Stimulus for the Long Run

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.

President Barack Obama today announced a plan to cut foreclosures and reboot new mortgage financings, at least when the economy shows signs of new life. The fact of offering a plan is an advance, given that Bush and his people did nothing and proposed nothing, even as the crisis reached critical mass. As we have written here since the crisis first broke, keeping people in their homes is fundamental to solving the larger economic problem. Again, it’s the fast-rising foreclosures and mortgage delinquencies that are eroding and destroying the value of hundreds of billions of dollars in mortgage-backed securities and the credit default swaps that “back them up” (sic). And it’s the falling value of those securities and swaps, in turn, which has led to the effective bankruptcy of financial institutions that had leveraged themselves to their eyeballs to buy them or issued them and then kept them (and how dumb was that?).

While the act of proposing anything serious puts the Obama Administration ahead of its predecessor, passing such a low threshold is hardly very meaningful -- especially since the problems continue to worsen. More than nine percent of mortgages today are either in foreclosure or delinquent, two to three times the numbers from just two years earlier; and if everything continues to unravel, those numbers could double in another year. If that happens, there won’t be many large, U.S. banks left standing. Many of the homeowners now in trouble could manage, if they just could refinance at current rates. But banks quite naturally see someone in financial trouble as a poor credit risk for a new loan, which is what refinancing is. And the fall in housing prices means tens of millions of those people can’t qualify to refinance. That’s because refinancing is available today only if you owe no more than 80 percent of the original mortgage’s value. The catch for millions of families is that as the value of their home goes down, their existing mortgage (the one being refinanced) accounts for a greater percentage of the value being refinanced. In the worst cases, people just walk away from a $200,000 home with a $300,000 mortgage -- and who would refinance one of those? In millions of other, less extreme cases, the falling prices simply disqualify people for refinancing.

The Administration wants to address this precise part of the problem, by providing $75 billion in subsidies to banks to defray half of the cost of refinancing for several million homeowners at risk of losing their homes. Mortgages owned by Fannie Mae and Freddie Mac are also eligible here, and they’re the ones most likely to actually see their interest rates reset, since the government owns Fannie and Freddie and can direct them to do it. It will be harder to convince bankers already staring at enormous losses already on their books or soon to be there, especially if they’re worried that their bondholders could sue them for resetting loans. The plan also has some $100 billion for the Treasury to keep buying more of Fannie and Freddie’s failing mortgage-backed securities since, as we also have said repeatedly, until foreclosure rates return to normal, the biggest bank bailout in the world won’t prevent more banking losses.

There are more direct ways to address foreclosures. We could provide direct loans to tide over those in trouble, or Fannie and Freddie could reset the loans of everyone in trouble. The problem is that anyone advancing such a common sense approach would become a very large political target -- and not just for reflexively-critical House Republicans.

How could the president or his advisors explain to those who work hard and spend less, so they can keep their mortgage payments up to date, why they don’t qualify for a lower interest rate from the government, when their neighbor who spent more or just had harder luck does qualify? More plainly, how does the government choose who would qualify for such direct help without enraging most of those who wouldn’t? In effect, the Administration plan finesses this problem by letting banks choose, without compelling them to do so. But what if the economy continues to worsen and the plan doesn’t work, which is a very real possibility? Indeed, don’t be surprised to see the Administration revisit it six months from now with a much less “voluntary” approach.

A couple weeks ago, I blogged about Recovery.gov, the site the Obama Administration has set up to be publicly accountable on the American Recovery and Reinvesment Act. Well, it's up now, fully equipped with video, information about the planned spending and tax cuts, and a snazzy, draggable timeline laying out the federal government's plans for implementing ARRA. 

Here's President Obama's introductory video to the site: 

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.

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.

• Spend? Save? The debate continues by Simon Rosenberg, 2/11/2009 - Building on a previous post, Rosenberg follows the growing debate about whether American families should be focusing on saving.

• 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. 

• The Utter Bankruptcy of Today's Republican Party by Simon Rosenberg, 1/28/09 - Rosenberg argues that Republican opposition to the economic recovery package represents the ideological bankruptcy of the party.

• Clearing the Decks for the Next Expansion by Michael Moynihan, 1/26/2009 - Moynihan envisions the economic situation he would like to see in 2012 and lays out the policy steps necessary to get there.

• NDN: Economic Recovery Package Signals New Priorities, Development of a 21st Century Economy, 1/15/2009 - NDN applauded the new direction signaled in the draft release of President Obama's economic recovery plan that will invest in technology, clean infrastruture, and a low-carbon, 21st century economy.

• 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.

• Accelerating the Development of a 21st Century Economy: Investing in Clean Infrastructure by Michael Moynihan, 10/18/2008 – NDN Green Project Director Michael Moynihan outlines a strategy for investing in clean infrastructure that will help create long-term prosperity.

• 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.

• Making the Struggle of Every Day People the Central Focus of the National Debate by Simon Rosenberg, 8/17/2008 - As the 2008 presidential campaign entered a crucial phase, Rosenberg argued that political leaders must focus on raising the wages and incomes of Americans.

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.

UPDATE:  This post was picked up by Reuters and internationally syndicated, appearing in papers worldwide over the weekend. From the Reuters article:

Some economists argue globalisation, in the sense of the
increasing integration of different countries in the world economy, is
the cause, acting as a transmission belt from one suffering economy to
the next.

"With globalisation, the world can suffer the central
cost of protectionism -- a deep fall in trade -- without passing any
new laws or regulations," Robert Shapiro, head of progressive think
tank NDN's globalisation initiative, said in a blog.

...

"The crux of it is that as the share
of what the world produces that's traded across borders rises -- 18
percent of worldwide GDP was traded in 1990, compared to 30 percent in
2006 -- a serious recession in a few large places moves quickly around
the world, driving down global trade," said Shapiro of NDN, a former
undersecretary in the U.S. Commerce Department.

In other words weak demand in one country increasingly affects others because they are more dependent on exports.

The new trade data out today show, unhappily, that the surest way to drive down our trade deficit is a deep recession that cuts into the money Americans have to buy imports. In December, the trade imbalance fell to less than $40 billion, a 35 percent drop from its $62 billion level last July. (It’s all seasonally-adjusted). The last time the trade deficit was this low was November 2003. Imports shrank by $74 billion from $230 billion in July to $174 billion in December, or nearly 25 percent. Of course, the same thing is happening to our trading partners: our exports also fell 21 percent, from $168 billion to $134 billion. Since we import so much more than we export, the decline in imports really drives down the overall deficit.

This is a window into something new and important: with globalization, the world can suffer the central cost of protectionism -- a deep fall in trade -- without passing any new laws or regulations. The crux of it is that as the share of what the world produces that’s traded across borders rises -- 18 percent of worldwide GDP was traded in 1990, compared to 30 percent in 2006 -- a serious recession in a few large places moves quickly around the world, driving down global trade. That’s particularly serious for countries that really depend on exports, which means most of the developing world. The global data are still sketchy, but it looks like in the last months of 2008 and the beginning of this year, exports (month-to-month) fell 25 percent in China, 33 percent in Korea, and 40 percent in the Philippines. To see how serious this is, consider that exports represent about 40 percent of GDP in all of those countries. It’s even worse in Taiwan, where exports account for 62 percent of GDP and fell 44 percent rate in November, compared to a year earlier. The other deeply trade-dependent region is Europe, where serious problems coming from this massive slowdown in trade will hit home within the next few months. 

The serious problem which they and others will face is fast-rising job losses by the people who produce the exports and those who make the goods and services that those workers purchase. So, as the world slides into this Great Recession, calls for new forms of protection for export industries are cropping up all over the place. We certainly hear these calls here, even though the United States for decades has been generally more accommodating of our trading partners than they have been toward us. We’ve pressed for more trade liberalization, pressed for it earlier, and stuck with generally low trade barriers and an aggressive global economic footprint more than our major trade partners. Countries like Japan, France and Germany don’t provide a very high threshold on these matters, to be sure, but we have consistently cleared it.  

