Economy

The New York Times this morning covers China’s suppression of the renminbi to encourage exports and active use of the World Trade Organization’s rules to prevent protectionism by its trading partners. 

To maximize its advantage, Beijing is exploiting a fundamental difference between two major international bodies: the World Trade Organization, which wields strict, enforceable penalties for countries that impede trade, and the International Monetary Fund, which acts as a kind of watchdog for global economic policy but has no power over countries like China that do not borrow money from it.

China had a $198 billion trade surplus with the rest of the world last year, with its exports to the United States outpacing imports by more than four to one. Despite that, in the last 12 months, Beijing has filed more cases with the W.T.O.’s powerful trade tribunals in Geneva than any other country complaining about another’s trade practices.

In addition, Beijing has worked to suppress a series of I.M.F. reports since 2007 documenting how the country has substantially undervalued its currency, the renminbi, said three people with detailed knowledge of China’s actions.

China buys dollars and other foreign currencies — worth several hundred billion dollars a year — by selling more of its own currency, which then depresses its value. That intervention helped Chinese exports to surge 46 percent in February compared with a year earlier.

Paul Krugman, in his column today, calls on the Treasury Department to declare China a currency manipulator, I, like Krugman, believe that the common conception of China’s "ownership" of the U.S. is a bit backwards. (Think: When you owe the bank $1 million, the bank owns you, but when you owe the bank $100 billion, you own the bank.) Having said that, Krugman’s solution – "playing policy hardball" by imposing a 25 percent surcharge on imports – seems to approach dangerous levels of protectionism while the global economy remains unstable and could turn out to be ineffective, backfire, or start a trade war. 

Fundamentally, there seems to be a question of domestic Chinese politics at hand – the global economy would be helped by China floating the renminbi sooner rather than later, but that action cannot appear to come as a result of foreign, especially American, pressure. There is, of course, another calculation in play – China’s currency policies hurt America less than they hurt others, namely developing nations. Since public American pressure on this issue is likely to backfire and other countries should care about this a lot, we are left with the less-exciting (and less fun for economic pundits) avenue of behind-the-scenes diplomacy and multilateral action.

Two other stories worth following on global and domestic finance:

• European Monetary Policy remains in flux, as the French are displeased with German labor-cost practices. This follows calls to create a European Monetary Fund, which follow the Greek financial crisis.

• Senate Banking Committee Chair Chris Dodd releases financial reform legislation today. The need and appetite for such reform has only been fueled in recent weeks by an absolutely awful report about what went wrong at Lehman. 

Politicians always on the lookout for ways to stir up voters recently have lit upon the fast-growing size of America’s national debt, whether the context is health reform, unemployment benefits or the war in Afghanistan. Their concerns are usually just easy excuses for opposing basic health coverage for working people, or assistance for out-of-work families, or standing up to Al Qaeda. But if we take them at their word, we’ll find that these concerns are largely misplaced – but not entirely so.  

Moreover, ironically, progressives may have more compelling reasons to control this debt than the current crop of conservative Republicans. Since the time of Ronald Reagan, most Republican conservatives have understood well that the large deficits that pile up the national debt deny Democrats the resources to carry out new initiatives. Bill Clinton and his followers understood this dynamic when they pressed to balance the budget – and, in the process, both create the political space to expand government’s role and deny conservatives the excuse that we can’t afford it. 

Let’s go to the numbers. The total U.S. national debt today is about $12.4 trillion, and CBO expects us to add another $1 trillion a year for another decade. The combination of a high national debt that’s growing very quickly can drive up interest rates. But in strictly economic terms, our debt numbers aren’t as high as they seem. The federal government itself holds $4.5 trillion of the debt, with nearly 60 percent of it sitting in the Social Security Trust Fund – and these securities can’t be sold or traded on financial markets. That brings down the publicly-held, economically-relevant debt to $7.9 trillion. In fact, another $780 billion of that is held by the Federal Reserve, which uses its portfolio of government securities to expand or contact the money supply, and then turns back to the Treasury most of the interest it earns. 

