Is it true that the three basket-case countries of Europe–Greece, Ireland, and Iceland–have outperformed Germany on real GDP and productivity growth? Or do the implausible official numbers demonstrate the bankruptcy of the global economic statistical system?
I was nosing through the just-released OECD Economic Outlook (top secret project, don’t ask), and I noticed something very interesting. The Outlook includes forecasts through 2012 for all sorts of macroeconomic variables, so we can now look at a 15-year time period (1997-2012) which includes the ten years of tech+housing boom (1997-2007) and the five years of the financial bust. Here are two charts comparing the strongest economy in Europe, Germany, with the three basket cases, Greece, Ireland, and Iceland. We’re looking at real GDP growth and total economy labor productivity growth:
and
These charts show that the three basket-case countries of Europe–Greece, Ireland, and Iceland–substantially outperform Germany during the boom years, which is to be expected (blue bars). For example, Greece had productivity growth averaging 2.4% per year from 1997 to 2007, compared to only 1% per year for Germany.
What is more surprising is that Greece, Ireland, and Iceland continue to outperform Germany, even when we factor in the 5 years of the bust, including forecasts through 2012 (the red bar). For example, average real GDP growth in Iceland is projected to be 2.7% annually over the 1997-2012 time period, almost double the 1.4% growth rate of Germany.
What can we make of these disparities? After all, we economists have been trained to believe that productivity growth is an essential measure of the health of an economy. Here are four possible explanations:
OECD forecasters have drunk too many bottles of wine, leading to overoptimistic forecasts
Five years post-bust is too short: The basket-case countries will be suffering for many years.
Boom-and-bust beats slow-and-steady in the long-run.
The usual way of measuring Gross Domestic Product overestimates both debt-fueled growth (Iceland, Greece) and growth fueled by supply chains (Ireland).
As anyone who has been reading me for a while knows, I lean towards #4. I think there’s a first-order problem with the way we measure GDP growth, because trade–including flows of knowledge capital–is being incorrectly counted, or not counted at all. That’s a big gotcha, since bad macro data have and will distort decision-making by policymakers,corporate leaders, and investors.
The Obama administration released its Afghanistan review this morning, and while everyone will be digging through it for truths and obfuscations, it’s worth simply comparing the review’s conclusions to President Obama’s “Terms Sheet” he dictated at the outset of his Afghanistan surge. Obama’s six-page terms sheet, first revealed and released in Bob Woodward’s book Obama’s Wars, calls for measuring progress in Afghanistan by answering questions in related to governance, Pakistan, training of Afghan forces, and international support. Let’s look at the new review and compare it to some parts of the old one, shall we?
The new review concludes that “the momentum achieved by the Taliban in recent years has been arrested in much of the country and reversed in some key areas, although these gains remain fragile and reversible.”
The initial review, however, called for “reversing the Taliban’s momentum” everywhere, not merely arresting it in some places (my italics). Small word change, big difference.
The new review says that “We are also supporting Afghanistan’s efforts to better improve national and sub-national governance, and to build institutions with increased transparency and accountability to reduce corruption – key steps in sustaining the Afghan government.”
The initial review had specific benchmarks to measure governance progress: Has President Karzai made merit-based appointments in the areas most essential to our mission? Has the Afghan government begun to implement an effective reintegration/reconciliation program? The new review is silent on these critical matters.
The new review holds that Afghanistan forces “have exceeded ANSF growth targets, implemented an expanded array of programs to improve the quality and institutional capacity of the ANSF, and sharply improved their training effectiveness.”
The initial review called for “accelerated ANSF growth while improving quality.” On this score, the U.S. is doing quite well, according to what was released today.
The new review argues that “Emphasis must continue to be placed on the development of Afghan-led security and governance within areas that have been a focus of military operations.”
The initial review insisted that we needed to establish “a program to transfer responsibility from ISAF to ANSF province by province.” No mention in the new document of what has been achieved, only on what must still be done.
Despite the negative balance sheet, on these and other scores, today’s review is cautiously optimistic. We are making progress, however fragile and recent. “Most important, al-Qa’ida’s senior leadership in Pakistan is weaker and under more sustained pressure than at any other point since it fled Afghanistan in 2001,” Obama’s new review argues. Reviewing the first assessment, however, reminds us that weakening al-Qaeda’s senior leadership in Pakistan was not the primary goal. Perhaps it should have been.
There has been much discussion this week about the launch of No Labels and its significant attempt to organize the cause of political moderation and bipartisan compromise into a movement. I hope it can succeed. But it’s worth reflecting for a moment on why political compromise is so hard these days, and the obstacles that a movement organized around the ideal of a politics of consent and compromise faces.
Fortunately, two very smart political thinkers have done exactly this, so my work in this post is merely to summarize and reflect a little on their arguments. In an important essay entitled “Mindsets of Political Compromise,” UPenn President Amy Gutmann and Harvard Political Theorist Dennis Thompson have made what strikes me as a very trenchant observation: “The more that campaigning comes to dominate governing in democratic politics, the harder compromise becomes.”
Gutmann and Thompson argue that there are two primary mindsets in politics – the uncompromising mindset and the compromising mindset.
