Globalization

The State of the Union and the Real Meaning of Competitiveness

Last Tuesday night, the President exhorted Americans to raise our economic game and challenged Congress to give us the means to do so.  His basic proposition, which comes from mainstream economics and more recently from Bill Clinton’s 1992 economic plan, is that expanding certain national investments can make us more competitive, especially if it’s tied to overall deficit restraint.  Moreover, Obama’s pitch for greater federal commitments to R&D, education and training and infrastructure carries greater urgency this time out, as recent sea changes in the U.S. and global economies have raised the stakes for most Americans in the new initiative’s success..   

If expanding these public investments is a radical idea, as some of the President’s opponents claim, so is the last 200 years of economic thought.  Since Adam Smith, it has been an economic commonplace that private markets and businesses will always tend to invest too little for any nation’s good in basic research and development, education and training, and infrastructure.  That’s why it has been the business of governments for nearly two centuries to mandate and pay for public education, build roads and bridges, and in many cases support basic scientific research.  

When Clinton called for the same roster of national investments, he argued from basic economics that they would make American workers more productive and American businesses more efficient.   That still holds true.  But the waves of globalization of the last 15 years provide a new framework for the operations of American businesses, based on international competitiveness.  The massive transfers of technologies and entire business organizations to developing countries by the world’s leading multinationals, especially in manufacturing, have shifted the basis of competition.  U.S., European and Japanese manufacturing operations can’t compete with the third-world dynamos on price.  Instead, our firms and workers have to compete on quality and innovation, which can depend fairly directly on the public investment priorities touted by the President last week, especially in R&D and education and training. 

The toys, cell phones, basic laptops and so on made or assembled today in China and places like it will always be cheaper than what any firm and its workers in America can produce.  That’s an inescapable advantage for Chinese companies that pay their manufacturing workers less than $50 per-week and their engineers less than $75 per-week.  That’s also why American companies and workers largely don’t produce what China exports anymore -- and why would they?   Instead, our firms and workers increasingly compete on the basis of newer, broader and higher quality goods and services.  In most cases, American companies can win this kind of competition for global market share, by coming up with more powerful and versatile laptops, cell phones and so on, often producing the technologically advanced new elements themselves.

Innovation comes in many forms, and American companies and workers operate through advanced business organizations that also can provide competitive advantages which outweigh price.  Wherever a computer, cell phone or other product is produced or put together, business customers often prefer an American or European company for the service.  When businesses wants to buy, for example, coated paper for high-end graphics, which is produced both here and in China, the vast majority still pay higher prices to buy American products, because the U.S. companies can provide better delivery times and terms, more flexible credit, and a more reliable supply of a broader range of products, all services still beyond the capacity of their developing-nation competitors.

A serious public investment agenda, then, follows not only from the classic cases of private underinvestment recognized since Adam Smith, but also from the actual terms of global competitiveness which American companies and workers face today.  It’s virtually certain that greater national support for basic R&D ultimately will lead to the development and use of more advanced products, manufacturing processes, and business methods.  Similarly, greater support for education and training would ensure that more American workers are truly competitive with their foreign counterparts when it comes to operating effectively in workplaces dense with innovative technologies and operating practices.    

The third leg of the President’s public investment program focuses on traditional infrastructure.  Most infrastructure investments, to be sure, involve more traditional, price and efficiency-based competition.  But whether or not American companies are able to move people and goods from one place to another efficiently, through sound road, rail and air systems, affects their competitiveness -- if not so much with China, than with their counterparts in Europe, Japan and other advanced economies.  

The fate of these proposals will also reveal a good deal about the two parties’ real commitment to U.S. competitiveness.   With conservatives once again believing that deficits do matter – at those under Democratic presidents -- can they nevertheless distinguish between real public investments and other kinds of federal spending which many of them now consider a scourge?  And for the other side of the coin, will the President’s allies in Congress be willing to give up any other kinds of domestic spending in order to finance these new investments?   

These tradeoffs were dubbed “cut-and-invest” when Bill Clinton talked them up in 1992 and 1993 – and even he had real trouble selling the cuts to Congress.  But the truth is, it mattered less for U.S. competitiveness back then, when China and other low-wage developing nations made little that anyone else wanted to buy.  Those days are now long gone, and with them, the stakes for public investment have become much greater.