So, the debt most worth worrying about comes to about $7.1 trillion, equivalent to a little less than half of our 2009 GDP of $14.46 trillion. Looking at the national debt as a share of GDP, as economists do, makes sense, because when that share goes up, it usually means that government deficits are growing faster than the economy that finances them. Stated a little differently, when the debt’s share of GDP rises, it usually means that the government is allocating more of the economy. To many economists, this portends slower long-term growth, because government is rarely as efficient as markets in making those allocations.  

That’s just what’s happening now. The share of GDP represented by all of our publically-held debt has risen from 40 percent just a few years ago to about 50 percent today, and it’s headed for 65 percent by 2015. But, the share is also expected to plateau from 2015 to 2020, even without Congress taking new steps to reduce the deficits. The same goes for the total or gross national debt: It comes in at about 80 percent of GDP today and is projected to reach 95 percent of GDP in 2015, where again it will roughly remain from 2015 to 2020. Such a fast-rising national debt, at least for the next five years, does suggest a less efficient economy – but maybe not, because you don’t have to also assume that no other technological or organizational advances emerge over the next few years to make us more efficient. 

Other economists have different worries: They note that historically, when a country’s debt reaches some fairly high level of GDP, investors begin to lose confidence. And when that happens, investors may demand much higher interest rates to keep buying the debt or, in extreme cases, refuse to buy any more of the country’s debt at any price. Across many countries and many years, this no-confidence trigger-level appears to lie at debt equal to 90 to 100 percent of a country’s GDP. But that’s certainly not a hard rule: Japan passed that level without experiencing a debt or currency crisis, and investors almost certainly would grant the United States and the dollar greater slack than Japan and its yen.

Others worry about the interest costs to service the government’s debt. Since, in a roundabout way, the federal government uses bookkeeping notations to “pay” the interest it owes itself, and the Fed gives back most of the interest it earns, what’s at issue here is the interest on the remaining, publically-held debt. In 2009, this debt came to about $7 trillion. Since interest rates have been low, the interest payments came to $187 billion last year, or less than 1.3 percent of GDP. 

That wouldn’t matter much economically, but for one catch: Nearly half of it was paid out to foreign investors, especially foreign governments. If Americans owned all of our national debt, the cost of servicing it would be a wash, since one set of Americans (the taxpayers) would pay another set of Americans (the bondholders). But foreigners now own 47 percent of all publically held U.S. debt – including nearly $900 billion owned by the Chinese Government (that’s more than the Federal reserve holds), $770 billion held by the Japanese Government and that nation’s investors, and another $210 billion by Middle Eastern governments and their reigning families. All of those interest payments are just deadweight losses for the U.S. economy that leave us poorer.

These foreign payments also highlight the domestic political costs of a very large national debt. For instance, the interest paid last year to foreign governments dwarfs the annual cost of the President’s health care reforms. And over the next few years, those costs will increase sharply, because the debt will go up quickly and interest rates almost certainly will be considerably higher. In 2015, for example, the Treasury expects to pay out more than $400 billion in net interest – at least half of it to foreign investors – and those payments should reach more than $650 billion by 2020. These increases in interest payments sent abroad would dwarf the cost of virtually any new social program that progressives might imagine.

Our fast-growing national debt also contains another potential trap. While a prosperous America can handle a national debt of $12 trillion or even $20 trillion a decade from now, another financial or economic meltdown on top of such debt could sink us all. America entered the 2008-2009 financial crisis and recession with an unusually small national debt, as a share of our GDP. That’s why the upcoming decade of trillion-dollar annual deficits (driven mainly by the costs of tens of millions of retiring boomers) will still leave us with a national debt smaller than our GDP. But imagine that a second meltdown requires new bailouts and new stimulus at least as great as the recent ones, but coming this time on top of existing, trillion dollar deficits. Global investors may well balk at those financing demands, producing a downward economic spiral for us all that would be very hard to stop.

This scenario isn’t hard to imagine, given Washington’s inability to agree to the financial market reforms required to avert another crisis. That leaves us with controlling the rising national debt. If the two parties don’t have the stomach to regulate Wall Street, perhaps they eventually will find their way, as Bill Clinton did, to reducing the underlying deficits.

On Thursday, March 18, Senator Mark Warner will join NDN to address America's economic competitiveness in a rapidly changing global economy. He will discuss the role of innovation in creating prosperity and offer his perspective on the Senate's work to craft a new economic strategy for America, which includes reforming the nation's health care and financial sectors.

Warner, a former Governor of Virginia, sits on the Senate's Banking, Budget, Commerce, and Rules Committees and the Joint Economic Committee. An early leader in the cellular telephone industry and long-time NDN friend, Senator Warner has distinguished himself as an important national voice for 21st century economic and innovation policies.

Senator Mark Warner on American Economic Competitiveness and Innovation
Thursday, March 18
Lunch served at 11:45; Event begins promptly at 12pm
NDN: 729 15th St. NW, 1st Floor
A live webcast will begin at 12pm
RSVP  |  Watch webcast

A question and answer session will follow Senator Warner's remarks. I hope you will join us for this important event on March 18.

Yesterday, the House of Representatives passed a version of Jobs Bill recently passed by the Senate. The legislation contained a payroll tax cut similar to one advocated by NDN. Specifically, the bill included:

• A payroll tax holiday for businesses that hire unemployed workers, to create some 300,000 jobs and an income tax credit of $1,000 for businesses that retain these employees 

• Tax cuts to spur new investment by small businesses to help them expand and hire more workers 

• Extension of the Highway Trust Fund allowing for tens of  billions of dollars in infrastructure investment 

• Provisions -- modeled after the Build America Bonds program – to make it easier for states to borrow for infrastructure projects, such as school construction and energy projects 

For more on the payroll tax cut, please see:

• Cutting Payroll Taxes to Create Jobs by Dr. Robert Shapiro, February 5, 2010

• President Obama, Senators Advance Payroll Tax Cut to Spur Job Creation by Jake Berliner, January 29, 2010

With the FCC preparing to issue new rules and policies to promote universal broadband access, Washington’s hive of think tanks and foundations (and lobbying shops that masquerade as one or the other) have issued a flurry of new studies on broadband’s impact on American jobs. It’s a marriage of two genuinely vital matters: Ensuring that every American has access to the wired world that increasingly permeates most people’s economic and social opportunities; and finding ways to restart job creation across the economy. Perhaps most important for the FCC’s deliberations, the new studies point to the different jobs impact of the network’s two principal parts, the companies that build the broadband infrastructure and those that provide its content.

In the most rigorous new study, Robert Crandall of the Brookings Institution and Hal Singer, a consultant, calculate the new jobs that arise directly from the tens of billions of dollars in new investments undertaken by broadband providers, laying cable, fiber and DSL lines, putting in place new connections, and building out wireless and satellite-based broadband networks. From 2003 to 2009, these direct investments created some 434,000 jobs; and over the next five years, the same process should produce more than 500,000 more jobs. And as we will see, these effects dwarf the job gains linked to the companies providing the content.

But the power of a market-based economy lies in the ways that a basic infrastructure such as broadband stimulates additional economic activity, much as highways and railroads once did. Building out these networks creates a platform for the development of thousands of new applications, and the combination creates new demand for the computers, software and other IT equipment needed to use the network and its applications.

Consider the iPhone cited in another new study from the Democratic Leadership Council. Without the broadband network, the iPhone would be just another cell phone. With it, Apple sold 43 million units in three years, its’ users downloaded 1 billion applications, and other mobile device makers scrambled to develop competing devices. And the people newly employed to produce these computers, software and other equipment earn wages and salaries, which enable them to buy more goods and services that yet more workers have to produce. Altogether, economists figure that these dynamics created another 430,000 jobs per-year from 2003 to 2009.

But there’s a big catch. As millions learned when the New Economy bubble burst in 2001, new technologies create enduring wealth and jobs only if they enable us to either do something entirely new or do more efficiently something we already do. Otherwise, the technology mainly moves around demand and the jobs linked to it: When we get our news from the Internet, it creates jobs on those sites while costing jobs at newspapers and magazines. This tradeoff happens especially when the economy is growing smartly and different companies and sectors have to compete for investment capital. So, we have to recognize that the cheering investment and job numbers for broadband don’t usually take account of the jobs that weren’t created when investment in other areas slowed — and that’s why economics is called the dismal science.

This caveat, however, also points to broadband’s real potential to create new efficiencies and new economic value — and the jobs that go with those gains. First, there are “spillovers” to other parts of the economy. So, as the use of broadband and its applications expand, other sectors from hotels and manufacturing to retail trade and educational services have to keep pace; and that requires that they increase their own investments in computers, software and so on. Those investments create new jobs not only to produce those technologies, but also to operate them once in place. One recent study estimated that for every one-percentage point increase in broadband penetration, several hundred thousand more new jobs are produced — and broadband access has been rising by several percentage-points per-year.

Combinations of broadband and advanced applications also can generate entirely new savings which allow people to spend more on other things, and so create additional jobs not counted in all of those studies. We see this happening in telecommuting, which saves transportation and other energy costs, as well as in telemedicine, which can not only reduce transportation and energy costs but also make the practice of certain areas of medicine more efficient and more effective. And if telemedicine saves people’s lives or reduces how long they’re sick, the economy gains all of the productivity which otherwise would have been lost.

There is one more catch in all of this good news: These various gains are not distributed evenly across the economy or equally across the society. It’s not just a matter of much of the gains going to workers in industries that develop and sell the fiber, cable, satellites, computers, cell phones, software, and so on. Beyond that, a recent study by the Public Policy Institute of California found that communities with new access to broadband — and parts of communities — experienced average job growth 6.4 percent greater than before they had broadband. To begin, much of those gains will be captured by workers with sound IT-related skills. Furthermore, this suggests that communities without such expanded access — and parts of cities where most residents remain not wired — will lag behind even more than before.

And within the broadband universe, the direct job gains associated with higher investments are also concentrated. Dividing that universe into the broadband providers such as AT&T or Verizon and the content providers such as Google and eBay, studies and SEC data show that, first, broadband providers invest three-to-four times as much as the content providers. Moreover, studies also find that each dollar invested by broadband providers creates about twice as many jobs as each dollar invested by the content providers.

These studies suggest several takeaways for the FCC. First, the FCC’s goal is the right one: Universal access to broadband is critical to promoting more job opportunities and economic growth across the economy. Second, the central element for job creation here are the investments required to ensure universal access — not only now, but also as broadband technologies continue to advance. The FCC should promote these investments in every way it can. At a minimum, the Commission should be extremely cautious about policy changes which could weaken the incentives for those investments — i.e., reduce their returns — or raise the price for people to access broadband.

American consumers gained a few consumer protections this week from the credit card companies, but it’s only the beginning of the reforms we need.  One very large issue remains untouched and unmentioned: The big credit and debit card networks, along with the large banks that issue most cards, impose “interchange” or “swipe” fees on merchants of 1.5 percent to 3.25 percent of every credit or debit card transaction.  This matters to all of us, because most of these fees are passed along in higher prices on every purchase like a hidden sales tax, whether or not the purchase involves a credit card. To be sure, we all derive economic benefits from using credit and debit cards.  But the fees attached to every card purchase are five-to-six times the actual costs of processing the transaction; and the card networks and card-issuing banks manage to insulate themselves from competitive pressures that might bring down those fees.

These findings come from an analysis that my advisory group, Sonecon, just completed for Consumers for Competitive Choice. The study found that in 2008, merchants paid the credit card networks and the banks issuing the cards some $48 billion in swipes fees. Of that, less than 20 percent went to cover the actual costs of processing the credit and debit card charges and covering fraudulent charges, while the remaining 80 percent went for a variety of forms of gravy. Only the absence of real market forces enables the card networks and banks to maintain these fees at levels that so far exceed their actual costs.

And all of us bear a burden from these excessive fees. We calculated that merchants pass along some 56 percent of these fees in higher prices. And since the credit card networks bar merchants from charging their customers a lower price if they don’t charge it, the high swipe fees raise the price of everything bought by anybody – from food, clothing and computers, to gasoline, restaurant meals, and furnishings. In all, the excess swipe fees cost an average American household $230 per-year. And if these fees were limited to the actual processing costs, plus a normal profit, the lower prices for everything would expand real demand enough to create nearly 250,000 more jobs.   

All of this comes about because our credit-card system operates along the lines of two interlocking cartels, allowing limited competition among their members while insulating themselves from outside price pressures. Three card companies – Visa, MasterCard, and American Express – account for more than 95 percent of all consumer charges and two-thirds of all business card transactions. That means that merchants have no choice but to accept most or all of these cards, which in turns means that consumers and businesses that want to charge it have no choice but to do so with these cards.  

Furthermore, most of these charges occur on cards issued by four financial institutions, with 70 percent of all charges being placed on cards issued by JP Morgan Chase, Bank of America, Citigroup, and American Express. The four big banks issue a bewildering variety of cards with various rewards and annual fees, each attached to a different swipe fee for merchants when they’re used. Between Visa and MasterCard alone, merchants are subject to more than 300 separate swipe rates and fees. But under the rules set down by the card networks and banks, a merchant that accepts one Visa or MasterCard has to accept all of them, regardless of the swipe fees imposed for charges on particular cards.  

These arrangements tend to push up the swipe fees. Most of the fees go to the banks. So, Visa, MasterCard and American Express compete for bank business by promising higher swipe fees; while the banks compete for new subscribers by offering increasingly generous rewards programs financed by the higher fees. Nor do the cartel-like rules imposed by the card networks and banks allow downward pressures on those fees: Merchants cannot choose which cards to accept based on the fees they pay, which might put pressures on high-fee cards; nor can they charge less for those paying by cash or using low-fee cards, which would allow consumers and businesses to put the pressure on the high-fee cards.  

These arrangements are also baldly unfair. More than half of all lower and moderate-income Americans don’t carry credit or debit cards at all, and relatively few of those who do have cards qualify for the rewards programs. Yet, they’re forced to pay higher prices for everything they purchase, in order to help finance the card-rewards programs offered to more affluent people and the outsize profits claimed by the card networks and card-issuing banks.  

It’s time to fundamentally change this part of the system. Australia used to have swipe fees averaging just 0.95 percent. They adopted reforms limiting the fees to the actual processing costs, plus reasonable profit, and they fell to an average of 0.50 percent. Through it all, Australia has retained a healthy credit and debit card system. As the Senate Banking Committee work to forge a final compromise on financial regulation, it should follow Australia’s example and grant the Federal Reserve or the Federal Trade Commission new authority to set reasonable rules for swipe fees.

A Senate measure designed to spur job creation moved forward last night, as five Republicans joined with their Democratic colleagues to push measure over the 60 vote procedural barrier. At the core of this proposal is a measure similar to one proposed by NDN, Senators Schumer and Hatch, and the White House that puts 13 billion dollars into temporarily reducing the payroll tax for new hires. 

The Senate’s newest member, Scott Brown, led the way for Republicans to join the measure, and was followed by Susan Collins, Olympia Snowe, George Voinovich, and Christopher Bond. What’s curious is that Orrin Hatch, who coauthored an op-ed proposing the measure with Schumer, and that many other Republicans did not vote for the measure. After all, it’s a tax cut for small businesses.