The uncompromising mindset is the mindset of the modern campaign, which “favors candidates who stand firmly on their positions.” Campaigning is about drawing distinctions and standing by principles, as it should be – voters need to know the difference between two candidates to make informed choices.
In their conception, this uncompromising mindset has two elements: “principled tenacity” and “mutual mistrust.”
Principled tenacity rests on the widely-held assumption that politicians are supposed to have deeply felt moral principles about things like justice and fairness, and they should fight for them.
Mutual mistrust is “the assumption that their opponents are motivated mainly by a desire to defeat them and their principles.” This often leads to cynicism, and they write that, “as the cynicism about the motives of politicians spreads to cynicism about the process of compromising, particular compromises become easier to resist and condemn.”
By contrast, the compromising mindset is, or should be, the mindset of governing, since reaching solutions in a democracy almost always requires some compromise. It also has two elements: “principled prudence” and “mutual respect.”
Principled prudence is based on “a pragmatic recognition that compromise is usually necessary in a democracy to accomplish anything of significance.” But it does not amount to mere compromise for the sake of compromise. It is instead a recognition that even if politics is the art of the possible, sometimes nothing is still better than the possible.
Mutual respect is the assumption that even if political opponents may have ulterior motives, they are still capable of negotiating in good faith and for what they think is right and that they are acting on principle.
Gutmann and Thompson argue that, “to reach a compromise, then, politicians must adjust their wills as much as their reason. They must be able to turn a will to oppose into a will to cooperate. That involves a psychological shift as much as a policy change.” They spend some time in their piece tracing out procedural ways to encourage politicians to find more common ground and be more aware of these different mindsets. (You can read the whole piece here)
Thinking in terms of mindsets is useful, because it clarifies just how different and incompatible the processes of getting elected and governing have become.
What this implies is that political moderates who care about the process of governing ought to get serious about campaign reform issues. Put simply, the permanent campaign increasingly means a permanent incapacity of elected officials to collectively solve problems. If politicians are spending all their time bashing their opponents and standing firm for their principles, that doesn’t leave them much time to get together to actually govern productively.
A slight caveat to this is that, as I’ve written in a recent op-ed for Politico, there is good evidence that the voting public, especially Democrats and Independents, do like compromise. And voters may even reward politicians who are seen as being willing to compromise. However, I’m aware of few campaigns organized around the claim of “I’m willing to compromise with the opposing party, so elect me.” All campaigns, as far as I can tell, are about drawing distinctions, even if it’s between a candidate who’s post-partisan and independent and one who’s not.
In case you missed it, CSPAN’s coverage of PPI’s event on China is available here. We had an all-star cast of speakers, including Sen. Chris Coons (D-DE), Assistant Secretary of Defense for Asia Chip Gregson, professors Joe Nye of Harvard and Mike Chase of the Naval War College, and James Fallows of The Atlantic.
We also want to highlight some press coverage in the last few days, including this Reuters story, this one from VOA, and a mention in the Washington Times. More to follow, we think.
In the latest Washington Post-ABC poll, released today, contains a remarkable though not surprising finding. Americans may profess to be deeply concerned about the budget deficit. But when it comes to solutions, not a single one of the nine major proposals to cut the federal budget receives majority support.
The same disconnect jumps out from a Pew poll released last week. An impressive 93 percent agree that the federal deficit budget is a major problem, and 70 percent say it must be addressed now (the other 23 percent think it needs to be addressed when the economy gets better). Yet only two of 12 proposals to reduce the deficit received majority support.
Like St. Augustine asking for “chastity and continence, but not yet,” the American public knows that the current budget deficit of almost $14 trillion is downright sinful. But actually doing something about it, well, hold on a minute now buddy, you can’t raise my taxes or cut any of these important programs! Certainly not now!
In the Pew poll, the only two things that receive majority support are raising the Social Security contribution cap (64 percent) and freezing salaries for federal workers (59 percent). Obama’s already on top of the pay freeze. He estimates it could save approximately $5 billion over two years, cutting the deficit to a much more manageable $13.995 trillion.
Reducing Social Security for high-income seniors wins the approval of 48 percent of respondents in the Pew poll, and 49 percent of respondents in the Post/ABC poll. Reducing defense spending gets 43 percent approval in the Pew poll and 44 percent approval in the Post/ABC poll. The most widely unpopular proposal was increasing the federal gasoline tax by 15 cents per gallon. Only 22 percent of respondents in the Pew poll and 21 percent of respondents in the Post poll approved.
Interestingly, Pew broke down the figures for Tea Party supporters, 84 percent of whom say that the federal deficit is a major problem that the country needs to address now. Yet, on seven of the 12 deficit reduction proposals, Tea Party supporters are less supportive the proposals than the general public. Again, that is LESS supportive! The only deficit reduction proposal with majority support among Tea Partiers is the aforementioned federal salary freeze (at 74 percent). And the only other to receive majority support is reducing Social Security for high-income seniors (by a narrow margin of 50-48 percent).
In a recent P-Fix post, Elbert Ventura noted that “Americans may profess to hate European-style states, but the disconnect between their hatred of taxes and love of benefits may well hasten the day of a European-style collapse.”
