Foreclosures

The inconvenient truth that lies behind this week's White House jobs summit is that there are no magic bullets for an economy thrown over the cliff by a huge financial crisis.  Even with all of our stimulus, bailouts, tax breaks and special Fed lending programs, job losses continue to mount, dampening investment and overall demand.  That's not all: Despite the administration's efforts to stem home foreclosures, they continue to rise and so pull down more mortgage-backed securities and their derivatives, which in turn also dampens business lending and jobs.  We're also seeing mounting losses in commercial real estate, propelled by higher vacancy rates and more tenants simply unable to pay their rents, which are driving up failures by the banks which lent out the money to develop those buildings.  Those failures also eat away at demand, investment and jobs.

And we're still highly vulnerable to more damaging shocks.  So, stock markets around the world fell sharply this past week when one of the world's largest commercial real estate companies, the government-owned Dubai World, announced that it couldn't pay its lenders.  For many, Dubai World's problems raised the scary possibility of sovereign debt defaults, which would be another blow to financial institutions around the world, which hold most sovereign debt.  And nations aren't the only sovereigns whose bonds could be in trouble: The largest real estate bubble and worst recession in 80 years could also compromise the debt status of the world's seventh largest economy, the state of California. 

While large fiscal and monetary stimulus will always help an economy in free fall - we saw that in the modest rebound in third quarter GDP - the number of Americans working could continue to fall for at least another year, because the economy had serious problems with job creation before the crisis hit.  After the 2001 recession, the briefest and mildest on record, the number of people working continued to slump for two years; and over the course of the 2002-2007 expansion, American businesses created jobs at less than half the rate of the previous two expansions.

So, the country has a serious problem with jobs, one which requires serious responses.  A little more stimulus can play a role here, especially targeted to state governments whose labor forces are being squeezed between their falling revenues and balanced budget requirements.  The cure for the private sector will have to involve stronger and more permanent measures that can directly reduce the cost to businesses of creating new jobs.  Here's a start:  Exempt from payroll taxes the first $3,000 to $5,000 of wages paid in each of the first two years to new hires by firms that expand their work forces. Since it would be a permanent measure that would reduce social security revenues, we should pay for it and use the new revenues to make the social security trust fund whole.  We can do that by enacting a small "Tobin tax" on financial market transactions, equal to, say, one-quarter of one percent of the value of trades, and pressing other major countries to do so as well.  James Tobin, the Nobel laureate who first proposed such a tax for currency trades, noted it could help reduce destabilizing currency speculation.  Given the recent crisis, slowing down speculation seems like the right medicine for stocks and bonds today.  And at such a low rate, it shouldn't affect long-term investment, especially if other financial-center countries go along.  And if we don't take strong measures, we will almost certainly find ourselves grappling with serious problems with job creation for many years. 

The statistics get almost numbing after awhile:

Sales of new homes in the United States fell to the lowest levels on record.

Americans living on unemployment checks at highest level since tracking started in 1967.

Home foreclosures rose 81 percent in the United States from 2007 to 2008.

Just last week, companies announced they were laying off more than 100,000 people. Caterpillar laid off 20,000; Boeing 10,000; even Starbucks laid off 6,700. Starbucks? How is that possible?

And more bad news this morning: according to the Washington Post, although not as grim as expected, the U.S. economy contracted 3.8 percent. Hey! We're supposed to be going the other way. But hard-pressed consumers are apparently cutting back on even the most basic of items: "Yesterday, Procter & Gamble, the giant consumer products company, cut its profit forecast in a sign that Americans are scrimping even on staples like Crest toothpaste and Tide detergent."

As if he needed more ammunition, President Barack Obama again used his weekly radio/YouTube address to underscore the need to pass his economic recovery and investment proposal. In his address, he hearkened back to several familiar themes: recovery will take years, not months. He will not put up with the excesses or greed of Wall Street or others. Partisan politics is a thing of the past. We must work together to overcome this very serious crisis. Obama's plan now moves to the Senate, where it will undergo changes, but is expected to have a better chance of receiving bipartisan support if his team handles things well.

NDN has long argued for the type of short-term jolt to and long-term investments in our economy that President Obama is arguing for. NDN also has made a strong case that we must aggressively address the root cause of the current financial disaster -- the collapse of the housing mkarket -- by keeping people in their homes. In this weekly address, President Obama does announce that his Treasury Secretary Tim Geithner will be making an announcement about helping people do just that, so stay tuned.

In the meantime, read NDN commentary and papers on the stimulus and how to revive and modernize our economy here. Also check out New York Times' columnist David Leonhardt's thought-provoking piece in tomorrow's Sunday magazine on how to get the economy going again, "The Big Fix." It asks some tough questions. 

And now, watch President Obama's address here:

As policy makers reach consensus on the need for an economic stimulus package, NDN Globalization Initiative Chair Dr. Robert Shapiro and NDN President Simon Rosenberg have posted an essay on the Huffington Post on the need for a Stimulus for the Long Run. In this piece, Shapiro and Rosenberg argue that any proposal should help determine the shape and strength of the economy for the next decade, rather than simply affecting the timing of the next recovery, through investing in the basic elements of growth for the 21st century to create a low-carbon, innovation-driven economy. The full essay follows:

When Congress goes back to work next week, its first job should be another stimulus package for the sinking economy. President-elect Obama also has said he wants another stimulus of his own design after he is sworn in. We know that more stimulus is necessary, because the ongoing financial and housing market crises will very likely produce an unusually long and deep recession. We also need additional stimulus as insurance against the possibility of another economic shock that would worsen the downturn, such as a run on the dollar that drives up interest rates, or worsening housing foreclosures that trigger more failures in financial institutions and further drive down consumer and business confidence.

The path of least resistance to deliver that stimulus is another round of tax rebates for American families, which in theory families would spend to jumpstart demand and, ultimately, the business investments and jobs to meet that demand. However, the catch is that approach is very unlikely to work this time. Most of the rebates from the spring 2008 stimulus were saved rather than spent; and given the recent, sharp decline in confidence, even a greater share of another round would be saved and so provide little stimulus. Moreover, President Obama and Congress can put those billions of dollars to uses that will stimulate long-term growth and income gains much more effectively.

Instead of tax rebates, congressional leaders and President-to-be Obama should look to targeted tax changes and targeted spending increases, with the lion's share going in a new direction: investments in the basic elements of growth for a 21st century economy. The stimulus should and will include traditional measures such as aid to the states facing serious revenue shortfalls and an extension of unemployment insurance. But for its major thrust, President-elect Obama should use the stimulus to drive policy reforms that will affect the shape and strength of the economy for the next decade, rather than simply affecting the timing of the next recovery. The stimulus should be first steps toward delivering on the change that President-elect Obama has pledged to bring to America.

This change should be directed toward creating a 21st century, low-carbon, innovation-driven economy, as the development, spread and efficient use of economic innovations will continue to be the most important factors driving all our future progress in growth, productivity, and incomes. For example, productivity gains are increasingly tied to an employee's capacity to operate effectively in workplaces dense with information and telecommunications technologies. Within a decade, workers who cannot perform in such work environments will be marginalized economically. Therefore, the stimulus should help businesses and workers prepare for the ideas-based economy, through grants to community colleges to keep their computer labs open and staffed in the evenings and on weekends for any adult to walk in and receive free computer training, a plan Obama endorsed as Senator. The stimulus also could include an innovative program to provide inexpensive laptops to every sixth-grader in America and spread broadband installation to schools, local libraries, and human services offices that currently lack it.

There is already a broad consensus on the need to include infrastructure investment in the stimulus, but instead of addressing only roads and bridges, America can also take this opportunity to invest in a new generation of clean infrastructure. The federal government can lead the way, through greening its buildings and vehicle fleets and putting 1,000 megawatts of solar power on its roofs. It also can provide funding to help modernize the electrical grid and build a new generation of light rail systems for urban areas, as well as greater support for research and deployment in renewable energy and energy efficiency technologies, and tax credits and other incentives for greening America's homes and private buildings.

Aside from energy, the other rapidly rising business cost squeezing wages and jobs is health care. To help hold down these costs for the long haul, the stimulus can provide support for hospitals, clinics and physicians to purchase and install the hardware and software for standardized electronic medical records systems. This will serve as a first down payment for 21st century health care reform, and will ultimately reduce costs and promote best-practices at the nation's hospitals.

These are all investments we know we have to make if we intend to make the U.S. economy more efficient, innovative and sustainable. They also are all investments that will ultimate pay for themselves several times over. Congress and President-elect Obama can use this opportunity not only to create more jobs, but to do so in ways that will help drive the development of a real, 21st century workforce and genuine 21st century economic infrastructure. And taking this course by passing a stimulus for change could be an early and important opportunity for him to practice both his new politics and a new form of economic leadership.

For more of NDN's thinking on creating a 21st century economy, please read NDN Green Project Director Michael Moynihan's essay, Accelerating the Development of a 21st Century Economy: Investing in Clean Infrastructure

As President-elect Barack Obama turns to the enormous challenges facing the nation, his first priority will be to set his priorities. Already, there are more urgent problems than any president could tackle successfully in a single term, and even more will almost certainly emerge. Moreover, he now will have to lead in ways he did not have to as candidate, by taking real and contentious actions. His historic, landslide election will give him greater, initial political capital than any president since Ronald Reagan. Even so, capital gets spent, and a president’s power and influence are finite, so he will have to choose precisely where he intends to focus all that capital, power and influence.

The lead items on his domestic agenda must be the nation’s financial and economic crisis. That will require, first, steps to slow housing foreclosures. He has pledged to initiate a 90-day moratorium on foreclosures, but that would be only a first, modest step. He also could also create a new fund to lend tide-over funds to homeowners facing foreclosure after the 90 days are up, and while Fannie Mae and Freddie Mac work out a responsible plan for them to renegotiate the terms and interest rates on the mortgages of homeowners in distress. He also can help banks get credit flowing again with a temporary, reduced tax rate on an estimated $700 billion in profits now held abroad by the foreign subsidiaries of American companies.

That step also could provide a measure of stimulus for an economy currently entering what is likely to be a long, nasty recession, and addressing the recession also must be one of President Obama’s first priorities. Tax rebates won’t work, since most Americans would most likely save any new checks rather than spend them. So Washington will have to jumpstart the nation’s additional spending, with a new spending package of $200 billion to $250 billion. And President Obama should focus most of it on the long-term investments he called for during the campaign, including grants to digitize health care records and provide access to computer training for current workers, and new supports to modernize the electricity grid and accelerate the development and spread of alternative energy. On top of that – and grants to cash-strapped states so they can avoid large cuts in their Medicaid programs and their workforces – the new president should focus the infrastructure piece of his stimulus on creating a national infrastructure financing bank and initiating new commitments for low-polluting light rail systems in major metropolitan areas.

The president will also hear demands and pleas for a new regulatory framework for the financial sector. That task is clearly a necessary and urgent one, but getting it right will be a long, complex process. His best move would be to create a national, expert commission with a mandate to figure it out over the next six months and report back to the nation.

The president’s serious priority-setting can only really begin once he addresses those emergencies – and it won’t be easy. The stimulus measures can be the first steps toward meeting his pledge to help build a more energy-efficient and climate-friendly economy. And since he will have to choose, the rest of that agenda should probably take lower priority than health care reform. One reason is that while the recession will cut energy prices and energy use with no help from Washington, for at least a time, it will only worsen out health care problems. The recession will further increase the numbers of people without coverage, perhaps by millions, without making a dent in the steady, sharp increases in health care costs that will continue to cut into jobs and wages. And any further delay will only make it all worse. It’s time to carry out his plans to make coverage much more nearly universal, and tie those extensions to a hard-nosed program of cost controls that will require hospitals and clinics to adopt the best practices of the country’s most cost efficient medical centers.

This will leave President Obama with plenty to tackle in the second half of his term. That can be the time to take further steps to help make America more climate friendly and energy efficient. It also has to be the time to build on the cost-control lessons from health care reform and finally address the serious and treacherous business of reforming Medicare and other entitlement spending for tens of millions of Baby Boomers.

And if President Obama can make real progress in these priority areas over his first term, it will almost certainly earn him an even bigger national landslide for a second term.