Paul Ryan Speaks and Makes No Economic Sense

Last night, as House Budget Committee Chair Paul Ryan offered a response to the President's State of the Union Address, he argued that government spending is hurting the economy. He talked about budget deficits and national debt. And he claimed he had ideas to fix it. Unfortunately, his solution, most comprehensively borne out in his "Roadmap," and the principles behind it exacerbate a whole slew of economic problems and have little basis in economic reality.

Let's look at Ryan's first claim - that his Roadmap reduces the deficit. It does, but not until well past the middle part of the century. According the Center on Budget and Policy Priorities:

Because of the Ryan plan's enormous tax cuts for the affluent, even the very large benefit cuts that the plan would make in Medicare, Medicaid, and Social Security - and the plan's middle-class tax increases - would not put the federal budget on a sustainable course for decades. The federal debt would soar to about 175 percent of the gross domestic product (GDP) by 2050. In contrast, most fiscal policy analysts recommend that the debt-to-GDP ratio be stabilized within the next ten years, and at a far lower level.

This contrasts directly with the Rivlin-Dominici plan, which would reduce the federal debt to 60 percent of GDP by 2020, the Bowles-Simpson plan, which would reduce the debt to 60% of GDP by 2023 and 40% by 2035, and even the plan assembled by Demos, the Century Foundation, and the Economic Policy Institute, which reduces the debt to 83% of GDP in 2020.

It is clear that Ryan's plan is not one focused on balancing the budget and reducing deficits or debt. Since Ryan is no fiscal hawk, what does Paul Ryan really care about?

The one thing the Roadmap does incredibly effectively is make dramatic cuts to popular government programs (it basically eliminates Medicare and makes sweeping cuts in Social Security). His reasoning for his massive cuts his that he claims that government spending is bad for the economy. But there is no economic logic to this either - especially right now.

I understand where Ryan's thinking comes from - in good economic times, government investment that leads to borrowing can "crowd out" private investment by raising interest rates, thereby diverting economic activity away from the private sector. This can be a legitimate concern in boom times, which is part of the reason having smaller deficits in good times is generally a good idea; a sizeable government deficit can lead to higher interest rates, which hurt the economy.

These, however, are nothing close to good economic times, and government is not driving out private sector investment and therefore not hurting job creation. How do we know this? There is virtually no inflation - economists are more worried about deflation right now - and a huge shortage of demand. Interest rates are basically the lowest they can possibly be, and the Federal Reserve keeps trying to drive them down. (That's why the Federal Reserve has gone to quantitative easing; it can't lower rates any further.)

Furthermore, it's not clear that Ryan understands the actual danger of debt, because he has effectively said he intends to play chicken with the upcoming vote on the debt limit. On this point, one cannot be any clearer - the best way to quickly explode interest rates is to ruin the full faith and credit of the United States by not increasing the debt limit. Not doing so would increase interest rates and injure the economy dramatically, a reality that fails to square with Ryan's complaints about the economic dangers of debt.

Finally, Ryan compared America's debt situation to that of Greece, Ireland, and Great Britain. This is embarrassing, for him. The Greek and Irish debt crises are completely different animals - the Greece's problems are derived largely from being on the Euro (not an issue for us), and the Irish crisis is financial sector driven; our fiscal issues are not. In Britain, a conservative government is leading a true austerity push, and has become unpopular virtually overnight. So, Britain is an apt analogy but not in the way Ryan means. Rather, it's a warning for what would happen here if American conservatives got their way.

All told, it is hard to find the actual economics behind Ryan's world view, an odd and scary phenomenon to discover in a Budget Committee Chair. Instead, his approach to the economy begins and ends at a strong dislike for government, an odd and scary phenomenon to find in someone who works for the government.

Government, Not as Big as Paul Ryan Claims

It's no coincidence that trust in government is at an all-time low now that the size of government is at an all-time high.


-House Budget Committee Chairman Paul Ryan, in his response to President Obama

Is the size of government at an all time high? Data says no.