This is spot on. The disconnect is downright maddening. I want to shake some of these people, show them the federal ledger, and say: Here is the reality. If we want to make a dent in the deficit, we are going to have to make some choices that involve real tax increases and real cuts to benefit programs. There is no more free lunch. We can pretend that somewhere there is a $10 trillion line item labeled “waste” that politicians are conspiring to protect, or we can have an intelligent conversation about this. If we stay in a fantasy world, the inevitable reckoning is going to be a lot more painful.
Now, if only there were some political leader out there with the courage to say something like that. Because this is one of those issues where the public is simply not going to come around on its own. Sure, perhaps better economic times would make some respondents slightly more willing to see higher taxes or reduced benefits. But real sacrifice, real hard decisions? That’s going to take political leadership. Any takers?
On the front page of the NYT this morning, Keith Bradsher gives a perfect example of a knowledge capital writedown, in his story about wind turbine technology being transferred to China by a Spanish company, Gamesa:
Nearly all the components that Gamesa assembles into million-dollar turbines here, for example, are made by local suppliers — companies Gamesa trained to meet onerous local content requirements. And these same suppliers undermine Gamesa by selling parts to its Chinese competitors — wind turbine makers that barely existed in 2005, when Gamesa controlled more than a third of the Chinese market.
But in the five years since, the upstarts have grabbed more than 85 percent of the wind turbine market, aided by low-interest loans and cheap land from the government, as well as preferential contracts from the state-owned power companies that are the main buyers of the equipment. Gamesa’s market share now is only 3 percent.
With their government-bestowed blessings, Chinese companies have flourished and now control almost half of the $45 billion global market for wind turbines. The biggest of those players are now taking aim at foreign markets, particularly the United States, where General Electric has long been the leader.
The story of Gamesa in China follows an industrial arc traced in other businesses, like desktop computers and solar panels. Chinese companies acquire the latest Western technology by various means and then take advantage of government policies to become the world’s dominant, low-cost suppliers.
It is a pattern that many economists say could be repeated in other fields, like high-speed trains and nuclear reactors, unless China changes the way it plays the technology development game — or is forced to by its global trading partners.
Because of Gamesha’s transfer of knowledge capital to China, GE’s knowledge capital has become less valuable, which eventually will affect wages and employment. Gamesha’s knowledge capital has been less valuable as well, which affects the Spanish standard of living.
The correct policy prescription is for the U.S. to dramatically up our investment in knowledge capital and physical capital. Dramatically. That may require less support for consumption now so that our children can be better off in the future.
It’s clear that China’s Navy is growing in size and quality. Not only does China have the largest navy in East Asia, it has an increasingly modern and capable force of imported and indigenously produced destroyers, frigates, missile patrol craft, and submarines. Beijing is even planning to deploy its own aircraft carriers, a development sure to alarm neighbors such as Japan, Vietnam, and India.
But what does it mean for American policy makers? Should the United States increase its own maritime power in response to Beijing’s growing strength? Are there diplomatic levers that Washington might pull to forestall potential Chinese aggression? Below, I explore these issues, first by giving a brief history of China’s evolving naval strategies since the People’s Republic began in 1949. (It’s critical that U.S. policy makers understand the evolution of China’s thinking about the roles and missions of its navy.) Then, I provide a full accounting of recent Chinese naval hardware developments. Finally, I draw policy recommendations designed to help American policy makers manage the challenges that have arisen as a result of China’s improving capabilities, regional assertiveness and expanding global interests.
In short, the U.S. will need to strengthen its ties to key countries in East Asia and develop strategic and tactical military concepts and capabilities that would allow it to counter China’s growing military power. Meanwhile, U.S. policy makers must seek collaboration with the Chinese military in an effort to highlight the benefits of being a global stakeholder to Beijing.
As Democrats shift from licking their wounds to figuring out how to win back the House in 2012, the obvious question is: what will it take? Or at least, what will it take besides the obvious triumvirate of a solidly recovering economy, a healthy dose of Republican overreach, and a bit of luck?
Over the next several weeks, I’m going to be taking a closer look at the 66 seats (net 63) that Democrats lost, asking some questions about the character of these lost districts with the goal of putting a finer point on what Democrats need to pay attention to in order to get those seats back. In this post, I’m going to focus on the role of manufacturing, race, and education.
But first a quick look at the map: Democrats lost seats all over the country: 23 in the South, 20 in the Midwest, 15 in the Northeast, and eight in the West.
Seats Democrats Lost, 2010
The bulk of post-election commentary has blamed the losses on the fact that the incumbent party almost always loses seats in a mid-term election and the fact that Democrats were being blamed for a bad economy.
But yet California, where unemployment is 12.4 percent, did not yield a single Republican pick-up (though California is famous for having very safe districts, so this may not be a fair test.). In Oregon, where unemployment is 10.5 percent, Democrats held the five (out of six) seats they maintain.
MANUFACTURING
One industry that has been hit particularly hard in the recession is manufacturing. Of course, the decline in manufacturing has been going on for a long time. In 1950, roughly three in ten U.S. employees worked in manufacturing. Today manufacturing jobs account for just 8.9 percent of U.S. nonfarm jobs. In the 2000s, manufacturing lost roughly one-third of its jobs, falling from 17.3 million people to 11.6 million people.
In most cases, these are jobs that are not coming back, leaving communities that depended on them demoralized and angry. How much of a factor was this in the 2010 elections?
Across the 66 Republican pick-up districts, manufacturing accounts for, on average, 11.9 percent of the jobs. That’s three full percentage points higher than the national average of 8.9 percent. In roughly three quarters (73 percent) of the districts Democrats lost, manufacturing accounted for more than the national average of 8.9 percent of the jobs.
Not surprisingly, this was most pronounced in the Midwest, where the 21 districts Republicans picked up averaged 14.4 percent of manufacturing jobs as a share of total non-farm employment. But it was also pronounced in the Northeast and the South. In both regions, manufacturing accounted for 11 percent of the jobs in the districts Democrats lost, two points above the national average. Only in the West did the districts the Democrats lost have less manufacturing than the national average, averaging only 6.9 percent of the economy. This was the region in which Democrats lost fewest seats – only nine.
Manufacturing Jobs as Share of Total Jobs
Entire U.S.
8.9%
ALL GOP Pick-Up Districts (average)
11.9%
Midwest GOP Pick-Up Districts (average)
14.4%
South GOP Pick-Up Districts (average)
11.0%
Northeast GOP Pick-Up Districts (average)
11.0%
West GOP Pick-Up Districts (average)
6.9%
To understand the potential importance of declining manufacturing as a key to the Democrats’ losses, consider Pennsylvania’s 11th District, which includes Scranton and Wilkes-Barre. Democrat Paul Kanjorski had held the seat since 1985, but was ousted by Lou Barletta by a 55-to-45 percent margin. The district gave Obama 57 percent of its vote, and was one of only nine Republican pick-up districts that voted for Kerry. Manufacturing accounts for 16.9 percent of jobs in the district.
Or Wisconsin’s 7th District (northwest and Central Wisconsin), where Republicans picked up a seat formerly held by long-time incumbent David Obey, and a district both Obama and Kerry carried as well. Manufacturing accounts for 17 percent of the jobs in the district. Likewise with the 17st District of Illinois (northwest Illinois) – held by a Democrat since 1983, went for both Kerry and Obama, and 14.3 percent of its jobs come from manufacturing.
EDUCATION AND RACE
Democrats also have a problem with non-college educated whites. This has been a long-standing challenge for Democrats. Many of these voters feel frustrated and left behind by economic changes related to the loss of manufacturing jobs and global competition. They don’t see Democrats as helping them out. They wonder why they can’t seem to get ahead, and they want answers and somebody to blame.
Democrats have not enjoyed parity with Republicans among white voters in 20 years (since Bill Clinton), but 2010 was especially bad, with white voters breaking 62-to-38 for Republicans in the mid-term elections.
This shows up in the districts that Democrats lost. The U.S. population is 65.9 percent white. The average Republic pick-up district was 76.8 percent white. In the Northeast, the average Republican pick-up district was 86.5 percent white, and in the Midwest, the average Republican pick-up district was 81.5 percent white. Overall, 82 percent of the Republican pick-up districts have white populations greater than the national average.
Pct. White
Entire U.S.
65.9%
ALL GOP Pick-Up Districts (average)
76.8%
Midwest GOP Pick-Up Districts (average)
81.5%
South GOP Pick-Up Districts (average)
68.8%
Northeast GOP Pick-Up Districts (average)
86.5%
West GOP Pick-Up Districts (average)
70.3%
A decent number of these whites are blue-collar workers, we should note that those without bachelors’ degrees who have been hit much harder in this recession (unemployment among those with college degrees is only 5.1 percent). In the 2010 elections, Republicans won among both voters with only a high school diploma (54-46 percent) and those with some college (56-41 percent) after Democrats won both categories in 2008.
In the United States, 27.4 percent of adults have at least a bachelor’s degree. But the Republican pick-up districts are on average, less well-educated. Only 24.1 percent of adults have a bachelor’s degree. The gap was greater in the districts Dems lost in the South, where only 20.8 percent were college-educated, and the Midwest, where only 23 percent were college-educated. Overall, 71 percent of the Republican pick-up districts have fewer adults with bachelors’ degrees than the national average
Pct. of Individuals With a Bachelor’s Degree
Entire U.S.
27.4%
ALL GOP Pick-Up Districts (average)
24.1%
Midwest GOP Pick-Up Districts (average)
23.0%
South GOP Pick-Up Districts (average)
20.8%
Northeast GOP Pick-Up Districts (average)
29.2%
West GOP Pick-Up Districts (average)
26.0%
One of the most poorly educated districts is the 18th District of Ohio (Eastern Ohio), where only 12.5 percent of adults are college educated. It had been a solid Democratic seat for 46 years until Republican Bob Ney won it in 1994. Ney resigned in 2006 and shortly thereafter wound up in prison on conspiracy charges. Zachary Space won solidly in 2006 and 2008 with more than 60 percent of the votes, but dropped 20 points this time around. It is also a high manufacturing district (17.4 percent of jobs come from manufacturing), and very white (96.3 percent)
Another poorly educated district is the 1st (and only) District of South Dakota. Just 15.1 percent of South Dakotans have a bachelor’s degree. And despite one of the lowest unemployment rates in the country (Just 4.5 percent), they voted out three-term incumbent Stephanie Herseth Sandlin, who had won easily in the last two elections, garnering 68 and 69 percent of the vote. South Dakota is 88.7 percent white.
