Category: Uncategorized

Washington Monthly: Nelson Mandela: (Almost) the Last of the Lions

Posted on by The Progressive Policy Institute

The passing of Nelson Mandela marks nearly the end of the generation of great leaders who presided over the astonishing half-decade of 1989-1994, when the post-World War II status quo came to a resounding and surprisingly bloodless conclusion with the collapse of Communism in Europe and Apartheid in South Africa.

The death of Margaret Thatcher last year was the last such watershed moment although — unlike Mandela — the Iron Lady was as widely detested as admired. Like her ideological soulmate Ronald Reagan (who was secluded for a decade before his death in 2004), Thatcher had experienced a long period of decline and had been mostly out of the public eye for many years. By contrast, Mandela’s slow, excruciating, and very public demise brings to mind more closely the agonizing illness of Pope John Paul II, another great figure of the era whose death in 2005 similarly triggered waves of mass mourning.

A few of the secondary figures of that period persist, including the Polish Solidarity leader Lech Walesa, former South African President F.W. de Klerk, former German Chancellor Helmut Kohl, Archbishop Desmond Tutu of South Africa, and of course former U.S. President George H.W. Bush. But with the death of Mandela, the only surviving figure of truly world-historic significance from that era is Mikhail Gorbachev of the former Soviet Union.

Continue reading “Washington Monthly: Nelson Mandela: (Almost) the Last of the Lions” →

Restoring Regular Order

Posted on by The Progressive Policy Institute

The Murray-Ryan deal sailed through the House yesterday, raising hopes that Washington may be returning, however fitfully, to “regular order” when it comes to the federal budget.

At a time when fiscal brinksmanship and 11th hour continuing resolutions have become the new normal, it is easy to forget the years prior when passing an annual budget was something that lawmakers were eager to undertake. They looked forward to their budget debates and hearings, as these events allowed them not only to engage in their oversight duty, but also to perform their theater. These were their stages to affect policy and gain public recognition.

What would it mean to restore regular order on budgeting? Although Congress has the ultimate responsibility for passing a budget, the process actually begins in the executive branch. The first step is for the President to submit his budget early next year.

For decades, federal agencies have submitted initial budget requests to the Office of Management & Budget (OMB) for review in the early fall. Budgetary decisions are then made by the OMB Director and are passed back to the agencies. The agencies may appeal these decisions, but have a short window of time to do so. This process is presumably happening right now. Continue reading “Restoring Regular Order” →

Ungrand Bargain

Posted on by The Progressive Policy Institute

For years, fiscal hawks have been urging elected officials to “go big” on debt reduction.  But as yesterday’s House vote on the Murray-Ryan budget showed, budget minimalism is the art of the possible in today’s Washington.

It’s an exceedingly modest agreement that temporarily repairs some of the damage done by the Budget Control Act of 2011. Nonetheless, the Senate ought to pass the two-year budget too, because it would accomplish three important things:

First, it would prevent another government shutdown in January. With the recovery finally gaining steam, it’s essential that Washington refrain from the kind of fiscal brinksmanship that has repeatedly torpedoed economic confidence. Yet the GOP could yet force a fiscal crisis over raising the debt ceiling, which has to be done again early next year.

Second, the agreement blunts the impact of the sequester, at least for the next two years. The deal would replace about half of the sequester’s cuts to domestic and defense spending in 2014 with savings elsewhere in the budget. And because those offsets take effect in future years, the deal also would reduce fiscal drag on the economy. Still, it’s just a temporary fix, and in any fiscal reform worthy of the name, the sequester must go.

Third, the deal could signal a “return to normalcy” in budget politics. In a rare moment of bipartisan accord, it passed the House with roughly equal numbers of GOP and Democratic votes. And for once, House Speaker John Boehner forthrightly criticized the Tea Party bitter enders and right-wing pressure groups who oppose on principle even tiny compromises with Democrats on fiscal matters.

The Murray-Ryan agreement has one really egregious flaw: It failed to extend unemployment benefits for 1.3 workers stuck in long spells of unemployment. Senate Democrats say they will try to rectify that Grinch-like omission next year.

All in all, however, the deal strikes a small blow for fiscal sanity and against the extremists who have held sway over Republicans since the 2010 election.

