NDN Blog

Are Republicans Leaders Suffering from Stockholm Syndrome?

            With a good part of the federal government now closed for business, the pathologies driving it are too obvious to ignore.  The diagnosis begins with the fact that there is no partisan argument this time about overall federal spending.  The White House and congressional Democrats have accepted the arbitrary cuts of the sequester process, despite evidence that they are slowing the economy.  Instead, the rightwing of the House GOP is holding normal government operations hostage to a variety of demands tied the Affordable Care Act.

            Obamacare has been a festering focus of Tea Partiers since 2010, when its passage helped elect a number of them to Congress.  Three years later, their continuing single-mindedness about those reforms has begun to look like a pathological obsession.  Too strong?   Their threats to close down Washington unless President Obama agrees to give up his signature achievement – and their deluded confidence that they can bend him to their will -- have been utterly unaffected by not only the results of the 2012 elections, but also by the prevailing consensus that their strategy will cost the GOP even more in 2014.
 
            This week, the pathology spread to Republican leaders.   Since Tea Party members make up less than one-quarter of the House GOP and an even smaller share in the Senate, they always need support from their more moderate colleagues and Party leaders to carry out their threats.  Those leaders and colleagues have for weeks publicly opposed the Tea Party strategy – that is, until this past weekend.  After months of being held hostage themselves to Tea Party threats of insurrection and primary challenges, House Speaker John Boehner, Senate Minority Leader Mitch McConnell and most of their associates have now identified with their captors and adopted their worldview.  In short, they’re suffering from a political version of “Stockholm Syndrome.”  If they don’t recover quickly, much of the national government could remain closed for a long time.  
 
This post was originally published in Dr. Shapiro's blog.
             

The Biggest Risks to the U.S. Economy Now Come from Congress and China

As summer ends, and investors and policymakers look ahead, the American economy faces a range of downside risks. Most of these risks are what economists call “exogenous,” which is a fancy way of saying that they come from sources outside the economy itself. Left to itself, the economy appears set to maintain its current path of moderate growth. GDP grew at a 1.8 percent rate in the first quarter of this year followed by 2. 5 percent growth in the second quarter, with no signs of the bracing job and income gains Americans remember from the 1980s and 1990s. But this may be the best-case scenario, since outside forces from lamebrain moves by Congress to developments in China could knock moderate growth off its perch.

The most clear and present threat to growth lies in the looming fight over the debt ceiling. It has to be said how truly foolish and irrational it is that this matter should pose any risk to our economic security. But the Republican Party is caught in an internal power struggle that could well result in Congress suspending the Treasury’s legal authority to issues bonds to finance debts already accrued by the current and previous congresses. It would constitute a technical default by the United States — and that would trigger an unprecedented slump in the value of all U. S. Treasury securities, until now the world’s most secure and stable financial instrument.

Interest rates on those securities would shoot up, and we would see a chaotic selloff in U.S. and global bond markets followed by a sharp economic slowdown and a precipitous nosedive in stock markets. It would all unfold like a bitter divorce, where one spouse spitefully engineers a collapse of the marital assets heedless of how it will affect their children (that’s the role for rest of us). Of course, it is not inevitable. Once the debt limit debate has produced some fiery political theater, the grownups in the GOP leadership and wealthy donors who underwrite most Republican campaigns may yet bring their party’s radicals to heel.

That outcome must be the expectation of most bond and stock traders, who are less concerned today about the debt limit than about the risks of Federal Reserve policy. The trillion-dollar question for big finance is when and by how much the Fed will step on Wall Street’s near-zero interest rates by “tapering” the Fed’s current quantitative easing program, QE3. The path of QE3 has even become an issue in the contest to succeed Fed Chair Ben Bernanke. While Vice Chair Janet Yellen believes that but for QE3, the economy would be weaker, Larry Summers has said the program doesn’t make much difference anyway. The implication is that Summers sees less risk in rapid tapering. And that may be why, according to a recent survey, most Wall Street traders prefer Yellen, despite Summers’ lucrative stints as a Wall Street adviser. While all of this makes for diverting debates on cable TV, the truth is that QE3 policy probably poses little risk to the U. S. economy. If interest rates jump in response to Fed tapering, whoever chairs the Fed will slow or suspend it.

That leaves risks from abroad to disturb the sleep of the President’s economic advisers. Two regions (the Middle East and Europe) and one country (China) have the economic heft to materially affect the path of American economy. In the Middle East, the immediate economic issue for the President is whether his coming response to Bashar al-Assad’s crimes could trigger some series of events that ultimately affects the flow of oil from the region, driving up energy prices everywhere.

Europe seems even less likely to disturb our recovery, especially as compared to a year ago, when investors’ confidence in the ability of Greece, Italy, Spain and Portugal to finance their sovereign debts nearly collapsed. A European sovereign debt crisis could still bring down the continent’s largest banks and plunge all of us into a deep recession. But for now, Mario Draghi, who heads up the European Central Bank (ECB), has convinced Germany’s Angela Merkel to muzzle her qualms about large-scale ECB interventions to head off a Eurozone meltdown.

The possibility of a different sort of debt crisis also has appeared in China. Since 2008, public and private debt in China has shot up from 130 percent of GDP to 200 percent, even as the country’s GDP has expanded nearly two-thirds. Over this brief period, corporate debt nearly doubled and household debt tripled. Worse still, in the face of these skyrocketing debts, overall growth, the returns that Chinese companies earn on assets they borrowed to finance, and Chinese wages all have slowed sharply. Already, many companies now pay their suppliers with six-month promissory notes, producing cash crunches for their own suppliers and workers. Many large banks are also writing down large numbers of non-performing loans. And as banks pull back, interest rates have risen, increasing the debt loads of firms and households, and forcing thousands of companies to downsize.

