NDN's Globalization Initiative was established to promote economic growth and restore broad-based prosperity in our globalized economy. Chaired by Dr. Robert Shapiro, Under Secretary of Commerce for Economic Affairs under President Bill Clinton, the program works toward modernizing our healthcare and energy policies; investing in 21st century skills for our workers and students, rebuilding America's infrastructure; and accelerating innovation across the economy. NDN also plays a major role in the debate over how to best manage the Great Recession and the crises impacting our housing and financial markets.
In December, NDN made the decision that the most appropriate term to describe the last decade was as a lost decade for everyday Americans. I blogged on this topic on December 3 and published a white paper on December 17 entitled, A Lost Decade for Everyday Americans.
Since that time, the lost decade narrative has been discussed in a variety of other sources. On Saturday, Neil Irwin in the Washington Post covered the lack of job growth over the last decade:
It was, according to a wide range of data, a lost decade for American workers. The decade began in a moment of triumphalism -- there was a current of thought among economists in 1999 that recessions were a thing of the past. By the end, there were two, bookends to a debt-driven expansion that was neither robust nor sustainable.
There has been zero net job creation since December 1999. No previous decade going back to the 1940s had job growth of less than 20 percent. Economic output rose at its slowest rate of any decade since the 1930s as well.
Middle-income households made less in 2008, when adjusted for inflation, than they did in 1999 -- and the number is sure to have declined further during a difficult 2009. The Aughts were the first decade of falling median incomes since figures were first compiled in the 1960s.
Thankfully, 2009 ended better than it began. Economists talk about green shoots of recovery taking hold. Consumer confidence has improved. Equity markets have soared. But for all the progress, the American economy remains extremely vulnerable.
To understand those economic risks, it is worth considering Japan’s experience in the 1990s. A bursting housing bubble there sparked a banking crisis that was followed by a decade of economic stagnation.
The Japanese government lacked the resolve to do what was necessary. It failed to fix its banks and stopped its early fiscal stimulus before recovery had taken hold, leaving the economy all too vulnerable to outside shocks, including the Asian currency crisis and the dot-com collapse in 2001. Japan’s annual growth rate — which had averaged 4 percent since 1973 — slowed to less than 1 percent, on average, from 1992 to 2003.
While obvious, it bears repeating that American economic policy must, first, account for fact that the last decade was already lost for everyday Americans, and, second, do everything to avoid another one. The economic, social, and political consequences of back-to-back lost decades would be catastrophic, and such a scenario is a legitimate possibility.
The Wall Street Journal recently published this fascinating graphic (h/t Bill Easterly):
Energy and ICT are truly dominant as this decade comes to a close, and the three largest banks are (with HSBC's headquarters move to Hong Kong) now based in China. Certainly global competition will only continue to intensify over the next decade. I'd venture a guess that the chart in 10 years will include more Asian companies and perhaps more from Latin America (and fewer from Europe). Will it include an energy company whose business relies on alternatives, or will fossil companies continue to dominate? Will state-owned enterprises continue to grow? Will one be the biggest company in the world?
NDN President Simon Rosenberg just sent out this note alerting people to the release of a new paper from NDN:
In recent weeks, policymakers in Washington have begun to take a new look at the American economy and the increasing struggle of everyday people in this new era of globalization.
To help inform this conversation, NDN will be releasing a series of targeted "white papers" over the next few months designed to highlight particularly significant aspects of this important debate.
We proudly release the first in this series, A Lost Decade for Everyday Americans. This new paper, written by Jake Berliner, Deputy Policy Director of NDN’s Globalization Initiative, makes the point that over the last ten years the typical American family has seen their incomes decline; and, that for many, economic hardship had come long before the recent recession began.
To ensure the success of the economic strategy the government adopts next year, it is imperative that the plan accounts for and explains the underlying economic weakness that affected everyday Americans in the years prior to the Great Recession. As this paper illustrates, this past decade in America has been a lost decade for ordinary Americans.
Marked by stagnating wages, declining median household income, rising living costs, abnormally slow job creation, and then capped by the destruction of many trillions of dollars in personal wealth held in housing and stocks, the decade has left most everyday Americans worse off than they were ten years ago. Too little of our national dialogue has focused on the intense struggle of everyday people prior to the Recession, yet understanding that struggle is critical to formulating an adequate response to this great economic challenge.
