Foreclosures

The inconvenient truth that lies behind this week's White House jobs summit is that there are no magic bullets for an economy thrown over the cliff by a huge financial crisis.  Even with all of our stimulus, bailouts, tax breaks and special Fed lending programs, job losses continue to mount, dampening investment and overall demand.  That's not all: Despite the administration's efforts to stem home foreclosures, they continue to rise and so pull down more mortgage-backed securities and their derivatives, which in turn also dampens business lending and jobs.  We're also seeing mounting losses in commercial real estate, propelled by higher vacancy rates and more tenants simply unable to pay their rents, which are driving up failures by the banks which lent out the money to develop those buildings.  Those failures also eat away at demand, investment and jobs.

And we're still highly vulnerable to more damaging shocks.  So, stock markets around the world fell sharply this past week when one of the world's largest commercial real estate companies, the government-owned Dubai World, announced that it couldn't pay its lenders.  For many, Dubai World's problems raised the scary possibility of sovereign debt defaults, which would be another blow to financial institutions around the world, which hold most sovereign debt.  And nations aren't the only sovereigns whose bonds could be in trouble: The largest real estate bubble and worst recession in 80 years could also compromise the debt status of the world's seventh largest economy, the state of California. 

While large fiscal and monetary stimulus will always help an economy in free fall - we saw that in the modest rebound in third quarter GDP - the number of Americans working could continue to fall for at least another year, because the economy had serious problems with job creation before the crisis hit.  After the 2001 recession, the briefest and mildest on record, the number of people working continued to slump for two years; and over the course of the 2002-2007 expansion, American businesses created jobs at less than half the rate of the previous two expansions.

So, the country has a serious problem with jobs, one which requires serious responses.  A little more stimulus can play a role here, especially targeted to state governments whose labor forces are being squeezed between their falling revenues and balanced budget requirements.  The cure for the private sector will have to involve stronger and more permanent measures that can directly reduce the cost to businesses of creating new jobs.  Here's a start:  Exempt from payroll taxes the first $3,000 to $5,000 of wages paid in each of the first two years to new hires by firms that expand their work forces. Since it would be a permanent measure that would reduce social security revenues, we should pay for it and use the new revenues to make the social security trust fund whole.  We can do that by enacting a small "Tobin tax" on financial market transactions, equal to, say, one-quarter of one percent of the value of trades, and pressing other major countries to do so as well.  James Tobin, the Nobel laureate who first proposed such a tax for currency trades, noted it could help reduce destabilizing currency speculation.  Given the recent crisis, slowing down speculation seems like the right medicine for stocks and bonds today.  And at such a low rate, it shouldn't affect long-term investment, especially if other financial-center countries go along.  And if we don't take strong measures, we will almost certainly find ourselves grappling with serious problems with job creation for many years. 

As President-elect Barack Obama turns to the enormous challenges facing the nation, his first priority will be to set his priorities. Already, there are more urgent problems than any president could tackle successfully in a single term, and even more will almost certainly emerge. Moreover, he now will have to lead in ways he did not have to as candidate, by taking real and contentious actions. His historic, landslide election will give him greater, initial political capital than any president since Ronald Reagan. Even so, capital gets spent, and a president’s power and influence are finite, so he will have to choose precisely where he intends to focus all that capital, power and influence.

The lead items on his domestic agenda must be the nation’s financial and economic crisis. That will require, first, steps to slow housing foreclosures. He has pledged to initiate a 90-day moratorium on foreclosures, but that would be only a first, modest step. He also could also create a new fund to lend tide-over funds to homeowners facing foreclosure after the 90 days are up, and while Fannie Mae and Freddie Mac work out a responsible plan for them to renegotiate the terms and interest rates on the mortgages of homeowners in distress. He also can help banks get credit flowing again with a temporary, reduced tax rate on an estimated $700 billion in profits now held abroad by the foreign subsidiaries of American companies.

That step also could provide a measure of stimulus for an economy currently entering what is likely to be a long, nasty recession, and addressing the recession also must be one of President Obama’s first priorities. Tax rebates won’t work, since most Americans would most likely save any new checks rather than spend them. So Washington will have to jumpstart the nation’s additional spending, with a new spending package of $200 billion to $250 billion. And President Obama should focus most of it on the long-term investments he called for during the campaign, including grants to digitize health care records and provide access to computer training for current workers, and new supports to modernize the electricity grid and accelerate the development and spread of alternative energy. On top of that – and grants to cash-strapped states so they can avoid large cuts in their Medicaid programs and their workforces – the new president should focus the infrastructure piece of his stimulus on creating a national infrastructure financing bank and initiating new commitments for low-polluting light rail systems in major metropolitan areas.

The president will also hear demands and pleas for a new regulatory framework for the financial sector. That task is clearly a necessary and urgent one, but getting it right will be a long, complex process. His best move would be to create a national, expert commission with a mandate to figure it out over the next six months and report back to the nation.

The president’s serious priority-setting can only really begin once he addresses those emergencies – and it won’t be easy. The stimulus measures can be the first steps toward meeting his pledge to help build a more energy-efficient and climate-friendly economy. And since he will have to choose, the rest of that agenda should probably take lower priority than health care reform. One reason is that while the recession will cut energy prices and energy use with no help from Washington, for at least a time, it will only worsen out health care problems. The recession will further increase the numbers of people without coverage, perhaps by millions, without making a dent in the steady, sharp increases in health care costs that will continue to cut into jobs and wages. And any further delay will only make it all worse. It’s time to carry out his plans to make coverage much more nearly universal, and tie those extensions to a hard-nosed program of cost controls that will require hospitals and clinics to adopt the best practices of the country’s most cost efficient medical centers.

This will leave President Obama with plenty to tackle in the second half of his term. That can be the time to take further steps to help make America more climate friendly and energy efficient. It also has to be the time to build on the cost-control lessons from health care reform and finally address the serious and treacherous business of reforming Medicare and other entitlement spending for tens of millions of Baby Boomers.

And if President Obama can make real progress in these priority areas over his first term, it will almost certainly earn him an even bigger national landslide for a second term.