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.
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."
The United States faces economic problems as daunting as any seen since the 1930s. GDP growth and job creation remain slow in the early stages of the current recovery, when both should be strong. Moreover, the pressures of globalization, along with technological advances, have reduced the capacity of American businesses to create new jobs even when demand is strong. These changes have boosted productivity, but most people’s wages and incomes remain stalled. And in the most dynamic sectors of our economy, those technological advances increasingly demand skills beyond those of most working Americans. These developments also have produced rapidly widening gaps in incomes and wealth, so that 20 percent of Americans now own 93 percent of the nation’s financial assets. And the one asset that most families can claim, their homes, has lost an average of 30 percent of its value in the last three years.
Yet, Washington continues to respond to these challenges through an economics of nostalgia. The economic agenda of most conservatives today consists mainly of tax cuts for those at the top who earn, save and invest the most, resting on an unflagging faith that markets are self-correcting and invariably produce the best possible outcome. After all, this approach seemed to work in the 1980s -- even if its reprise under George W. Bush led to nearly a decade of historically anemic job creation and stagnating incomes, and culminated in a disastrous financial meltdown and long deep recession of 2007-2009. The progressive response amounts mainly to a series of stimulative spending and tax measures bolstered by virtually unlimited and free loans for large financial institutions to stimulate their own lending. And while similar approaches worked in the 1960s and 1990s, the current iteration has produced the weakest recovery in decades.
The progressives are closer to the mark than the conservatives, because when the private sector underperforms as badly as ours has over the last 18 months, it needs stimulus of the sort currently promoted by the President and likely to pass the Senate this week. But in an economy hampered by serious structural problems, stimulus alone cannot ignite strong and self-sustaining gains in growth, jobs and incomes. To accomplish that, both sides need to put aside their traditional responses and consider new approaches that can directly address the structural problems holding back real prosperity. Ironically, the most significant initiative to do so is the one program that the Administration gets the least credit for – the health care reforms or at last those parts which over time should slow the rate of increase in medical and insurance costs, and thereby help provide a foundation for faster job creation and wage gains.
These nostalgic economic nostrums seem to blind most of Washington to the necessity for a new economic strategy. For example, it should be evident to all but the most ideologically-blinkered free marketers that the housing market has been dysfunctional for nearly a decade. Moreover, the sustained decline in housing values has produced a “negative wealth effect” which continue to dampen consumer demand when the various stimulus measures run out. Conservatives argue for letting those markets work their will, which would amount to another two years of slow demand and declining assets for most Americans. A better strategy begins by acknowledging that declining housing values are a real problem, now driven by high levels of home foreclosures. We can try to fix that with a new loan program to help families facing foreclosure keep their homes. And if that strengthens consumer demand, it should also trigger significant increases in business investment – and together, both should generate real job gains.
The problem of slow job creation isn’t limited to our current circumstances – in the expansion of 2002-2007, American businesses created jobs at less than half the rate, relative to GDP growth, seen in the expansions of the 1980s and 1990s. Much of this problem comes from the intense competitive pressures unleashed by globalization, which limit the ability of businesses to pass along higher costs by raising their prices, and therefore forces them to cut costs when, for example, their energy, health care or pension bills go up. A reasonable response to this problem would be measures to lower the cost to businesses of creating new jobs. For the short term, for example, we can give U.S. multinationals 18 months to bring back their foreign profits at a lower tax rate, but only if they already expand their U.S. workforces by 5 percent to 10 percent. That would produce an estimated 750,000 to 1.3 million additional jobs. For the longer term, we should consider cutting the payroll tax for employers on a permanent basis and using a carbon fee to restore the revenues for Social Security.
Similarly, neither stimulus nor the market alone can affect the growing mismatch between the IT skills required to excel at most well-paying jobs today and the training of most American workers over age 30 or 35 years. For $300 million to $400 million a year – a fraction of the smallest bank bailout of 2008 or 2009 – Washington could provide grants to community colleges to keep their computer labs open and staffed in the evenings and on weekends so any adult could walk in and receive free computer training. It’s also time to join the rest of the advanced world in recognizing that higher education has become as much a public good as elementary and secondary education. Our idea-based economy now requires that government also ensure genuine low-cost access for both undergraduate and graduate training for anyone attending public colleges and universities, tied perhaps to a requirement for a year or two of public service.
This leaves us a major structural problem that at least Washington acknowledges – the prospect of damaging long-term deficits once the economy recovers, tied to fast-rising entitlement spending for retiring boomers. The economics of nostalgia will be of little use here as well, but a view of a more effective strategy will require a separate discussion.
"The debt ceiling, obviously, is going to have to be increased if we're not going to default, so the question is, what do we get in exchange for that, and what kind of fiscal controls?" said Rep. Paul Ryan (R-Wis.), the incoming chairman of the House budget panel, last week on Bloomberg Television.
Ryan's question - what do I get in exchange for not letting the United States of America default? - has only one answer: a $174,000 paycheck for being a member of the United States Congress. This is going to be an interesting battle over the next few months, but Ryan's current position of demanding something that fits his ideology in exchange for not ruining America's credit could easily be considered unpatriotic.
Barack Obama exhibited this week what Machiavelli called the essential quality of a successful statesman, “virtu,” or the capacity to advance a society’s vital interests while respecting the constraints of conditions beyond his control. The vital interest at stake here is a decent economic expansion that improves the circumstances of the vast majority of Americans, and the critical condition beyond the President’s control was the Republicans’ ability to block any tax increase for a very small minority of high-income households. While this week’s tax deal isn’t nearly enough to drive a robust recovery, it should be good economic news for most Americans.
Yes, the President agreed to two more years of the Bush tax cuts for very well-to-do people, covering their overall incomes, dividends and capital gains, and sheltering all but the very richest estates from inheritance taxes for two years. But those were concessions to conditions beyond his control, since without them, there would have no action at all. Moreover, in return the President won the GOP leaders’ acquiescence to some significant help for nearly everyone else. Beyond two more years of lower tax rates for average Americans, he secured expanded tax credits for parents putting their children through college, a one-year payroll tax reduction for working people, an expanded Earned income Tax Credit for working poor families, and an additional year of unemployment benefits for millions of out-of-work Americans.
To be sure, that won’t be enough to drive a strong expansion. That still requires difficult measures to correct the distortions that brought on the original financial crisis and still continue to dampen the expansion. A strong revival of consumer spending, of the sort that powers most early expansions, still depends on steps to stabilize housing prices. And while this week’s deal includes another dose of tax breaks for business investment, a surge in business spending will have to wait for consumers to begin spending freely again and for lenders to clear their books of billions of dollars in real estate-related investments that continue to deteriorate. Nevertheless, the deal passes the basic test of sound economic policy by moving the economy in the right direction, and should help nudge the jobless rate down a bit.
The temporary nature of these measures also provides intriguing opportunities for Democrats. The payroll tax reduction would expire one year from now, just as the 2012 campaigns get going. Ultimately, neither party would let that happen, but the President could use its prospect to drive progressive social security reforms. For example, the 2 percent cut in the payroll tax rate for employees could be phased out very gradually, and the lost revenues could be offset by raising the cap on the wages subject to the tax. The 1983 social security reforms set the cap to cover 90 percent of all wages, rising each year at the same rate as average wages. But since the wages of those at the top have grown much faster than the average, today the cap covers only 85 percent of wages. Push it back to 90 percent, as the Bowles-Simpson Commission has proposed, and we could phase out the “temporary” tax rate reduction over a decade’s time and take a big step towards guaranteeing the system’s long-term solvency.
Moreover, the tax cuts for high-income Americans could be more vulnerable politically two years from than they are today. It’s safe to say that the deficit will be a hot-button issue in 2012, and with the Bush tax cuts now set to expire in January 2013, the election-year deficit debate will include heated arguments over who should have to pay higher taxes. According to current polls, at least, the public’s answer is those high-income folks.
While the loudest complaints about the deal have come from progressive Democrats, the real question is why the Republicans agreed to it. For all of the GOP’s talk about jobs and deficits, the deal exposes their real bottom line: Preserve at almost any cost lower taxes on the incomes of the top 2 percent of Americans and on the estates of the top 0.5 percent. The deal equally highlights the President’s priorities – tax relief for the middle class, and help for the unemployed and the poor. And if the economy finally begins to gather steam by 2012, the contrast embedded in this week’s deal might well boost the President’s prospects.
