Clean Infrastructure

Obama's Weekly Address Focuses on the Budget

President Obama's Weekly YouTube address today focuses on the budget outline he released earlier this week. In breaking down the various elements of his budget, Obama explains how the specifics correspond to commitment to change he made on the campaign trail.

The most memorable line comes after he discusses the changes from the Washington status quo that his budget represents:

I know these steps won’t sit well with the special interests and lobbyists who are invested in the old way of doing business, and I know they’re gearing up for a fight as we speak.  My message to them is this:

So am I.

Take a look at the whole address:

This very much feels like the President is governing with the large mandate he won on election day, and rightly so. It's amazing to think how much there is to do, after so much of this - energy, infrastructure, healthcare - has gone undone for the last 8 years or longer.

NDN Economic Backgrounder: The Road to Recovery

With news today that last year's fourth quarter was even worse than expected, take a look at some of NDN's lastest and important thinking on the economy, from thoughts on the President's budget and housing, and financial stability plans to visions for creating a 21st century economy:

  • The Economic Logic in President Obama's Speech to Congress by Dr. Robert Shapiro, 2/27/2009 - Shapiro breaks down President Obama's address to Congress, pointing out that the underlying logic of the President's agenda springs from the fierce new challenges Americans face under globalization to their jobs and incomes.
  • Financial Stability: Plan Z by Michael Moynihan 2/23/2009 - Moynihan lays out a plan of last resort for financial stability, noting that it might not be pretty, but it could be necessary. 
  • A Stimulus for the Long Run by Simon Rosenberg and Dr. Robert Shapiro, 11/14/2008 – This important essay lays out the now widely agreed-upon argument that the upcoming economic stimulus package must include investments in the basic elements of growth for the next decade, including elements that create a low-carbon, energy-efficient economy.
  • Back to Basics: The Treasury Plan Won't Work by Dr. Robert Shapiro, 9/24/2008 - As the financial crisis unfolded and the Bush Administration offered its response, Shapiro argued that, while major action was needed, the Treasury's plan would be ineffective.
  • Keep People in Their Homes by Simon Rosenberg and Dr. Robert Shapiro, 9/23/2008 – At the beginning of the financial collapse, NDN offered this narrative-shaping essay and campaign on the economic need to stabilize the housing market.
  • VIDEO: Dr. Robert Shapiro yesterday faced off against former Congressman John Kasich on the President's budget. The outcome was never in doubt.

The Economic Logic in President Obama’s Speech to Congress

President Barack Obama's superb address Tuesday night had an underlying, unifying logic which some may have missed, but which hopefully those reading this will recognize.  

First, on the financial and economic crisis, he embraced the three basic steps we have urged since last September: on top of a stimulus aimed at long-term investments and helping the states – that’s now done – there will be new requirements that banks getting help from taxpayers use that assistance to expand their lending, and new steps to keep people in their homes and bring down foreclosure rates. It’s just economic common sense – but that’s precisely what most of official Washington casually casts aside in favor of scoring short-term, political points. (Take a look at Gov. Bobby Jindal’s empty and sneering response to the President’s speech. His repeated citing of Katrina as a model for government action, by itself, should be a career-ending act).

The President also laid out a domestic agenda for the rest of his first term, and it looks like the most sweeping since FDR and LBJ. I suppose that personal blogs, by definition, are no place for humility, so here it is straight. The three cornerstone Obama initiatives -- slow down our fast-rising health care costs, expand energy conservation and our use of alternative fuels, and give everybody new chances to upgrade their working skills -- are the exact prescription laid out more than a year ago in my book, Futurecast: How Superpowers, Populations and Globalization Will Change the Way You Live and Work. It’s also been a regular theme of this blog and a series of papers issued by NDN.  

Here, too, it’s just economic common sense, for a world being transformed by globalization.  The underlying logic of the President’s program springs from the fierce new challenges Americans face under globalization to their jobs and incomes. Globalization has made competition much stronger, and that competition leaves American businesses and their workers in a bind. Their costs have been rising very fast, especially for health care and energy, but intense global competition makes it harder for companies to raise their prices to cover these rising costs. The result is that the wages of most American stopped rising since about 2002, even as they became more productive. And most can’t find higher wages by getting new jobs, because before the current crisis began, the same forces had made this period the weakest for job creation since World War II.