Mandel’s work featured as one of “The Most Important Economic Stories of 2013” by The Atlantic

Posted on by The Progressive Policy Institute

Matthew O’Brien writing for The Atlantic highlighted the work of Michael Mandel, PPI’s cheif economic strategist, in a recent survey of “The Most Important Economic Stories of 2013 – in 42 Graphs.”  Mandel’s contribution was a graph reflecting the increasing tech education of minorities:

 

“The tech boom has opened up new opportunities for minorities. Over the past two year, the number of blacks working in computer and mathematical occupations has risen 28%, while the number of Hispanics working in computer and mathematical occupations has risen by 24%. That’s more than double the 10% rise in overall tech employment.”

Find the full list of important economic stories on The Atlantic‘s website here.

 

Senate Commerce Committe Testimony: Crafting a Successful Incentive Auction: Stakeholders’ Perspectives

Posted on by The Progressive Policy Institute

 “Crafting a Successful Incentive Auction: Stakeholders’ Perspectives”

United States Senate Committee on Commerce, Science, and Transportation

Tuesday, December 10, 2013

Testimony of Hal J. Singer, Ph.D.

Senior Fellow, Progressive Policy Institute

 

The key policy issue facing this Committee is whether to impose asymmetric limits on the amount of spectrum that a bidder may acquire at the auction depending on the location of the bidder’s spectrum holdings—that is, whether to impose an “asymmetric spectrum cap.” In April of this year, the Department of Justice (DOJ) advocated for policies that would support an asymmetric spectrum cap designed to favor bidders that lack low-frequency spectrum. And at his first major policy speech at Ohio State last week, Federal Communications Commission (FCC) Chairman Tom Wheeler cited the DOJ’s letter in support of such limits. I want to make four simple points about the wisdom of an asymmetric spectrum cap from the perspective of a competition economist concerned with promoting consumer welfare.

First, as a condition of slanting the auction rules in a way to favor certain bidders, one must establish empirically that carriers without access to low-frequency spectrum are impaired in the ability to compete effectively. Although this particular input is not distributed uniformly across carriers, it is hard to detect any impairment in the output market. Despite its lack of low-frequency spectrum, Sprint’s net additions for contract customers were up 18 percent in 2012, and during the third quarter of 2013, Sprint’s postpaid service revenue and ARPU hit record levels. T-Mobile, another carrier that relies largely on high-frequency spectrum, enjoyed its biggest growth spurt in four years in the second quarter of 2013, adding 1.1 million new subscribers. In July, T-Mobile was gaining two subscribers from AT&T for every one it lost to AT&T. This evidence is hard to square with the notion of impairment. Continue reading “Senate Commerce Committe Testimony: Crafting a Successful Incentive Auction: Stakeholders’ Perspectives” →

Washington Weighs in On Auction Move

Posted on by The Progressive Policy Institute

Hal Singer, PPI senior fellow, was quoted by John Eggerton of Broadcasting & Cable on the frequency spectrum auction timetable. FCC Chairman Tom Wheeler made the decision to delay the auction until 2015, which may impact the consumer as Singer explained:

Wireless carriers are bumping up against spectrum constraints that can only be met with more equipment (which raises incremental costs) or higher prices (to manage the congestion directly),”says Hal Singer, senior fellow, at the Progressive Policy Institute. “Both options lead to higher prices, which is bad news for wireless consumers. Ideally,  we could free up additional spectrum as quickly as possible.” But, he adds: “If 2015 is the soonest possible to conduct an open, well-run auction, then I understand the delay.

The article also mentioned Singer’s upcoming testimony before congress on this issue. You can read the full article here.

America’s Digital Policy Pioneers

Posted on by The Progressive Policy Institute

On Wednesday, we honored Larry Irving, Ambassador Bill Kennard, Ambassador Karen Kornbluh, Ira Magaziner, and Michael Powell as digital policy pioneers at our event “Enabling the Internet: A Conversation with America’s Digital Policy Pioneers.” Each of these individuals made important contributions to that led to the exponential growth and the Internet’s rapid emergence as a tool for communication, information access, global commerce and social networking. PPI brought them together on one stage to continue our ongoing conversation about how government can collaborate with private enterprise to take advantage of technology as a major engine of the U.S. economy.

