In his weekly address, President Obama describes the path for American success in the more competitive, technologically connected 21st century economy:
We’re living in a new and challenging time, in which technology has made competition easier and fiercer than ever before. Countries around the world are upping their game and giving their workers and companies every advantage possible. But that shouldn’t discourage us. Because I know we can win that competition. I know we can out-compete any other nation on Earth. We just have to make sure we’re doing everything we can to unlock the productivity of American workers, unleash the ingenuity of American businesses, and harness the dynamism of America’s economy.
General Electric CEO and newly appointed Chair of the President’s Council on Jobs and Competitiveness Jeffrey Immelt authored a piece in the Washington Post today describing the major areas of focus for the council. Immelt's "hope is that the council will be a sounding board for ideas and a catalyst for action on jobs and competitiveness."
Ensuring that America can compete in a 21st century, globalized economy is perhaps the greatest governing challenge of our time. It is now more than clear that our economic competitors have raised their game, and we must now raise ours. Everything Immelt describes in his piece is right on – we must better engage with fast growing markets outside the United States and we must increase innovation here in the United States. The agenda required to raise our game is vast, and I look forward to hearing more on this agenda from the President’s Council on Jobs and Competitiveness and the State of the Union on Tuesday. Immelt concludes:
GE sells more than 96 percent of its products to the private sector, where America's future must be built. But government can help business invest in our shared future. A sound and competitive tax system and a partnership between business and government on education and innovation in areas where America can lead, such as clean energy, are essential to sustainable growth.
It is possible to be a competitive global enterprise and still care about your home. In fact, it is not just possible but imperative. There is no easy solution to "fix" the American economy. Persistent and high unemployment - and the pessimism it breeds - should not be accepted. We must work together to construct an economy that creates more opportunity for more people.
Today in the Wall Street Journal, President Obama lays out a vision for a 21st Century Regulatory System. He concludes that:
Despite a lot of heated rhetoric, our efforts over the past two years to modernize our regulations have led to smarter—and in some cases tougher—rules to protect our health, safety and environment. Yet according to current estimates of their economic impact, the benefits of these regulations exceed their costs by billions of dollars.
This is the lesson of our history: Our economy is not a zero-sum game. Regulations do have costs; often, as a country, we have to make tough decisions about whether those costs are necessary. But what is clear is that we can strike the right balance. We can make our economy stronger and more competitive, while meeting our fundamental responsibilities to one another.
It is important to understand that not only is regulation not always bad, sometimes it can lead to innovation. Over the summer, Washington Post columnist Steven Pearlstein wrote about Harvard Professor Michael Porter's research on just that:
It's been 20 years since Harvard Business School professor Michael Porter provided scholarly support for the notion that, rather than hamper economic growth and competitiveness, well-crafted regulation could actually promote it. Porter's first observation was that some of the world's most prosperous and economically vibrant countries were also those with some of the most stringent business regulations, such as Germany and Japan. His studies of specific industries also turned up numerous examples of new products and more efficient ways of doing business that came about only because companies and industries were forced to comply with rules.
Porter's musings, introduced in an article in Scientific American, have since spawned a cottage industry of researchers intent on proving or disproving his hypothesis. Its most controversial aspect was to suggest that profit-maximizing companies were ignoring opportunities to produce profitable new products or adopt more-efficient production techniques. Such a notion not only runs counter to the most basic principles of economics and efficient markets, but it also offends the sensibility of corporate managers, who find it preposterous that such opportunities could be revealed only when the EPA or an OSHA inspector knocks on their company's door.
But subsequent research confirmed what some of us have long since discovered -- namely that corporate executives can be stuck in their ways, averse to risk and unwilling to sacrifice short-term profitability for long-term gain. And as a result of these market "imperfections," sometimes a new regulation comes along that spurs innovation by forcing companies to look at things in new ways. That doesn't mean that regulation is costless, but it does suggest that, on an economy-wide basis, those costs can be offset by subsequent investment and innovation.
As the President's op-ed describes, the role of regulation in our economy is not as simple as many describe. For more on his strategy, check out OMB Director Jack Lew's blog.
According to John Boehner, government spending is killing jobs and harming the economy. His idea is to cut domestic discretionary spending by 20 percent. Unfortunately, Boehner seems to have badly misplaced a lesson from an introductory economics course. Let's look at the economics behind this popular conservative argument.
The economics behind the conservative complaint about spending are straightforward – in good economic times, government investment that leads to borrowing can "crowd out" private investment by raising interest rates, thereby diverting economic activity away from the private sector. This can be a legitimate concern in boom times, which is part of the reason having smaller deficits in good times is generally a good idea; a sizeable government deficit can lead to higher interest rates, which hurt the economy.
These, however, are nothing close to good economic times, and government is not driving out private sector investment and therefore not hurting job creation. How do we know this? There is virtually no inflation – economists are more worried about deflation right now – and a huge shortage of demand. Interest rates are basically the lowest they can possibly be, and the Federal Reserve keeps trying to drive them down. (That’s why the Federal Reserve has gone to quantitative easing; it can’t lower rates any further.)
The point of the stimulus, in fact, was that government needed to function as the spender of last resort to avoid a deflationary spiral. In a package of tax cuts and spending, government injected demand into an economy that was sorely lacking it in order to spur the economy and create jobs. The idea behind stimulus is that government injects demand, which is then multiplied throughout the economy. Since the economy still sorely lacks demand, further cutting government would be an economic disaster of epic proportions. Here’s the kicker: the countercyclical economic underpinnings are the same on the spending and tax sides – so conservatives talking about the need to cut taxes in a recession are actually espousing the same Keynesian economics that I am.
That the economics don’t work out for John Boehner right now points to another fact – that his arguments are actually about a philosophical belief in the appropriate size of government. Fair enough. But then let’s have that debate, over which government functions are appropriate and which ones are not. As John Boehner will soon find out (when he has a fight that sounds eerily similar to the one Bill Clinton cleaned Newt Gingrich’s clock on in 1995-1996), more than 80 percent of domestic discretionary programs are not ones Americans will actually consider "discretionary."
"The debt ceiling, obviously, is going to have to be increased if we're not going to default, so the question is, what do we get in exchange for that, and what kind of fiscal controls?" said Rep. Paul Ryan (R-Wis.), the incoming chairman of the House budget panel, last week on Bloomberg Television.
Ryan's question - what do I get in exchange for not letting the United States of America default? - has only one answer: a $174,000 paycheck for being a member of the United States Congress. This is going to be an interesting battle over the next few months, but Ryan's current position of demanding something that fits his ideology in exchange for not ruining America's credit could easily be considered unpatriotic.
While certain other parts of the press conference he held yesterday received more attention, the President also built on the speech he gave in North Carolina on Monday, when he described an economic direction for the country. His agenda his one designed to that ensure America's success in the more competitive, global economic of the 21st century:
Here’s going to be the long-term issue. We’ve had two years of emergency -- emergency economic action on the banking industry, the auto industry, on unemployment insurance, on a whole range of issues -- on state budgets. The situation has now stabilized, although for those folks who are out of work, it’s still an emergency. So we’ve still got to focus short term on job growth.
But we’ve got to have a larger debate about how is this -- how is this country going to win the economic competition of the 21st century? How are we going to make sure that we’ve got the best-trained workers in the world? There was just a study that came out today showing how we’ve slipped even further when it comes to math education and science education.
So what are we doing to revamp our schools to make sure our kids can compete? What are we doing in terms of research and development to make sure that innovation is still taking place here in the United States of America? What are we doing about our infrastructure so that we have the best airports and the best roads and the best bridges? And how are we going to pay for all that at a time when we’ve got both short-term deficit problems, medium-term deficit problems, and long-term deficit problems?
Now, that’s going to be a big debate. And it’s going to involve us sorting out what government functions are adding to our competitiveness and increasing opportunity and making sure that we’re growing the economy, and which aspects of the government aren’t helping.
And then we’ve got to figure out how do we pay for that. And that’s going to mean looking at the tax code and saying, what’s fair, what’s efficient. And I don’t think anybody thinks the tax code right now is fair or efficient. But we’ve got to make sure that we don’t just paper over those problems by borrowing from China or Saudi Arabia. And so that’s going to be a major conversation.
And in that context, I don’t see how the Republicans win that argument. I don’t know how they’re going to be able to argue that extending permanently these high-end tax cuts is going to be good for our economy when, to offset them, we’d end up having to cut vital services for our kids, for our veterans, for our seniors.
But I’m happy to listen to their arguments. And I think the American people will benefit from that debate. And that’s going to be starting next year.
So my job is to make sure that we have a North Star out there. What is helping the American people live out their lives? What is giving them more opportunity? What is growing the economy? What is making us more competitive?
Suffice it to say, there are a wide range of opinions on the tax deal President Obama announced last night. There's a lot to like and dislike about this deal, but it's clear that, in terms of actually moving the economy over the next two years, this was better than a lot of the alternatives. A quick round-up of some opinions.
So is this a good deal? It's a lot better than I would've told you the White House was going to get if you'd asked me a week ago. There's some new stimulus in the form of the payroll-tax cut and the expensing proposals. The older stimulus programs that are getting extended -- notably the unemployment insurance and the tax credits -- probably would've expired outside of this deal. The tax cuts for income over $250,000 are a bad way to spend $100 billion or so, and the estate tax deal is really noxious.
It's bad news for the deficit, though the White House and Congress are right to make the deficit less of a priority than economic recovery. And speaking of that economic recovery? This isn't enough, and it's not well targeted. The deal amounts to the White House throwing some bad money after good. But the end result is between $200 and $300 billion more in tax breaks, tax credits and unemployment insurance than there would've been if not for this deal (I say $200-$300 billion because of the uncertainty over what would've been extended in the absence of this package). That's better than nothing -- or to be more specific, better than backsliding.
Why were Republicans so flexible? They are willing to deal away a lot if they're getting tax cuts for the rich. President Clinton got Republicans to establish a Childrens' Health Insurance Program in 1997 in return for a capital gains tax cut. Now Obama got a fair amount of stimulus in return for upper-bracket tax cuts. Unfortunately, it tends to be terrible policy. But it's the party's core policy goal, and if you help them attain it they can be surprisingly reasonable.
Most of this round of stimulus does look to be relatively low bang-for-buck, and it is not paid for over ten years, but it does look to me as though it is better than a poke in the eye with a sharp stick.
"In the current environment, emergency unemployment insurance is much more efficacious that tax cuts for upper income groups,” said Zandi, in an email to TIME. “Given the fragility of the recovery, however, I would do both."
David Frum says the deal is "a win for the President."
More economists: Mark Thoma is concerned about social security and the financing mechanism for the payroll tax cut, Greg Mankiw likes it, with some caveats, and Dean Baker cautions that this package is anti-contractionary, not really stimulative.
Early reports about today's deal over tax cuts and other economic legislation in the lame duck session reveal that a two-percent cut in the payroll tax is to be included for one year. This is indeed a positive development. Based on Rob Shapiro's long standing advocacy for a cut in the payroll tax in order to spur job creation, Rob, Simon Rosenberg, and I wrote a memo over the summer advocating a one year payroll tax cut. Indeed, the Congressional Budget Office has said that a payroll tax cut is the most effective measure for job creation.
If today is any indication (and it is, this is a mathematical reality), the next two years are going to be difficult for those elected on the promise of cutting taxes and cutting the deficit. The fact is that you just can't do both at the same time. Policymaking is about setting priorities, and right now creating jobs and growing the economy have to be at the top of the list.