The President understands that coming out of the current crisis isn’t enough, if we just return to another period of growth without wage gains or healthy job creation. He also understands another theme of Futurecast and NDN's work, namely that about half of Americans also need new skills if they aspire to jobs with a real future. That’s the basis for the third plank of the domestic agenda he laid out last night -- genuine, new access for young people to go to college or receive other, post-secondary training, and new opportunities for everyone else to upgrade their skills

President Obama’s first speech to Congress already ranks as the most serious and thoughtful presidential address on the economy in decades. Perhaps it took an historic crisis to break through the political cant and mental laziness that has gripped our economic agenda for so long. But the President is using this moment to put forward not only meaningful answers for the crisis, but serious, long-term remedies for much deeper economic problems which other politicians routinely ignore. That’s presidential leadership of the sort we haven’t seen since, well, FDR.

Regulating and Pricing Carbon

New York City--The indication over the weekend from Carol Browner that the EPA plans to move forward on regulating greenhouse gases, though not unexpected, provides indication that we are likely to see real action on climate change this year.  The possibility of EPA regulation of CO2 emissions makes a cap and trade system look like the more appealing alternative.  Thus, despite the conventional wisdom that you cannot impose taxes or new costs on business during a recession, it is increasingly looking like we will see action on climate change in time for the US to have a meaningful position and thus play a leadership role in Copenhagen.

Obviously as far as the climate is concerned, this is good news.  However, as far as the declining economy is concerned it may not be bad news either for several reasons.  First, stability and clarity with respect to the pricing and potential regulation of carbon is an improvement over uncertainty since it lets companies plan ahead.  Companies that make carbon reduction technologies, alternative energy companies, and companies exploring clean coal, will have clear rules if action moves forward.  And even utilities and heavy industry will benefit from clarity as opposed to uncertainty.  Done right, the higher cost of some energy that will result from pricing carbon will be largely recaptured by the government through auctions in a cap and trade system or taxes in a carbon tax regime.  In the current atmosphere of huge deficits and economic uncertainty, the resolution of regulatory uncertainty combined with a potential revenue source may offset the economic effects of higher energy prices.

Moreover, at this critical point in economic history, there is another reason that meaningful action and leadership by the United States is welcome.  At this critical juncture, global cooperation is paramount to managing the economic crisis. The global economy has survived and even thrived cleaning up the environment.  It has not survived the breakdown of global cooperation on key issues.  When the history of the current crisis is written, the breakdown of global cooperation earlier in the decade--due to the go-it-alone philosophy of the Bush Administration--will be assigned a part.  On the other hand, successful cooperation leading up to Copenhagen and beyond, by restoring global trust, can be part of the solution.

And of course there is the inconvenient issue of the climate.  The indication that the Administration and Congress are moving forward on climate change is thus good news.

Obama Talks Trade, Energy in Canada

President Barack Obama, on his first official trip abroad, is in Canada today, meeting with Prime Minister Stephen Harper and other high level Canadian government officials. Talks have been wide-ranging, but have reportedly focused on trade and energy.

Both these relationships are incredibly important: Canada and America are each others' largest trading partners – indeed, it is the largest trade relationship at the world, and the Canadian-American energy relationship is vast. Among other notable items, the United States imports more oil from Canada than anywhere else, and the American and Canadian electrical grids are integrated.  

Reuters reports that everyone seems to have left pretty happy, with an agreement on energy and Obama having calmed Canada about the "Buy American" provisions of the economic recovery legislation:

The United States and Canada, two significant greenhouse gas emitters, agreed on Thursday to work together on new energy technologies to fight climate change, saying it was key to recovery from global recession.

Obama calmed Canadian fears about a "Buy American" clause in the $787 billion U.S. economic recovery plan agreed last week. Canadians fear it will hurt commerce between the two countries, which have the world's largest trading partnership.

"Now is a time where we have to be very careful about any signals of protectionism," Obama told a joint news conference after several hours of talks with Harper. He stressed the United States would meet its international trade obligations.

"I'm quite confident that the United States will respect those obligations and continue to be a leader on the need for globalized trade," Harper said.

A Green Horizon

New York City -- The recovery bill that President Barack Obama will sign today, on schedule and less than one month into his presidency, is an important milestone in the effort to get America's economy back on track. Coming on the heels of tough economic news around the world last week, it is a welcome positive development. Its green initiatives, many of which began as NDN proposals suggested to the Obama team last year, include credits for solar and wind energy, money to green the federal government, smart meters, and other investments in our future. All of these are good things that pave the way for future prosperity.