Government employment has been decreasing:

GovernmentEmoloyment

(courtesy of Calculated Risk)

SOTU Backgrounder: Raising Our Game - A New Economic Strategy for America

The 21st century economy is more competitive, more technology dense, and more interconnected than ever before. With the the rise of new economic powers, it is clear that the rest of the world has raised its game, and America must raise ours. For years, NDN has advocated an economic strategy for America that does just that. The strategy must include: modernizing and controlling costs in our healthcare and energy systems, investing in infrastructure and worker skills, accelerating innovation and new business development, and engaging with the global economy. Below, please find some useful resources on these topics:

The Rise of the Rest

The Rise of the Rest: How New Economic Powers are Reshaping the Globe by Jake Berliner, 4/23/10
In this white paper, Globalization Initiative Deputy Policy Director Jake Berliner describes the rise of new economic powers and the challenges and opportunities they are presenting the American and global economies.

Crafting An American Response to the Rise of the Rest by Simon Rosenberg, 1/21/2010
In this essay written for Salon, Simon lays out three strategies for the Obama Administration to craft a comprehensive response to the new politics of the 21st Century.

Economic Strategies & Globalization by Peter Brodnitz, 11/8/07
This presentation details the results of extensive polling conducted by NDN and Benenson Strategy Group in October of 2007 on the American public's opinions about globalization and the changing economy

Accelerating Job Creation and Innovation

The Acceleration Agenda: Job Creation, Innovation and Economic Development in the 21st Century by Dan Carol, 9/15/10
Senior Fellow for Innovation and Clean Economy Dan Carol describes a series of low-cost but high-impact steps we can take now to accelerate job creation, growth, and American competitiveness.

Towards a New Economic Strategy for America - Steps We Can Take in 2010 by Simon Rosenberg, Dr. Robert Shapiro, and Jake Berliner, 7/23/10  
NDN outlines a political and policy framework to take steps to promote near-term job creation and economic growth. Policy recommendations include a payroll tax cut and a new model for bottom-up economic development.

Rediscovering the Obama Narrative by Dan Carol, 4/21/10 
Carol lays out an Obama-esque vision for public-private, bottom-up economic development and innovation.

The New Landscape of Globalization: The Real Foundations of American Prosperity in the 21st Century by Dr. Robert Shapiro, 6/20/2007 
Shapiro offers this forward-looking paper on the state of globalization, the structural problems facing the American economy, and a road map to prosperity in this new economic era.

Focusing on the Struggle of Everyday People

Why It Doesn't Matter Much that Obama's Jobs Record is Better than Bush's by Dr. Robert Shapiro, 1/5/11 Shapiro points out that, while job creation in the first two years of the Obama Presidency has far outpaced the Bush record, Obama is getting less credit because people's underlying economic conditions remain extremely weak.

The Pitfalls of Economic Nostalgia by Dr. Robert Shapiro, 12/15/10 
Shapiro identifies the structural problems behind America's slowest recovery in decades, and offers new approaches to address jobs, housing values, and the stagnating incomes of middle class Americans.

Keeping the Focus on the Struggle of Everyday People: 2010 Edition by Simon Rosenberg, 1/26/2010
More than ever, we need to recognize that the lack of income growth for average families is the greatest domestic challenge facing America today, and lead a national conversation about how we can create a plan that addresses the struggle of everyday people.

A Lost Decade for Everyday Americans by Jake Berliner, 12/17/2009
In this white paper, we argue that everyday Americans are at the end of a “lost decade” and explain the still misunderstood causes of the virulence of the recession.

Investing in Infrastructure and a Clean Economy

What's Next On Climate - Five Strategies for Moving the Clean Economy by Dan Carol, 10/20/10
Efforts to pursue carbon reduction policies have not gone according to plan over the last year. Therefore, we must deploy new strategies for moving the clean economy forward. In this memo, Dan Carol lays out 5 supplemental but decidedly big strategies for doing so.

A Politics of Investment by Simon Rosenberg, 7/27/10
In an article written by Ron Brownstein, Simon argues that "The challenge for us in the next few years is creating a politics of investment during a time of potential austerity to make sure that we're ... funding the future and not the past."

Electricity 2.0: Unlocking the Power of the Open Energy Network (OEN) by Michael Moynihan, 2/4/10 In a major policy paper, Green Project Director Michael Moynihan argues that America must upgrade to Electricity 2.0, an open, distributed network, to unlock the potential of clean technology and unleash a renewable revolution.