These leading architects of U.S. digital policy, looked back to the early debates and key decisions over Internet regulation, and forward to the modern challenges of data security and privacy, international governance, the advent of the “Internet of Everything,” and national firewalls abroad. Larry Downes, the panel’s moderator, guided the conversation by asking the panelists to describe the challenges they faced in the first days of the “information superhighway” and extrapolate how those lessons might be applied to the decisions facing policy makers today at home and abroad. A consensus was built around the principles of bipartisanship and the idea that legislation of new technologies should always lead with “do no harm.”


2013 Digital Policy Pioneers: Ira Magaziner, Ambassador Karen Kornbluh, Larry Iriving, Michael Powell and Ambassador Bill Kennard

NYTimes – Room for Debate: The Threat Is Small, the Opportunies Are Great

Posted on by The Progressive Policy Institute

Investors shouldn’t be overly concerned about the high level of stock prices, for two reasons. First, the market boom has not yet translated into excess spending in the real economy. Household spending is still weak, as shown by retailers rushing to open their stores on Thanksgiving. Many large businesses are reluctant to commit to big capital spending projects, while home building remains low compared to the mid-2000s. So even if the market dropped suddenly — which could happen — the plunge wouldn’t drag down the rest of the economy.

By contrast, during the 2006-2007 finale of the housing/finance boom, consumers, home buyers, home builders and stock investors all fed each others enthusiasm. Rising home prices allowed Americans to borrow and spend, lifting profits and stock prices of consumer product companies. Similarly, the housing boom helped the profits and stock prices of home builders and mortgage lenders. So the post-2007 collapse of the stock market coincided with a collapse of consumption and home building. That’s not going to happen this time.

Second, history suggests that a tech-driven stock market boom can broadly benefit Americans by boosting business investment, creating jobs, and encouraging innovation. Let’s look back at the tech boom and bust of the 1990s, which peaked in 2000. That year, business investment hit almost 15 percent of gross domestic product, compared to today’s 12 percent. And it wasn’t useless investment either — companies were spending on new computers and software, while telecom upstarts such as WorldCom and Global Crossing created huge new fiber-optic networks. Simultaneously, the unemployment rate dropped below 4 percent. True, WorldCom and Global Crossing went bankrupt after the boom ended, as investment in networks outran the immediate demand for bandwidth. But the fiber remained, setting the stage for today’s connected world.

Today’s stock market boom is not yet having a broad impact on business investment. However, the strong market makes it easier for young tech companies such as Twitter to go public and raise capital for expansion. As a result, tech-related jobs are growing, including a 26 percent increase for blacks and Hispanics in computer and mathematical occupations over the past two years. What’s more, the prospect of a successful public offering at a high stock price encourages investors to fund innovative new companies in cutting-edge technologies such as big data analysis, online education, health-related mobile apps and software, cloud storage, financial payment networks, the Internet of Everything and 3D printing.

Will some or most of these companies fail? Of course. But a booming stock market that helps fuel innovation and job growth is a net plus for the U.S. economy.

The New York Times published this article by PPI’s chief economic strategist, Michael Mandel.  You can find the original article here.

 

RealClearWorld: Iran’s Last Chance

Posted on by The Progressive Policy Institute

For all the bluster and thundering certitudes of President Obama’s critics, no one really knows for sure if Iran’s new government is serious about pursuing a nuclear weapon. Thanks to the deal struck in Geneva last weekend, we are likely to find out sometime in the next six months.

The agreement is intended to test Iran’s willingness to neuter its nuclear program in exchange for a way out of its deepening economic and political isolation. It is probably Tehran’s last chance to avoid a U.S. or Israeli military strike aimed at destroying its nuclear facilities.

Although fairly modest in scope, the Geneva deal carries some obvious risks. Relaxing economic pressure now may sap the international community’s will to maintain stiff sanctions on Iran indefinitely. And if the deal succeeds, Iran will gain a measure of international legitimacy without having to relent on its harsh internal repression, support for terrorism or hostility toward Israel.

Nonetheless, the worst outcome of all — for the United States, for Sunni Arab states terrified of Shiite Iran’s regional ambitions and for Israel — is an Islamic Republic with nuclear weapons. President Obama and Secretary of State John Kerry are trying to stave off that strategic calamity without resorting to war.

 Giving the president zero benefit of the doubt is Israeli Prime Minister Benjamin Netanyahu, who denounced the deal as “bad and dangerous.” For him, the agreement confirms growing suspicions that Obama will never resort to the one option — force — that can neutralize Iran’s nuclear threat, despite the president’s repeated vows to keep that option “on the table.” In fact, the deal effectively gives Iran six month’s immunity from an Israeli military strike.