But to make the most of this stimulus, President Obama has to keep our eyes focused on the bill's benefits and our future. A piece by Ahmar Bhidhe in today's Wall Street Journal, points out that a key element of the bill is how it is presented and, in turn, perceived by the public. The money will begin trickling out immediately but will not show up in a big way in the economy for some time. Much of the bill's initial impact will therefore rest on its "signaling" effect, as game theorists say. In other words, what it says to people about what our leaders believe about the future and are committed to do. 

The President has an opportunity to shape this signaling effect later today. If he emphasizes the dark clouds -- in effect amplifying the criticism of the bill from his opponents -- he may reduce the signaling effect. On the other hand, if he emphasizes hope and possibility --assuring Americans about our future, he will maximize the bill's positive economic impact.

History shows that many slumps have served to incubate new ideas that then bear fruit when the slump is over. This was certainly true in the 1970s, when entrepreneurs like Jobs, Wozniak, Gates and Allen, ignoring high gas prices, low stock prices and stagflation, were working away in their garages on revolutionary new technologies. It was true in the early 1980s when Ronald Reagan's optimism stirred enthusiasm about entrepreneurship, whatever one thinks of Reagan's social policies. And just last week, Twitter raised money for its software, while a host of clean technology companies will use money from the recovery bill to invent game-changing technologies to build the clean economy of the future.

However, the President's opponents have unleashed a withering barrage of attacks on the recovery bill. And economic news has plenty to suggest hunkering down. When President Obama signs the bill in Denver -- a location chosen to highlight the clean technology elements of the bill -- he will do well to talk about the potential of the future, rather than give credence to the naysayers.

Two Questions Central to the Emerging Economic Debate

You can see them gaining currency in thank tanks, op-ed pages and tv shows.  2 questions whose answers will drive our policies and dictate the terms of our recovery - is our financial system insolvent? and Will high-levels of consumer debt force American consumers to save rather then spend, and take them out of the game over the next few years?

We've been asking the Spend? Save? question here for a few weeks nowDavid Leonhardt attacked it last week in the Times, and Paul Krugman visits the question today in his column

Last week the Federal Reserve released the results of the latest Survey of Consumer Finances, a triennial report on the assets and liabilities of American households. The bottom line is that there has been basically no wealth creation at all since the turn of the millennium: the net worth of the average American household, adjusted for inflation, is lower now than it was in 2001.

At one level this should come as no surprise. For most of the last decade America was a nation of borrowers and spenders, not savers. The personal savings rate dropped from 9 percent in the 1980s to 5 percent in the 1990s, to just 0.6 percent from 2005 to 2007, and household debt grew much faster than personal income. Why should we have expected our net worth to go up?

Yet until very recently Americans believed they were getting richer, because they received statements saying that their houses and stock portfolios were appreciating in value faster than their debts were increasing. And if the belief of many Americans that they could count on capital gains forever sounds naïve, it's worth remembering just how many influential voices - notably in right-leaning publications like The Wall Street Journal, Forbes and National Review - promoted that belief, and ridiculed those who worried about low savings and high levels of debt.

Then reality struck, and it turned out that the worriers had been right all along. The surge in asset values had been an illusion - but the surge in debt had been all too real.

So now we're in trouble - deeper trouble, I think, than most people realize even now. And I'm not just talking about the dwindling band of forecasters who still insist that the economy will snap back any day now.

For this is a broad-based mess. Everyone talks about the problems of the banks, which are indeed in even worse shape than the rest of the system. But the banks aren't the only players with too much debt and too few assets; the same description applies to the private sector as a whole.

The other question, to the solvency of our financial system, was discussed a great deal on the Sunday talk shows yesterday.   Last week Martin Wolf of the FT wrote

Yet hoping for the best is what one sees in the stimulus programme and - so far as I can judge from Tuesday's sketchy announcement by Tim Geithner, Treasury secretary - also in the new plans for fixing the banking system. I commented on the former last week. I would merely add that it is extraordinary that a popular new president, confronting a once-in-80-years' economic crisis, has let Congress shape the outcome.

The banking programme seems to be yet another child of the failed interventions of the past one and a half years: optimistic and indecisive. If this "progeny of the troubled asset relief programme" fails, Mr Obama's credibility will be ruined. Now is the time for action that seems close to certain to resolve the problem; this, however, does not seem to be it.

All along two contrasting views have been held on what ails the financial system. The first is that this is essentially a panic. The second is that this is a problem of insolvency.