Investing in Our Common Future: U.S. Infrastructure by Michael Moynihan, 11/13/07 
Michael Moynihan looks at the current state of public investment in infrastructure and proposes a set of measures to restore our national political will and improve funding mechanisms to rebuild and advance U.S. infrastructure.

21st Century Skills and Learning

Tapping the Resources of America's Community Colleges: by Dr. Robert Shapiro, 7/26/07 
Young Americans are increasingly adept at working with computers, but many American workers still lack those skills. Here, we propose a direct new approach to giving U.S. workers the opportunity to develop those skills.

A Laptop in Every Backpack  by Simon Rosenberg and Alec Ross, 5/1/07 
The more globally interconnected world means that Americans will need more facility with the global communications network. Therefore we believe that America needs to put a laptop in every backpack of every child.

President Obama: Countries Around the World are Upping Their Game

In his weekly address, President Obama describes the path for American success in the more competitive, technologically connected 21st century economy:

We’re living in a new and challenging time, in which technology has made competition easier and fiercer than ever before. Countries around the world are upping their game and giving their workers and companies every advantage possible. But that shouldn’t discourage us. Because I know we can win that competition. I know we can out-compete any other nation on Earth. We just have to make sure we’re doing everything we can to unlock the productivity of American workers, unleash the ingenuity of American businesses, and harness the dynamism of America’s economy.

GE's Immelt on the President's Council on Jobs and Competitivess

 

General Electric CEO and newly appointed Chair of the President’s Council on Jobs and Competitiveness Jeffrey Immelt authored a piece in the Washington Post today describing the major areas of focus for the council. Immelt's "hope is that the council will be a sounding board for ideas and a catalyst for action on jobs and competitiveness."

Ensuring that America can compete in a 21st century, globalized economy is perhaps the greatest governing challenge of our time. It is now more than clear that our economic competitors have raised their game, and we must now raise ours. Everything Immelt describes in his piece is right on – we must better engage with fast growing markets outside the United States and we must increase innovation here in the United States. The agenda required to raise our game is vast, and I look forward to hearing more on this agenda from the President’s Council on Jobs and Competitiveness and the State of the Union on Tuesday. Immelt concludes:

GE sells more than 96 percent of its products to the private sector, where America's future must be built. But government can help business invest in our shared future. A sound and competitive tax system and a partnership between business and government on education and innovation in areas where America can lead, such as clean energy, are essential to sustainable growth.

It is possible to be a competitive global enterprise and still care about your home. In fact, it is not just possible but imperative. There is no easy solution to "fix" the American economy. Persistent and high unemployment - and the pessimism it breeds - should not be accepted. We must work together to construct an economy that creates more opportunity for more people.

Indeed.

 

What the Obama-Hu Meetings Can Mean for the U.S. Economy

Barack Obama and China’s President Hu Jintao have genuinely important economic matters to talk about this week, even if there’s little prospect for any agreements that could materially improve our own economy anytime soon. But President Obama can –– and certainly will –– use these meetings to hammer home his long-term priorities for the U.S.-Sino relationship. And so long as Hu continues to see the United States as the “indispensable nation” for China’s economic development –– Hu’s own words –– a U.S. President’s priorities matter. And in acknowledging China’s increasing success in the global economy, the President can also remind Americans why they have to raise their own economic game –– and how his domestic policies can help them do just that.

A few of these discussions may produce quick benefits. For example, Obama will press Hu on China’s lax enforcement of the intellectual property (IP) rights of American companies in the Chinese market. A lot of Americans still see such enforcement as a parochial issue for a few big pharmaceutical and software outfits. It’s true that Chinese producers regularly try to rip off U.S. patented drugs, mainly for third-world markets; and until recently even the Beijing government used pirated versions of Windows.  But there’s much more at stake here for us. The fact is, the only promising, long-term strategy that the global economy offers the United States today depends on our outsized national capacity for developing and adopting economic innovations –– from new products and technologies, to new ways of financing, marketing and distributing goods, and new ways of organizing a business and running a workplace. IP rights in the world’s second largest market, then, affect everything from movies, machine parts and genetically-enhanced foods, to computer slates, Internet business processes, and nanomachines. 

