The plan out of the House GOP to cut around $40 billion from domestic agencies in the next few months ($32 billion net, but an $8 billion addition for the Pentagon and Veterans Affairs) would be laughable, except cuts like this are no laughing matter. There's a simple reality at foot here: these cuts have nothing to do with putting America on sound fiscal footing, nothing at all. Furthermore, they have nothing to do with job creation.
The nation's fiscal picture is clear - growing Medicare costs are the largest contributor to our long-term fiscal problems. Yet the plan out of the House does not address these costs. (The House did that the other day, by attempting to exacerbate healthcare costs by repealing the Affordable Care Act.)
Additionally, the economic problems facing the country mainly stem from a shortage of demand in the economy. Pulling roughly $40 billion out of the domestic economy removes demand from the economy. It's not yet clear where exactly the $40 billion would come from, but it is likely that some of it comes from programs that either have strong multiplier effects on the overall economy or are the engines of future economic growth. These cuts, especially, must be fought.
By commonly held metrics, these cuts do not contribute to growth or put the nation on a meaningfully better fiscal path. Because of these two facts, it is incumbent on their proponents to explain why they matter. Changing a "culture of spending," as Rep. Paul Ryan purports to do, is not real economic policy. Conservatives clearly hold a faith that less government is better. They should be asked to make that case when they propose such cuts, instead of getting to hide behind a vale of fiscal responsibility or economic literacy.
The revolt in Egypt is being driven by disaffected middle-class youth angry about the lack of economic opportunity. Likewise, in Tunisia, unemployment and high food prices were at the core of the people's complaint with their government. Such is generally the case - economic stagnation leads to political unrest.
In America, too, the economy drives political volatility. Upset about 10% unemployment, the American electorate threw out the Democratic House of Representatives in 2010; in 2006 and 2008, declining household incomes and an economic collapse led Americans to push Republicans from power. While American political angst is delivered differently - at the ballot box and not in the streets - the economy, again, creates political change.
This analysis may seem simple, but it's factual - political scientists have found a strong correlation between income and both Presidential approval rating and congressional seats won in mid-term elections. Political volatility is an inevitable result of a bad economy, and the volatility is generally accompanied by anger. People feel a bad economy and get angry about whatever they didn't like to begin with-they just do it louder.
This isn't to say that there aren't other issues that matter to citizens; there are. Egyptians were furious that Mubarak planned for his son to succeed him. Healthcare, civil rights, immigration, and fiscal issues, to name a few, are important to Americans. But the economy is like no other political issue because it's not just about sharing values or agreeing with a candidate's principles. "The economy" actually means the real quality of life enjoyed by a country's people. When people's economic well-being declines, when opportunity no longer presents itself, the body politic gets angry, and that anger is manifested politically. In dictatorships, governments get overthrown; in democracies, they get voted out. If the Egyptian economy were thriving, Mubarak would likely still be in control of Egypt. And if the American economy were thriving, we'd have seen far less volatility in the last three elections, less angst about deficits and debt, and likely no Tea Party. (We'd be in the 1990's, when items such as school uniforms topped the agenda.)
So what do regular people want? Simple: they want leaders who are responsive to their overriding concern - the economy. Oddly, this most basic political fact isn't always acted upon. Hosni Mubarak should have done more than replace his cabinet with new faces when people's complaints are about a lack of opportunity. Conversely, it's no surprise that the President's State of the Union address won high approval ratings - he talked about people's economic problems and his plan to create a better economy.
Ultimately, the politics and the policy have to meet - political leaders must have a plan for the economy and that plan must actually work. That's why, if incomes, housing values, and job prospects for everyday Americans improve before the 2012 elections, President Obama will in all likelihood be reelected. And, if other autocracies with miserable economies fail to improve in coming years, Egypt and Tunisia will mark just the beginning of a string of similar incidents of political unrest.
Update - 2/1/2011: Jordan's King Abdullah II has fired his cabinet due to protests. The New York Timesreports that economic issues are driving popular discontent:
Recent demonstrations in Jordan marked the first serious challenge to the decade-old rule of King Abdullah, a critical American ally in the region who is contending with his country’s worst economic crisis in years....Banners decried high food and fuel prices and demanded the resignation of the prime minister, appointed by the king.
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.
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 - wouldnot put the federal budget on a sustainable course for decades. The federal debt would soar to about 175 percentof 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.
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:
Economic Strategies & Globalizationby 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
The Pitfalls of Economic Nostalgiaby 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 Editionby 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 Americansby 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 Economyby 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."
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.
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.
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.
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.
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.