Yet, here we are today, on the brink of passing a “Buy American” provision that will bar the use of foreign-made manufactured products and goods in many projects supported by the stimulus package. President Barack Obama said he wanted the Senate to dial it back, since he understands that it would invite real retaliation that would injure more export-industry workers. So the Senators added a caveat that the restrictions can’t violate our WTO obligations. Here’s the translation of that: “Buy American” will mainly target developing countries, because Japan, EU nations and other advanced countries are all signatories to WTO agreements to not discriminate against other countries in many areas, including government procurement. China, Brazil, India and most other developing nations are not yet signatories. So, we can expect a good dose of tit-for-tat protection from those countries. And that could disrupt the production networks and supply chains of some of our largest global companies, such as Boeing, Pfizer, Dell and Coca-Cola. At a time of grave economic turmoil and peril, this can’t make any sense.

And we’ll still be vulnerable to legitimate, tit-for-tat from Europe and Japan, since they currently apply lower tariffs in many areas than mandated by the WTO. That means they could raise their tariffs without violating their WTO agreements -- and we could do the same in the next round of retaliation.

The best way to cauterize this drive for protection is to take a deep breath, and make sure that workers have greater means to protect themselves. The Administration is offering some of that, for example in health care benefits for those who lose their jobs. We can go well beyond health care, however, especially in real opportunities for working people to expand or deepen their skills and abilities. That remains a serious gap in the stimulus, which hopefully the first Obama budget can rectify. 

For months, NDN has written a great deal about what we believe should be in an economic recovery plan. We’ve argued for investment in provisions that will both spur the economy now and create the basis for future prosperity.  We’ve argued for investments in clean and traditional infrastructure, broadband access, electronic health records, and computers in schools. While we have some concerns about what will end up in the final bill, all in all we think the recovery plan that is emerging is a good one and should be passed as soon as possible. We applaud the work of this young Administration and Congress for moving so swiftly and so assuredly to take the kind of action required at this challenging time for the nation.  

However, there are two provisions being discussed that we believe should not be in the final bill: mandatory E-verify usage by employers receiving stimulus funds and "Buy American" requirements for materials involved in stimulus funded projects. We believe that, in coming days, these provisions should be removed from the economic recovery legislation. While they are well intentioned provisions, we, like many others, do not believe that they will function as a stimulus for the economy and will do more harm than good.

As President Obama pointed out yesterday in Elkhart, Indiana, there are many effective ways to make America more competitive in the global economy, but we believe that "Buy American" provisions, which, depending on the version of the bill, would force steel, iron, and other materials used in stimulus projects to be American-made, are not among them. We have serious concerns that Buy American provisions, while well-intentioned, place us right on the edge of our international legal commitments and open the door to dangerous retribution from other nations also in the midst of grave economic challenges at home. America not only imports from abroad, but our workers and our companies sell a great deal abroad.   Enacting provisions that would slow American exports and potentially diminish the overall volume of trade at a time of an accelerating global slowdown could tip the world into a global depression. As many have pointed out, America tried this strategy in the early 20th century, and it was instrumental in bringing about the Great Depression.  

Similarly, however laudable the goal of using the nascent E-verify system by all companies receiving stimulus funds to ensure that these funds go to legal workers, the reality is that the system is not yet ready for broad, mandatory deployment. Indeed, mandating its use could have adverse consequences for the economic recovery, as it would almost certainly slow the use of funds, be incredibly costly to employers, and, because of the consequences of false "no matches" (which are easily triggered and all too common), would delay the recovery plan’s goal of putting Americans back to work.  For those policymakers interested in the United States having national, effective electronic immigration verification system, they should work with the President to include it in a broader effort to fix our broken immigration system later this year.  

As members of Congress debate the economic recovery plan in conference committee over the next few days, we trust that they will keep an eye out for provisions that are clearly not in the economic interests of the United States. The inclusion of Buy American and E-verify provisions fall well short of this measure and should be removed from the legislation.

Today, President Obama reasserted ownership of the economic recovery plan in Elkhart, Indiana, going on the road to tell the American people, "that endless delay or paralysis in Washington in the face of this crisis will bring only deepening disaster."

Obama also, in response to a question about what he would do to keep jobs in America, discussed workforce training. He specifically mentioned America’s community colleges as an important resource in remaining competitive in the global economy. NDN has long advocated a proposal, called "Tapping the Resources of America’s Community Colleges: A Modest Proposal to Provide Universal Access to Computer Training" that would, through the computer labs in the nation's community colleges, offer free computer training to all Americans. As a Senator, Obama endorsed this proposal. In it, Dr. Robert Shapiro wrote:

It is time that America ensures that all workers have real opportunities to build the skills necessary to operate one of the most important new technologies of our time, computers. Young Americans are increasingly adept at working with computers, but many American workers still lack those skills. Here, we propose a direct, new approach to giving U.S. workers the opportunity to develop those skills, by providing federal government grants to America’s community colleges to keep open their computer labs three nights every week, staffed by instructors who will provide basic instruction to any person in the community who walks in and requests it.

The primary way any nation can ensure that its people enjoy broad-based upward mobility is to raise the productivity of its workers and businesses. Achieving that goal, as the United States has done throughout most of its history, depends largely on three critical factors. First, the economy must promote the development and spread of new technologies, new ways of organizing and operating businesses, and other innovations that create new value and new efficiencies. Second, companies must invest in those technologies and in other business and economic innovations, so workers can use them to perform their jobs more productively. Finally, workers, companies, and the government must provide continuing support for all workers to acquire the skills to operate new technologies and perform well in innovative business environments.

President Obama took his campaign for the economic recovery plan to the road today, heading to the especially hard-hit Elkhart, Indiana. Here's what he had to say about the economy and the recovery plan.

You know, we tend to take the measure of the economic crisis we face in numbers and statistics.  But when we say we’ve lost 3.6 million jobs since this recession began – nearly 600,000 in the past month alone; when we say that this area has lost jobs faster than anywhere else in America, with an unemployment rate over 15 percent; when we talk about layoffs at companies like Monaco Coach, Keystone RV, and Pilgrim International – companies that have sustained this community for years – we’re talking about Ed Neufeldt and people like him all across this country.  

We’re talking about folks who’ve lost their livelihood and don’t know what will take its place.  Parents who’ve lost their health care and lie awake nights praying the kids don’t get sick.  Families who’ve lost the home that was their corner of the American dream.  Young people who put that college acceptance letter back in the envelope because they just can’t afford it.

That’s what those numbers and statistics mean.  That is the true measure of this economic crisis.  Those are the stories I heard when I came here to Elkhart six months ago and that I have carried with me every day since.  

I promised you back then that if elected President, I would do everything I could to help this community recover.  And that’s why I’ve come back today – to tell you how I intend to keep that promise.   

The situation we face could not be more serious.  We have inherited an economic crisis as deep and as dire as any since the Great Depression.  Economists from across the spectrum have warned that if we don’t act immediately, millions more jobs will be lost, and national unemployment rates will approach double digits.  More people will lose their homes and their health care.  And our nation will sink into a crisis that, at some point, we may be unable to reverse.

So we can no longer afford to wait and see and hope for the best.  We can no longer posture and bicker and resort to the same failed ideas that got us into this mess in the first place – and that the American people rejected at the polls this past November.  You didn’t send us to Washington because you were hoping for more of the same.  You sent us there with a mandate for change, and the expectation that we would act quickly and boldly to carry it out – and that is exactly what I intend to do as President of the United States.  

That is why I put forth a Recovery and Reinvestment Plan that is now before Congress.  At its core is a very simple idea: to put Americans back to work doing the work America needs done.  

The plan will save or create three to four million jobs over the next two years.  But not just any jobs – jobs that meet the needs we’ve neglected for far too long and lay the groundwork for long-term economic growth: jobs fixing our schools; computerizing medical records to save costs and save lives; repairing our infrastructure; and investing in renewable energy to help us move toward energy independence.  The plan also calls for immediate tax relief for 95 percent of American workers.

Full text here.

In his newest weekly address this morning, President Obama congratulates the Senate for reaching a compromise on the stimulus bill, and stresses the urgency of passing a stimulus package. Clocking in at over 4 minutes, it's one of the longer addresses the President has released. Check it out below: