New York City - Watching the spectacle of auto CEOs seeking aid on Capital Hill, it is interesting to contrast their reception with that of their better heeled Wall Street counterparts. Though--or perhaps because the auto guys--compared by the New York Post this morning to Moe, Larry and Curley--are the poor men among recent corporate CEOs seeking money, they have been treated far more contemptuously. They have had to travel hat in hand to Washington. In contrast, bankers for the most part have stayed in New York, while the G -men, like borrowers calling on the Morgan Bank in days of yore, have made the trip to see them. Many Americans cannot resist gloating over the plight of the auto CEOs. Indeed the headline of today's Post was Rust in Peace.
Are people really more angry about their cars breaking down and high paid auto workers than about 30% interest on credit cards, bait and switch mortgages and fee-based banking? I don't think so. Reflecting on the different treatment, I think the answer is that neither group has sympathy among the public but bankers have sympathy among those in power. This has spared them the humiliating treatment of publicly asking for money at hearing after hearing.
Outside of Detroit, hardly anyone in government even knows a car guy. In contrast, bankers and financiers are densely intertwined with the political class in Washington. Washington routinely taps people from the financial industry to work in government and countless Schedule C employees not to mention cabinet officials go to Wall Street upon leaving government. Most policy wonks know dozens of people in the financial sector. There lies the difference in how the two sectors, both suffering in the current downturn, have been received. (There also lies the risk of crony capitalism.)
It also helps the financial sector that a large group of government organizations, from Treasury to the SEC to the Fed to the CFTC are devoted to its well being. The auto industry though regulated with respect to safety and emissions has no similar agencies with a stake in its ongoing health.
However, if policy makers were to put aside the cultural and career affinity they may have for finance as opposed to manufacturing, they would find that the auto industry is every bit as important to America's future.
Finance is a great way to make money. However, you don't have to believe with Kevin Phillips that finance becomes an outsized part of countries in decline to acknowledge that financial business gravitates to sectors and regions that are putting money to productive use. Strong industry in a country makes for strong financial opportunities. Silicon valley was a driver of Wall Street wealth building in the 1990s. American firms, not British or Japanese ones, took most of the business.
However in the last decade, as the center of productive uses for capital has moved to China, US financial institutions have had to chase business there and eventually, they will find themselves outmaneuvered by Chinese banks. And markets recognize this fact. If the Big Three go under, the stock market and US financials may decline in value as well. The irony is that if that happens, the financials stand a good chance of getting more billions from TARP or the FED. The result in that scenario would be that we lost not only the money but the car companies, too. It makes more sense to put together a real plan to get our auto industry back on track.
New York City - Clean infrastructure stimulus is coming and it is coming fast, perhaps as soon as January 20th, given the new accelerated timetable of President Elect Obama and the Congressional leadership. For us at NDN, this is an exciting moment, as we have been advocating on behalf of a large green stimulus package that works for the long term as well as the short term for quite some time.
Clean infrastructure stimulus has the ability not only to create jobs in the near term -- particularly in sectors and regions hard hit by the now official recession, the manufacturing belt and the construction industry -- but also to create the clean, modernized physical plant and infrastructure that America needs to ensure our future prosperity.
However, how the stimulus is structured and carried out is as critical as the dollar amount. On Tuesday, the nation's governors presented President Elect Obama with a list of $176 billion in infrastructure projects ready to go. However, to get the money out onto the street quickly, moving it through the usual government channels won't work. Rather, we need to create a new process and structure to get the money out quickly and efficiently.
Dick Ravitch, the former New York City MTA Chairman and head of New York Governor Paterson's new infrastructure commission, knows more about how federal funds flow to the states under ordinary circumstances than most. Funds normally move slowly. He argues this is no time for business as usual and his recommendation, an emergency infrastructure board, well supervised, with proper auditing controls and carefully monitored by Congress, is critical to getting funds flowing and jobs starting quickly.
Rather than allocate money to agencies, Congress should authorize a board to fund valid projects. Infrastructure projects that get funded should be ones teed up and ready to go with all their zoning and permitting in place so that the only thing missing is funding. This is a far better way to move the funds out quickly than the usual funding channels that generally go through the Department of Transportation. At the same time, money should be allocated according to sound, consistent principles to ensure orderly dispensation of funds. The interests of the people can be adequately addressed by states identifying those that are high priority.
Projects with a green advantage such as public transportation projects, projects that employ green building, water projects and others that move us toward a low carbon economy should go to the head of the line.
As excited as we at NDN are about the speed with which green stimulus is now moving forward, moving money out quickly but also responsibly is vital to making this historic stimulus work. If the money is spent wastefully, or perceived as being spent wastefully according to political expediency, it will not only be a tragic missed opportunity but also reduce its impact and undermine market confidence.
Indeed, just yesterday, China's sovereign wealth fund announced it would no longer invest in American banks because of the erratic changes in US policy. I wrote recently about the problem with the Treasury managing the bailout fund like a hedge fund. What we need is structure and consistency but a streamlined process to move money out onto the street where it is needed quickly and effectively.
At the same time, we cannot let red tape or ordinary bureaucratic lethargy slow funding when a key purpose of stimulus is to get the money out quickly to create jobs and get the economy moving again.
We don't have that much time to get this right, but we do have a great deal of will as we face up to the severe economic challenges facing the country. An emergency board with emergency powers but also the proper rules in force to guarantee the judicious but expeditious spending of the tax payer's money is a good idea that the incoming Administration and Congress should embrace.
Following are links to some of NDN's work on a clean infrastructure stimulus:
The official word came today on an economic fact that policymakers have generally known and the American people have certainly felt: The United States has been in a recession for about a year. The National Bureau of Economic Research, the group of seven economists who officially decide such things (it was eight until President elect Obama tapped Christina Romer to chair the CEA) issued a statement today saying that the recession began in December of last year.
As Time'sJustin Fox points out, there have not yet been two consecutive quarters of negative GDP growth – a commonly understood metric for a recession – so NBER's panel was careful to explain their rationale.
A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators. A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough. Between trough and peak, the economy is in an expansion.
The committee determined that the decline in economic activity in 2008 met the standard for a recession… All evidence other than the ambiguous movements of the quarterly product-side measure of domestic production confirmed that conclusion. Many of these indicators, including monthly data on the largest component of GDP, consumption, have declined sharply in recent months.
Even before delivery of the official word on the recession, economists on both the left (Krugman, Reich) and the right (Mankiw) have been invoking Keynes so much that the words of Richard Nixon ("We are all Keynesians now") seem an appropriate descriptor for the moment.
While there is some general agreement on the need for a large economic stimulus package, disagreement exists on its ramifications for long-term deficits. Mankiw, primarily, argues that the Fed may have tools left to act creatively, but certainly understands the Keynesian optics and argues for a decentralized stimulus that gives money for infrastructure to states. Krugman and Reich argue convincingly that a free lunch basically exists in this case, as increasing output in the short term will more than overcome the deficits created.
Whatever the disagreements, one thing seems to be indisputable to bothsides of the aisle: a stimulus that focuses on spending that spurs the economy now with long term benefits in mind is the best way to go. NDN has been making this argument for months; NDN President Simon Rosenberg and Globalization Initiative Chair Dr. Rob Shapiro went into specific detail on a potential package in "A Stimulus for the Long Run" and Green Project Director Michael Moynihan argued that Clean Infrastructure must be included in such a package.
The incoming Obama administration seems to be on the right track. Rahm Emanuel recently made a statement on a green stimulus, and Obama has signaled a desire to sign a stimulus package into law immediately after his inauguration. Getting the economy back on track will not be easy, but doing it the smart way, by investing in America’s present and future, is the only way to go.
In what turns out to have been a highly prescient book, the two authors predicted that 2008 would be a “change” election, informed by new technology and by the outlook of a new generation of millennial voters, who tend to be more inclusive, optimistic and tech-savvy than their elders.
Their work on Millennials was also featured in MarketWatch, the Toledo Blade, and the National Journal. The National Journal piece, "Where are the New Voters?", also features NDN's work on Hispanic issues:
"It's another indication that America went through a civic realignment in 2008," said Morley Winograd, a fellow with the progressive think tank and activist group NDN, and co-author of Millennial Makeover: MySpace, YouTube and the Future of American Politics. Hispanic voters, too, have swung decisively to Democrats, NDN experts note, and increased their share of the electorate by 62 percent in Colorado, 50 percent in Nevada, and 28 percent in New Mexico.
Michael's recent essay, "Building the Electron Superhighway," was featured in the Huffington Post and Grist.
Rob was quoted in Forbes on President-elect Obama's economic team:
Rob Shapiro, an economist who was a top official in Clinton's Commerce Department, said Obama's selection of Geithner and Summers, as well as his wooing of Hillary Rodham Clinton as secretary of state, reflect Obama's interest in attracting expertise and people of strong will.
"It tells you that not only does President-elect Obama have respect for expertise, but that he is very comfortable in an administration with very major figures," said Shapiro, now an official with NDN, a think tank formerly known as the New Democratic Network.
President Elect Obama's comments at the press conference yesterday announcing Peter Orszag as head of OMB, following his announcement on Monday of other key economic appointments – Tim Geithner as Secretary of the Treasury, Larry Summers as director of the NEC and Christina Romer as head of the CEA – illustrates the tightrope that the new Administration will have to walk in addressing the economic crisis.
On the one hand, on Monday the President Elect highlighted the immense economic challenges facing the country that will require a stimulus package that Larry Summers has said "must be speedy, substantial and sustained." On the other, however, it is important that the stimulus not be perceived as wasteful spending. And thus it was appropriate for President Elect Obama to highlight his cost cutting challenge to Orszag, namely to eliminate waste from the federal budget.
By it very nature, a rapidly implemented stimulus cannot be as focused as ordinary elective spending. To accomplish its goal, the stimulus must be broad, get the money out on the street quickly, and be large enough to do its job. However, if the money is perceived as being dropped from a helicopter (in the metaphor popularized by Fed Chairman Bernanke), it may undermine faith in the government and hence confidence in markets.
As the stimulus package is developed and released, all eyes will be on whether it appears to be thoughtful or wasteful of the public's money. President Elect Obama's comments yesterday were thus encouraging in suggesting he recognizes this requirement and that his team will work to ensure that the stimulus meets this crucial test.
As we at NDN have argued, investments in infrastructure not only have a short lead time in getting money where it is needed, they also are not wasteful because they will continue to pay dividends for years to come. We need new, up to date roads, bridges, rail lines, water mains, fiber and power lines to undergird our future prosperity. However, as we have also argued, a key part of infrastructure investments being up to date is that they acknowledge our energy and environmental challenges. Retrofitting older buildings, requiring that every new government facility meet green standards and making transportation investments based on their energy and environmental implications is investing in the future.
Placing a gigawatt of renewable solar power on government buildings over the next 5 years, for example, is not only desirable but is also cost effective. Investing in our electricity grid can not only create jobs today but stimulate the economy down the road. And funding a clean infrastructure bank to make energy smart infrastructure investments will not just stimulate the economy but raise productivity in the future.
In short, energy and environmentally smart represents a responsible use of the public's money. And making these sorts of investments is one way to meet the challenge of stimulating the economy responsibly. In coming weeks, we look forward to working with the Administration's new team, Congress, and stakeholders on a stimulus package that addresses both our short and long term economic challenges.
New York City - Should the federal government build or incent others to build a new electron superhighway? In other words, a backbone for a 21st century electrical grid? At NDN's recent event on clean infrastructure, U.S. Rep. Jay Inslee asked precisely that question and it's one more and more energy leaders are asking.
Our current grid, as former CIA Director Jim Woolsey has noted, resembles nothing so much as the road system before interstates were built. Had President Eisenhower not built the interstate system after observing the autobahns in Germany and fretting over the difficulty of moving an army from one end of America to the other, our roads would be a network of streets, shopping boulevards and country roads, slowed by trucks as well as tolls. There would be no easy way to travel between one large city and another and trade and distribution of goods would be drastically hampered.
This is precisely the situation we have today in the world of electricity, where mid-20th century wires are now tasked with carrying 21st century loads and tolls are collected by dozens of utilities along the way. As a result, instead of a national market in electricity, we have a balkanized patchwork of local fiefdoms each with vastly different prices. Electricity producers face obstacles in moving their electrons to market -- hardly an ideal solution.
How would an electron superhighway work? One proposal by the Energy Department would build major high voltage (765KV) trunk lines traveling East to West and North to South, particularly in the underserved center of the country. Like Interstates 10, 40, 80 and 90 which link the East and West and Interstates 5, 55 and 95 (as well as those in between) which link the North and South, these large roads would facilitate long distance movement of power. Relieved of this burden, utilities could focus their resources on localized distribution. While the proposal might cost $60 billion to $100 billion (a weekend's worth of bailout money), the long-term benefits would be tremendous. In fact, the proposal could be financed through a miniscule tax of less than a penny on the average monthly utility bill.
A particularly interesting approach to building an electron superhighway would be to run the cables underground. No one wants a high voltage transmission line running anywhere near their home, leading to complex obstacles to siting new lines. Additionally, underground lines are far more expensive than overhead ones and it is harder to identify problems when they occur. However, new superconducting wire (eliminating almost all the resistance in a wire by cooling it down using liquid nitrogen) that can be laid in a three-foot trench and is already being implemented in Long Island could be run underneath bike paths, along roads and in other unobtrusive places. While this technology, proven in pilot projects and now being tested at scale is new, it could revolutionize long-distance power transmission.
The interstate highway system is not the only model for moving goods. The Internet backbone, though jumpstarted by federal investment, is run privately for profit. Similarly, private companies own the long distance natural gas pipes. And private companies own the railroads.
Of these, the Internet system is probably least illustrative because it remains unregulated. Natural gas is produced at a comparatively limited number of points, simplifying its long distance transportation requirements. America's rail system, a relic of the 19th century, is probably not a model for a ubiquitous electricity network.
It may be that federal ownership is not necessary. However, a national tax on electricity would certainly be easier to implement than hundreds of individual rate cases -- the traditional method for funding investment. Important obstacles to greater federal involvement in electricity remain, however, in the form of state regulators and some utilities that have traditionally opposed a larger federal role.
As America confronts its 21st century challenges, in particular, developing a grid that can facilitate a national electricity market and also accommodate decentralized generation of renewable power, the idea of an electron superhighway merits serious attention. At a very minimum, work should accelerate on how to implement an electricity backbone. As FERC Commissioner Jon Wellinghoff, quoting Albert Einstein, remarked at NDN's clean infrastructure event, "physics is easy, politics is hard."
On Wednesday, the Wall Street Journal reported that President-elect Barack Obama’s Chief of Staff-designee Rahm Emanuel "promised that a major economic stimulus would be 'the first order of business’ for Mr. Obama when he takes office Jan. 20. The focus of spending will be on infrastructure, specifically 'green infrastructure.'"
According to Congressman Emanuel's statement, this green infrastructure will include mass transit, modernizing the electrical grid, and universal broadband Internet access, all of which NDN has been arguing should be included in the next Administration's agenda. NDN strongly supports this policy direction and will work with Members of Congress in support of this agenda.
NDN has long been a strong and vocal advocate of a clean infrastructure stimulus because of its ability to create jobs and stimulate the economy in the short term while also creating a basis for future prosperity.
As Moynihan wrote more than a year ago, America needs "a GREEN Act requiring that federal infrastructure and buildings...not only address issues like global warming but also establish American leadership in green technologies of the future." Wrote Moynihan, "Only by working together can Americans reverse the decline in infrastructure that is eroding our present economy and make the forward-looking public investments needed to ensure future prosperity." To that end, NDN has proposed a number of green stimulus measures including a clean infrastructure bank, modernization of the electrical grid, support for mass transportation, and greater broadband access.
Recently, Moynihan, NDN Globalization Initiative Chair Dr. Robert Shapiro, and NDN President Simon Rosenberg have authored a number of essays and analyses on clean infrastructure and clean technology:
Additionally, earlier this week, NDN hosted a Capitol Hill forum entitled, "A Vision for a Modernized Electric Grid: Clean Infrastructure for a 21st Century Economy," with U.S. Reps. Jay Inslee and Earl Blumenauer, FERC Commissioner Wellinghoff, and other energy experts. Click here for video and photos of the event.
Word has just come down that U.S. Rep. Henry Waxman (CA-30) has defeated Rep. John Dingell (MI-15) in the race for chairman of the powerful House Energy and Commerce Committee. This will have a dramatic impact on the course of climate change and energy legislation in the 111th Congress.
New York City -- At NDN, we have been arguing for many months that a stimulus package is needed to jump start this difficult economy. We need a proposal that works for the long term as well as the short term. Absent real stimulus, there is a possibility, as Rob Shapiro argues, that the economy may lapse into a "sub-optimal equilibrium" in which people spend and produce far less than they can. However, we have also argued that the form the stimulus takes is as important as the amount. Invesments in clean infrastructure have the ability not only to get money onto the street quickly but also to address our long-term economic challenges such as stagnant wages, rising energy costs and the threat of climate change.
Yesterday, President-elect Obama and his Chief of Staff Rahm Emanuel said that a clean energy and infrastructure stimulus package literally will be the first order of business for the new Administration come January. What a difference a new President can make!
This is good news for the American economy and the American people. Clean infrastructure investments have the ability to create high-paying domestic jobs, lower energy costs and raise productivity all while stimulating the economy in the short term.
Here are some of the stimulus measures proposed yesterday by the President-elect's new chief of staff: mass transit, upgraded electricity transmission lines, "smart" electrical meters that allow consumers to save money by using electricity at off-peak hours, and universal broadband Internet access.
All not only make sense but are critical to our future.
As the new Administration takes shape and a new Congress prepares to take office, we look forward to working with stakeholders and policy makers to make these critical investments and get America moving again!
New York City -- On October 3, the day President Bush signed the $700 billion bailout package that Hank Paulson called vital to saving American capitalism, the Dow closed at 10,325. Yesterday it closed at 8,424. In the six unhappy weeks of the bailout fund's life, the Dow has shed close to 2,000 points or about 20% of its value. Almost as soon as the fund was authorized, the Treasury and the Fed shifted gears and followed Gordon Brown in using the first slice to invest in banks. Capitulating last week to the fund's dubious impact on markets, Secretary Paulson announced that the Troubled Assets fund would not be used, after all, to buy troubled assets. Yesterday, he announced he does not plan to use the unspent funds of about $410 billion at all but will instead leave it as dry powder for the Obama Administration. Some have unkindly called this fund a slush fund. However, launched by a former Goldman star, levered at close to 100% and with the goal of making opportunistic investments, it really resembles nothing so much as a Hedge Fund.
So what's wrong with a government hedge fund?
The advantage of a Hedge Fund over a more constrained capital allocation process is that the fund manager can make the decisions quickly. If the manager is a genius, the fund does well. However, a genius one year can turn out to be not so smart the next. And as the limited partners in this hedge fund, the public should have the right to withdraw its money if the fund manager does not have a strategy.
In a world of constrained debt, one cost of the public's commitment to this hedge fund is that it has used up a healthy amount of the public's credit -- something that has not gone unnoticed by markets. As an article in the current Barrons observes, the yield curve, or the premium for borrowing for a longer period, has stiffened, recalling the famous inflation premium on long-term debt that drove the Clinton Administration's fiscal restraint. That premium disappeared during the Bush years, thanks to supercharged global liquidity from the Asian savings glut and expansion that followed the Asian financial crisis. Its reappearance, however, bears noting. More ominously, perhaps, a little known derivative, the credit default swap for long-term U.S. government bonds -- a derivative that should not exist since it represents insurance against a Treasury default -- has risen in price. In other words, some are now betting against the full faith and credit of the U.S. government.
However, this hedge fund poses another problem for the economy and government policy that is impacting the proposed government stimulus, its opportunity cost. Any focused stimulus package now pales in comparison with the TARP hedge fund. Of what stimulative impact is $2 billion for weatherization or $10 billion to extend unemployment benefits when the Treasury is giving out chunks of $30 billion or $50 billion at a time to AIG?
The hedge fund -- while it may have served a purpose in helping the banks stay solvent --threatens to interfere with needed stimulus.
As we have argued at NDN, the unbridled use of monetary tools last year left the Fed empty handed as we enter a recession and a fiscal stimulus is now the primary tool left to policy makers with which to address the slowdown. But we have also argued this fiscal stimulus should work for the long term as well as the short term.
We suggested a substantial share go into clean infrastructure projects that get money out onto the street but also address our long-term energy, environmental and economic challenges. Clean infrastructure projects can not only can create jobs and exert a large multiplier effect, but also pave the way for future prosperity. As President-elect Obama said over the weekend and again yesterday, clean energy is his top priority next year because it has the ability to address so many of our challenges at once.
However, as long as the Hedge Fund overshadows any proposed stimulus, it will be difficult for Congress to make these needed investments. What, then, is the answer?
Now that the immediate challenge of stabilizing the banks has been met, Congress and the incoming Administration should reassert their authority over the second half of the hedge fund. A portion of this money might be better allocated to stimulus than loans to banks. In any case, it should not stand in the way of a meaningful stimulus package.
The hedge fund may have served a short term purpose, but it is no way over the long term to allocate public funds. The sooner we begin making real investments, not just backstopping financial institutions, the sooner we will get America's economy moving again.