A 21st Century Economic Strategy for America

Statement on Today's Deficit Numbers and the Bernanke Reappointment

Below, please find my comments today on the reappointment of Federal Reserve Chairman Ben Bernanke and the new OMB report estimating that the deficit will reach $9 trillion over the next decade.

On the new OMB estimates:

The new numbers today from the Office of Management and Budget remind us that short term and long term deficit projections are very uncertain. What is equally certain is that the economy needs stimulus today, whatever the short term cost to the deficit, as well as sharp reductions in long term deficits. Those long-term reductions have to form the basis for the other reforms in health care, energy, education and training which our economy and nation need. Addressing both of these tasks remains the administration’s most important domestic challenge.

On Chairman Bernanke's reappointment:

Chairman Bernanke did not see this crisis coming, but he steered the economy well once it arrived. The country still needs his wisdom, because this crisis is not over. Our large financial institutions remain fragile, as they continue to hold most of the toxic assets which brought down other financial giants. The economy remains vulnerable to additional shocks from the financial system, including the deteriorating commercial real estate markets. Foreclosures continue to rise, which in turn drain more of the value of the mortgage-backed securities still held by financial institutions. The only reason we haven’t seen greater effects is that we suspended their mark to market accounting. But underneath the bookkeeping, these problems remain serious. All of this portends a very challenging economic environment and the prospect of a difficult recovery. The President was right to opt for continuity in the face of this large and critical agenda, which we hope Chairman Bernanke will help resolve.

Senator Chuck Senator Schumer Offers Bill Based on NDN Proposal to Increase Workers' Skills through Free Computer Training

U.S. Senator Chuck Schumer (NY) yesterday introduced a companion bill to one sponsored by U.S. Rep. John Larson (CT-01), Chairman of the House Democratic Caucus, that taps the resources of the nation's approximately 1,200 community colleges to offer free computer training to workers and others seeking to improve their IT skills.

The Community College Technology Access Act of 2009 – S. 1614 and H.R. 2060 - is based on a paper written in 2007 by NDN Globalization Initiative Chair Dr. Robert Shapiro, Tapping the Resources of America’s Community Colleges: A Modest Proposal to Provide Universal Computer Training. During the presidential campaign, then-U.S. Sen. Barack Obama endorsed the idea as part of his platform and, as President, recently announced the American Graduation Initiative, which includes a massive investment in the nation’s community college system.

As Shapiro wrote in his 2007 paper:

The typical community college computer lab is open and used by students 66.5 hours per week. These hours are highly concentrated in the daytime of weekdays, when most working people are on their jobs. Under our proposal, the federal government would provide grants to defray the costs of keeping these labs open and staffed by community college instructors an additional 30 hours each week, on evenings and weekends when these labs are generally closed or little-used. During those hours, any person would be able to walk in and receive instruction in computer-related skills, at no cost. We estimate that if two-thirds of community colleges participate, and each provides three instructors for 30 hours a week, 48 weeks a year, Congress could provide every worker in America access to IT training for about $125 million a year.

Said Schumer, the Vice-Chairman of the Joint Economic Committee, "Anytime that we can increase opportunities for our workers to gain access to computers and IT training, we are investing in the future of our job market and our economy. Our community colleges play a critical role in workforce training, and this program will enable workers and students to access community college computer labs for free during times when they would otherwise go unused. I am proud to have introduced this legislation in the Senate to help brighten the future of our workers and our community colleges."

"In joining with Chairman Larson to sponsor this legislation, Senator Schumer has again shown that he understands the need to move aggressively to provide America's workers with the skills to succeed in the competitive U.S. and global economies, particularly during tough economic times," said Shapiro, a former Under Secretary of Commerce for Economic Affairs. "The Community College Technology Access Act presents the country with a vision for helping every worker who wants to get ahead. Tens of millions of Americans entered our workforce before computers and the Internet became ubiquitous. Many of them now are in what could be their most productive and highest- earning years. Without access to information technology skills, however, many of them will never fulfill their potential or may find themselves trapped in dead-end jobs.  As non-wired employment becomes increasingly rare, Americans without solid IT skills will find themselves economically marginalized. This program can help millions more American workers thrive in our idea-based economy."

For more on NDN's efforts on worker skills and facility with the global communications network, visit our 21st century skills page.

California "Always" Liberal? Ross Douthat Must Be Dreaming

In yesterday's New York Times, conservative columnist Ross Douthat accuses President Obama of "pushing a blue-state agenda during a recession that’s exposed some of the blue-state model’s weaknesses, and some of the red-state model’s strengths."