While certain other parts of the press conference he held yesterday received more attention, the President also built on the speech he gave in North Carolina on Monday, when he described an economic direction for the country. His agenda his one designed to that ensure America's success in the more competitive, global economic of the 21st century:
Here’s going to be the long-term issue. We’ve had two years of emergency -- emergency economic action on the banking industry, the auto industry, on unemployment insurance, on a whole range of issues -- on state budgets. The situation has now stabilized, although for those folks who are out of work, it’s still an emergency. So we’ve still got to focus short term on job growth.
But we’ve got to have a larger debate about how is this -- how is this country going to win the economic competition of the 21st century? How are we going to make sure that we’ve got the best-trained workers in the world? There was just a study that came out today showing how we’ve slipped even further when it comes to math education and science education.
So what are we doing to revamp our schools to make sure our kids can compete? What are we doing in terms of research and development to make sure that innovation is still taking place here in the United States of America? What are we doing about our infrastructure so that we have the best airports and the best roads and the best bridges? And how are we going to pay for all that at a time when we’ve got both short-term deficit problems, medium-term deficit problems, and long-term deficit problems?
Now, that’s going to be a big debate. And it’s going to involve us sorting out what government functions are adding to our competitiveness and increasing opportunity and making sure that we’re growing the economy, and which aspects of the government aren’t helping.
And then we’ve got to figure out how do we pay for that. And that’s going to mean looking at the tax code and saying, what’s fair, what’s efficient. And I don’t think anybody thinks the tax code right now is fair or efficient. But we’ve got to make sure that we don’t just paper over those problems by borrowing from China or Saudi Arabia. And so that’s going to be a major conversation.
And in that context, I don’t see how the Republicans win that argument. I don’t know how they’re going to be able to argue that extending permanently these high-end tax cuts is going to be good for our economy when, to offset them, we’d end up having to cut vital services for our kids, for our veterans, for our seniors.
But I’m happy to listen to their arguments. And I think the American people will benefit from that debate. And that’s going to be starting next year.
So my job is to make sure that we have a North Star out there. What is helping the American people live out their lives? What is giving them more opportunity? What is growing the economy? What is making us more competitive?
I was invited by colleagues at the Center for American Progress to add ideas from my recent NPI working paper, The Acceleration Agenda, to their 10-day discussion on how to restore US competitiveness kicked off by Governor Ed Rendell last week.
Accelerating Job Creation and Competitiveness from the Bottom Up
Many thanks to the team at CAP for kicking up this important conversation. In addition to the smart ideas already offered by Ed Rendell and Rob Atkinson to refocus federal priorities, here are a few more low-cost, high-impact, and very bipartisan steps we can take to accelerate growth and competitiveness, detailed in The Acceleration Agenda.
First of all, it's important to note that the news is not all bad. The Obama administration is leading a new robust set of long-term investments in education, broadband, and clean energy competitiveness through its unheralded "new foundation" program.
But we can go faster by rewiring our broken economic development system to better link entrepreneurs to financing and build nontraditional networks that connect innovators, suppliers, and customers across traditional geographies. At the core of this economic development strategy is a new emphasis on nurturing bottom-up economic growth rather than top-down government dictates. The reason: Different federal programs "siloed" at departments and agencies across Washington simply can't deliver results based on a one-size-fits-all strategy to meet the challenges of 21st century global economic integration.
There certainly is good reason to consider how to revamp federal programs so that they work more collaboratively and more efficiently, as the CAP report highlights, but even still policymakers need to consider a bottom-up acceleration cookbook that features these ingredients:
Distributed federal engagement networks
An important finding in the Council on Competitiveness's Collaborate report makes clear how trusted, on-scene "barrier busters" in communities like Louisville and Denver have been critical to building working alliances between governments, the private sector, and community leaders. To be blunt: We need to make sure that more interagency meetings happen in frontline communities, not in Washington D.C. This is cheap to do and we can measure the benefits.
Implementation partnerships with business
Bottom-up doesn't mean just states, cities, or universities get more money. We need locally-led, public-private partnerships to be the locus of competitive innovation, too. Here is where businesses and community foundations can step up. Government cannot build this last mile alone. Like the Welfare to Work Partnerships of the 1990s, this new generation of Jobs and Innovation Partnerships would engage businesses directly in problem-solving.
