This morning’s employment report makes the President’s case that the economy is not only strengthening, but has been for some months now. The unemployment rate fell to 7.8 percent; and this time, it was not because more people dropped out of the labor force. The number of discouraged workers or people “marginally attached” to the labor force actually declined. Rather, the bullish numbers come not only from creating 114,000 net new jobs in September, but from stronger job creation in July and August than originally reported. Job creation was revised upward from 141,000 to 181,000 for July and up from 96,000 to 142,000 for August. In addition, the average hours worked was up, and so was average hourly pay.
The Labor Department actually collects the jobs data in two ways. The Census Bureau surveys business establishments, which produces the numbers above. It also surveys households, and the household survey is usually more bullish than the establishment survey. This month was no exception. It found that the number of unemployed fell by 456,000 in September and total employment rose by 873,000. Now, some 600,000 of those newly employed people found only part-time work, so the increase in those employed full-time last month was about 270,000 according to the household survey. When the establishment and household surveys diverge this much, it usually means that a revision is coming down the line, just as we saw this month for July and August. It is a good bet that in early December, we will learn that under the establishment data, employment last month rose not by 114,000, but by closer to 140,000 to 160,000.
The jobs picture is improving, because the elements of a stronger expansion finally are coming together. Household debt has largely returned to normal levels and housing prices have stabilized, and both are bolstering consumer demand. Next, we should see business investment strengthen in response to the stronger consumer demand. In fact, conditions would be even better, but for the rest of the world. For the first time in years, the biggest drag on the American economy is coming not from the after-shocks of the 2008-2007 financial meltdown, but from a new recession in much of Europe and economic weakening in China.
The press may not yet realize it, but last night’s debate actually made a little news: Mitt Romney no longer has a tax plan. For more than a year, he has promised to cut all tax rates by 20 percent. When the President noted that the non-partisan Tax Policy Center has calculated that such rate cuts would cost $4.9 trillion over 10 years, Romney responded with a new promise to not let his tax plan increase the deficit. That means the $4.9 trillion will have to come from closing or reducing deductions, such as mortgage interest and state and local taxes. The Tax Policy Center study assumed the same, and then calculated that there isn’t enough money in deductions for high-income people to fund their 20 percent rate cut. That is why the Center concluded that Romney’s plan would result in net tax increases for the middle class.
To counter those facts, Romney last night said that he wouldn’t reduce the overall income taxes paid by the wealthy. Since their deductions can’t pay for their rate cuts, that means that their 20 percent rate cut won’t happen either. Similarly, funding a 20 percent rate cut for middle-class households would require terminating all of their deductions, from home mortgages and child care to college tuition and charitable contributions. Since Romney would never support ending those deductions for middle-class households -- and even if he did, it would never happen – it means that their 20 percent rate cut also can’t happen. As the President confronted Romney with basic arithmetic, the basic elements of the Romney tax program unraveled, one by one.
For more see this recent essay by Rob, "Mitt Romney Is Just Not Ready To Be President."
For a candidate running for president on promises to reform taxes and entitlements, Mitt Romney provided evidence this week that he understands little about either taxes or federal transfer programs. Here is what he said: 47 percent of Americans are “dependent” on government transfers. They are the same 47 percent of Americans who pay no income taxes. And nothing he might do or say in his campaign will convince that 47 percent of the country to “take personal responsibility and care for their lives.”
To begin, those who do not pay federal income taxes — 46 percent last year, but in normal economic times, about 40 percent of the country — are not the same people who receive transfer payments. Generally speaking, about one-third of Americans who pay no income tax do not receive any transfer benefits. They are too young to collect Social Security or Medicare, and they are not poor enough to collect Medicaid or welfare. Then there is the flip side: About 40 percent of those who receive transfer payments also pay income taxes. Americans who collect Social Security and Medicare, the vast bulk of federal transfer payments, are distributed across the income distribution. In fact, the average household in the top 1 percent collected $9,000 in those transfer payments in 2009. And incidentally, that $9,000 was only a little less than the average transfer payment collected by those households smack in the middle of the income distribution.
Mr. Romney says these are people who won’t take personal responsibility for their own lives. Among those who receive transfer payments, 70 percent of their payments come from Social Security and Medicare. Those benefits, of course, are available only to working people who paid into the systems from the (via their ?) paychecks. Much of the rest goes to veterans and to students receiving federal loans and grants, also people hardly unwilling to “take personal responsibility and care for their lives.”