With the President getting ready to go to Copenhagen, the EPA did what Congress wouldn’t: It put in place a policy that ultimately would sharply reduce carbon emissions. The EPA finding that greenhouse gases (GHG) pose a health threat and thus trigger a process to reduce the risks through direct regulation has become the president’s “deliverable” in Copenhagen. More important, the only forces that will ever prod Congress to take action on climate are broad public opinion and pressures from powerful groups – and that’s the real importance of the EPA finding and a series of additional rule-makings scheduled over the next year. The finding and prospective rule-makings should bolster the public’s existing opinion that serious measures to reduce greenhouse gas emissions action are required, and put the fear of God in many business executives (or more precisely, the fear of unaccountable government regulators). And the threat that the EPA may directly regulate the greenhouse gas emissions of every company in America is a credible one, given the Supreme Court’s recent holding that the law requires that EPA come to some finding about the dangers of those emissions. The only course left for all the powerful groups that work so hard to stop or profoundly weaken climate legislation –their most recent handiwork is evident in the effective gutting of Waxman-Markey – is to enact a serious program that would preempt EPA. Are you listening, big coal? And climate activists should be on the same mission, once they consider what EPA regulation could look like under the next conservative Republican president.
The finding also could accelerate the search for new approaches to climate change, broadening the debate beyond the cap-and-trade model which Congress has already rejected three times and, if Kerry-Boxer ever comes to a vote, will almost certainly defeat again. The leading alternative, of course, is a carbon-based tax with the revenues going to cut payroll or other taxes. It’s an approach that’s worked well in Sweden and now is being considered in France, Ireland and Denmark. Economists like it, because it doesn’t introduce additional volatility to energy prices as cap-and-trade does; and environmentalists like it, because a stable price for carbon is a prerequisite for businesses to invest large sums in developing and adopting alternative fuels and technologies. Now, if businesses can come to dislike the prospect of direct EPA regulation with enough fervor, a new consensus could emerge around a new way to address climate change.
Speaking of Copenhagen, let’s also cut through the nonsense about the whole project foundering unless rich countries agree to pay for the climate efforts of poor countries. Climate change is almost entirely the business of the world’s developed and large, fast-developing countries, because poor countries simply don’t have enough electricity generation, factories, capital-intensive farming, and automobiles to produce significant amounts of GHGs. In fact, the world’s three economically-dominant places -- America, the European Union, and China -- account for 55.5 percent of all emissions. Include twelve more nations -- Russia, India, Japan, Canada, South Korea, Iran, Mexico, South Africa, Saudi Arabia, Australia, Brazil, Indonesia, -- and you cover 85 percent of global emissions. Among those twelve, the only, barely plausible cases for assistance are India and Indonesia, although both are on sharply-rising growth and development paths that could soon generate the incentives and resources required to become more climate-friendly on their own. Ensuring that the world’s 120 or so other countries, most of them small and many of them poor, share some responsibility for addressing climate change is truly a secondary issue.
It’s also clear that at this time, virtually no country seems prepared to shoulder the cost of making even its own economy truly climate friendly, much less pick up the bills to make other countries less carbon-dependent. The best course is probably a business form of technology sharing, in which governments support the formation of joint ventures between developers in the United States, the EU and the other dozen or so large GHG emitting nations –especially China and India – to develop, produce and sell climate-friendly fuels and technologies. Then saving the planet could end up being good business for everybody.
As the American government struggles with what to do with its new ownership stake in storied corporate brands like AIG, Chrysler, Citigroup and General Motors, one of the fundamental questions that must be asked now is, can these brands - after months of stories about their insolvency - be saved?
Simon wasn't so sure, and neither am I. But if I were an executive at one of these banks, I would be doing everything I could to repair my brand. One of the worst problems these banks have caused is the global impression that America caused an international financial meltdown, which has been, to say the least, bad for both these banks and America’s interests abroad.
So what can they do? Here at NDN, and in particular Sam duPont's Global Mobile blog, we have been covering the role of mobile technology in what the State Department is calling 21st Century Statecraft. One of the most exciting innovations in this space is mobile banking, which Sam has been discussing quite a bit, and I blogged about a year and a half ago. (Sam recently posted a video of Alec Ross, the Senior Advisor on Innovation to Secretary Clinton, discussing this.) MBanking has the potential to revolutionize standards of living globally by connecting some of the world’s poorest economies to modern financial services without needing to create the physical infrastructure of a bank.
So here’s my modest proposal to American bankers, a group of people who’ve been particularly good at innovating over the last two decades: Call up State, say you want to build - for free - a modern, mobile communication device based banking system for less developed nations and that you want to put your best people on it.
Imagine if every time a sizeable percentage of the world’s population did a financial transaction, they knew it was because of the American government and the American financial sector. There’s plenty of profit motive in it for banks, as the additional customers alone would be a boon. Not only would this be great for America’s standing in the world and help these banks repair their image, it would have that nice added benefit of dramatically improving people’s lives.
Martin Wolf in the FT sums up nicely the big problem with China’s currency practices:
At the conclusion of a European Union-China summit in Nanjing last week, Wen Jiabao, the Chinese premier, complained about demands for Beijing to allow its currency to appreciate. He protested that “some countries on the one hand want the renminbi to appreciate, but on the other hand engage in brazen trade protectionism against China. This is unfair. Their measures are a restriction on China’s development.” The premier also repeated the traditional mantra: “We will maintain the stability of the renminbi at a reasonable and balanced level.”
We can make four obvious replies to Mr Wen. First, whatever the Chinese may feel, the degree of protectionism directed at their exports has been astonishingly small, given the depth of the recession. Second, the policy of keeping the exchange rate down is equivalent to an export subsidy and tariff, at a uniform rate – in other words, to protectionism. Third, having accumulated $2,273bn in foreign currency reserves by September, China has kept its exchange rate down, to a degree unmatched in world economic history. Finally, China has, as a result, distorted its own economy and that of the rest of the world. Its real exchange rate is, for example, no higher than in early 1998 and has depreciated by 12 per cent over the past seven months, even though China has the world’s fastest-growing economy and largest current account surplus.
Do these policies matter for China and the world? Yes, is the answer. Mark Carney, governor of the Bank of Canada, notes in a recent speech, that “large and unsustainable current account imbalances across major economic areas were integral to the build-up of vulnerabilities in many asset markets. In recent years, the international monetary system failed to promote timely and orderly economic adjustments.”* He is right.
What we are seeing, as Mr Carney points out, is a failure of adjustment to changes in global competitiveness that has unhappy precedents, notably during the 1920s and 1930s, with the rise of the US, and, again, during the 1960s and 1970s, with the rise of Europe and Japan. As he also notes, “China’s integration into the world economy alone represents a much bigger shock to the system than the emergence of the US at the turn of the last century. China’s share of global gross domestic product has increased faster and its economy is much more open.”
Moreover, today, China’s managed exchange rate regime is quite different from those of other big economies, which was not true of the US when it rose to prominence. Thus, China’s managed exchange rate is shifting adjustment pressure on to other countries. This was disruptive before the crisis, but is now worse than that in this post-crisis period: some advanced countries, notably Canada, Japan, and the eurozone, have already seen big appreciations of their currencies. They are not alone.
China’s currency practices are hurting the United States far less than developing nations and the eurozone, amongst others, and the US government knows it. Two things are mind-boggling to me: why other countries don’t stand up to the Chinese more (I’m glad many have avoided the all-too-easy protectionist route, because that could be a disaster, but am not sure the current dialog on rebalancing is going to move the ball enough), but, more importantly, how the Chinese could possibly think that currency manipulation is a good long term strategy. Sure, it helps exports, and the CCCP has basically made a massive political bet on dramatic GDP growth based on exports, but it doesn’t have to be this way.
For a so-called socialist country, China is barely one at all. The domestic social safety is virtually non-existent, and as badly as the U.S. needs to expand healthcare coverage, China needs to much more. A social safety net would lessen the incredibly high savings rates that Chinese operate with (because they have no choice), in turn giving China’s people a greater ability to consume, a positive outcome for both the Chinese economy and the rest of the world.
In America these days, it’s popular to agonize over the amount of money we owe China. But China is saving because it has to, not because it wants to. As the saying goes, when you owe the bank $100,000, the bank owns you, but when you owe the bank $1.6 trillion, you own the bank. (For more on this, read Christopher Hayes’ recent article in The Nation.)
At last week’s Jobs Summit, President Obama said he’ll consider any good idea to create jobs. I heard him say it, and I believe him. His speech yesterday at the Brookings Institution offered some decent, standard approaches, including more infrastructure spending and tax breaks for small businesses. The President would be well-served to cast his policy net a bit wider. Since the Great Recession began, the economy has shed an astounding 7.3 million private-sector jobs – and based on the last two recoveries, businesses could continue to cut back their labor forces for another year or longer. The President and Congress can create more government jobs whenever they like, for example by giving states an additional $50 billion or so targeted to jobs. But finding the right lever to get private companies to hire more people than they would otherwise is a lot harder.
The most direct and sensible approach is to somehow reduce the costs of hiring for companies. The unsurprising catch is that the incentives required to get them to hire a million or more new people, whom otherwise they wouldn’t have hired, are very expensive. So, most serious jobs proposals would either drive up our already-mammoth deficits or require a significant new tax.
Most, but not all, because there is one approach I know of that wouldn’t cost taxpayers anything. The foreign subsidiaries of America’s multinational companies currently hold offshore an estimated $1 trillion in past earnings, because our tax laws defer the U.S. corporate tax on those earnings until the parent companies bring them back to the U.S. parent company. The challenge is to leverage these funds for job creation at home, by creating a strong incentive for them to bring back a share of those earnings tied to a requirement that they use the funds to finance new hires. It’s the closest thing to “found money” that this administration and Congress will ever find.
We actually tried this once before, in a fashion, and it worked reasonably well. In 2004, Congress slashed the corporate tax on such “repatriated” earnings for one year, from 35 percent to 5.25 percent, and IRS data show that it increased net inflows of those earnings by $312 billion, including $252 billion by U.S. manufacturers. The 2004 law also told companies they had to use the new funds they brought back to, among other things, finance new workers, new investment, or pay down domestic debt. Recent surveys found $73 billion of the repatriated earnings went to create or retain jobs, $75 billion for new capital spending, and $39 billion to pay down domestic debt. Here’s the free lunch: In the short run, the temporary program raised $34 billion in new federal revenues. And it may not even have reduced revenues over the long-term, or not by much, since without the tax break, most U.S. multinationals keep their foreign-source earnings abroad indefinitely, or at least until they can be used to offset domestic losses for tax purposes.
We can estimate what would happen if we tried this approach again. A recent analysis I did with AEI’s Aparna Mathur found that such a policy could bring back $420 billion in foreign-source income now held abroad. And if the program were targeted again in the same way as in 2004, it could mean $97 billion for new employment, or enough to create or save 2.6 million jobs over two years, as well as $101 billion for new capital spending, enough to produce long-term wage gains of 1.3 percent.
Skeptics will claim that most companies would use their repatriated funds in other ways, such as stock buy-backs; and since money is fungible, the government couldn’t stop them. Two academic studies built models which inferred that this happened last time; but there’s no real evidence that companies evaded the restrictions, and a recent academic survey suggests that most did follow the law. Even if some didn’t, we can tighten the restrictions this time. We could allow multinationals to bring back offshore earnings for one or two years and pay just 5 or 10 percent corporate tax on them here, so long as they use those funds only to create new, net jobs or increase their net investment. That means they would have to not only hire new people, but expand their overall workforces. It might just help businesses create between 1 million and 2 million new jobs while actually reducing the deficit, which seems like the kind of new idea the President is looking for.
Friday’s unemployment report of fewer jobs lost than expected surely beats the alternative, but that does not mean that the employment situation will improve significantly anytime soon. What it hopefully means is that things won’t get dramatically worse, although that certainly can’t be ruled out.
Calculated Risk, perhaps the most prolific chart maker and data analyst of all economics blogs, presents an analysis on the potential speed of the employment recovery. These estimates are based on Okun’s Law (an established relationship between GDP growth and job creation):
In the 2010 budget, OMB projects real GDP growth of 3.5 percent from the fourth quarter of this year to next, meaning that, if Okun’s law were still operable, we’d be somewhere in the mid to high 9 percent unemployment range at the end of next year. (The Federal Reserve sees similar numbers.)
Having said that, many leading economists, including NDN’s Rob Shapiro and the Director of the National Economic Council Larry Summers, have argued that Okun’s law has broken down, making the relationship between GDP growth and employment weaker, which means these projections may be - sadly - optimistic.
With the White House Forum on Jobs and Economic Growth getting underway, now is a good time to note that the problem isn’t just jobs. As we’ve long argued and the Wall Street Journal pointed out recently, the last decade has been a lost one for everyday Americans. First, we generally note that, even as GDP and productivity surged, household income didn’t keep up. In fact, the average household income took more than a $2000 loss during the Bush presidency.
A second point, illustrated by theWall Street Journal, is that private sector employment has basically not grown in a decade.
It is difficult to understand how bad this recession has been without fully understanding the pre-recession weakness of the American consumer caused by dropping incomes and higher costs. NDN’s Dr. Rob Shapiro – who is at the White House Forum right now – has agued that structural dynamics in the American economy have broken down its job creation and wage growth capability. For NDN’s latest thinking on these important issues, please consult:
In his weekly address, President Obama says he went to Asia in large part to help create economic prosperity:
As we emerge from the worst recession in generations, there is nothing more important than to do everything we can to get our economy moving again and put Americans back to work, and I will go anywhere to pursue that goal.
That’s one of the main reasons I took this trip. Asia is a region where we now buy more goods and do more trade with than any other place in the world – commerce that supports millions of jobs back home.
The finding also could accelerate the search for new approaches to climate change, broadening the debate beyond the cap-and-trade model which Congress has already rejected three times and, if Kerry-Boxer ever comes to a vote, will almost certainly defeat again. The leading alternative, of course, is a carbon-based tax with the revenues going to cut payroll or other taxes. It’s an approach that’s worked well in Sweden and now is being considered in France, Ireland and Denmark. Economists like it, because it doesn’t introduce additional volatility to energy prices as cap-and-trade does; and environmentalists like it, because a stable price for carbon is a prerequisite for businesses to invest large sums in developing and adopting alternative fuels and technologies. Now, if businesses can come to dislike the prospect of direct EPA regulation with enough fervor, a new consensus could emerge around a new way to address climate change.