Flexible finance mechanisms
Public-private partnerships are critical to picking the right local projects, but then we need to fund them. The clear message emerging from bipartisan and business-friendly competitiveness consortia across the country is the dire shortfall of small amounts ($2 million to $10 million) of flexible seed and risk capital to kick-start the first wave of new entrepreneurialism. Filling this gap is critical. We just need to lock the smart people in a room for a few days.
New governors on both sides of the aisle are eager to pursue federal waiver strategies for economic development and infrastructure, similar to past efforts around health and welfare implementation. An executive order strategy, as recommended by CAP, can include this acceleration win-win.
Name the big idea
Separate economic sectors, such as small business, clean energy, infrastructure, exports, skills, and entrepreneurship, need to be better linked under one integrated framework. The sooner we name it, the sooner we can get to work building it. We could call it U.S. Competitiveness Strategy, A Regional Race to the Top, 21st Century Infrastructure, or simply More Jobs Dammit. But we need to organize around a shared lexicon, both at the federal level as CAP has outlined, and at the local level as suggested here. Until we do, many promising initiatives from the White House and the different departments and agencies in the administration will move slowly in their own lanes, rather than speed along on a fast track we need to build together.
Suffice it to say, there are a wide range of opinions on the tax deal President Obama announced last night. There's a lot to like and dislike about this deal, but it's clear that, in terms of actually moving the economy over the next two years, this was better than a lot of the alternatives. A quick round-up of some opinions.
So is this a good deal? It's a lot better than I would've told you the White House was going to get if you'd asked me a week ago. There's some new stimulus in the form of the payroll-tax cut and the expensing proposals. The older stimulus programs that are getting extended -- notably the unemployment insurance and the tax credits -- probably would've expired outside of this deal. The tax cuts for income over $250,000 are a bad way to spend $100 billion or so, and the estate tax deal is really noxious.
It's bad news for the deficit, though the White House and Congress are right to make the deficit less of a priority than economic recovery. And speaking of that economic recovery? This isn't enough, and it's not well targeted. The deal amounts to the White House throwing some bad money after good. But the end result is between $200 and $300 billion more in tax breaks, tax credits and unemployment insurance than there would've been if not for this deal (I say $200-$300 billion because of the uncertainty over what would've been extended in the absence of this package). That's better than nothing -- or to be more specific, better than backsliding.
Why were Republicans so flexible? They are willing to deal away a lot if they're getting tax cuts for the rich. President Clinton got Republicans to establish a Childrens' Health Insurance Program in 1997 in return for a capital gains tax cut. Now Obama got a fair amount of stimulus in return for upper-bracket tax cuts. Unfortunately, it tends to be terrible policy. But it's the party's core policy goal, and if you help them attain it they can be surprisingly reasonable.
Most of this round of stimulus does look to be relatively low bang-for-buck, and it is not paid for over ten years, but it does look to me as though it is better than a poke in the eye with a sharp stick.
"In the current environment, emergency unemployment insurance is much more efficacious that tax cuts for upper income groups,” said Zandi, in an email to TIME. “Given the fragility of the recovery, however, I would do both."
David Frum says the deal is "a win for the President."
More economists: Mark Thoma is concerned about social security and the financing mechanism for the payroll tax cut, Greg Mankiw likes it, with some caveats, and Dean Baker cautions that this package is anti-contractionary, not really stimulative.
Early reports about today's deal over tax cuts and other economic legislation in the lame duck session reveal that a two-percent cut in the payroll tax is to be included for one year. This is indeed a positive development. Based on Rob Shapiro's long standing advocacy for a cut in the payroll tax in order to spur job creation, Rob, Simon Rosenberg, and I wrote a memo over the summer advocating a one year payroll tax cut. Indeed, the Congressional Budget Office has said that a payroll tax cut is the most effective measure for job creation.
If today is any indication (and it is, this is a mathematical reality), the next two years are going to be difficult for those elected on the promise of cutting taxes and cutting the deficit. The fact is that you just can't do both at the same time. Policymaking is about setting priorities, and right now creating jobs and growing the economy have to be at the top of the list.
"Older politicians will have to get beyond their ideological blinders to recognize the opportunity waiting for any candidate or political party that can embrace both halves of the Millennial era civic ethos paradox."