Also convinced that the mullahs have taken Obama to the cleaners are U.S. conservatives. They complain that the agreement doesn’t require Tehran to stop all enrichment as a condition for sanctions relief. That’s true; it’s an interim agreement that slows down Iran’s nuclear program for six months, during which time a comprehensive resolution is supposed to be reached. Applying the same sledgehammer logic that led to the government shutdown debacle, Republicans evidently believe anything less than Iran’s immediate and unconditional surrender constitutes appeasement.

Meanwhile, some influential Democrats aren’t showing much enthusiasm for the Geneva deal either. Senators Chuck Schumer and Robert Menendez, chairman of the Senate Foreign Affairs Committee, have vowed to keep pushing for new sanctions on Iran anyway. Rather than turning the screws on Iran, though, this would likely shift the onus of intransigence from Tehran to Washington, embolden Iranian hardliners who oppose any bargain with the Great Satan, and undermine Obama’s negotiating leverage. Why should Iran’s comparatively pragmatic new president, Hassan Rouhani, take any risks for a peaceful resolution of the standoff if Obama can’t deliver on his commitments?

Now there’s talk on Capitol Hill of passing sanctions that won’t kick in for six months. But it’s almost always a mistake for Congress to try to micromanage foreign policy, especially delicate negotiations between two feuding nations that haven’t talked directly to each other since 1979.

Besides, the idea that layering on new sanctions will force Iran to capitulate totally misreads what motivates its rulers. Yes, the sanctions have inflicted growing economic pain, and Rouhani is eager to reduce that pressure. Tehran urgently needs hard currency, and it needs to sell its oil on global markets again. But Iran has added centrifuges, stepped up enriching and moved steadily closer to a nuclear breakout even as the international community has ratcheted up the economic and political pressure. The Islamic Republic, for which opposing American “imperialism” is not just a policy but a founding principle, isn’t going to cave in to demands from a U.S.-led coalition.

It might be induced, however, to embrace a face-saving formula in which the United States and its P5+1 partners tacitly acknowledge Iran’s “right to enrich” in exchange for a verifiable dismantling of its capacity to develop enough weapons grade uranium or plutonium to make a nuclear weapon.

Skepticism toward Iran is perfectly rational, given its deceptive behavior over the past decade, but creative statecraft demands more than straight-line extrapolation from previous experience. Sometimes, with imagination and courage, bitter antagonists do break through the crust formed by decades of profound mistrust, and find a new modus vivendi. That’s what happened during Nixon’s “opening” of China in 1972, at Camp David in 1979, in the Reagan-Gorbachev 1988 “walk in the woods” and the 1998 Easter accords that pacified Northern Ireland.

Under the interim deal, Iran will dilute or otherwise render harmless its highly enriched uranium and halt further enrichment above 5 percent. It will also stop fuel production for the heavy water reactor at Arak, which by producing plutonium could give Iran a second route to the bomb. In return, the coalition is offering about $7 billion relief from economic sanctions.

At a minimum the deal sets the clock back on Iran’s ability to acquire nuclear weapons. If we’re lucky, it will trigger a dynamic of horse-trading and incremental trust-building that could make bigger breakthroughs possible in six months. If not, then we’ll know that Tehran is once again stringing the international community along, and we’ll react accordingly.

In either case, the deal will clarify at last Iran’s real intentions — and the course America should pursue.

RealClearWorld published this article by PPI president Will Marshall.  You can find the original article here.

Our Odd Upper House: The U.S. Senate’s Peculiarities Don’t End With the Filibuster

Posted on by The Progressive Policy Institute

The filibuster is back in the news, but that’s just one of the peculiarities that make the U.S. Senate perhaps the world’s oddest legislative chamber.

When viewed from an international perspective, three other features — the extraordinary scope of its powers, its drastic misapportionment, and the exceptional weakness of its leadership structures — make the U.S. Senate a true global outlier. Further, each of these features has a significant (and often negative) impact on American democracy, politics, and policymaking.

The Senate is an Exceptionally Powerful Upper House: The Senate shares full legislative, budgeting, and oversight authority with the House; it also has additional powers to confirm executive nominees and to ratify treaties. However, among legislatures in the world’s established democracies, the norm is for upper houses to be decisively weaker than lower houses. Besides Italy, no other member of NATO, the European Union, or the G-8 has an upper house whose power matches that of its lower house.