The Senate should be congratulated for moving this measure forward, as should those who voted for it from both parties.  I remain confused by exactly what kind of tax cut needs to be proposed to get more Republicans than three from New England and two who are retiring to vote for it.

For more on this measure, please see:

• Cutting Payroll Taxes to Create Jobs by Dr. Robert Shapiro, February 5, 2010

• President Obama, Senators Advance Payroll Tax Cut to Spur Job Creation by Jake Berliner, January 29, 2010

The most remarkable aspect of our current economic predicament is the politics surrounding it, which are now as dysfunctional as Bear Stearns or AIG just before they tanked in 2008.  The latest illustration is this week’s partisan take on the effectiveness of last year’s stimulus, one year after its passage.  While every cable TV loudmouth with economic opinions calls himself or herself an economist, there was never a debate among real economists over whether an $800 billion, two-year package of spending and tax cuts would help spur growth and employment.  Whether one thinks that economic relationships were better described by John Maynard Keynes and Robert Solow, or by Friedrich von Hayek and Milton Friedman, the conclusion is that it would.  And one year later, the data show that it did: Growth is back, albeit still weak; and the rapid ascent of joblessness slowed sharply, not from a spurt of new job creation but because many fewer people lost their jobs.

The short-term benefits of the stimulus have been willingly acknowledged by conservative economists from Harvard’s Martin Feldstein (Reagan’s CEA chair) to AEI’s Kevin Hassett (McCain’s economic tutor).   That makes the current carping by GOP leaders either mindlessly uninformed or willfully misleading.  

To be sure, economists have serious differences about other aspects of stimulus, principally whether their long-term costs outweigh the short-term benefits.  Ironically, here’s where a truly perverse streak in our current economic debate really kicks in.  While a neoclassical economist would expect smaller short-term benefits and larger long-term costs from stimulus than a Keynesian colleague, both would agree that the prospect that government borrowing will continue to expand after a real recovery takes hold calls for long-term deficit reduction. So, how do we explain GOP opposition to the President’s call for pay-as-you-go budget rules and a bipartisan deficit reduction commission?  In this case, the ideological blinders which dictate no tax increases even to control runaway deficits reinforce the Republican political calculus that any achievement by the President could diminish the public’s anger at incumbents.  The result is the GOP’s perverse and dysfunctional “just say no” approach to the economic debate.  

With public concerns over long-term deficits heating up – especially among the Tea Party followers currently being courted furiously by Republican leaders -- the GOP probably won’t be able to maintain its blanket opposition to any serious move to reduce those long-term deficits.  But in other areas of economic policy where the politics are less clear-cut, most notably financial reform, their across-the-board opposition will be easier to maintain.  Moreover, the economics of financial reform are also less clear-cut, producing diverse views among Democrats as well.  With most Republicans unwilling to even consider a bipartisan meeting of the minds over these reforms, the structural problems that led to the market meltdown of 2008-2009 will remain unaffected.  In the wake of a financial crisis that very nearly tipped the world into a global depression, the politics that produce this outcome are unconscionable.

The final irony may come if the GOP political strategy succeeds.  If Republicans pick up large numbers of seats in Congress come November – and they might just take over the Senate -- their enhanced numbers and especially the new members may force them to show they can produce some real progress.  And those pressures, in turn, will require compromises with the President and congressional Democrats that seem utterly out-of-reach today.

The good people at the Truman National Security Project are out with a new study today on the costs to American security of reliance on oil. Truman COO and Iraq veteran Jon Powers' op-ed on Huffington Post previews the study and includes a telling quote from former CIA Director James Woolsey:

Except for our own Civil War, this [the war on terror] is the only war that we have fought where we are paying for both sides. We pay Saudi Arabia $160 billion for its oil, and $3 or $4 billion of that goes to the Wahhabis, who teach children to hate. We are paying for these terrorists with our SUVs.

From an economic perspective, the reliance on oil is also tremendously costly. This graph (via calculatedrisk) illustrates that more than half of America's trade deficit now consists of imported oil: