a boatload of new revenues. Half of those new revenues should go to deficit reduction, while the other half goes to lower a corporate tax rate that’s currently one of the world’s highest. To the modest degree that the lower corporate taxes in Europe and East Asia encourage American multinationals to shift more of their operations abroad, this approach should help create more conditions for domestic job creation.  And we can amplify this effect with a measure described earlier in this series, sharp cuts in the payroll taxes of employers who expand their overall workforce and payrolls. In any case, ending tax subsidies for influential interests will make the entire economy more efficient, because companies that never qualified for special treatment would no longer have to compete at a disadvantage with tax-protected companies for capital and skilled workers.  

Next, progressives should apply a similar and more sweeping approach to the personal income tax. The current, staggeringly complicated system is unsalvageable. Nearly 43 percent of all households pay no income taxes at all; and few of the 90 million households that do pay income tax can figure out their own liability. The responsiveness and accountability of a democracy can erode quickly when government is financed by a system that doesn’t affect more than two-fifths of the people and isn’t understood by the rest. The current income tax also is plainly unfair:  Since different forms of income and spending are taxed differently, people with the same incomes, but earned or spent in different ways, bear very different tax burdens.   

Progressives should make a clean sweep of this entire mess by creating a single personal exemption of $100,000 to $150,000 that would supplant all current personal deductions, from mortgage interest and child care expenses to capital gains and employer-provided health insurance. In one swoop, between 84 percent and 95 percent of all families would owe no income taxes, and the system would return to its origins, when it affected only the very well-to-do. The affluent also would claim the $100,000 to $150,000 exemption, plus an unlimited deduction for new retirement savings. But every other dollar would be taxed at 25 percent rate, regardless of whether the taxpayer earned or received it as salary, dividends, stock options, the “carried interest” of hedge and private equity fund managers, foreign royalties, or lottery winnings. This is progressive tax simplification with a vengeance.  

Of course, a 25 percent tax on the income of only a small share of Americans will produce much lower revenues than the current system; and taking most people off the income tax could create powerful new pressures for more spending, if they know they won’t have to pay anything for it.  So a new tax has to take the place of the income tax for most people; and the best candidate is an 8 percent to 10 percent value-added tax (VAT) that would cover everything people consume, except home purchases and rent, medical care, educational costs, and energy. Since the VAT would fall only on what people consume, not on what they save, it should have the same economic effect as the unlimited deduction for new retirement saving for higher-income people.  Together, these provisions come close to eliminating taxes on new savings, enabling the country to finance more of its own investment and deficits without borrowing hundreds of billions of dollars a year from China, Japan, and Middle Eastern oil states. And the Earned Income Tax Credit can be scaled up to offset the cost of the VAT for lower-income families.  

We exempt energy from the VAT, because energy is the focus of a third major tax reform, the enactment of a carbon-based tax to address climate change. Economists have long favored this approach over a cap-and-trade program, mainly because cap-and-trade creates more volatility in energy prices, which in turn harms the overall economy and weakens the incentives to develop new climate-friendly fuels and technologies. A direct, carbon-based tax, which will adjust the prices of different forms of energy in direct proportion to their harmful effects on the climate, makes more sense economically and environmentally. The last question for progressive tax reform is what we do with the $200 billion a year in new revenues which a serious commitment to address climate change would generate. Since the point of climate policy is not to make people poorer, but only to induce everyone to use less climate-damaging forms of energy – most notably, phasing down coal – the answer is to recycle the carbon-tax revenues through other, progressive tax cuts.  One obvious candidate is payroll tax cuts, which would further reduce the costs for businesses of creating new jobs or raising the pay of existing jobs.

How much of these carbon-tax revenues could ultimately go to cutting payroll taxes, and how much might be reserved for deficit reduction, will depend on how successful we are in the other parts of this economic plan. If progressives can unwind special-interest spending and tax subsidies, contain health care costs, and put in place a broad VAT, the vast majority of carbon-tax revenues can go for tax cuts. Yet, the final results of all of these changes will also depend on how well we navigate the final issues for this plan, involving our role in the global economy. Those matters, including financial regulation, will be the focus of part four, next week.

For background on this series on a New, Progressive Economic Strategy, please read:

• A New, Progressive Economic Strategy, Part 1

• A New, Progressive Economic Strategy, Part 2: Spending Reforms

You don’t have to be a Nobel economist to see that the United States needs a new economic plan if we hope to restore what once seemed part of the American birthright – ample job opportunities, strong and widespread income gains, and broad upward mobility. Last week, we sketched a package of initiatives to equip businesses and workers with the resources and incentives that such a strategy requires. This week, in part 2, we turn to a more general condition for sustained economic progress, a plan to control long-term deficits and national debt.  

Bringing down the trillion dollar-plus annual deficits now projected for the next decade is straight-forward conceptually – you cut federal spending, raise taxes, and do both in ways that promote faster growth and so further increase revenues and further reduce spending. Moreover, serious steps to reduce these deficits should be a clear goal for progressives, so long as it’s phased-in a few years from now when the economy is stronger. Once the economy recovers from the neglect and mistakes of the Bush administration and those who ran Wall Street, the current trajectory of massive deficits will push up interest rates and slow investment, incomes and growth. Tolerating these long-term deficits, then, would consign average Americans to another lost decade economically – and perhaps even worse, lay the toxic foundations for another crisis. 

In practice, serious deficit reduction is always a difficult business, since who wants to pay higher taxes or accept fewer benefits? The challenge is to rethink and reconfigure federal spending and taxes, so we can channel spending and raise revenues in ways which reinforce job creation and income gains, and so help families and businesses prosper. This week, we focus on the spending reforms; next week, we will rethink taxes.  

Progressives should approach this challenge in three ways. First, end not only earmarks but their larger and more permanent version, the major subsidy programs for influential industries. These subsidies arbitrarily tilt the economy towards companies with political clout and so reduce the jobs and wealth the economy is capable of producing. These industry entitlements range, for example, from much of the farm program which ends up raising food prices, and export promotion efforts that give selected exporters artificial advantages without affecting the overall trade deficit, to the below-market fees for mineral rights and other natural resources. Make a clean sweep of these ongoing taxpayer bailouts, and we could save between $100 billion and $150 billion per-year.  

The second area involves the inescapable reforms of individual entitlements. Unlike industry entitlements, these programs serve clear and compelling social interests. As the boomers begin to retire, however, these programs in their current forms will become plainly unsustainable. Social Security reforms are the more manageable part, analytically and politically. The program’s long-term deficit would melt away, for example, if Congress enacted three fairly modest adjustments: Shift the pension’s annual cost-of-living adjustment to reflect the actual inflation recorded by the Bureau of Labor Statistics for the elderly people who receive it; link increases in the retirement age to increases in life expectancy for those age 65 and over; and tax all of the benefits of retirees with incomes above the national average. And all of these changes reflect the progressive values of fairness.

Fixing Medicare and Medicaid is much tougher. As this year’s wrenching debate over health care reform demonstrated, nothing inspires greater public anxiety than changes in the arrangements which people consider matters of life and death. Yet, the current arrangements are also plainly unsustainable, especially as boomers enter the phase of their lives when heart diseases and cancers, the most common and expensive conditions to treat, become much more common. The general path is clear: We need reforms that go considerably beyond this year’s changes to substantially slow the rates of increase for all health care costs. 

By taking this broad approach, we can not only preserve Medicare but also produce large economic dividends. First, smaller annual increases in health care costs will reduce pressures on businesses to hold down wages. That’s just what happened in the 1990s, when the shift to HMOs produced several years of much slower health care inflation, and average incomes grew more than 2 percent annually, after inflation. Moreover, slower health care costs also will help the overall economy. Since other advanced countries produce health care outcomes comparable to our own at less cost, our additional spending is flagrantly inefficient, stealing wealth and jobs from more economically-productive areas.  

Happily, this year’s health care debate aired a catalog of strategies to help contain these costs without compromising the quality of care; and the bill, as enacted, provides a credible beginning for a more extended process to control future increases. The insurance exchanges should reduce costs in the individual and small-group insurance market, and the investments in IT should help slow costs across the system. Both can be expanded and beefed up. The new law also begins to move the Medicare program from volume-based payments to reimbursements based on the value of the treatments. That can be substantially strengthened as well. This year’s reforms also create a new advisory board to propose new ways to cut Medicare costs, with a process to fast-track the recommendations through Congress. Eventually we can apply this kind of arrangement to all of health care.  

Finally, both parties will have to accept the most difficult changes advanced by the other.  Democrats will have to live with taxing a share of the value of employer-provided coverage, along with serious malpractice reforms. And Republicans will have to accept a public option, in order to introduce real competition for insurers in areas where one or two of them comprise an effective monopoly or duopoly.

Looking out several years, these reforms for industry and individual entitlements should be able to pare several hundred billion dollars per-year from our structural national deficits. And if that’s not enough, there’s still a third area of large, potential savings in defense spending. For a start, eliminate any weapon system that the Pentagon says it doesn’t need or want. These programs have become geographic entitlements, sustained to keep taxpayers dollars flowing to the districts of those who sit on the defense appropriations subcommittees. That’s hardly a sufficient reason to weaken a broad plan with the promise of restoring economic opportunities and prosperity for average Americans.

Read Part 1 of a New, Progressive Economic Strategy here.

If you were just watching Fox News, you saw Simon discussing the Tea Parties. He pointed out that one key reason for anger with the government is that everyday Americans have seen their incomes decline over the last decade (which we've called a lost decade for everyday Americans). The show's host questioned Simon's facts on this point. Here's a graph, straight from Census Bureau data:

What it shows is that median household income in fact declined by more than $2000 during the Bush Presidency, from $52,500 in 2001 to $50,330 in 2008.

I know we want the government to keep it's hands off of our government statistics, but, as Daniel Patrick Moynihan used to say: you're entitled to our own opinions, but not your own facts.