Obama’s problems among white, non college-educated voters are well-known, but these are both districts that Obama yet still went Democratic for the Congressional seat. That these voters have now lost faith in the ability of a Democrat to represent them in Congress, and in a rather remarkable way (both of these districts, for example, reduced their Democratic vote share by 20 percent in just two years) speaks volumes of the problems Democrats are having with non-college educated voters.
TAKEAWAYS
This analysis echoes others that point to the fact that Democrats are struggling among white working-class voters, many of whom had voted Democrat in the past, it adds a new way of parsing the data.
For all Democrats’ talk about helping working class folk, they have not done much for those who have lost blue collar jobs other than extend unemployment benefits. This does little to assure those upset by the pervasive sense of decline and who want somebody to blame for their increasing feelings of powerlessness.
As Steven Pearlstein wrote shortly after the election, “For the president and his party, regaining the confidence of the industrial Midwest is now a political imperative. For the U.S. economy, its no less an imperative to find a way to revive the Rust Belt.” Democrats have thus far only paid lip service to this with their “Make it in America” initiative, which appears to be mostly an apparently failed attempt at messaging as far as I can tell.
The problem for these districts is that the Democrats can’t rely solely on a generally improving economy to bring back manufacturing. These are places where there is a real sense of decline, and where voters are surely feeling incredibly frustrated that Democrats really haven’t done much to help them. If Obama and the Democrats want these beleaguered voters to give the Democrats another chance, they’re going to need to show them that they are serious about investing in America again.
Certainly, making inroads with the white working class voters is not the only way that Democrats can win back the House. There are other paths to 218. But without making at least a few inroads in key swing districts, the Democrats will have a lot less room for error in any other strategic approach.
The Obama-McConnell tax deal is expected to head from the Senate to the House today, with the big question being whether House Democrats have the temerity to amend the bill and risk a wholesale Republican abandonment of the process.
Senate defections on the key cloture vote were pretty limited: Ten Democrats (Bingaman, Brown, Feingold, Gillibrand, Hagan, Lautenberg, Leahy, Levin, Sanders, Udall) and five Republicans (Coburn, DeMint, Ensign, Sessions and Voinovich). Steny Hoyer is hinting that House Democrats will be given an opportunity to support an amendment making the package more acceptable to progressives, but that a majority will be there for the original deal.
The estate tax provisions seem to be the real flashpoint for opposition from both sides, with Republicans objecting to the return of the “death tax” (even though under current law it’s due to resurrect itself at 2001 levels) and Democrats objecting to a relaxation in rates and exemptions benefitting a handful of the very rich without generating any positive impact for the economy. This is the sort of very basic difference of perspective on which compromise is probably impossible.
Meanwhile, two new public opinion surveys indicate pretty strong support for the deal across party lines.
According to Pew, 60 percent of Americans support the tax deal, while 22 percent disapprove. More interesting, an above-average 64 percent of self-identified conservative Republicans and 65 percent of self-identified liberal Democrats support the deal. A WaPo/ABC survey shows respondents favoring the package by a 69-29 margin, with support rising to 75 percent among self-identified Republicans and 68 percent among both self-identified Democrats and indies.
Interestingly, this survey shows narrow majority popular support for three enumerated parts of the deal—the UI extension, the two-year extension of the Bush income tax rates, and the new estate tax rates and exemptions—but 57 percent opposing the payroll tax holiday, generally considered the provision most likely to stimulate the economy. Breaking down these elements by party ID, the UI extension is the only provision gaining majority support among Democrats, Republicans, and indies, though the increase in the estate tax exemption comes close (with support from 52 percent of Democrats and 48 percent of indies). The whole package is generally more popular than its parts, which might indicate some support for bipartisan action as an end in itself.
Elite opinion is clearly on a track of its own. Aside from the strong opposition to the deal among many progressive opinion-leaders, which has resonated with House Democrats, conservative opinion is split, especially in the ranks of potential 2012 presidential candidates. Mike Huckabee and Newt Gingrich—two candidates who have most emphasized cultural as opposed to economic issues—have endorsed the deal. Mitt Romney, who has been burnishing his credibility with conservatives by taking a strong stand against ratification of the new START Treaty, came out against the tax deal today, arguing that temporary tax cut extensions would not reduce investor “uncertainty” and also calling for an overhaul of the entire UI system. Sarah Palin also expressed opposition to the tax deal, but without elaboration other than an attaboy for Jim DeMint, whose own opposition was motivate by the “unpaid-for” UI extension and the very existence of the “death tax.” Rush Limbaugh, Charles Krauthammer, and RedState’s Erick Erickson have also been outspoken opponents of the deal, mostly on grounds that this is not time for cooperation with Obama and Democrats. It’s probable that some conservatives privately oppose a deal on the additional grounds that the deadlock prevents congressional action on DADT and START until the new Congress takes office.
Right in the midst of this saga, conservatives have been significantly distracted by a federal district court ruling in Virginia that the Affordable Care Act is unconstitutional. Two other federal district judges have ruled otherwise in parallel suits, and it’s obvious the whole issue will have to be resolved by the U.S. Supreme Court. But conservatives are greeting the decision with high hosannas, presumably wanting to burnish the credibility of their arguments for a radically scaled-back interpretation of federal powers under the Commerce Clause. If the High Court does indeed embrace this interpretation, progressives will have a broader set of problems than the demise of ACA’s individual mandate; the constitutionality of a whole range of existing federal programs could be called into question.
Next month, Chinese President Hu Jintao will be visiting Washington and Defense Secretary Gates will be visiting Beijing. Though the U.S. and China have had their disagreements of late – over North Korea, over human rights, over currency valuations – both have much more to gain from cooperation than conflict.
Such was the general consensus at a PPI Event today entitled, “China’s Choice: Regional Bully or Global Stakeholder?” The event featured: The Honorable Chris Coons, U.S. Senator (D-Del.), Member, Senate Foreign Relations Committee; The Honorable Wallace “Chip” Gregson, U.S. Assistant Secretary of Defense, Asian and Pacific Security Affairs; Joseph S. Nye, Jr., Harvard University; James Fallows, The Atlantic Magazine; Michael Chase, Naval War College.
Sen. Coons kicked off the event by relating the experiences of a newly elected Senator who had spent the last several months on the campaign trail listening to the ordinary Americans’ trepidations about China.
“I’ve seen and heard the growing frustrations of average Americans, and their perceptions, or misperceptions, about the rise of China,” Coons said. “Americans are deeply concerned we’ve lost our economic and manufacturing edge and Washington has taken its eye off the ball.”
But Coons also registered an optimistic note: “I don’t view it as a zero-sum game. China’s rise does not have to mean the decline of America.” The Senator expressed hope that the U.S. and China could overcome the short-term impasses over such issues as trade and intellectual property and could have a “long-term harmonious relationship”
Assistant Secretary Gregson followed Coons with a similar hope. “Together,” he said, “the U.S. and China can build a new century of global prosperity, and the time to begin is now…both countries have a great deal to gain from cooperation.”
Gregson highlighted the importance of the Pacific region, which is home to 15 of the world’s 20 largest ports, including nine in China. Five of the world’s seven largest standing armies (China, North Korea, South Korea, India, and Pakistan) are there as well. “China sits at a fulcrum,” said Gregson.
The Assistant Secretary outlined the three pillars of the U.S. approach to China:
An effort to sustain and strengthen bilateral cooperation;
An effort to strengthen relations with other Asian allies;
And that a rising China should abide by global norms and international laws.
He noted that China’s military build-up, which has often been less than transparent, has raised real concerns. “This type of military build-up far exceeds China’s defensive needs,” he said. “We call upon China to become more transparent. We are not asking for an unreasonable degree of disclosure. Just enough to allow all parties to avoid miscalculation.”
Professor Nye, author of a new book entitled The Future of Power (about how power is transitioning from the West to the East, and from state to non-state actors), spent a few minutes musing on a question he posed: “Can the rise of China be peaceful?”
Referencing Thucydides’ history of the Peloponnesian War and the rise of Germany in the early 20th Century, Nye noted that the rise of a new power often provokes fear from rivals, and “if we fear too much it becomes a self-fulfilling prophecy.” Referencing FDR, Nye argued the more apt position to take with China was that “the greatest thing we should fear is fear itself.”
“There is a rise in Chinese power, but a mistake to over-estimate it,” said Nye. “The size of China’s economy and our economy may be equal in size by 2030, but they will not be equal in composition, and per capita income will only be 1/3 of our per capita income.”
Fallows, who spent four years living in China and has written about his experiences inPostcards from Tomorrow Square: Reports from China (and is writing another book about China), argued that in most respects, the fundamental arrangement and consensus between the U.S. and China has been remarkably stable for the last 30 years: It’s better to work together than as enemies; China’s prosperity need not be at the direct expense of the United States; and there are going to be real disagreements.
As for America’s perceived sense of decline in the face of a rising China, “The central thing here is that the issues that matter to America’s viability have nothing to do with China,” said Fallows. “They would be identical if China did not exist. The greatest concerns are the functionality of the political system.”
Chase, who has written three memos on China’s military for PPI, noted that one of the challenging things about assessing China’s military prowess is that the military hasn’t been involved in a hot war since 1979 (Vietnam). Chase recommended a path of working with China as well as building up our military capacity to match China’s possible threats.
The event concluded with a question about climate change, which will probably be the most pressing challenge that the U.S. and China will have to solve. Nye noted that China has now surpassed the U.S. in greenhouse gas emissions. Fallows put it simply: “There is either a collaborative strategy of the U.S. and China, or no hope at all.”
If things feel more decrepit and worn-out these days, it’s because they are. The average age of the U.S. capital stock is at a 40-year high in all three major categories: nonresidential, residential, and government. Take a look at this chart:
One unpleasant surprise after another, from the top down.
The age of the residential stock is at its highest level in 40 years, despite the mammoth building boom of the 2000s.
The age of the government capital has steadily risen over the past 40 years, suggesting great underinvestment in public infrastructure.
The age of the private nonresidential capital stock has risen more or less steadily since the early 1980s, with a slight dip in the New Economy boom of the 1990s.
Let’s break it down by industry. This chart shows the change in the average age of the capital stock since 2000.
It’s kind of an odd and surprising picture. The sectors which got younger were mining, farming, and transportation. The information sector, which was supposed to be leading the economy, had the biggest rise in average age. That’s because we just weren’t investing enough in information technology over this stretch to make up for the aging of the old physical infrastructure.
With Congress about to enact a massive new tax package that may be the last attempt we make at any kind of fiscal stimulus anytime soon, what other approaches should we be looking to for the long-term changes we need to regain our economic vitality?
In this morning’s Post, Senator Mark Warner offers an answer that makes a lot of sense in the cash-strapped, post-stimulus world we find ourselves in: cutting regulatory red tape to invigorate the private sector. Citing both the enormous compliance costs for businesses as well as the chilling effects regulation can have on investment and innovation, Senator Warner outlines his legislative proposal for a “regulatory pay-as-you-go” system to curb the steady increase in regulatory burdens on our economy.
Senator Warner’s proposal, which he discussed at PPI’s infrastructure forum in September, is similar to the “one-in, one-out” approach recently adopted in Britain, requiring agencies imposing new regulations to identify existing regulations with the same amount of economic impact to be eliminated. The idea is that if we are serious about wanting to let the private sector drive economic growth through new investment and innovation, we should at least try to hold the level of regulatory burden constant, rather than expanding it without any effort whatsoever to revisit potentially outdated or poorly designed rules already in place.
PPI has argued for the same idea that our regulatory system needs to be more responsive to the needs of the economy, most notably in recent policy memos by Michael Mandel, who has proposed his own approach of countercyclical regulatory policy. Like Warner, Mandel suggests that one of the best ways we can encourage job growth and revive our economy is to recognize that government is generally better at choking off innovation than it is at actively promoting it, so the best thing we can do is to be cautious in imposing new rules on the innovative ecosystems in our economy, like the communications sector, that are the best sources of new growth.
Senator Warner is right to model his legislation on the steps taken in the U.K., but the trick is coupling good ideas with the right political leadership to force a cultural shift in the way we think about regulating the private sector. As Warner points out, British reforms have been years in the making, and they are the product of institutional changes based on improving collaboration and input from business to craft policies that would make Britain more globally competitive. This effort has crystallized in the last year under the coalition government led by Prime Minister David Cameron, whose dedication to bringing a “new economic dynamism” to his country offer a pretty good lesson in leadership for President Obama to study while he writes his State of the Union speech for January.
In his excellent speech in October, Cameron laid out an actual strategy (!) for growth that included fiscal discipline, increased investments in human capital and infrastructure, a renewed focus on exports and competitive advantage, and an effort to encourage new companies and innovation to drive growth. Putting aside differences of opinion some may have about Cameron’s fiscal austerity, one thing this speech does offer that Warner and Mandel can both love, and that White House advisors can learn from, is Cameron’s attitude about government regulation:
Successful, high-growth economies are like ecosystems –they are organic, evolve through trial and error and depend on millions, billions, of individual preferences, choices and relationships. Governments can expect to intelligently design all this as much they can expect to intelligently design the Great Barrier Reef. But what they can do is create an environment in which businesses are confident enough to invest. . . . If we are to get back to strong growth, these profits need to turn into productive investment – and my message to you today is that we are providing the stability for that investment.
PPI strongly supports Senator Warner’s pay-as-you-go proposal as a long overdue approach to modernizing our regulatory system. Both Warner’s proposal and Mandel’s countercyclical regulatory approach are helpful starting points for a discussion about how to make institutional changes that create a consistent method of scrubbing stale and ineffective regulations out of the system to make way for new rules better tailored to today’s economy.
PPI has supported a number of structural reform proposals to our regulatory system, like creating a review board that periodically submits a list of regulations for repeal to Congress for an up-or-down vote, much like the BRAC base-closure process. We have also recommended that OMB conduct “innovation impact studies” for new agency rules to measure the regulatory footprint imposed on innovative ecosystems in the economy, the same way we conduct environmental impact studies. OMB’s Office of Information and Regulatory Affairs (OIRA) would be a natural fit to take charge of such an effort, not only because of its institutional competence in reviewing agency rules, but also because its current Administrator, Cass Sunstein, could seek advice from his friend and co-author of Nudge, Richard Thaler, who serves as a lead advisor to the British government in its regulatory reform efforts.
As usual, Warner brings an invaluable perspective and fresh thinking to the Senate, and Democrats would be smart to showcase his creative thinking the same way Republicans thrust younger members like Paul Ryan into the spotlight.
Senator Warner is right to propose this regulatory PAYGO legislation as a means to boost our economy when our other options for doing so effectively are starting to run thin. Pointing across the pond for an example of smart reform policy is also dead-on, but perhaps he should also point President Obama to David Cameron’s October speech as an example of smart, strategic leadership.