Asking readers to consider California, which he places against the stellar conservative governance of Texas, Douthat notes:

California, always liberalism's favorite laboratory, was passing global-warming legislation, pouring billions into stem-cell research, and seemed to be negotiating its way toward universal health care.

(his link points to a Time article about Arnold Schwarzenegger's work in this area, who, last I checked, has an R and a 28 percent in state approval rating next to his name)

While California is undoubtedly a national leader in trends of all stripes, understanding the legacy of California governance as being "liberalism's favorite laboratory," couldn't be more wrong. The reasons for California's epic struggles lie, not in the "always liberalism" that Douthat sees, but instead in the Ronald Reagan conservative tax revolt coming home to roost.

In contrast to, say, California's efforts on energy policy, which research shows have created prosperity in the state over the last generation, the tax revolt defining Proposition 13 destroyed a top notch public schools system and, more recently, rendered the state bankrupt. The 1978 ballot initiative, which capped property taxes and mandated a 2/3 rule for the state legislature to pass a budget, has created a structural shortfall in the state budget and a political inability for legislators to craft a solution -- but Douthat doesn't see fit to mention it.

Conservatives love to argue that California has incredibly high tax rates, and, in the case of some specific taxes, that's true. But that's only because Proposition 13 so drastically lowered property taxes as to necessitate raising taxes to compensate for lost revenue. As Ezra Klein, in discussing Robert Samuelson's op-ed on California (which, like Douthat's piece, conspicuously fails to mention Prop 13), notes this morning:

Total state and local taxes take up 11.73 percent of the average Californian's income. The national average is 11.23 percent. And it's been like that for many years:

CAtax

Far from being "always" liberal, California's electoral votes were supposed to be safe for Reagan's Republicans, giving them a generational lock on the White House. Here again, California was ahead of the nation, this time in discovering that conservatives couldn't govern and is now as deep blue as the Pacific Ocean.

Now that the nation has learned its lesson from eight years of red-state governance under Douthat's vaunted Texas leadership, America followed California, this time for the better, in overwhelmingly rejecting failed conservative governance. Blue-staters (a lot of folks these days) have only had six months on the job after eight years of botched "red-state" governance. It will be a lot longer than that if conservatives like Douthat can't even figure out where they went wrong; Proposition 13 was certainly one of the first places.

Update: Ezra Klein just blogged on Douthat's column as well. He does a nice job taking down the argument that Texas is a good model for anything and the broader red-blue frame that Douthat tries to use.

President Obama's Weekly Address Focuses on GDP Numbers, Recovery Act, New Foundation, and Innovation

In his weekly address, President Obama discusses the impact of the Recovery Act on recent GDP numbers and the New Foundation. He sees innovation as a key piece of that New Foundation. Here's what the President had to say about employment, a lagging economic indicator:

But history shows that you need to have economic growth before you have job growth.  And the report yesterday on our economy is an important sign that we’re headed in the right direction.  Business investment, which had been plummeting in the past few months, is showing signs of stabilizing.  This means that eventually, businesses will start growing and hiring again.  And that’s when it will really feel like a recovery to the American people.

And innovation:

Innovation has been essential to our prosperity in the past, and it will be essential to our prosperity in the future. But it is only by building a new foundation that we will once again harness that incredible generative capacity of the American people. All it takes are the policies to tap that potential – to ignite that spark of creativity and ingenuity – which has always been at the heart of who we are and how we succeed. At a time when folks are experiencing real hardship, after years in which we have seen so many fail to take responsibility for our collective future, it’s important to keep our eyes fixed on that horizon.

Watch the whole thing for yourself:

Changing American Behavior Around Debt Likely to Slow Chinese Growth

Michael Pettis, a Peking University professor who I had the good fortune to meet as part of a college program in Beijing, writes in the Financial Times that it's time to get ready for lower Chinese growth. Pettis spells out the change that is likely to occur and hints at ramifications for policymaking in China and beyond:

For 20 years, and especially in the past decade, rapidly rising debt has allowed America’s consumption growth to exceed economic growth, with a concomitant rise in the country’s trade deficit. One consequence of this too-rapid growth in American consumption has been that the non-US global economy was able to grow faster than non-US global consumption. This was especially true for Asia, the main beneficiary of the US consumption boom, and for China in particular.

While Chinese consumption was growing at an impressive 9 per cent a year over the past few years, Chinese gross domestic product growth substantially outpaced it, clocking in at 10 per cent to 13 per cent annually. China was able to do this in large part because as it poured resources and cheap financing into manufacturing, and in so doing produced many more goods than Chinese households and businesses were able to consume, the balance was exported abroad, where much of it was absorbed by US consumers.

But everything has changed. Whether America likes it or not, US debt levels will decline over the next several years. As a result American consumption will grow substantially slower than the US economy, and so the trade deficit will decline. For the rest of the world, even ignoring the possibility of a decline in global investment, a contraction in the US trade deficit will bring with it a period in which economic growth will be less than consumption growth.
...

Over the next five years or more Chinese economic growth will necessarily be lower than growth in Chinese consumption. The massive but unsustainable investment in infrastructure and new production facilities that characterises the Chinese fiscal stimulus package will not be able to change this fact. From its dizzying heights during the past two decades, the world needs to prepare itself for a decade during which, if all goes well, China grows at a still respectable but much lower rate of 5-7 per cent. If the current fiscal stimulus package retards China’s adjustment process, as many analysts argue that it does, growth rates may be much lower.

The Council of Economic Advisors, the National Economic Council, and many others have told us that the American economic recovery will export driven. It seems that, for the sake of the economic future of both the U.S. and China, policymakers need to thing about getting as many of China's 1.3 billion people into the (low-carbon, sustainable) consumption game as possible. For more on China and the U.S.-China Strategic and Economic Dialogue, take a look at pieces from Michael Moynihan and Robert Shapiro this week.

Oh, and you should certainly buy the newly released, paperback version of Shapiro's Futurecast, which focuses a great deal on China.

Rob Shapiro's Futurecast Released in Paperback

NDN Globalization Initiative Chair Dr. Robert Shapiro's important book Futurecast: How Superpowers, Populations, and Globalization Will Change Your World by the Year 2020 has been released in paperback. It's a great book, but don't take my word for it, read it for yourself. Some other strong references:

"[Shapiro’s book] is a storm warning at a time when food shortages, higher energy prices and a credit crunch are forcing our heads out of the sand: if readers turn to Futurecast, they will find an argument that gives us a measure of what we should expect from our political leaders - and from ourselves - if we are to continue our civilization on the high plateau we have managed to reach." --The Financial Times

"Rob Shapiro's prescient and insightful book probes the confluence of challenges that society will face in the coming years. He argues that our world has become increasingly interdependent, and we must foster global cooperation to achieve a sustainable existence with equal opportunity for all. Futurecast is a vital resource for anyone seeking to understand the world our children will inherit." -- President Bill Clinton

Futurecast

What's Next for the American Economy with Jagdish Bhagwati and Robert Shapiro

Please join leading economists Jagdish Bhagwati and Robert Shapiro at NDN for a discussion of the challenges facing the American economy. This is the first in a series of discussions on this important and timely topic to be led by NDN Globalization Initiative Chair Robert Shapiro. Bhagwati, a leader in international economics, will join NDN to discuss the ongoing Great Recession, America's place in the global economy, and the future for global trade policy.

BhagwatiDr. Jagdish Bhagwati is the University Professor at Columbia University and Senior Fellow in International Economics at the Council on Foreign Relations. He has been Economic Policy Adviser to Arthur Dunkel, Director General of GATT (1991-93), Special Adviser to the UN on Globalization, and External Adviser to the WTO. He has served on the Expert Group appointed by the Director General of the WTO on the Future of the WTO and the Advisory Committee to Secretary General Kofi Annan on the NEPAD process in Africa, and was also a member of the Eminent Persons Group under the chairmanship of President Fernando Henrique Cardoso on the future of UNCTAD.

Professor Bhagwati has published more than three hundred articles and has authored or edited over fifty volumes; he also writes frequently for The New York Times, The Wall Street Journal, and The Financial Times, as well as reviews for The New Republic and The Times Literary Supplement. Professor Bhagwati is described as the most creative international trade theorist of his generation and is a leader in the fight for freer trade. His most recent book, In Defense of Globalization (Oxford, 2004), has attracted worldwide acclaim. Five volumes of his scientific writings and two of his public policy essays have been published by MIT press. The recipient of six festschrifts in his honor, the latest three on his 70th birthday (please click here for more information), he has also received several prizes and honorary degrees, including awards from the governments of India (Padma Vibhushan) and Japan (Order of the Rising Sun, Gold and Silver Star). 

Complete bio.

ShapiroDr. Robert J. Shapiro is the Chair of NDN's Globalization Initiative, and has been involved in the project since its inception in early 2005. Dr. Shapiro has an extensive background examining the American and global economies. From 1997 to 2001, Dr. Shapiro was U.S. Under Secretary of Commerce for Economic Affairs. In that position, he directed economic policy for the Commerce Department and oversaw the Nation’s major statistical agencies, including the Census Bureau while it planned and carried out the 2000 decennial census.

Prior to his appointment as Under Secretary, he was co-founder and Vice President of the Progressive Policy Institute and the Progressive Foundation. He also was principal economic advisor in Governor Bill Clinton’s 1991-1992 presidential campaign and senior economic advisor to Vice President Albert Gore and Senator John Kerry in their presidential campaigns. Dr. Shapiro also served as Legislative Director for Senator Daniel P. Moynihan, Associate Editor of U.S. News & World Report, and economic columnist for Slate. He has been a Fellow of Harvard University, the Brookings Institution, and the National Bureau of Economic Research. Dr. Shapiro holds a Ph.D. from Harvard University, a M.Sc. from the London School of Economics and Political Science, and an A.B. from the University of Chicago. He has lectured at many universities, including Harvard University and Stanford University, and is widely published in both scholarly and popular journals.

Dr. Shapiro is also the co-founder and chairman of Sonecon, LLC, a private firm that provides advice and analysis on market conditions and economic policy to senior executives and officials of U.S. and foreign businesses, governments and non-profit organizations. Dr. Shapiro has advised, among others, U.S. President Bill Clinton and British Prime Minister Tony Blair; private firms such as MCI, Inc., New York Life Insurance Co., AT&T, Google, Gilead Sciences, SLM Corporation, Nordstjernan of Sweden, and Fujitsu of Japan; and non-profit organizations including the American Public Transportation Association, the Education Finance Council, and the U.S. Chamber of Commerce. He is also a Senior Fellow of the Progressive Policy Institute, and a board member of the Ax:son-Johnson Foundation in Sweden and the Center for International Political Economy in New York.

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Coming To Terms With the Deteriorating Economy

Having worked in Washington for 16 years now, I've learned a bit about how an idea moves from the periphery of the debate here to its center.  And this week you could feel that happen for the rising concern about our economy.  Despite the President's emphasis on health care and climate change of late, there is a new and growing sense of urgency here about the worsening economy and whether the government's response so far has been adequate or effective.  

Unemployment in Michigan is over 15 percent now, and the US unemployment rate is now higher than the EU's.  In a Senate hearing on Thursday Chris Dodd publically criticized the President's mortgage foreclosure plan as not having delivered on its promise.  A new study finds dramatic drops in state government revenues, which foreshadow both what will happen at the federal level later this year and significant troubles again with state governments themselves.   While there was what appeared to be good news with the financial sector, a deeper analysis predicts significant troubles ahead even for banks who showed profits in the 2nd quarter.   Twice as many banks have failed this year already as failed in all of 2007 and 2008 combined.   Many friends of ours have talked in alarming terms about what is likely to happen to the commercial real estate market later this year, a coming crisis which could also devastate local and regional banks who have escaped the worst of the financial crisis so far.  Add to that what could our first national flu pandemic in a generation, which if it is virulent as some predict, could slow economic activity and productivity even further.

The President is clearly paying attention to all this, and has begun to address these growing concerns head on.  Last Saturday he devoted his weekly address to the economy.  On Sunday he offered up a thoughtful op-ed on the economy in the Washington Post.  On Tuesday the President proposed a compelling new community college plan which spoke directly to the struggle of existing American workers.   On Friday NEC chief Larry Summers gave a speech reviewing the Administration's economic progress so far, and where it hopes to go in the months ahead.   And next Wednesday night the President will hold a prime time press conference where one can be certain he will address the growing concerns about the economy to a national audience.  

As he prepares for his remarks next Wednesday, he would be wise to heed the warning from a new letter offered up by 21 freshman Democratic House members this week.  The NYTimes provides this summary

Representative Jared Polis, a freshman Democrat from Colorado who voted against the bill approved Friday in the Education and Labor Committee, said he worried that the new taxes “could cost jobs in a recession.”

To help finance coverage of the uninsured, the House bill would impose a surtax on high-income people and a payroll tax — as much as 8 percent of wages — on employers who do not provide health insurance to workers.

Mr. Polis said these taxes, combined with the scheduled increase in tax rates resulting from the expiration of Bush-era tax cuts, would have a perverse effect. “Some successful family-owned businesses would be taxed at higher rates than multinational corporations,” he said.

In a letter to the House speaker, Nancy Pelosi, Mr. Polis and 20 other freshman Democrats said they were “extremely concerned that the proposed method of paying for health care reform will negatively impact small businesses, the backbone of the American economy.”

There have been calls from some quarters for a 2nd stimulus plan, an acknowledgement that what the first stimulus has not done enough to stop the current economic deterioration.  This may be necessary, but I think what will need to be done is much more comprehensive than just a new stimulus plan.  Future action could include a much more aggressive action against foreclosures, a more honest assessment of the health of our financial sector, an immediate capping of credit card rates and a rollback of actions taken by credit card issuers in the last few months, a speeding up of the 2010 stimulus spending, a completion of the Doha trade round and a much more aggressive G20 effort to produce a more successful global approach to the global recession, the quick passage of the President's community college proposal, enacting comprehensive immigration reform which will bring new revenues into the federal and state governments while removing some of the downward pressure on wages at the low end of the workforce, and recasting both the President's climate and health care initiatives as efforts which will help stop our downward slide and create future growth.

The worsening economy has become the nation's number one problem.   We will need a new language to talk about it, moving beyond the words stimulus and recovery which no longer seem to speak to the gravity of the economic moment we are in.  This is the most important work in front of the government now, and I look forward to hearing the President on Wednesday night about his plans for the remainder of the year.

For more on this be sure to read this excellent Thursday essay from Rob Shapiro.

Politicians Who Ignore the Problem with Jobs Could Lose Their Own

While public debate about jobs usually focuses on the unemployment rate, what matters more are the changes in the number of people still working and how many hours they're working, since that determines how much wealth and income the economy produces. On these matters, major developments are unfolding which could play decisive roles in determining not only the economic prospects of millions of households, but also the results of the 2010 and 2012 elections. As it now stands, Democrats in 2010 will have to explain why the jobs numbers are still deteriorating, and President Obama will likely go into his reelection campaign with fewer Americans working than when he took office.

What's been happening with jobs already has broken past records. Since this recession began – the National Bureau of Economic Research pegs the start at December 2007 – the number of Americans employed has fallen by 6.5 million or 4.7 percent. That's far worse than the entire, deep 1981-1982 recession, when the number of people at work fell by 2.8 million or a little over 3 percent. The current jobs numbers also are in an entirely different league from those seen in the recessions of 1990-1991 and 2001, when total employment fell by just a little more than 1 percent.

The number of Americans on the job will also continue to worsen even after this recession finally ends. After the 1990-1991 recession, jobs didn't begin to come back for 13 months – and it took four more years for manufacturing jobs to increase. The pattern was even worse after the 2001 downturn, when the number of Americans working kept on falling for two more years – and for nearly five more years for manufacturing jobs. All told, we may be looking at as many as 9 million fewer Americans working than before this all began. In addition, the number of hours worked by those who have jobs also is falling more sharply than it used to. During the big 1981-1982 downturn, an American worker's average number of hours shrank 1.7 percent, and the recessions of 1990-1991 and 2001 produced declines in average hours of less than 1 percent. This time, average hours on the job are down 2.4 percent already – and it will get worse before this recession ends.

These developments are yet another reason why the next expansion, when it finally comes, will be relatively weak. The main element now available to prop up a coming expansion is the President's stimulus, which was designed to kick in mainly this fall and winter. (The only way to get stimulus out more quickly is tax cuts; but the evidence showed that Bush’s spring 2008 tax relief had little effect on this cycle, since most of it was saved.) But the stimulus is a single shot affair, and the emerging jobs picture suggests that it's time to design a second one.

It's also time to take more seriously mounting evidence that globalization and other developments are taking big bites out of America's long-vaunted capacity for creating jobs. We see this evidence throughout the last expansion (2002-2007), when we added new jobs at a rate barely one-third as great as during the expansions of the 1980s and 1990s. Yet, there are few signs that these developments matter much in the current political debate. For example, a central factor in our new problems creating jobs, even during expansions, has been fast-rising health care costs being borne by businesses. With those businesses facing intense global competition, as most large U.S. businesses do, they've found themselves unable to pass along their higher health care costs through higher prices. So instead, they cut other costs, starting with jobs.

Even so, the health care reforms being considered by Congress all involve even higher health care costs for most businesses, which will mean more job cuts even as the economy grows. No one questions that health care reform is an urgent, national priority -- as are efforts to contain the risks of climate change. But we gain little except a false sense of accomplishment by enacting health care reforms that also aggravate the new jobs problem, or climate legislation such as Waxman-Markey which cannot deliver significant reductions in greenhouse gases.

The right way to do this is to focus first on the underlying problems in the current downturn and the issues with jobs and incomes -- before we take on broad and urgent reforms in other areas. The politics, if nothing else, virtually dictate it, since a growing economy that creates large numbers of new jobs and pushes up incomes is always a prerequisite for the public’s support for reforms that, one way or another, end up imposing new costs on them.

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