The Financial Times observed recently that “such a rapid increase in borrowing has historically led to crises in countries from Argentina to South Korea.” Some experts dismiss this prospect, pointing to China’s stringent capital controls to prevent large-scale capital flight and Beijing’s strict management on the value of the currency. But markets that lose confidence find ways to subvert such controls; for example, through bank runs, accelerating inflation, and sharp drops in foreign investment. So, even if China can sidestep a full blown credit crisis, it cannot escape much slower growth while the government and domestic firms unwind the excess debt. And that will mean slower growth in many countries that depend on rising exports to China—starting with Japan, South Korea, Taiwan, Australia and Chile — as well as here at home, in states such as California, Texas, Washington, Illinois and New York.

This post was originally published in Dr. Shapiro's blog

Washington — or Its Accountants — Finally Accept the Idea-Based Economy

Today, the Bureau of Economic Analysis (BEA) will put in place a set of critical changes in how it measures America’s gross domestic product (GDP). The most important change reclassifies what businesses spend on research and development, which now will be counted as an economic investment rather than an ordinary business expense. By so doing, the country’s official national accounts finally recognize that ideas play the same role in prosperity and income growth as new factories and equipment. More important, the change signals that Washington — or at least its accountants — accept that the country has an idea-based economy.

I was present at the creation of these changes. In the late 1990s, while overseeing the BEA as Under Secretary of Commerce for Economic Affairs, I helped them set up the first tests of how to approach R&D as an investment. Then as now, this shift was a no-brainer. Those of us who study what makes economies grow learned as students that innovations drive growth even more than new capital investments. Based on the strict patent protections which the United States has embraced since the time of the Constitution, Americans always have known this intuitively. So for more than 200 years, the world’s most market-based economy has granted temporary monopoly rights to anyone who comes up with a new invention.

Investors clearly believe in the value of patents and the inventions they animate. A new study covering more than eight decades of patents (1926-2010) has found that when a company receives a new patent, its stock market value increases on average by $19.2 million (in 2013 dollars). Even setting aside such blockbuster patents as the core inventions from Apple or Google, the researchers found that the median bump in a firm’s stock market valuation after receiving a patent was $5.9 million.

In fact, intellectual property and, more broadly, intangible assets now virtually dominate American business. Since the mid-1990s, American firms have invested more in new, intangible assets — databases, brands, worker training and competencies, as well as R&D and patents — than they have in new physical assets. That tells us that businesses now expect to earn more from ideas in their various forms than from their plant and equipment.

Here, too, investors agree. In 1984, the “book value” of the 150 largest U.S. corporations — what their physical assets would bring on the open market — was equal to about three-quarters of their stock market value. So, nearly 30 years ago, large American businesses were worth about one-quarter more than the plant, equipment and real estate that generated their profits. By 2005, the book value of America’s 150 largest companies equaled just 35 percent of their stock market value. By that time, about two-thirds of their value came from their intangible assets, because those assets had become the main source of the value and profits which large companies generate.

This shift to intangible assets is not confined to popularly-recognized “idea-based” industries such as information technologies and biotechnology. A 2011 analysis by Kevin Hassett and myself found that by 2009, intellectual property, strictly defined, accounted for at least half of the market value of not only the software, telecom and pharmaceutical sectors, but also such disparate industries as food, beverages and tobacco, media, healthcare, professional services, household and personal products, consumer services, and autos. And when we expand the category to all intangible assets, broadly defined, those idea-based assets accounted for at least 80 percent of the market value of all of the industries just mentioned, plus capital goods, materials, transportation, and consumer durables and apparel. That covers every major industry except retail, real estate, banking, energy, and utilities.

Now that the official accounts for the American economy finally treat the R&D that leads to most patents and innovations as economic investments, we can also better track and compare their value. For instance, we now know that U.S. businesses have spent less on R&D in recent years than they did in the 1990s — and that nevertheless, the United States spends more on R&D than all of Asia and Europe combined.

U.S. companies and individuals hold about 25 percent of the world’s patents, a share close to America’s 22 percent share of worldwide GDP. America’s real advantage in this area, however, probably lies in its outsized willingness to fund the young enterprises that often develop new, patented advances. So, while the United States claims 25 percent of all patents, the Organization for Economic Cooperation and Development (OECD) reports that we also account for roughly half of all worldwide venture capital investment.

America’s shift to an idea-based economy inevitably will shape much of our economic future. The information and Internet technologies so integral to creating and managing ideas have spread across every economic sector. Within each industry, those firms most adept at applying those technologies to their operations will, on balance, be the ones most likely to succeed. That has already become gauge for investors to use and watch. More important, a widening gap has opened between the incomes of most Americans and the incomes of the top 20 percent of workers who are already adept at creating and managing ideas or at least operating in workplaces dense with information and Internet technologies. Finding new ways to enable most Americans to prosper in an idea-based economy is now the most pressing economic challenge facing Washington policymakers.

This post was originally published in Dr. Shapiro's blog

Why Job Gains are Still So Modest - and it Could Get Much Worse

The economic recovery is now four years old -- the anniversary comes this month – yet job growth remains a big problem.  Since the recession technically ended in June 2009, American businesses have expanded their workforces at an average annual rate of 1.4 percent, creating some 6.1 million new jobs.  The good news is that we’re creating new jobs at twice the rate seen in the first four years of the last expansion.  Nevertheless, the job gains are much smaller than those seen in the early years of the expansions of the 1980s and 1990s.   So, is this ongoing problem simply a feature of the slower economic growth of this cycle, or have American businesses lost some of their storied capacity for generating new jobs?  The answer is, some of both – and over the next decade, new technologies could further aggravate the problem.