Under the first view, the prices of a defined set of "toxic assets" have been driven below their long-run value and in some cases have become impossible to sell. The solution, many suggest, is for governments to make a market, buy assets or insure banks against losses. This was the rationale for the original Tarp and the "super-SIV (special investment vehicle)" proposed by Henry (Hank) Paulson, the previous Treasury secretary, in 2007.

Under the second view, a sizeable proportion of financial institutions are insolvent: their assets are, under plausible assumptions, worth less than their liabilities. The International Monetary Fund argues that potential losses on US-originated credit assets alone are now $2,200bn (€1,700bn, £1,500bn), up from $1,400bn just last October. This is almost identical to the latest estimates from Goldman Sachs. In recent comments to the Financial Times, Nouriel Roubini of RGE Monitor and the Stern School of New York University estimates peak losses on US-generated assets at $3,600bn. Fortunately for the US, half of these losses will fall abroad. But, the rest of the world will strike back: as the world economy implodes, huge losses abroad - on sovereign, housing and corporate debt - will surely fall on US institutions, with dire effects.

Personally, I have little doubt that the second view is correct and, as the world economy deteriorates, will become ever more so. But this is not the heart of the matter. That is whether, in the presence of such uncertainty, it can be right to base policy on hoping for the best. The answer is clear: rational policymakers must assume the worst. If this proved pessimistic, they would end up with an over-capitalised financial system. If the optimistic choice turned out to be wrong, they would have zombie banks and a discredited government. This choice is surely a "no brainer".

The new plan seems to make sense if and only if the principal problem is illiquidity. Offering guarantees and buying some portion of the toxic assets, while limiting new capital injections to less than the $350bn left in the Tarp, cannot deal with the insolvency problem identified by informed observers. Indeed, any toxic asset purchase or guarantee programme must be an ineffective, inefficient and inequitable way to rescue inadequately capitalised financial institutions: ineffective, because the government must buy vast amounts of doubtful assets at excessive prices or provide over-generous guarantees, to render insolvent banks solvent; inefficient, because big capital injections or conversion of debt into equity are better ways to recapitalise banks; and inequitable, because big subsidies would go to failed institutions and private buyers of bad assets.

Why then is the administration making what appears to be a blunder? It may be that it is hoping for the best. But it also seems it has set itself the wrong question. It has not asked what needs to be done to be sure of a solution. It has asked itself, instead, what is the best it can do given three arbitrary, self-imposed constraints: no nationalisation; no losses for bondholders; and no more money from Congress. Yet why does a new administration, confronting a huge crisis, not try to change the terms of debate? This timidity is depressing. Trying to make up for this mistake by imposing pettifogging conditions on assisted institutions is more likely to compound the error than to reduce it.

And the aforementioned Professor Roubini wrote yesterday in the Washington Post:

The U.S. banking system is close to being insolvent, and unless we want to become like Japan in the 1990s -- or the United States in the 1930s -- the only way to save it is to nationalize it.

As free-market economists teaching at a business school in the heart of the world's financial capital, we feel downright blasphemous proposing an all-out government takeover of the banking system. But the U.S. financial system has reached such a dangerous tipping point that little choice remains. And while Treasury Secretary Timothy Geithner's recent plan to save it has many of the right elements, it's basically too late.

The subprime mortgage mess alone does not force our hand; the $1.2 trillion it involves is just the beginning of the problem. Another $7 trillion -- including commercial real estate loans, consumer credit-card debt and high-yield bonds and leveraged loans -- is at risk of losing much of its value. Then there are trillions more in high-grade corporate bonds and loans and jumbo prime mortgages, whose worth will also drop precipitously as the recession deepens and more firms and households default on their loans and mortgages.

Last year we predicted that losses by U.S. financial institutions would hit $1 trillion and possibly go as high as $2 trillion. We were accused of exaggerating. But since then, write-downs by U.S. banks have passed the $1 trillion mark, and now institutions such as the International Monetary Fund and Goldman Sachs predict losses of more than $2 trillion.

But if you think that $2 trillion is high, consider our latest estimates at the financial Web site RGE Monitor: They suggest that total losses on loans made by U.S. banks and the fall in the market value of the assets they are holding will reach about $3.6 trillion. The U.S. banking sector is exposed to half that figure, or $1.8 trillion. Even with the original federal bailout funds from last fall, the capital backing the banks' assets was only $1.4 trillion, leaving the U.S. banking system about $400 billion in the hole.

Two important parts of Geithner's plan are "stress testing" banks by poring over their books to separate viable institutions from bankrupt ones and establishing an investment fund with private and public money to purchase bad assets. These are necessary steps toward a healthy financial sector.

But unfortunately, the plan won't solve our financial woes, because it assumes that the system is solvent. If implemented fairly for current taxpayers (i.e., no more freebies in the form of underpriced equity, preferred shares, loan guarantees or insurance on assets), it will just confirm how bad things really are.

Nationalization is the only option that would permit us to solve the problem of toxic assets in an orderly fashion and finally allow lending to resume. Of course, the economy would still stink, but the death spiral we are in would end.

Both of these essays echo an essay Rob Shapiro wrote within days of the announcement of the original TARP, Back to Basics: Why The Treasury Plan Won't Work.  

I read these articles.  I listen to the commentators.  I and many others in positions of responsibility continue to wake each day to an even greater understanding of the enormity of the problems our nation now faces, of the hole dug by the mismanagement and ignorance of the previous administration.  Clearly, now, we have to conclude these are no ordinary times.   

So my friends watch the debate over the next few weeks and come to your own conclusion - should American consumers spend, or save? And are the banks insolvent?  How we answer these questions in the short term will dictate very much how we approach the next stage of the management of our economic crisis. 

NDN Backgrounder: Recovery, the Financial System, and Protectionism

With the economic recovery plan on the verge of final passage, please find some of NDN's best and latest thinking on the plan, the great recession, and the financial system: 

  • The Fallout of the Great Recession for Trade by Dr. Robert Shapiro, 2/11/2009 - Shapiro argues that the world is currently experiencing the economic symptoms of protectionism without actual protectionist measures being put in place, which could have dangerous consequences for the global economy.
  • Optimism and Hope by Michael Moynihan, 2/11/2009 - Moynihan points out that an optimistic message is the best way for the Obama Administration to lead the country through these difficult economic times.
  • Stabilizing the Financial System by Michael Moynihan, 2/10/2009 - Moynihan examines the reaction to Treasury Secretary Tim Geithner's speech and the necessary next steps for the financial system.
  • Recovery Without E-verify and Buy American by Simon Rosenberg, 2/10/2009 - Rosenberg advocates for the removal of "Buy American" and E-verify provisions from the stimulus, provisions that will not stimulate the economy and will do more harm than good. 
  • Politics and the Economic Crisis by Dr. Robert Shapiro, 1/9/2009 - Shapiro argues that, for an economic recovery plan to be effective, we must also address the underlying causes of the "Great Recession," including the housing crisis.
  • A Stimulus for the Long Run by Simon Rosenberg and Dr. Robert Shapiro, 11/14/2008 – This important essay lays out the now widely agreed-upon argument that the upcoming economic stimulus package must include investments in the basic elements of growth for the next decade, including elements that create a low-carbon, energy-efficient economy.
  • Back to Basics: The Treasury Plan Won't Work by Dr. Robert Shapiro, 9/24/2008 - As the financial crisis unfolded and the Bush Administration offered its response, Shapiro argued that, while major action was needed, the Treasury's plan would be ineffective.
  • Keep People in Their Homes by Simon Rosenberg and Dr. Robert Shapiro, 9/23/2008 – At the beginning of the financial collapse, NDN offered this narrative-shaping essay and campaign on the economic need to stabilize the housing market.

For additional recent thinking from NDN on the economy, click here for last week's backgrounder and click here for more on NDN's work to keep people in their homes.

Krugman on Rising to the Challenge

From his column today:

And I don't know about you, but I've got a sick feeling in the pit of my stomach - a feeling that America just isn't rising to the greatest economic challenge in 70 years. The best may not lack all conviction, but they seem alarmingly willing to settle for half-measures. And the worst are, as ever, full of passionate intensity, oblivious to the grotesque failure of their doctrine in practice.

There's still time to turn this around. But Mr. Obama has to be stronger looking forward. Otherwise, the verdict on this crisis might be that no, we can't.

Immigration and the Economy: Start-ups vs. Bailout, Greencards vs. Greenbacks

"Dear America, please remember how you got to be the wealthiest country in history. It wasn't through protectionism, or state-owned banks or fearing free trade. No, the formula was very simple: build this really flexible, really open economy, tolerate creative destruction so dead capital is quickly redeployed to better ideas and companies, pour into it the most diverse, smart and energetic immigrants from every corner of the world and then stir and repeat, stir and repeat, stir and repeat, stir and repeat."

A New York Times op-ed today by Tom Friedman - quoted above - brings up some interesting points.  Enjoy

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