If we consider Mr. Romney’s view of personal responsibility from the other direction – those who pay no income taxes – we find that 61 percent of them work for a living, since they pay payroll taxes. In fact, the payroll tax rate they pay, 15.3 percent, is higher than the 13.6 percent income tax rate that Mr. Romney paid last year on his $21 million income. Another 22 percent of those who pay no income taxes are elderly people collecting Social Security and Medicare, again after working for it their whole lives. The remaining 15 percent – equal to 7 percent of the country, not 47 percent — pay neither income nor payroll taxes, because they’re either disabled or desperately poor.
This juxtaposition of payroll and income taxes should alert Mr. Romney that looking at only one form of tax will tell you little about who and how we pay for government. In fact, everyone is a taxpayer when you consider all forms of tax — federal taxes on personal income, corporate income, estate and excise taxes, as well as state and local income, sales, property and excise taxes. Looking at all taxes, the top 1 percent pay out about 29 percent of their total income. That is only a little more than Americans in the very middle of the income distribution, who pay 25 percent of their total incomes in federal, state and local taxes. Even the poorest 20 percent of households pay about 17 percent of their meager incomes in all federal, state and local taxes. These tax burdens hardly describe the free-ride that Mr. Romney attributes to nearly half of Americans.
Although Mr. Romney seems unaware of it, the payroll tax has become the signature tax of American government. Last year, Americans paid about $300 billion more in payroll taxes ($1.4 trillion) than they did in income taxes ($1.1 trillion). In fact, the federal income tax today claims just 11 percent of all personal income. Moreover, among all Americans who work, 86 percent pay more in payroll taxes than in federal income tax. Even among the top 20 percent of households, 54 percent pay more payroll tax than income tax. In fact, 2.3 percent of people in the top 1 percent pay more in payroll taxes than income taxes. That means, of course, that those who pay little or no income tax include some of the country’s wealthiest people.
Most of this week’s commentary on Mr. Romney’s views of taxes, transfer payments and personal responsibility has focused on his political insensitivity. But his views reveal something much more important. He clearly has devoted considerable time and effort to understand how to minimize his own taxes. Yet, through his many years of preparing to run for president, he never bothered to understand the fundamental shape and distribution of American taxes and entitlements, and how they affect everyone’s lives. In a moment of candor that recalls, of all people, Sarah Palin, Mr. Romney has demonstrated he is not yet equipped or ready to be president.
As Published in the Washington Post on August 17, 2012:
Two respected economic advisers to the Romney campaign launched a new line of criticism of President Obama’s economic stewardship on this page this week [“Obama’s faulty math; his economic arguments contradict themselves,” op-ed, Aug. 16]. The case offered by Kevin Hassett of the American Enterprise Institute and Glenn Hubbard of Columbia Business School contained three bold claims.
Two of the three are demonstrably wrong as matters of economics, and the other is off-point.
First, Hassett and Hubbard say that the president has misled the country in claiming that economies that suffer financial crises typically recover only very slowly. Second, they insist that Obama himself didn’t expect a slow recovery, judging by his administration’s initial forecast. And they say that if Obama did expect a slow recovery, he should have known that Keynesian stimulus wouldn’t work under that circumstance.
If this brief were true, it could suggest that the president was befuddled in his early months in office, then lied to promote his stimulus package and now is lying again. But this brief is simply wrong, and as good economists, they should know it.
To refute Obama’s claim about the slow recovery — as well as a recent, landmark study documenting hundreds of disappointing recoveries following financial crises around the world — Hassett and Hubbard cite a less well-known study from the Cleveland Federal Reserve Bank. That study, by Michael Bordo and Joseph Haubrich, found that financial crises in the United States often have been followed by strong recoveries. But the main evidence comes from the long series of financial busts from 1880 to the 1920s. In fact, Bordo and Haubrich note that the three major U.S. financial crises since the 1920s — 1932-33, 1990-91 and 2007-08 — were all followed by notably slow recoveries. Moreover, as Ezra Klein reported in The Post this month, Bordo believes that the slow pace of the current recovery reflects not the president’s policies but the fact that it follows a meltdown in both finance and housing.
The Romney campaign’s notion that the 2007-08 financial crisis should have been followed by a rapid, strong recovery — and, by implication, would have been but for Obama’s policies — ignores other well-known economic evidence. The data show, for example, that the current recovery is comparable to the one that followed the 2001 recession, when Hubbard chaired George W. Bush’s Council of Economic Advisers. In the three years following the end of the 2001 recession, which did not involve a financial crisis, real gross domestic product grew only modestly faster than it did in the past three years. Moreover, in the 37 months since the end of the 2007-09 recession, U.S. businesses created nearly 3.9 million new jobs. Recall that fewer than 1.1 million were created in the first 37 months after the 2001 downturn.
The Romney advisers then criticized the Obama administration for its first economic forecast. Yes, the administration initially predicted a stronger recovery than has occurred. In part that was because administration officials, along with everyone else, underestimated the depths of the precipice the economy had fallen into. The Bush administration made much the same mistake, with much more dire consequences. The Bush team ignored all signs of an impending meltdown and then stood by as Lehman Brothers collapsed, taking AIG, Merrill Lynch and others down as well.
Finally, the Romney advisers claim that if Obama had expected a slow recovery, he should have known that stimulus would produce only a temporary lift, to be followed by a comparable decline. There is an economic theory called “rational expectations”; it holds that stimulus never works. Almost all economists dismiss it because the overwhelming consensus is that stimulus often does work. In any case, there is no theory or evidence to support the peculiar claim that the expectation of a slow recovery will disarm Keynesian stimulus. In fact, within two months of Congress passing Obama’s stimulus, our sickening slide toward a depression halted, and growth and job creation resumed — albeit at the moderate pace characteristic of recoveries following a financial and broader economic crisis.
Yes, growth has slowed periodically since then, but not to anything like the degree the Romney advisers claim. According to their notion, we should be in a deep recession today. In any case, the president asked repeatedly for additional measures to bolster the recovery, which Republicans in the House of Representatives have repeatedly rejected.
Beyond the partisan cherry-picking of economic evidence, the question remains: Could Obama have done anything else to drive a more robust recovery? The history of economic meltdowns suggests that a strong recovery is possible only if you directly address the underlying causes of the crisis. In our case, that meant not only stabilizing the financial markets, which we did, but also taking decisive steps to stabilize housing prices by reducing home foreclosures.
Now, imagine the political firestorm if the president had tried to force banks to refinance the mortgages of homeowners in danger of losing their houses or offered short-term loans to help them meet their mortgage payments until the economy recovered. The president’s opponents can hardly blame him now for not taking steps that they would have blocked in any case.
Once again, the Eurozone debt crisis threatens to suck the oxygen out of the global economy. Two years of austerity across most of Europe continues to produce the predicted effects: We learned this week that Europe’s private sector keeps on contracting. Moreover, global investors began to bail again on Spain, driving interest rates on 10-year Spanish government bonds to an unsustainable 7.6 percent. Greek, Portuguese and Irish public finance faced comparable rates, so they have to rely on bailouts. Yet, there isn’t nearly enough money in those bailout facilities to rescue Spain, too. That’s why this week, Moody’s downgraded its outlook for the region’s strongest economies, Germany and the Netherlands. If anything, that move was cautious. If Spain spirals into default, it would likely trigger a continent-wide banking crisis, followed in all likelihood by a real Depression. It also could upend our own economy on the eve of the election.
It’s a crisis with lots of nubs. For one, Spain is in the middle of the world’s sharpest housing contraction and a recession currently forecast to last into 2014. That what happens when austerity dramatically slows public spending while the nation’s private banks are writing down tens of billions of Euros in mortgage loans gone south. The result is that government revenues have been falling faster than government spending, piling up more debt – and now several of the country’s provincial governments say they also cannot keep on going without major support from Madrid.
That is why foreign investors see a growing risk that, sometime soon, Spain’s government won’t have the money to service its fast-rising debts. The 7.6 percent interest rate on new Spanish debt is the market’s current demand to offset that risk. But unless Brussels and Berlin step in with new, credible assurances for those holding Spanish bonds, the interest rate will keep on rising until everyone begins to dump the bonds. Madrid would have to try to borrow even more money, and if it cannot, a sovereign debt default would quickly follow.
Eurozone leaders have tried to head off all of this, but only through a series of indirect and inadequate measures. The immediate threat from a major sovereign debt default is the collapse of dozens of large banks with large holdings of those sovereign bonds. German and French banks, for example, hold $600 billion in Spanish bonds. The Eurozone could have followed the basic rule of monetary unions, and used the European Central Bank (ECB) to guarantee those bonds in some way. That’s what the Federal Reserve has done for a century here (and the Treasury did it for 50 years before the Fed was created). Yes, it would be harder for the Eurozone to pull that off, since it has no single national government. But it does have a single central bank.
Yet, Angela Merkel has consistently vetoed that course, preferring instead to build a new political and economic environment that could head off future defaults. So, while Greece and Spain slowly sink, with Italy not far behind, Merkel pursues continent-wide banking regulation to discourage future bank runs from one Euro country to another. She also is pushing for continent-wide fiscal arrangements to head off the large deficit spending down the road that can cripple an unproductive economy when bad times strike. For the current crisis, she has agreed to spend €100 billion from the Eurozone to pay the bills of Greece’s government this year. She also has allocated another €100 billion to bail out the balance sheets of Spanish banks. And she has allowed banks in Germany, France, Italy and elsewhere to use their Spanish and Italian bonds as collateral from hundreds of billions of Euros in low-cost loans from the ECB.
This week, the markets rendered their latest judgment on those steps. The sky-high interest rates now in Greece, Spain, and looming in Italy tell us that all of Mrs. Merkel’s handiwork will not be enough to head off a sovereign debt default. The results could be disastrous for many major European banks and the Eurozone economies. How bad could it be? Even before facing final default, Greece has seen its GDP shrink by 25 percent, its average wage fall by nearly 20 percent, unemployment rise past 20 percent, and government pensions cut back 30 percent.
One final word. On this side of the Atlantic, the political season has made every development fodder for campaign attacks. So, we can count on the President’s opponents charging that America under his leadership is following the path of Spain and Greece. That is nonsense. The Eurozone faces a crisis of confidence about the capacity of its less productive economies, burdened by deep recessions and large debt overhangs, to honor their future debts. The irreducible proof is the rising risk premium on new Greek, Spanish and Italian bonds. There is not the slightest hint of such doubts about the United States. The interest rate on 10-year U.S. Treasury bonds is 1.75 percent, less than one-fourth Spain’s level, and actual yields are even lower. And while Europe is deep into a double-dip recession with fast-rising unemployment, we have had more than three years of slow but steady growth and job creation.
To be sure, a European banking crisis triggered by a sovereign debt default, one which spread from Spain to Italy and then across the continent, would almost certainly end our own expansion. American exports to Europe – our largest foreign market -- would fall sharply. American banks would be hit by losses on thousands of investments and other deals that involve European banks which such a crisis will take down. So, in the end, our presidential election could turn on events entirely beyond the influence or control of either President Obama or former Governor Romney. Not even their legions of consultants and operatives, and the stream of billionaires funding the campaign’s television wars, will be able to override the economic consequences here at home of either a full-blown Eurozone meltdown or, for that matter, the successful resolution of the crisis.
If our financial policies were based on recent experience, the debate over government regulation versus self-regulation by Wall Street would be settled. Yet, the refrain that “the big banks know best” remains the default position of most American conservatives and many policymakers. This childlike faith will be tested by the new scandal swirling around some of the most basic interest rates in the global economy, the LIBOR or “London Inter Bank Offered Rates.” This past week, Barclays Bank admitted that it secretly manipulated LIBOR rates for years, all to pad its own bottom line. And Barclays is not some lone, bad apple. Investigators here and in London, Brussels and Tokyo are hard at work looking into reports of similar manipulation by other big players, including Citigroup, Deutsche Bank and J.P. Morgan Chase. This could turn into the largest consumer fraud ever seen.
It will take months for the general public to catch on to what this latest scandal is about. It starts with one basic fact: LIBOR interest rates are not set by the supply and demand for credit, like many other rates. Instead, every morning, representatives of the 18 largest Western banks report on what they would be willing to pay to borrow funds from each other (“Inter Bank”) in the future. Under LIBOR rules, the four highest and four lowest estimates are eliminated, and the average of the rest becomes the official rate. For example, in 2007, the LIBOR rate to borrow three months in the future, in dollars, averaged 5 to 5.5 percent.
LIBOR rates are a very big deal, because they are benchmarks for countless other interest rates. The majority of adjustable rate mortgages, for example, are set at a LIBOR rate plus 2 or 3 percentage points. So are millions of student loans, auto loans, and credit card finance charges. LIBOR rates also are used to set or reset small business loans, futures contracts, and interest rate swaps. All told, an astonishing $360 trillion in loans around the world are indexed to LIBOR. That is more than five times the value of the world’s entire GDP this year.
One reason that LIBOR has such a far reach is that there are numerous LIBOR rates for different purposes. Each rate has a time frame – rates for loans one day from now; one month, three months and six months out; one year, five years and ten years from now, and so on. There are 15 such time frames, all told. In addition, separate LIBOR rates also are provided for dollars, Euros, yen, and seven other currencies. The integrity of these LIBOR rates, however, depends entirely on the honesty of banks reporting the rates they actually would be willing to pay. Inevitably, we got what we should have expected.
So, when Barclays (and almost certainly others as well) had investments that paid off, or simply paid off more, when interest rates rose, it simply reported a higher figure to LIBOR in order to nudge up the average. And that usually led to higher interest rates for millions of other businesses and people with loans indexed to the LIBOR. Sometimes, it worked the other way. In late 2008, Barclays (and probably others) low-balled the rates they reported for LIBOR averaging. The purpose was to make themselves look more sound than they actually were, since they would be willing to borrow only at low rates. They presumably figured that might reassure their shareholders and perhaps even dampen public demands for tighter regulation.
For several years, academics and a number of market followers warned that something funny was going on with LIBOR. The evidence was not hard to find For example, the “spread” or difference between U.S. Treasury rates and LIBOR rates for loans of the same time frame began to widen. From 2000 to 2006, LIBOR rates averaged one-quarter of one percentage point above Treasury rates, and the two rates moved up and down together in lock step. In 2007, however, that spread more than doubled to nearly two-thirds of a percentage point, and their movements up and down did not track each other so closely. By 2008, the difference in the rates was five times what it was in 2000-2006, averaging 1.3 percentage points, and the up-and-down movements of the two rates no longer tracked each other.
All of the obvious parties that might have done something about it – the Fed and the SEC, for example, or the Financial Services Authority in Britain – apparently looked the other way. This tolerance for sub rosa interest rate manipulation has cost millions of ordinary Americans and Europeans a great deal of money. Early analysis suggests that for several years, the LIBOR was off by an average of 30 to 40 basis points. (100 basis points equal one percentage point in an interest rate.) That is enough, for example, to add $300 to $400 to the annual cost of a $100,000 loan.
In 2007 and 2008, Americans held $11.1 trillion in outstanding residential mortgage debt. At the time, between 30 percent and 40 percent of that debt carried adjustable rates. If the bankers’ manipulations of the LIBOR was responsible for raising LIBOR rates by just 20 basis points in that period, their shenanigans added between $6.6 billion and $8.9 billion to the yearly interest paid by American homeowners. And those mortgages account for less than one percent of all of the financial assets and instruments affected by manipulated LIBOR rates.
LIBOR hearkens back to a time when finance operated like a gentlemen’s club, and its leading members behaved honestly. That is a universe away from the current Wall Street culture and behavior. They take out bets and pay themselves fortunes for doing so, even when they cannot make good on those bets without taxpayer bailouts. They create securities they know are likely to fail, on behalf of clients prepared to bet against those instruments – and then pawn off the same securities on other clients as safe investments. And now, we also know that when they bet on interest rates rising or falling, they stacked the LIBOR deck to nudge rates in the direction that made them money. And they left everybody else with the bill.
So long as big finance will do almost anything to goose its own profits and bonuses, “self-regulation” is a dangerous myth. It should give way to sound law enforcement, which in economic terms means more government regulation.
I spent much of last week in Geneva, Switzerland. Even in that city of global institutions, in the European country most untouched by the continent’s sovereign debt crisis, most conversations found their way to hand-wringing over Europe’s economic decline. As the Eurozone governments struggle to save their common currency, it is increasingly clear that the misguided austerity policies of many European governments have exacted large tolls on employment and growth. Moreover, Europe’s economic problems will last much longer than the current debt crisis, even if it ends better than anyone now imagines. One reason is that capital investment, the foundation of future growth, has been depressed since the crisis of 2008-2009.
With capital investment persistently slow across most of Europe, political and economic leaders need to ask themselves, where would additional investment produce the greatest benefits? One part of the answer is the same for Europe as it is here, in the United States. Perhaps the single most important area of investment today lies in the telecommunication infrastructure, networks and devices on which business and social activity increasingly rely. Earlier this year, NDN issued a new study I wrote with Kevin Hassett of the American Enterprise Institute on one aspect of this development. We investigated the impact on job creation in the United States associated with the transition from 2G to 3G infrastructure and devices. We found that this shift created almost 1.6 million jobs from April 2007 to July 2011, even as overall U.S. employment fell by nearly 5.3 million jobs over the same years.
The current transition to 4G networks and devices should produce a similar economic bounce, so long as the necessary policies and capital investments are there to help drive it. For example, since 4G involves more intensive data streams, the transition requires additional spectrum. It will take strong White House leadership to ensure that the private investment needed to build out more spectrum and related, next generation IP broadband infrastructure are available to support 4G services. In the process, these advances will promote the President’s larger goals of a strong recovery, job creation and universal broadband.
Like the economy they enable, these technologies are inherently global. So, the same dynamics apply to Europe, even in its current straits. Throughout much of the 1990s, Europe had a real edge over the United States in advanced telecommunications, especially in the mobile or wireless space. That is no longer the case. Europe’s transition to 4G, for example, has been much more rocky than ours. In its latest Digital Agenda report, the European Commission noted that while people and businesses in Europe “are generating enough digital demand to put Europe into sustainable economic growth,” this potential is undermined by a “failure to supply enough fast internet, online content, research and relevant skills.”
Two years ago, the European Union set a goal of doubling its public investments in advanced telecommunications facilities and skills by 2020, which assumed annual growth in these areas of about six percent. So far, the actual growth has averaged just two percent. Moreover, private capital spending on 4G infrastructure across Europe also has lagged the United States. In 2011 and 2012, American telecom companies invested more than $25 billion per-year in wireless facilities alone. Yet, since 2007, comparable investments across the European Union, with a GDP slightly larger than ours, have been 15 percent to 40 percent less than in the United States. In response, European Digital Affairs Commissioner Neelie Kroes, warned recently, “Europeans are hungry for digital technologies and more digital choices, but governments and industry are not keeping up with them. We are shooting ourselves in the foot by under-investing.”
The substantial effects on employment which we documented from the transition from 2G to 3G, and now from 3G to 4G, are signs of larger dynamics at work. Across professions, industries and nations, Internet technologies have become integral parts of most economic activities and operations. Moreover, with the advent and dispersion of 4G technologies, wireless Internet has begun to assume a pivotal role in these operations and activities. National policy and business strategies ignore these developments only at great cost.
To be sure, both Europe and the United States face special and more immediate challenges today, which neither has yet mastered successfully. But the task of promoting investment in 4G infrastructure and networks is well within the capacity and understanding of all modern governments and businesses, and should be a national priority. Fifteen years ago, in the transition to 2G, the United States followed Europe’s example, to America’s benefit. Today, it is Europe’s turn to follow our spectrum policies and investment strategies.
Presidents regularly get the credit or blame for developments beyond their control. Sometimes, they also get no credit or blame for the decisions they do take. Barack Obama fits both molds. A fresh example of the second pattern is the President’s surprising semi-breakthrough on European debt, at this week’s G20 meeting in Los Cabos, Mexico. For months, President Obama and Treasury officials have quietly urged Eurozone leaders to do what it takes to avoid a sovereign debt meltdown, before they tackle long-term reforms. This week, it looks like it might pay off. According to reports, Obama emerged from a private huddle with German Chancellor Angela Merkel with her grudging agreement to use Eurozone funds to directly support Spanish and Italian bonds. For the first time since the crisis began more than two years ago, the country with the deepest pockets has tacitly agreed to stand behind the full faith and credit of its member countries. If these reports are true, this week’s agreement should hold off a full-blown debt crisis for a while, and with it the prospect of a deep global recession this year. Yet, how many Americans will give Obama any credit for all this, come November?
In a similar fashion, Mr. Obama inherited an economy seized by an historic financial meltdown. His predecessor mismanaged the crisis so badly that it drove the country into the worst recession in 80 years. Steeling himself against opponents united only by their partisanship, the President unleashed a flood of fiscal and monetary stimulus to arrest America’s downward spiral towards genuine depression. Six months later, growth resumed and private employment began to increase. Yet, in November, how much credit will voters give the President for avoiding the worst case scenario?
Instead, the President finds his reelection threatened by an economic reality he can do little to change — namely, that an economy shaken by financial crisis usually recovers very slowly. In principle, to be sure, his administration might have done more to overcome the economic drag he inherited from Bush. He might have pressed harder to stabilize the housing market with short term loans for homeowners facing foreclosure. He might have tried harder to nail down a grand bargain for long-term fiscal balance.
But the President also recognized the new political reality following the 2010 elections. However hard he pressed or pushed Congress, neither deal was possible with Tea Party members calling the shots in the House, and Tea Party activists threatening to take down any Republican willing to work with the “enemy.” Obama did successfully block the hard right program of slash-and-burn budget austerity, which almost certainly would have plunged the economy back into recession, as it did in Britain. But once again, come November, how much credit will he get for avoiding another downturn?
This President has shown that he can take care of himself politically. He may not be able to point to the dismal hand he inherited from Bush, at least not without seeming to whine. But he can point voters to the numerous troubling aspects of Romney’s economic record in Massachusetts and Bain Capital. Obama also has the political advantage in many policy areas, since the public generally favor his approach to taxes, Medicare and Medicaid, higher education, and the deficit.
Unhappily, however, the economy is still far from safe and sound. This week’s news from the G20 meeting will not settle the Eurozone’s economic problems. That leaves the President’s reelection still hostage to the sovereign debt crisis. On top of the Obama-Merkel meeting of minds, the other good news is that Greece’s new government should be able to avoid a precipitous default and chaotic exit from the Euro. Eventually, Greece almost certainly will default and leave the Euro, but hopefully not before the Eurozone has prepared for it.
The question remains, then, of what additional arrangements Frau Merkel will accept to reassure international investors that Spain and Italy will not follow Greece’s path. Time is short, because Europe is already in recession, and such deals are usually pricey. Moreover, at this moment, European leaders cannot even agree on whether the next step should be uniform banking regulation, a fiscal union, or expanded political authority for the Eurozone. All of these measures are important for the Eurozone to become a stable economic entity. But first, the Eurozone has to survive. That will require what the President has called for all along – measures such as Eurobonds or central bank authority to guarantee that after Greece, no other Eurozone country will ever have to default.
Since late 2008, NDN and I have urged Congress to help Americans stay in their homes by taking steps to reduce foreclosure rates and stabilize housing prices. These recommendations reflected basic economics: The worst recession in 80 years would inevitably exacerbate the housing bust as abnormally high foreclosure rates drove down housing values. This, we predicted, would leave all American homeowners poorer. Moreover, this “negative wealth effect" would dampen both consumer spending and business investment, producing a persistently slow expansion. Congress refused to take steps, and unfortunately we were right about the results.
Today, the Federal Reserve confirmed the negative wealth effect we have warned about. The Fed calculates that U.S. families' median net worth fell by nearly 39 percent from 2007 to 2010. Average net worth, which is pulled upward by high-net-worth people at the upper end of the spectrum, also fell by nearly 15 percent. Moreover, the decline in people’s home equity accounted for 82 percent of the decline in the total median net worth of American homeowners.
Congress must finally act to relieve these pressures. American taxpayers today own Fannie Mae and Freddie Mac. One step Congress could take would be to direct Fannie and Freddie to provide temporary bridge loans to homeowners whose mortgages they hold and which are in danger of foreclosure. To be fair to all homeowners, those who accept these loans would return to the taxpayers 20 percent of any eventual capital gain, in addition to repaying Fannie and Freddie for the loans. This simple measure will help stabilize everyone’s housing prices and stem the negative wealth effect, producing at last a much stronger and more sustainable expansion.
Update - Watch Rob talking about the report on the NewsHour tonight! (SR)
With the presidential election turning on the economy, the debate has focused on what’s right or wrong with the current recovery, and who’s responsible. They agree that growth is too slow and deficits are too high; and unsurprisingly, President Obama blames the GOP for both while Mr. Romney blames the President. The President’s arguments are stronger, especially given Romney’s risible claim that he can balance the budget and cut taxes another $5 trillion at the same time. The larger point is that the high deficits and tepid expansion are legacies of the financial meltdown, and resolving them would only allow economic policy to finally move past 2008-2009. The next stage of the economic debate, then, should focus on the two critical issues that have bedeviled middle-class Americans for more than a decade — namely, historically-slow jobs growth, and stagnating incomes.
A presidential campaign can accommodate only a handful of big ideas. Here, then, are three new policy initiatives to help reignite job creation and income gains: 1) reduce the cost of creating new jobs by reforming payroll taxes; 2) restore the foundation for middle-class wealth by stabilizing the housing market; and 3) enable everyone to become more productive by providing universal, low-cost access to college education and worker training.
Tax reforms offer the best way to reduce the cost of creating new employment and keeping those already employed in their jobs. The focus of such reforms is not the tax on corporate profits. Yes, the corporate tax is an inefficient mess, but reforming it will do little for those looking for work. The right target for job creation is the payroll tax, because it directly increases the labor costs of every employer. The idea here is to stimulate job creation and employee retention by cutting the employer side of the payroll in half, and on a permanent basis. And we can replace the revenues lost to Social Security with a carbon-based pollution tax.
The second idea could help address slow job creation and the slow expansion, as well as widening inequality. Employers have been creating relatively few new jobs not only because of the cost of doing so. Employers also are not confident about when Americans will begin to spend again like they used to, creating the demand for the goods and services which additional workers could produce. The simplest way to boost demand is more budget stimulus – and good luck with that. A more efficient way, however, is to remove any factors holding back normal consumer spending. It’s not unemployment, with the jobless rate already down from 9.8 percent to 8.2 percent. Rather, what continues to hold back tens of millions of consumers is the hard fact that the housing bust has left them substantially poorer.
So far, the bust has cost most homeowners one-third of the value of their homes. This is a big deal economically, because home equity is the main form of wealth or saving held by most of the middle class. Consider the following: The bottom 80 percent of Americans, measured by income, own just 7 percent of the value of the country’s financial assets – but they also hold 40 percent of the value of all residential real estate. The sharp drop in housing values, therefore, wiped out most or all of the home equity built up by tens of millions of Americans. Before most people begin spending again at the rate required to boost business investment and hiring, housing prices have to stabilize and begin to move up.
Washington spent more than $1 trillion to stabilize the financial markets, which generate most of the wealth of the top 1 percent to 20 percent of Americans. For much less, we can stabilize the housing markets which generate the wealth of everybody else. The most direct way to do this is to keep people in their homes by bringing down the current abnormally-high foreclosure rates. Fannie Mae, which taxpayers now own, could extend low-cost, two-year loans to millions of homeowners facing foreclosure. The funds could be used only for mortgages held by Fannie Mae. And to control the moral hazard lurking in such relief, 20 percent of any capital gain earned from eventually selling those homes would go back to taxpayers.
The third initiative would ensure that everyone can build the skills needed to earn a rising income by providing low-cost access to college education and worker training. First, we could replace student loans with an expanded and upgraded form of national service: Two years of service in the military or the Peace Corps, or three to four years service in Americorps, would earn any young person in-state tuition at a public college or university for four years. Young people considering college would be asked to give something of themselves back in service to the country, and would no longer have to face huge debts that can take decades to work off. In addition, every working American should have access to additional training in the information technologies integral to virtually all industries and jobs. The plan here is one that Mr. Obama supported when he was in the Senate – provide grants to community colleges to keep their computer labs open and staffed in the evenings and on weekends, so any adult can walk in a receive free instruction.
This agenda is forward-looking rather than present-oriented, so it does not address the deficit. In truth, everyone knows perfectly well what to do about it. Simpson Bowles, Domenici-Rivlin, the Senate Gang of Six all rely on the same formula: Raise new revenues, reform Medicare and Medicaid, cap discretionary spending, and reduce defense spending. This approach, which President Obama supports, broke the deficit logjams in the 1980s under Ronald Reagan and the 1990s under Bill Clinton. The only thing standing in its way today is the intransigence of extreme conservatives who would rather see the U.S. default on its sovereign debt than consider raising taxes. We can only hope that the public will continue to rally around this balanced approach and convince House Speaker John Boehner and Senate GOP leader Mitch McConnell. Once that is done, we can turn to the real business of restoring jobs and income gains.