To get at why this is happening, you have to first take account of the character and basic features of these economic cycles.  For example, job creation bounces back more sharply after a deep recession than following a milder downturn.  So, we start by comparing the job gains seen over the last four years, following the Great Recession of 2007-2009, with those following the deep downturn of 1981-1982.  The gap is very large:  The 1.4 percent annual growth in private employment over the last four years is 61 percent less than the 3.6 percent annual job gains seen during the first four years of the 1982-1989 expansion.   We see a similar disparity between job creation in the first four of the two most recent expansions that followed more moderate recessions.  The 0.7 percent annual rate of job growth over the first four years of the 2002-2007 expansion was 68 percent less than the 2.2 percent annual job gains seen in the first four years of the 1991-2000 expansion.   Something has changed.

The most obvious change is that every successive expansion since the 1980s has seen progressively lower rates of economic growth, especially in the early years.  U.S. GDP grew by an average of 5 percent per-year in the first four years of the 1980s expansion, followed by 3.4 percent annual gains in the first four years of the 1990s expansion, 3.0 percent growth per-year in the early years of the 2002-2007 expansion, and just 2.3 percent average annual growth over the last four years.  As Keynesians have insisted, the slower economy should explain much of the recent slowdown in job gains – although not all of it.

We can calculate roughly how much of the slowdown in job gains can be traced to the slower economy by adjusting the rates of job creation for the rates of overall growth.  Those calculations suggest that if the economy had grown as fast over the last four years as it did in the first four years of the 1980s expansion, we could have seen 3.0 percent annual job gains instead of just 1.4 percent average job growth.  Since jobs actually grew in the early 1980s by an average of 3.6 percent per-year, as much as 80 percent of the current slowdown in job creation may simply reflect slower economic growth.  So, while recent austerity measures – the sequester, increases in payroll and income tax rates, and so on – do not explain all of the slowdown in growth, their apparent impact on jobs is powerful testimony to how misguided those measures have been.

Thinking through job creation in this way, then, tells us that some 20 percent of our current employment problem, and perhaps more, is “structural.”  Put another way, U.S. businesses now respond to economic growth by creating fewer jobs than they used to.

Technological advances, of course, are one of the driving forces at play here.  The countless applications of information technologies (IT) across every industry and economic activity have created considerable wealth, but they also displace more jobs than they create.  Consider our manufacturing workforce, which contracted nearly 28 percent over the last two decades, falling from 16,480,000 positions in 1992 to 11,951,000 in 2012.  All of these job losses can be accounted for by workers with high school diplomas or less, whose number in manufacturing declined by more than 40 percent.  The picture is different for workers with the skills to operate in an IT-dense workplace:  Over the same 20 years, manufacturing jobs held by college graduates increased by 2.4 percent and the number with graduate degrees jumped 44 percent.

The latest threat to jobs, according to many technologists, is coming from robotics, the application of information technologies to new forms of kinetic hardware.   Today, businesses worldwide employ some 1.4 million industrial robots, mainly in automobile and electronics assembly.  Those numbers appear to be rising quickly.  For example, FOXCONN, the Taiwan-based giant that assembles 40 percent of the world’s consumer electronics -- and employs 1.2 million workers around the world -- has announced plans to purchase 1 million new robots over the next three years.

A new report from the Atlantic Council  catalogues the growing number of large-scale, public-private R&D programs underway.  The U.S. effort is led by DARPA, NASA and firms such as Raytheon and iRobot, with grants from the NSF National Robotics Initiative playing a venture capital role.  In Japan, the FANUC Corporation and the Ministry of Economy, Trade and Industry have taken the lead.  In Korea, the Ministry of the Knowledge Economy is working with LG and Samsung.  And in Europe, the European Network of Robotic Research is collaborating with companies such as Philips and the ABB Group.

No one can predict the direction or dimensions of robotics a decade from now.  Nevertheless, the next generation of the technology will be able to draw on important recent developments, such as the first, open source Robot Operating System as well as advances that allow robots to retrieve and manipulate objects outside the structured environment of an assembly line.  In the last year, for example, Willow Garage released a new personal robot that can fold laundry and pour beer, the French firm Robotsoft showcased robots that monitor elderly patients, Italian and Swedish firms offered robotic landscapers, a Japanese company unveiled its new robot teachers, and South Koreans developed robots to assist firefighters and provide basic child care.  The first large-scale application of the technology may well involve transportation.  Drone technology could force early retirement on thousands of pilots, and future variations of Google’s driverless car could displace tens of thousands of teamsters, cabbies and bus drivers.  In any case, our structural problems with job growth are likely to worsen.

This post was originally published in Dr. Shapiro's blog

The Politics and Economics of Obama's New Climate Program

          The Supreme Court's blockbuster decisions on voting rights and same-sex marriage attracted most of the attention, but President Obama also moved decisively last week, on climate change.  The facts that drove the President are scientifically undisputed.  Increasing concentrations of greenhouse gas emissions in the earth's atmosphere continue to raise global temperatures; and without serious action, the long-term effects on sea levels and climate could be catastrophic.   Yet, climate-change deniers on the far right have a tight hold on a majority of congressional Republicans, who now won't even acknowledge the threat.  With no hope of reaching a reasonable accommodation, the President put forward new regulations that don't need their approval -- and ultimately will be less effective and more costly for average Americans than the alternatives which Congress won't consider. 

            For a while now, most climate experts and economists have broadly agreed that the most efficient and effective way to reduce these carbon and other greenhouse gas (GHG) emissions is the direct approach:  Raise the price of fuels based on the GHG emissions they produce, and so raise the price of all goods and services based on the emissions created to produce them.  In principle, this approach could attract bipartisan support.  It rests on one of the bedrock tenets of conservatism, the power of prices in free markets, as well as the liberal disposition to create national programs to improve the general welfare.  Yes, the most straight-forward way to achieve such climate friendly fuel prices is apply a dreaded tax to all forms of energy based on their carbon dioxide (CO2) and other GHG emissions.  But even that, in more placid political times, could be a basis for attracting broad support, since the revenues from a climate tax could be dedicated to cutting payroll, corporate and other, more economically-distorting taxes.