China already is legally obliged to protect the IP rights of American companies inside China under the rules of the World Intellectual Property Organization. So, Obama will press Hu to actually meet those obligations; and since China has recently begun to build its own R&D establishment, it’s an area where China’s interests and ours are beginning to align. The truth is, this is ultimately non-negotiable for the United States. But it also should prove to be a small price for China to pay for a solid economic relationship with the country that is not only one of its largest markets, but also its leading source of foreign direct investment into China –– including new technologies and business methods that are at issue in IP enforcement. 

There is much less prospect of real progress on nudging China to revalue its currency, a recent hot-button issue for some prominent members of Congress.  A stronger renminbi certainly would appear to be in our interest, since it would cut the price of U.S. exports inside China and raise the price of their exports inside the United States.  In practice, it probably would make little difference to our economy. A stronger renminbi mainly would help companies in places which produce the same things as domestic Chinese companies –– places like Bangladesh and Thailand, not Michigan or Alabama. Yes, it would shave the price of U.S. products inside China –– but it would do the same for the products of our Japanese and European competitors.

Anyway, Hu has no intention of taking major steps in this area. Chinese leaders have always approached the value of their country’s currency as a matter of national sovereignty.  The truth is, we don’t react very well either when China or the governments of other countries criticize U.S. monetary policies, such as the recent blasts from Germany and China about the Fed’s second round of quantitative easing.  And even if Hu approached this matter less dogmatically, it wouldn’t change that fact that the cheap renminbi is a critical part of the country’s basic strategy for strong, export-led growth; or that Hu and his fellow leaders see the success of that strategy as a lynchpin of their own political legitimacy.  And while it won’t be mentioned this week, China’s long-term goal in this area is to claim for the renminbi part of the U.S. dollar’s role as the world’s reserve currency, which would come at our expense and help insulate the renimbi from future pressures to revalue. 

Obama may get a more receptive hearing when he presses Hu to engage with the United States –– and the rest of the world –– on climate change. Both men know very well that China is now the world’s largest greenhouse gas emitter.  That’s mainly because China has the world’s most ambitious program for building new electricity-generating plants; and since its only significant domestic energy source is coal, that’s what those plants run on.  Hu also knows that the world will address this threat sooner or later –– and when they do, China cannot afford to sit on its hands.  Obama’s challenge is the same one he faces with many Americans –– come up with a strategy that will raise the price of fossil fuels without imposing serious costs on the economy.  Here at home, the answer to that riddle is a carbon-based tax with the revenues recycled for tax cuts in other areas.  For China, Obama’s approach will have to be more subtle –– for example, intimations about a future agreement to promote joint ventures by U.S. and Chinese companies to develop and sell new alternative fuels and climate-friendly technologies. 

These issues also give Obama the opportunity to drive home his case for new public investments at home –– in education and training, for example –– to expand America’s modest comparative advantage in fielding a workforce that can adapt easily to new technologies and business methods. This week’s meetings also could provide a platform to highlight his tax incentives for businesses, so they can make the investments required to better compete with Japanese and European companies in the Chinese market.  And any meaningful U.S.-Sino discussions on climate change will dovetail nicely with the administration’s calls to expand R&D in this area, and so establish a more commanding position for the United States –– with or without China –– in global markets for green fuels and technologies.

What Role for Regulation in the American Economy

Today in the Wall Street Journal, President Obama lays out a vision for a 21st Century Regulatory System. He concludes that:

Despite a lot of heated rhetoric, our efforts over the past two years to modernize our regulations have led to smarter—and in some cases tougher—rules to protect our health, safety and environment. Yet according to current estimates of their economic impact, the benefits of these regulations exceed their costs by billions of dollars.

This is the lesson of our history: Our economy is not a zero-sum game. Regulations do have costs; often, as a country, we have to make tough decisions about whether those costs are necessary. But what is clear is that we can strike the right balance. We can make our economy stronger and more competitive, while meeting our fundamental responsibilities to one another.

It is important to understand that not only is regulation not always bad, sometimes it can lead to innovation. Over the summer, Washington Post columnist Steven Pearlstein wrote about Harvard Professor Michael Porter's research on just that:

It's been 20 years since Harvard Business School professor Michael Porter provided scholarly support for the notion that, rather than hamper economic growth and competitiveness, well-crafted regulation could actually promote it. Porter's first observation was that some of the world's most prosperous and economically vibrant countries were also those with some of the most stringent business regulations, such as Germany and Japan. His studies of specific industries also turned up numerous examples of new products and more efficient ways of doing business that came about only because companies and industries were forced to comply with rules.

Porter's musings, introduced in an article in Scientific American, have since spawned a cottage industry of researchers intent on proving or disproving his hypothesis. Its most controversial aspect was to suggest that profit-maximizing companies were ignoring opportunities to produce profitable new products or adopt more-efficient production techniques. Such a notion not only runs counter to the most basic principles of economics and efficient markets, but it also offends the sensibility of corporate managers, who find it preposterous that such opportunities could be revealed only when the EPA or an OSHA inspector knocks on their company's door.

But subsequent research confirmed what some of us have long since discovered -- namely that corporate executives can be stuck in their ways, averse to risk and unwilling to sacrifice short-term profitability for long-term gain. And as a result of these market "imperfections," sometimes a new regulation comes along that spurs innovation by forcing companies to look at things in new ways. That doesn't mean that regulation is costless, but it does suggest that, on an economy-wide basis, those costs can be offset by subsequent investment and innovation.

As the President's op-ed describes, the role of regulation in our economy is not as simple as many describe. For more on his strategy, check out OMB Director Jack Lew's blog.

Why It Doesn’t Matter Much that Obama’s Jobs Record is Better than Bush’s

 

The great partisan squabble of 2011 over the economy begins this week with the new Congress.  Even if some of the rhetoric seems fresh, the core issues likely to become the stuff of real political fights – the terms of entitlement spending, the shape of the tax code, and the value of public investment -- are all familiar from battles during the previous two administrations.  There is one important difference, however, which will startle both sides.  When we probe the economics and politics, it appears that the real issue for most Americans isn’t jobs and unemployment, but incomes and wealth. 

The first clue lies in public data which have been almost universally ignored:  George W. Bush’s record on jobs was much worse than Barack Obama’s.  Both men took office during recessions which had taken shape under their predecessors, but with quite different effects.  So far, we have 21 months of jobs data under Obama, from February 2009 to November 2010:  Over that period, as the administration took numerous steps to support the economy, American businesses shed a net of 1,975,000 jobs.  George W. Bush’s approach was much simpler, relying almost entirely on large tax cuts.  Yet, even though the 2001 downturn was barely a blip compared to what Obama would face eight years later, Bush saw 2,852,000 private-sector jobs disappear in his first 21 months.  The job losses in Bush’s first two years, then, were nearly 1 million larger than during Obama’s first two years.  Set aside the first six months of each president’s term, before their policies could take effect, and the comparison grows even starker.  In those subsequent 15-month periods, American business under Bush shed 1,772,000 jobs, compared to job gains of 715,000 under Obama’s program. That doesn’t include the most recent developments, including a report today from ADP Employer Services estimating that private employment jumped by 297,000 in December.  By any economic measure, then, the Obama approach has been much more successful with regard to jobs than the Bush program which congressional Republicans now want to repeat.  

But the Bush program was much more successful politically, judging by the 2002 and 2010 midterm elections.  To be sure, the Bush White House managed to change the subject from its dismal jobs record to terrorism and Saddam Hussein, which helped a lot.  But the huge Democratic losses last November, despite Obama’s much better record on jobs, tell us that the main issue for most voters – at least those with jobs -- probably wasn’t unemployment at all, but rather their overall economic condition.  In this regard, Bush was as lucky as a Rockefeller:  He inherited an economy which under Clinton had produced large income and wealth gains for most Americans, giving them a critical cushion to muddle through the 2001 recession without having to cut back much.  Obama, on the other hand, had the misfortune of inheriting a much weaker economy from Bush, one which had left most Americans treading water even before the financial crisis and Great Recession of 2007-2009 eroded their assets.   

Let’s retrace the real conditions.  Throughout the Bush expansion, most Americans experienced no income gains, although their wealth appeared to increase.  Here, the stock market isn’t very important.  The Federal Reserve reports that the top 20 percent of Americans control 93 percent of the value of all financial assets, including pension and retirement accounts.  With 80 percent of the country holding only 7 percent of the nation’s financial assets, the falling stock markets of 2000-2001 and 2007-2009 had little direct effect on most people economic condition.  But one asset is widely held by Americans: Nearly 70 percent of the country owns their own homes.  Bush’s legacy to Obama, then, included not only a half decade of stagnating incomes, but also wealth losses for most people amounting to between 25 and 30 percent of the value of their homes.  Layer a deep recession on top of all that, and voters grow very cranky.

The truth is, most people are prepared to live with large job losses that affect others, so long as their own economic conditions remain decent.  But wipe out a good slice of their assets, so that most of them have to cut back, and whoever is in office will pay a big political price.

Where does Washington go from here?  The GOP wants to replay the Bush program, which is no more likely today to lead to sustained income progress and wealth gains than it was in the last decade.  This time around, they also want to layer on deep cuts in public spending, an approach likely to cut the legs off of the fragile expansion which just now is beginning to take hold.

The administration’s alternative looks a lot like Bill Clinton’s program, which did help promote broad income gains.  In his State of the Union address and budget proposal, President Obama will likely call for targeted, new public investments in infrastructure, R&D and education, additional steps to expand foreign markets starting with the free trade agreement with Korea, and measures to bring down the deficit very gradually by restraining defense, Medicare and overall discretionary spending.   This agenda may not usher in another historic boom, but it would provide a more solid foundation for long-term income progress.

It’s also time to help Americans rebuild their assets through new public steps to finally stabilize housing values.  The best way to do that is to provide direct loan assistance to those facing home foreclosures, since high foreclosures are the most powerful force still driving down housing prices in most places.  Otherwise, the voters may prove to be quite cranky again in 2012, endangering second terms for scores of congressional Republicans and perhaps even President Obama.

Employment increased by 297,000, exceeding the highest projection in a Bloomberg News survey, after a revised 92,000 rise in November, according to figures from ADP Employer Services. The median estimate in the Bloomberg survey called for a 100,000 gain last month.

 

The (Lack of) Economics Behind Conservative Arguments about Spending

According to John Boehner, government spending is killing jobs and harming the economy. His idea is to cut domestic discretionary spending by 20 percent. Unfortunately, Boehner seems to have badly misplaced a lesson from an introductory economics course. Let's look at  the economics behind this popular conservative argument.

The economics behind the conservative complaint about spending are straightforward – in good economic times, government investment that leads to borrowing can "crowd out" private investment by raising interest rates, thereby diverting economic activity away from the private sector. This can be a legitimate concern in boom times, which is part of the reason having smaller deficits in good times is generally a good idea; a sizeable government deficit can lead to higher interest rates, which hurt the economy.

These, however, are nothing close to good economic times, and government is not driving out private sector investment and therefore not hurting job creation. How do we know this? There is virtually no inflation – economists are more worried about deflation right now – and a huge shortage of demand. Interest rates are basically the lowest they can possibly be, and the Federal Reserve keeps trying to drive them down. (That’s why the Federal Reserve has gone to quantitative easing; it can’t lower rates any further.)

The point of the stimulus, in fact, was that government needed to function as the spender of last resort to avoid a deflationary spiral.  In a package of tax cuts and spending, government injected demand into an economy that was sorely lacking it in order to spur the economy and create jobs. The idea behind stimulus is that government injects demand, which is then multiplied throughout the economy. Since the economy still sorely lacks demand, further cutting government would be an economic disaster of epic proportions. Here’s the kicker: the countercyclical economic underpinnings are the same on the spending and tax sides – so conservatives talking about the need to cut taxes in a recession are actually espousing the same Keynesian economics that I am. 

That the economics don’t work out for John Boehner right now points to another fact – that his arguments are actually about a philosophical belief in the appropriate size of government. Fair enough. But then let’s have that debate, over which government functions are appropriate and which ones are not. As John Boehner will soon find out (when he has a fight that sounds eerily similar to the one Bill Clinton cleaned Newt Gingrich’s clock on in 1995-1996), more than 80 percent of domestic discretionary programs are not ones Americans will actually consider "discretionary."

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