Indeed, of the 23 countries that have been independent and continuously democratic since 1950, only three besides the U.S. have powerful upper houses. The remainder are either unicameral, and hence have no upper house at all, or apply a version of the so-called “one-and-a-half house” approach. Under this approach, weak upper houses play a role by reviewing legislation, voicing minority opinions, and suggesting amendments. But they rarely initiate major bills and, most importantly, they can be overridden by the lower house in cases of disagreement.

Such constitutional arrangements greatly streamline the legislative process and facilitate the creation of coherent public policy. In contrast, political systems with two equally powerful chambers, such as Italy and much of Latin America, are much more prone to ineffective governance of the kind we’ve been witnessing in Washington D.C.

The Senate is Extraordinarily Malapportioned: If the concept of “one-person, one-vote” is the modern gold standard for the allocation of political power, then the Senate is easily one of the world’s least representative legislative houses. Wyoming’s population of 576,000 is 66 times smaller than California’s 37 million — yet both have two US Senators. Likewise, North Dakotans have 38 times the per capita influence of Texans in the Senate, and Vermonters have 31 times the Senate clout of their neighbors in New York.

When translated into votes on the Senate floor, the nine most populous states represent just over 50 percent of the population but have a mere 18 Senators. The 26 smallest states have a majority of 52 Senators, but include only 18 percent of the national population.

The small-population states have repeatedly benefited from their outsized representation in the Senate by receiving disproportionate funding in such policy areas as food and nutrition, community development, environmental quality, disaster relief, and homeland security. Although some other democracies also have malapportioned upper houses, those upper houses tend to relatively weak and thus their policy impact is much less pronounced.

The Senate is Largely Leaderless: Although the Senate Majority Leader is often equated with the Speaker of the House, by comparison the power of the Senate’s top figure is ambiguous and diffuse. Unlike the Speaker, the Senate Majority Leader has no Rules Committee and few other tools to determine the flow of legislation or to limit the amount of deliberation, debate, and delay on the floor. Senator Robert Dole once opined that he was not “the Majority Leader, but the Majority Pleader.”

The major difference between the houses, of course, is that individual Senators can and do make creative use of that chamber’s expansive rules of debate and amendment — including, yes, the filibuster, which was only partly reformed by last week’s actions by Senate Democrats.

Virtually nowhere else in the world can a single rank-and-file member of a legislature so easily bring the work of the entire legislature to such a halt. And as a consequence, few other legislative chambers have leaders who are so weak relative to the average member, and thus so unable to set coherent goals or to move the institution beyond impasses. Former Senate Majority Leader Trent Lott got it about right when he termed his autobiographyHerding Cats.

So can any of this be meaningfully addressed? Reform of the Senate has been discussed for almost as long as the Senate has been in existence, and change does not come easily. However, last week’s events show that incremental reforms are achievable. The year 2013 also marks the centennial of the 17th Amendment, which ushered in huge changes by mandating the direct election of Senators — and also made it clear that sweeping reform of the Senate is indeed possible.

These debates are sure to continue, but in the meantime it’s valuable for Americans to understand our unusual upper house as it really is, and not as we may assume it to be.

The Huffington Post published this article by Raymond Smith, a PPI senior fellow.  You can find the original article here.

NYT: If It Looks Like a Bubble and Floats Like a Bubble …

Posted on by The Progressive Policy Institute

Nick Bilton writing for the New York Times quoted PPI’s Michael Mandel, chief economic strategist, on why current investments do not constitute a tech bubble on the same scale as the 1990’s.  Mandel explained the differences between today’s environment and the the dot-com boom/bust:

“Bubbles that are not self-feeding are not a big problem, and I’m not seeing the kind of self-feeding that I saw in the ’90s,” Mr. Mandel said. “So if it turns out that the social media boom is overdone, or that any aspect of the tech economy is overdone, the only thing that will get lost is the money that was invested.”

Read the entire New York Times article here.

High Speed ‘Trains of the Future’ May Finally Be Coming to the Northeast

Posted on by The Progressive Policy Institute
Talked about for years, a high speed rail service for the Northeast may be on its way at last, with the Federal Railroad Administration expected to approve an overhaul of the tracks.

It may seem improbable, but the odds that faster trains are coming to the Northeast Corridor have jumped recently. That’s because beginning in 2015, the Federal Railroad Administration (FRA) is expected to finally permit modern European designs on tracks throughout the country, running side by side with heavy freight, at all times of day. This decision could cut the weight of U.S. passenger trains in half, meaning trains can go faster, accelerate more quickly, cause less wear on tracks, and get passengers to their destination in less time.

How much time? The decision by the FRA to finally shelve regulatory requirements from the 1920s means that lighter replacement train sets for the Acela could cut the trip from Boston to New York by 30 minutes (the trains can maneuver the curvy tracks of New England at higher speeds) and the faster acceleration and braking could shave 5 to 10 minutes off the trip from New York to Washington.

That doesn’t seem like a lot of time savings, particularly on the New York to Washington run, but for a small investment, you could shave off a lot more minutes.

For example, if you combine the purchase of the new lighter Acela train sets with some of the incremental improvements that Amtrak has proposed in its 2012 “Vision for the Northeast Corridor” report, passengers on trains could get from Boston to New York City in 2 hours and 51 minutes (versus 3 hours and 30 minutes currently) and travel between New York City and Washington in a mere 2 hours and 22 minutes (2 hours and 50 minutes now). And for the first time, the Acela will actually be able to reach speeds of 160 mph both north and south of New York, which was what it was supposed to do back when it was built in the 1990s.

The cost for these faster times? About $19.2 billion spread out over ten years. That’s a lot of money, especially in these tough fiscal times, but compared with the $150 billion price tag for Amtrak’s Next Generation High Speed Rail (which could include a new tunnel under the Long Island Sound that everyone knows will never be built), or the $69 billion being spent on the California’s high speed rail project, it’s a bargain. Or to put it another way, we can spend $19 billion to shave 67 minutes between Boston and Washington or we can spend an additional $131 billion to cut another 149 minutes.

And because lighter trains mean less fuel consumption, the cost for a ticket on the Acela could be cut. That would help increase Amtrak’s share of the travel market from Boston to New York, possibly to as high as 70 percent from the current level of just above 50 percent, as well as increase its share of the Washington to New York market, which is already over 70 percent.

Of course, as long as the sequester is in place, any additional investment in high speed rail, no matter how modest and cost effective, is a non-starter. But if Congress and the Administration can finally reach a larger budget agreement, there is hope. Creating a true high speed rail corridor has long been a goal of Democrats and in particular the Obama Administration. And the new Chairman of the House Committee on Transportation and Infrastructure, Bill Shuster, is from Pennsylvania, a state that would greatly benefit from this investment. In addition, if Democrats are willing to open the operation of the rail system to private firms (while maintaining ownership of the infrastructure with Amtrak and the Federal government), enough Republicans, might be swayed to make this smart, cost effective investment.

But even if none of that happens, the FRA’s decision alone will help speed up travel in the northeast, and that is long overdue.

The Daily Beast published an article by Paul Weinstein, a PPI senior fellow.  You can find the original article here.

NYT: Gross Domestic Freebie

Posted on by The Progressive Policy Institute

Tyler Cowen writing for the New York Times quoted PPI’s Michael Mandel, chief economic strategist, on how over regulation is an impediment to the development of the economy.  In the article, Mandel explains the combined negative effect of seemingly small inhibitions:

“Michael Mandel, an economist at the Progressive Policy Institute, compares many regulations to “pebbles in a stream.” Individually, they may not have a big impact. But if there are too many pebbles, a river’s flow can be thwarted.”

Read the entire New York Times article here.

New Yorker: More Freedom on the Airplane, if Nowhere Else

Posted on by The Progressive Policy Institute

The New Yorker‘s James Surowiecki referenced a study by PPI’s Michael Mandel, chief economic strategist, in an article about the true value of digitally based companies. The author referenced Mandel and others to substantiate the idea that these companies have been traditionally undervalued:

“Another study, by the economist Michael Mandel, contended that the government had underestimated the value of data services (mobile apps and the like) by some three hundred billion dollars a year.”

Read the entire piece in the New Yorker here.

 

Ending the Consumption Bias

Posted on by The Progressive Policy Institute

Progressives need a bolder plan for overcoming structural impediments to more robust growth

It’s time for progressives to move on from a consumption based model and refocus their energies on building a more productive version of democratic capitalism, leading in innovation, generating good jobs in abundance and raising returns to both labour and capital.

Setting out a new progressive growth narrative must begin with an accurate diagnosis of the core economic dilemma facing many post-crisis western economies. In the US, many liberals believe it is weak economic demand, and they prescribe more government spending to stimulate consumption. This is the standard Keynesian remedy, but it is inadequate at best because it does not deal with the US economy’s structural weaknesses: lagging investment and innovation, a paucity of workers with technical and middle-level skills, and unsustainable budget and trade deficits. None of these problems can be fixed by boosting consumption.

We should not be misled by analogies between the present predicament and the Great Depression. In the 1930s, the issue was overproduction and under-consumption; now it is the reverse. Over the past decade especially, Americans have consumed far more than they have produced, borrowing heavily to make up the difference. This model of debt-fuelled consumption brought the country anaemic growth, a shrinking job base, recurrent financial bubbles and crippling debts.

Progressives must disenthrall themselves from the notion that consumption drives US prosperity. There are few economic factoids more misleading than the claim that consumer spending accounts for 70 per cent of US economic activity. Of course, consumer spending creates economic activity, but the question is, where? If you buy a shirt or television, you stimulate manufacturing jobs in China, or perhaps Mexico.

This is not to begrudge these countries opportunities to grow. But the problem with borrowing massively to buy imports is that it does not encourage productive domestic investment. Business investment in the US is a stunning 25 per cent below its long-term trend. America’s job drought is in fact an investment drought. Furthermore, research from the Kauffman Foundation suggests a loss of entrepreneurial verve. The number of business start-ups, which Kauffman says generate most of US net job growth, has plummeted by about a quarter since 2006.

If there is a bright spot in the US economy, it is the rebound of corporate profits and stock prices since 2009. Yet these gains also highlight a stark inequity: returns to capital are up, but returns to labour are down.

Making production rather than consumption the organising principle of US economic policy will not be easy. For a generation, Washington has relentlessly increased subsidies for consumption, assuming that the productive base of the economy will take care of itself.

The consumption bias pervades government and society. It is evident in America’s swollen national debt and long-term fiscal dilemma; in monetary policies that drive the cost of borrowing towards zero; in tax policies that put greater burdens on labour and capital investment than consumption spending; and in trade policies that encourage a deluge of low-cost imports, even at the expense of domestic production and jobs.

We see it at work at the household level as well. Americans today collectively owe over $11 trillion, or about 95 per cent of the country’s disposable income. Leveraged to the hilt, they can no longer rely on cheap credit and low-priced imports to compensate for lost jobs, dwindling production and stagnant middle-class wages. In a world of cheap labour and rapidly narrowing technology gaps, advanced countries can thrive only by speeding the pace of innovation and capturing its economic value in jobs that stay at home.

For all these reasons, progressives need to replace the old growth model with a new strategy that stimulates production rather than consumption, saving rather than borrowing, and exports rather than imports.

Progressives for Production

This shift will require fundamental changes in policy that cut across conventional partisan and ideological lines and challenge entrenched interests. Liberals in the US, for example, are unquestionably right that America needs to boost public investment. But conservatives also are correct in calling for lower taxes on entrepreneurs and urging government regulators to take a light hand to encourage investment in innovative industries.

Political polarisation, in fact, may pose the most daunting obstacle to a high-growth strategy. The two parties are deadlocked in a witless ‘government versus markets’ argument even as it becomes blindingly obvious that both a more dynamic private sector and a more strategic public sector are necessary to create the right conditions for a US economic comeback.

Let’s get specific. What policy changes are required, and what political adjustments do progressives need to make?

Most importantly, US prosperity cannot be rebuilt on the quicksand of chronic government and household borrowing, overconsumption and a soaring national debt.

A high-growth strategy requires a credible framework for long-term debt reduction that boosts public investment now while gradually raising revenues and cutting public spending on consumption. There is no way for America to create more jobs or hone its competitive edge without more investment in modern infrastructure, science and technology, and education and workforce development. Also essential are institutional innovations, such as a national infrastructure bank that would use federal dollars to leverage private capital investments in transport, energy and water projects that can generate measurable economic returns.

How to pay for new investment while also whittling down the nation’s $16 trillion debt? By rebuilding the tax base and slowing the unsustainable growth rates of big entitlements programmes. Health benefits especially are set to balloon as the number of Americans over 65 will double by 2030. But, just as conservatives have adopted a pigheaded stance against tax hikes, too many liberals are in denial about the need to rebalance the nation’s massive social-insurance programmes.
Like some kind of fiscal doomsday machine, automatic, formula driven spending on consumption by retirees is relentlessly crowding out space in the federal budget for future-oriented investments in things progressives ought to care about – early education for poor children, child nutrition and health, access to colleges, environmental protection, and more.

The Congressional Budget Office projects that entitlement spending will more than double, from 7.3 to about 16 per cent of GDP, by 2037. Spending on everything else will fall from 11 to 7 per cent. To deal with the coming demographic tidal wave, Washington will need to trim benefits for the wealthy retirees who need them least.

High-tech innovation and a manufacturing revival

In addition to reorienting fiscal policy around saving, investment and growth, progressives need a balanced strategy that fosters both high-tech innovation and a manufacturing revival.

The US leads the world in a crucial new category of economic activity: ‘data-driven growth’. According to Progressive Policy Institute economist Michael Mandel, the digital realm of internet publishing, search and social media has become one of America’s fastest growing sectors, posting an 80 per cent gain in jobs from 2007 to the present. As US telecommunications companies invest heavily in high-speed mobile broadband, sales of mobile devices and data services are growing exponentially. Mandel’s research shows that, since the first smartphone was introduced in 2007, ‘app’ developers have created 750,000 new jobs. Jacques Bughin of McKinsey & Company estimates that companies that make strategic use of ‘big data’ grow twice as fast as those that do not.

Progressives should give high priority to protecting the innovation ecosystem responsible for the dramatic rise of the data-driven economy. Yet they have often sided reflexively with self-styled ‘consumer activists’ who demand more top-down regulation in the name of privacy, competition, low prices, or a general suspicion of big and successful companies such as Apple, AT&T and Google.

Of course, progressives must stand firm against right-wing attempts to roll back vital health and environmental  rules. But, if they are serious about growth, they will embrace a more strategic approach to economic regulation, one that stresses the cumulative impact of rule-making on innovation, productivity and competitiveness as well as traditional concerns about market power and consumer prices.

Innovation is also integral to expanding manufacturing jobs, another key element of a progressive growth strategy. There is promising news here. Thanks to a confluence of economic factors, some major companies (such as Apple, General Electric and Otis Elevator) are beginning to bring production back home. Such factors include rising wages in China (about 17 per cent a year); the higher productivity of US workers; automation that reduces labour’s share of company expenses; rising transportation costs; and an influx of cheap natural gas in the US. Companies are also increasingly worried about intellectual property theft and leery of separating their research and production centres.

Most promising of all is the advent of the “Internet of Everything” – the marriage of the physical and virtual economy through sensors, hyper-fast broadband and real-time data crunching. This promises to modernize and raise productivity in manufacturing, as well as other sectors as yet barely touched by the IT revolution: health care, education and public service delivery.

These developments raise workers’ hopes for relief from wage compression and suggest an opportunity not to reverse globalisation but to rebalance it in favour of domestic production. Policies that encourage ‘inshoring’ of production could reverse the hollowing out of America’s middle class by creating millions of good jobs for workers with both high- and middle-level skills.

All this, of course, implies rising consumer prices, since the US will be making more commodities at home and buying fewer cheap imports. But a modicum of inflation is a price worth paying to rebuild a diverse job base that offers opportunities to all workers, not just those with advanced degrees. After all, unless you are retired or on the dole, to be a consumer you first have to be a worker.

No country, even one as wealthy and fundamentally sound as the US, can afford to consume more than it produces indefinitely.  It is time for progressives to refocus the nation’s energies on building a more productive version of democratic capitalism that leads the world in innovation, generates good jobs in abundance and raises returns to both labour and capital.

Debt-fuelled consumption is a formula for slow-motion economic decline. To put western economies back on a high-growth path, we need something different: A new political economy of production.  It’s time for progressives to tackle the challenge of creating new wealth with the same passion they bring to spreading it around.

Policy Network published an article by Will Marshall, which summarizes his chapter in Policy Network’s recent publication Progressive Politics after the Crash: Governing from the Left (I.B Tauris, 2013).

You can find the original article here.