            The truth is that every other serious approach to climate - from a cap-and-trade system to the President's new regulations - also would raise prices:  Directly or indirectly, they make it more expensive to use fuels that emit more than their share of greenhouse gases, relative to other fuels that damage the climate less.  Over time, those price differences should gradually move millions of businesses and tens of millions of households to favor the cheaper, more climate-friendly fuels and technologies, and the goods and services produced using them.

            The sobering news is, we don't have much time.  Scientists warn that however broadly we might adopt the current generation of cleaner fuels and technologies, the atmospheric concentrations of CO2 and other GHG will soon reach levels that will produce serious climate changes.  However, the economics of setting a clear and hefty price on carbon and other GHG would also create new incentives that could extend the frontiers of climate technology.  If energy companies, scientists and entrepreneurs can be certain about the price of carbon and other greenhouse gases, looking forward - if they know how much more it will cost people to use climate-damaging fuels, compared to climate-friendly ones - that would create strong incentives to develop and adopt the next generation of climate-friendly fuels and technologies. 

            The question is, how efficient and effective are each of these approaches, and which is most likely to spur new advances?   The question highlights the costs of the extreme right's current hold on congressional Republicans, which drives the political stalemate on climate policy and has left President Obama with few options apart from executive regulation.  His new regulatory agenda has three parts.  It includes, first, higher energy-efficiency standards for appliances and buildings, aimed at reducing energy use whether clean or otherwise.  There also are new loan guarantees for projects to reduce or isolate the greenhouse gases emitted by fossil fuels, and additional grants to develop more efficient biofuels.  These guarantees and grants are designed to promote greater use of more climate-friendly technologies and fuels by reducing the cost of capital to develop them.  While these measures provide a sense of the administration moving on many fronts, their combined impact on the climate crisis will be modest. 

There is one measure that could matter a great deal more:  The President has directed the EPA to develop new CO2 and other GHG emission standards for existing power plants.  This follows EPA regulations proposed last year that set similar standards for new power plants.  The logic is straight-forward:  Set standards that will force utilities to rapidly shift from coal to natural gas and renewable fuels.  This makes sense, since the use of cheap coal to generate electricity accounts for about half of worldwide carbon and other GHG.  Shifting to natural gas worldwide would cut life-cycle GHG emissions by 20 percent, and shifting to renewable fuels would reduce those emissions by as much as 40 percent.

            There is no doubt that sufficient regulation could move the United States to a path under which our GHG emissions would decline in a sustained way.  But using regulation in this way will cost Americans a great deal more than a carbon tax with the same result.  Under the new regulation, existing power plants will have to develop and adopt new investments that meet a new, uniform standard by reducing their emissions from fossil fuels or converting their plants to use cleaner fuels.  To begin, monitoring and enforcing such regulation will cost a lot more than collecting a tax.  More important, the program suffers from the inefficiencies of most regulation, because some utilities will be able to meet the regulation much more cheaply than others, based on the state of their current plants.  For example, plant A could reduce its emissions by a required unit by investing $1,000,000, while plant B could reduce its emissions by the same unit for $250,000, and by two units for $500,000.  So, reducing emissions by two units under the regulation will cost $1,250,000, while plant B could achieve the same result for the climate under a tax or a cap-and-trade system for $500,000.  Under all of these alternatives, most of the costs are passed along to the ratepayers and consumers.  But a tax with offsetting tax reductions could return much of those costs to everyone.  Based on a simulation from several years ago, those costs could average some $1,500 per-household, year after year. 

            Finally, while the new regulations should spur technological innovations to enable utilities to meet the standard more efficiently, the incentive to innovate will dissipate once the standard is met.  By contrast, the economic incentives to develop and adopt cleaner fuels and technologies never go away under an emissions tax, since every incremental advance would reduce the tax and, with it, the price of energy. 

            This past weekend, President Obama also devoted his weekly address to his new climate program.  He deserves credit for refusing to be cowed by his opponents' intransigence.  He could truly elevate his presidency, however, by taking the case for a carbon/GHG tax with offsetting tax cuts to the country, and beating his opponents on one of the most fateful challenges we face today. 

This post was originally published in Dr. Shapiro's blog

 

As the Economy Improves, Give Some Credit to Globalization

The economic news and data have turned distinctly upbeat. With unemployment down, consumer confidence up, and personal debt back to normal levels, it was no surprise when last week's revised report on first quarter GDP showed consumer spending rising at twice the rate of the preceding three quarters. Housing investment is now increasing at a 14 percent rate, following a 25 percent drop in home foreclosures compared to the first quarter of 2012 and many months of rising housing prices. Business investment is still sluggish, but corporate profits are strong, and the stock market is setting new records. These positive reports also explain why markets barely moved when Federal Reserve chairman Ben Bernanke noted recently that the Fed's aggressive program to keep interest rates low might wind down sooner than expected.

The biggest drag on the economy, as usual, is government. If not for Washington's misguided sequester cuts, tax increases and continuing layoffs by state and local governments, GDP would be growing at a healthy three to five percent annual rate.  Even so, conditions are improving enough to sharply drive down the deficits projected for the next two years. With Europe stuck in a double-dip recession, the United States once again finds itself a prime engine of global growth.

Credit for much of this turnaround goes to the Fed, and some of it is luck. But business attitudes and orientation count here, too. In particular, American policymakers and businesses have been committed to globalization for the last two decades, especially compared to their European counterparts.  And this deep engagement in global markets is a critical factor in the economy's renewed strength. Not only are exports one of the brighter points in the current recovery.  In addition, years of sustained competition in global markets have made many U.S. industries markedly more efficient and innovative than their rivals in other advanced economies.

Bill Clinton deserves some thanks for all this.  He not only articulated the need for Americans to actively engage in world markets, clearly and convincingly. He also made that attitude concrete by corralling bipartisan majorities to enact NAFTA, create the World Trade Organization, and draw China and other large developing nations into a global trading system. American multinational companies may be best known today for their byzantine strategies to minimize their U.S. taxes. But their many years of investing in foreign markets at higher levels and rates than firms from other major economies count for a lot more.  Once there, they have had to compete with lower-cost producers in markets those producers know better than they do. This intense competition has forced U.S. multinationals to come up with new efficiencies and innovations, which they also have applied to their U.S. operations and markets.

The falling U.S. trade deficit provides clear evidence that all of this matters. In the first quarter of this year, for example, our trade imbalance was $22 billion less than it was a year earlier. This may seem remarkable, since stronger growth here than in Europe and Japan would suggest a rising U.S. trade deficit as imports rise and exports fall. It's true that some imports are up - but so are most exports, including high tech goods that account for 19 percent of all U.S. exports.  The main reason, though, is globalization as U.S. companies that have spent years setting up shop around the world now tap into fast-growing markets across the developing world.

Consider whom we now trade with.  Our traditional major markets of Europe and Japan now account for just 25 percent of U.S. exports. They're overshadowed today by the 32 percent share of our exports which go to our NAFTA partners, Canada (19 percent) and Mexico (13 percent). Another 12 percent of U.S. exports go to the rest of Latin America, seven percent to China, and 13 percent to the rest of non-Japan Asia. In fact, American firms export nearly half as much to Africa and the Middle East as they do to Europe.

President Obama is now doubling-down on the commitment to globalization. Last term, he got Congress to approve new free trade pacts with South Korea, Colombia and Panama. This term, he's pressing for a major new trade deal with Pacific Rim countries and another with the European Union. The negotiations for the first deal, the Trans-Pacific Partnership Agreement (TPP) began in 2010. Now, the President is pressing all interested parties - Australia, Brunei, Chile, Canada, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam, along with the United States - to complete the deal within one year. That's an ambitious deadline, since TPP would lower or end many thorny domestic barriers to open trade.  Among these are  regulations and other impediments to competing in service-sector businesses, with state-owned enterprises, and in areas of government procurement, as well as health and safety regulations targeted at foreign competitors. And if we and the 10 other Pacific Rim countries can strike the deal on TPP, Japan and South Korea would probably join too, and further expand its impact.

Completing a new free trade pact between the U.S. and the EU within the President's two-year deadline will be equally daunting. Here, too, the issues include many of the toughest for trade in the 21st century, encompassing barriers rooted in the domestic regulation of services as well as health and safety, labor and environmental rules, agricultural subsidies, data privacy, and anti-trust policy. These are very difficult matters not only for the regulation-prone countries of continental Europe, but for the United States as well. Nevertheless, German Prime Minister Angela Merkel and the UK's David Cameron are both on board with Mr. Obama. Alas, France's President Francois Hollande is less enthusiastic, and the president of the European parliament, Martin Schulz, has warned that any deal must "put the European model at its core," especially with regard to "labor unions and social rights."

Both sets of negotiations will test everyone's patience and political limits. But the process will recommit the United States to the path of liberal internationalism that has helped drive American prosperity for more than 65 years. And if they succeed, the result will not only reassert America's global economic leadership.   The new agreements should also permanently raise the incomes of tens of millions of people here and abroad, along with the sales and profits of tens of thousands of U.S. and foreign companies.

This post was originally published in Dr. Shapiro's blog

Is America Still a Top Destination for Immigrants?

American exceptionalism has become a theme of our immigration debate.  From both sides, we hear that America is a uniquely desirable place that, for good or ill, draws an outsized share of the world’s immigrants.  The truth of this matter is that large-scale immigration is a worldwide phenomenon tied to contemporary globalization.  Porous borders and rising education levels have allowed tens of millions of people in developing societies to become more mobile, and new communications and transportation technologies give everyone access to information about other countries and ways to get there.  Perhaps most important, rising global demand has created vast new opportunities for foreign labor – whether it’s to bolster shrinking labor pools across much of Europe, provide services in thinly-populated, oil-rich countries in the Middle East, or cater to wealthy global elites in dozens of tax havens.

So, despite dire warnings that U.S. immigration reform will set off another invasion of America by new immigrants, the data show that many other countries are stronger magnets for foreign workers than the United States.  In fact, when it comes to foreign-born residents, America looks fairly average.

It is true that more foreign-born people live in America today than anywhere else.  But that’s mainly because we are a very large country, with more native-born people as well than anywhere except China and India.  And most of our immigrants came here with our permission: Two-thirds of all foreign-born people living in the United States are naturalized citizens or legal permanent resident aliens, and another 4 percent have legal status as temporary migrants.  That leaves about 30 percent who are undocumented.   

Consider the percentages of foreign-born residents living today in various nations:  America with just under 13 percent of its population foreign-born, according to U.N. data, ranks 40th in the world for immigrants as a share of the population.  By contrast, across the 10 most immigrant-intensive countries, foreign-born people account for between 77 percent and 42 percent of their total populations. 

These unusually high proportions of immigrants appear to be generally linked to global trade and finance.  In the top 10, for example, we first set aside the special cases of Macau and Hong Kong, whose Chinese populations are counted as foreign-born, and Vatican City.  Of the remaining seven nations, four are in the Middle-East – Qatar, the United Arab Emirates, Kuwait, and Bahrain – where tens of thousands of foreign workers are needed to help meet global demand for oil and provide services for native populations grown wealthy off of their oil.  The other three countries in the top 10 are global tax havens and financial centers – Andorra, Monaco, and Singapore -- that draw thousands of global elites followed by foreign workers to provide their services.  

The next 10 most immigrant-heavy countries, where foreign-born persons comprise between 42 percent and 22 percent of their populations, include five more tax havens (Nauru in Micronesia, Luxembourg, Lichtenstein, San Marino, and Switzerland) and three more oil rich, Middle Eastern countries (Saudi Arabia, Oman, and Brunei).  The two others in this group are the special cases of Israel, where Jewish national identity is the draw, and Jordan, home to tens of thousands of people displaced by the Iraqi and Israel-Arab conflicts.

Beyond the top 20 countries for foreign-born residents, numerous other nations that more closely resemble the United States, in economic opportunities and social benefits, also draw immigrants in greater relative numbers than America.  For example, some 19 percent to 20 percent of the populations of Australia and Canada are foreign-born, compared to our 13 percent.  Austria, Ireland, New Zealand and Norway also lead the United States in immigrants as a share of their populations, as do the smaller and less-advanced nations of Estonia, Latvia, Belize, Ukraine, Croatia, and Cyprus.   A similar pattern emerges from OECD data covering 25 industrialized countries from 2001 to 2010.  Over that decade, the share of the American population born somewhere else has averaged 12.1 percent.  By this measure, the United States trails not only such countries as Australia, Austria, Canada, Luxembourg, Switzerland and Israel, as noted above, but also Sweden, Germany, and Belgium. 

This pattern also does not change much when we look at the most recent, annual “net migration rates” of various countries (2012).  That’s a standard demographic measure calculated by taking the number of people coming into a country, less the number of people who leave, and divide by 1,000.   Using that measure, the United States ranked 26th in the world.   At 3.6 net immigrants per-1,000 in 2012, we trail far behind three oil-rich countries averaging 24.1 net immigrants per-1,000 (Qatar, UAE, and Bahrain), 13 tax havens averaging 10.8 per-1,000 (from the British Virgin Islands and the Isle of Man, to the Cayman Islands and Luxembourg), and two countries that have become sanctuaries for refugees (Botswana and Djibouti at 14.9 per 1,000).  In addition, at least four other advanced countries also had much higher net migration rates last year -- Australia, Canada, Spain and Italy, averaging 5.3 net immigrants per-1,000 or a rate nearly 50 percent higher than for the United States.

Given the role of labor demand in migration flows and the particular demand in the United States for skilled workers, it is also unsurprising that, according to the Census Bureau, almost 70 percent of foreign-born people residing here, by age 25 or older, are high school graduates.  In fact, nearly 30 percent hold college degrees, the same share as native-born Americans.  On the less-skilled part of the distribution, of course, we find many undocumented male immigrants.  But as we showed in a 2011 analysis for NDN and the New Politics Institute,  undocumented male immigrants also have the highest labor participation rates in the country:  Among men age 18 to 64 years, 94 percent of undocumented immigrants work or actively seek work, compared to 83 percent of native-born Americans, and 85 percent of immigrants with legal status.

On balance, the data show that the United States is not home to an unusually large share of immigrants, legal and otherwise.  As globalization has increased the demand for labor in dozens of countries while lowering the barriers to people moving to other places for work, America has become fairly average as a worldwide destination.   

This post was originally published in Dr. Shapiro's blog

The Meaning and Misuses of GDP

America’s Gross Domestic Product — GDP — is a very powerful statistic. Markets and politicians zealously track the quarterly numbers looking for a bottom line on how investors and the rest of us feel about our conditions and prospects. Compiled by some 2,000 economists and statisticians at the Bureau of Economic Analysis (BEA), GDP pulls together everything they can measure concerning how much America’s households and various industries earn, consume and invest, and for what purposes. Over the last two weeks, however, two new developments should have reminded us that we know less about GDP than we usually believe.

Early this week, the BEA itself tacitly acknowledged that the GDP measure lags behind the actual economy. The Bureau released a set of changes in how it calculates GDP, designed to take better account of the economic value of ideas and intangible assets. Today, few among us would question the notion that new ideas can have great economic value. But some 15 years ago, long before smart phones, tablets and protein-based medications, the BEA started to study how to revise the GDP measure to take better economic account of innovations. This week, the Bureau announced that when a company undertakes research and development or creates a new book, music, or movie, those costs will be counted as investments that add to GDP, rather than ordinary business expenses, which do not.

In an instant, the official accounting of the economy’s total current product increased some $400 billion. Business profits also have been larger than we thought, because ordinary business expenses reduce reported profits, while investments do not. Most important, the revisions told us that American businesses and government, together, now invest just 2.1 percent of GDP in R&D — less investment than in the 1990s here, especially by businesses, and less than much of Europe.

While this week’s BEA changes bring us closer to an accurate picture of GDP, last week we learned how naïve we can be about blatant misuses and distortions of GDP. This story began four years ago, when two well-respected economists, Carmen Reinhardt and Kenneth Rogoff, published an economic history of financial crises. R&R’s timing (2009) was impeccable, and their book was a bestseller for an academic treatise. More important, it gave its authors wide public credibility when they issued a paper the following year, “Growth in a Time of Debt,” that claimed to have found a deep and strong connection between high levels of government debt and a country’s economic growth. The data, they reported, showed that when a country’s government debt reaches and exceeds the equivalent of 90 percent of GDP, its growth slumps very sharply.

With the big run-up in government debt spurred by the financial crisis and subsequent deep recession, conservatives who had waited a long time for a plausible economic reason to slash government found it in the new R&R analysis. And based on its authors’ newly-elevated reputations, conventional wisdom-mongers from think tanks to editorial boards echoed the new line on austerity. Even the most liberal administration since LBJ couldn’t resist the new meme. Despite a palpably weak economy, the President and congressional Democrats grudgingly accepted large budget cuts, and then pumped the economy’s brakes some more by insisting on higher taxes. And we were not the only ones so economically addled. As government debt in Germany, France, Britain and most other advanced countries rose sharply, conservatives there argued that less government was a necessity for average Europeans as well.

Just last week, we learned that the R&R 2010 analysis was so riddled with technical mistakes that its “findings” about what moves GDP are meaningless. When three young economists from the University of Massachusetts found they couldn’t replicate the results – the standard test for scientific findings — they took R&R’s model apart, piece by piece, to figure out why. It turns out that R&R – or more likely, their graduate assistants – left out several years of data for some countries, miscoded other data, and then applied the wrong statistical technique to aggregate their flawed data. And as bad luck would have it, all of their disparate mistakes biased their results in the same direction, amplifying the errors. In the end, instead of advanced countries experiencing recessionary slumps averaging – 0.1 percent growth once their government debt exceeded 90 percent of their GDP, the correct result was average growth of 2.2 percent carrying that debt burden.

Utterly wrong as R&R’s analysis was, the austerity advocates proceeded to badly misuse it. The authors had merely reported a correlation between high debt and negative growth – or, as we now know, between high debt and moderate growth – without saying what that correlation might mean. Hard line conservatives and their think tank supporters, here and abroad, quickly insisted it could only mean that high debt drives down growth. That can happen, but only rarely — when high inflationary expectations drive up interest rates, which at once slows growth and increases government interest payments. In the much more common case, Keynes still rules: Slow or negative growth leads to higher debt, not the other way around. In those more typical instances, cutting government only depresses growth more, further expanding government debt. Occasionally, the correlation of negative growth and high government debt reflects some independent third cause. The tsunami and nuclear meltdown that struck Japan in 2012, for example, simultaneously drove down growth and drove up government debt. And sometimes, there is no correlation: Britain carried government debt burdens of 100 percent to 250 percent of GDP from the early-to-mid-19th century, while it was giving birth to the Industrial Revolution.

The R&R analysis did not distinguish between these various scenarios. Yet, the conservative interpretation became the received public wisdom. The IMF, the World Bank and most politically-unaffiliated economists insisted that slashing government on top of weak business and household spending would only make matters worse. No matter. The inevitable result was not the stronger growth as promised, but persistently high unemployment and slow growth here, and double-dip recessions for much for Europe and Japan. In the end, R&R deserve less criticism for their mistakes than for their failure to correct the damaging distortions of their deeply flawed work.

This post was originally published in Dr. Shapiro's blog.

 

 

The President’s Budget and the Case for Shelving Austerity

The President released his FY 2014 budget today, and right off, it makes more economic sense than most of what passes for serious fiscal discussion in DC.  In particular, it offers up new public investments, uses revenues and entitlement changes to restore long-term fiscal sanity, and phases in those changes down the road when the economy (hopefully) is stronger.  Apart from Fed policy, the budget is government’s most powerful tool for affecting economic growth.  So, the critical economic question is what budget approach would most effectively boost U.S. growth, for both the near-term and longer.  The best answer for now is a plan built around an ambitious public investment agenda, serious measures to broaden the tax base and pare entitlement benefits for well-to-do retirees, and reform that finally resolve the festering issues left over from the 2008-2009 financial meltdown.

To appreciate why continued austerity would be economically reckless, just review the economic data from 2012.  Yes, the United States grew faster than almost any other advanced economy.  But that’s only because the Eurozone has been back in recession, France and Britain treaded water at 0.1 percent and 0.2 percent growth, and Germany grew less than 1 percent.  Even in Northern Europe, Denmark contracted and Sweden expanded just 1.2 percent.  So, the United States looked good with 2.2 percent growth – although only 0.4 percent in the final quarter of 2012 – in-between Canada’s 1.9 percent rate and Australia with 3.3 percent growth.

With such dismal growth, here and across the developed world, the budget’s first mission should be to strengthen it.  There is no economic basis for any short-term spending cuts or tax increases, especially on top of the continuing, mindless sequester.  To be sure, under very special conditions, austerity can stimulate economic activity in a weak economy – namely, when high inflationary expectations drive up interest rates, constraining investment and consumption.  But those conditions have nothing to do with our current economy since interest rates here and across the advanced world are at or near record lows.  The case for austerity, then, is simply politics, and the continuing calls from conservatives to slash federal programs merely mask their fervid preference for a small, weak government. 

Economics matters more in this debate, and progressives should use our slow growth to promote an expanded agenda for public investment.  They could call on Congress to dedicate an additional one percent of GDP to investments that will strengthen the factors that drive growth.  That could mean, for example, more support for reforms to improve secondary education, reduce financial barriers to higher education, and provide retraining for any adult worker who wants it.  It also could mean renewed public support to develop light rail systems across metropolitan areas and improve roads, ports and airports.  This is also the right time economically for Washington to more actively promote the frontiers of technological innovation by expanding support for basic research.  Finally, let’s review federal regulation with the aim of lowering barriers to new business formation.  New and young businesses are reliable sources of new jobs and greater competition.  Those elements, in turn, stimulate higher business investment, particularly in new technologies.

Progressives also would be well advised to accept long-term entitlement reforms that could accompany the new public investments.  Since Social Security provides at least 90 percent of the income of more than one-third of retirees, pension reforms should focus on some form of means-testing.  The best template to contain healthcare spending is more elusive. The Affordable Care Act includes a half-dozen measures calculated to slow rates of health spending.  So, a bipartisan effort to strengthen those measures, perhaps with malpractice reforms to entice conservatives, would be a good place to start. 

These initiatives, by themselves, still won’t be enough.  Economic history teaches us – if only we’d listen – that the recovery that follows a financial crisis is always slow and bumpy, unless policymakers directly resolve the distortions that brought about the crisis.  Many of those distortions in finance and housing linger on.  In finance, the challenge is to get financial institutions to divest themselves of their remaining toxic assets and, equally important, further limit the impulse of these institutions to speculate in exotic financial instruments that remain only lightly unregulated, like a hedge fund.  The political resistance will be daunting, of course.  But the economics is clear: Until such changes occur, Wall Street will not focus sufficient resources towards supporting home-grown business investment.    

The challenge in housing is as difficult politically, though technically less complicated.  Across the nation’s five largest mortgage holders, almost 12 percent of all mortgages were in serious trouble at the close of last year.  Some 6.5 percent of all mortgages were delinquent, another 1.6 percent of them were in bankruptcy proceedings, and 3.6 percent were in foreclosure.  So long as these rates are abnormally high, especially foreclosures, housing values will be weak – and the primary asset of most U.S. households will languish.  Even worse, a weak housing market consigns most homeowners to stagnate economically or even grow steadily poorer; and that means they will consume less and the recovery will continue to be stunted.  One sensible approach would be a new federal program to help people avoid home foreclosures through government bridge loans – like student loans -- made available until the job market recovers. 

This year’s budget debate will probably follow a now-familiar and sterile course, in which the President offers his plan, which is promptly met with partisan invective, followed by personal attacks from all sides.  For average Americans to see their economic prospects really improve, progressives will have to forgo the partisan fights and instead use the Obama proposal to start a new public conversation, one focused on the challenges and changes necessary to get this economy back on track.  

This post was originally published on Dr. Shapiro's blog

Why We All Have to Worry about Cyprus

With Europe’s brazen mismanagement this week of the banking collapse in Cyprus, the Euro crisis moved closer to farce and, potentially, closer to a serious problem for the rest of us. Over the past three years, as global investors have periodically fled the government bond markets of Greece, Portugal, Ireland, Spain and Italy, Eurozone leaders have grudgingly spent $650 billion bailing those countries out. The whole point of these bailouts has been to protect the solvency of the European banks that hold most of the bonds of those countries, including any of the leading banks in Germany and France. Yet, last week, when the two major banks in tiny Cyprus needed a modest bailout of $13 billion to hold the Eurozone together, European leaders proposed that all of the banks’ depositors help pay the bill. In short, they were prepared to tear up the EU pledge of deposit insurance, the last defense against nationwide bank runs.

Luckily, the people of Cyprus said no. Yet, this Tuesday, Eurozone finance ministers came up with a new way of restructuring the ailing Cypriot banks that will still mean large losses for their large depositors, as a condition of the latest bailout. So now, the next time global investors lose confidence in the bonds of, say, Italy or Spain, the banks across Europe that hold those bonds may face waves of withdrawals by their largest depositors. That could bring on the kind of far-reaching financial crisis which the bailouts were designed to head off.

From the vantage of Berlin or Paris, the new deal is certainly appealing in broad, if crude, political terms. European voters get the satisfaction of forcing the well-heeled depositors of the failing banks to pay a price, along with those banks’ investors. And many of those depositors aren’t even Eurozone citizens: Instead, they’re hyper-rich Russians, including at least 80 oligarchs who looted much of their country’s economy and then shifted their proceeds to foreign accounts. They didn’t choose Cypriot banks for their investment expertise, since the bankers sunk much of the deposits in Greek sovereign bonds, the world’s worst investment. They chose Cyprus because it’s a traditional tax haven with very low taxes and strict bank secrecy laws. Old times may also have played a role with many of the oligarchs, since Cyprus was once the KGB’s favorite listening post on the Middle East.

The global economics of the deal, however, are simply terrible. Large depositors account for a tiny fraction of all Cypriot bank accounts, but more than half of all Cypriot bank deposits. It’s a pattern seen almost everywhere, including the United States. Here, bank accounts of $250,000 or more account for less than one-half of one percent of all bank accounts, but nearly one-quarter of total bank deposits. In normal times, our own deposit insurance limits the amount subject to its guarantee at $250,000. But when confidence in banks is fragile or failing, the government always steps in to guarantee all deposits. That’s just what the Treasury and FDIC did in September 2008, to prevent a run on American banks by large depositors that would have spread the crisis across the U.S. banking system. That unlimited guarantee remained in place until our financial system was stable and healthy again, ending only at the end of last year.

Eurozone leaders have ignored these basic tenets of deposit insurance. Instead, they have sent a troubling message to large European depositors: Even in a financial crisis, large accounts are no longer safe. So, the next time that global investors begin selling off Italian or Spanish government bonds, threatening the solvency of the banks holding those bonds, we could see a run by large depositors not only in Italy and Spain, but also across Germany and France. And that would set off a new financial crisis that could trigger a downward spiral across much of world – including here in America.

Moreover, it seems that unnecessary economic mistakes have become the new norm. Austerity programs for economies struggling with weak recoveries, both here and across much of Europe, are the most common example. That’s why the Eurozone, taken together, has been in a recession for nine months; why Britain’s GDP has declined in four of the last five quarters; and why even the German economy has been contracting since at least last October. And an extended downturn in Europe only increases the likelihood of renewed government bond problems in Italy or Spain which, given this mismanagement of deposit insurance in Cyprus, could spiral out of control.

These are not the only examples of inane economic policy thinking these days.

Paul Krugman this week, for example, offered a defense of capital controls, citing how the movement of funds in and out of national markets can destabilize economies. But the issue is not the unfettered movement of funds across global markets. In fact, those capital flows have been a key factor in the strong performance of many developing economies, as well as our own economic stability. Rather, the problem lies in what financial institutions do with those funds and the willingness of governments to enforce sensible limits on what they do. In the end, the spectacular stupidity of Eurozone leaders this week may be just the most recent and dangerous example of how politicians manage to miss the most obvious and important economic point.

 

This post was originally published on Dr. Shapiro's blog

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