It’s no secret that the relentless polarization of U.S. politics has left independent and moderate voters politically homeless. Today a bipartisan group of activists gathers in New York to launch an effort to organize this “radical center” and amplify its voice in Washington.
No Labels is the brainchild of Nancy Jacobson, a veteran Democratic activist and fundraiser. Its organizers include veteran political players from both parties of a distinctly pragmatic, non-doctrinaire bent (including yours truly). It aims to build an online network of Americans – imagine a MoveOn.Org for centrists – who are fed up with the nation’s dysfunctional political system and want to do something about it.
That won’t be easy, even with the Internet’s unprecedented power to connect virtual communities of like-minded people. Unlike arch partisans and members of interest groups, independents and moderates are notoriously hard to mobilize. They tend not to be impelled by passionate causes, and to pay fleeting attention to politics. “Liberals and conservatives have passion. Moderates and independents have lives,” observes political analyst Charlie Cook.
There’s little doubt, however, that voters across the broad middle of the spectrum have become more disenchanted with politics and government. The midterm election was the third straight in which independents turned against the incumbent party. This restiveness is grounded in what they see as the Obama administration’s failure to deliver, especially on the economy. Independents don’t trust the Republicans either, and the last thing these voters want is an intensification of Washington’s zero-sum political game.
According to a new poll by Allstate/National Journal Heartland Monitor, only 10 percent of Independents welcome the GOP victory as a chance to roll back government. Seventy percent said neither party’s agenda alone can solve the nation’s problems. This poll confirms other recent surveys in finding a strong preference for bipartisan cooperation over confrontation. President Obama’s tax-cut deal shows he’s gotten the message.
So No Labels is tapping into something real. On the other hand, it so far is defined more by what it’s against – incivility, partisan cant, rigid dogmas, special interest power and, above all, a paralysis in government’s ability to solve problems – than by what it’s for. Can a movement organized by political insiders tap and channel grassroots anger in politically consequential ways? Can it coalesce behind a positive agenda for governing? We’ll see.
For now, it’s enough to say that the problems No Labels seeks to solve are real enough. There’s no question we need a broad civic mobilization to bring intense pressure to bear on our political leaders to work together to solve the nation’s problems. Independents and moderates may be an inchoate political force, but there are lots of them. If No Labels can get even a fraction of them mobilized for political action, Washington will take notice.
The US was in an awkward position in Cancun. The administration clearly wanted to show leadership, but it was hamstrung by an inability to deliver legislation with any tangible commitments. Since that seemed unlikely to change in the new Congress, US negotiators were left playing defense on the key issue — mitigation.
This makes movement in other areas (such as finance and forests) difficult, though that is in part due to US insistence on parallel, rather than serial, treatment of issues.
The result was sometimes bizarre diplomatic displays by the US, such as Energy Secretary Steven Chu’s address — essentially a remedial crash course in climate science. Secretary Chu did not take questions, one suspects because it would have been difficult to answer the obvious one — how does the US plan to meet the President’s 17%-cuts-by-2020 goal articulated last year?
Difficult, but not impossible. The awkward position in which US officials find themselves and the effects it has on US credibility and capability make the administration’s continued avoidance of serious public discussion of EPA carbon regulations puzzling. Research at RFF and elsewhere indicates that EPA regulations, either on the books already or likely in the near future, could achieve emissions reductions in the range of the President’s goal.
I’ve studied these regulations over the past year or so, and I’ve been repeatedly surprised by their likely impact. Vehicle fuel economy standards, new power plant permitting rules, and whatever the agency decides to do for existing sources can each make a significant emissions impact. Perhaps more interestingly, coming EPA regulations ostensibly aimed at other pollutants could have a big impact on carbon by pushing a substantial portion of coal plants into retirement, and replacing them with cleaner technology.
It’s not clear why the US administration and negotiators didn’t trumpeting these regulations as evidence of a commitment to cut emissions. It’s possible it is felt that a regulatory approach won’t be understood or taken seriously by the international community, but EPA regulations are far from the only complex issue on the table (just ask your local climate finance expert for a quick summary if you suspect otherwise). And other countries are undoubtedly familiar with a regulatory approach — for many it is their preferred domestic environmental policy. One thing is certain, though — the best way to ensure that the international community (and the American public) fails to understand or appreciate the EPA’s capabilities is for the administration and its negotiators to refuse to explain them.
Another possibility is that the administration worries that hyping EPA’s powers is politically dangerous. The agency is more effective, this argument goes, if it can operate quietly and at its own pace. To put it more directly, to speak of regulation is to destroy it — perhaps because Congress would respond by seeking to cripple the agency.
But the President should not forget that his party still controls the Senate, and that he still wields the veto pen. Even if the President resigned himself to giving up EPA powers (or delaying them) as part of a compromise, it would surely be in his interest to say how strong these powers are, thus increasing their value in any bargain.
Moreover, the argument that regulatory emissions cuts are more effective if kept quiet contradicts what is arguably the central dogma of US foreign climate policy — that US action is valuable not for its small contribution to global goals, but as a tool for unlocking negotiations and prompting action elsewhere. If US negotiators can’t or won’t talk about the best policy tool the US currently has, they can’t do their jobs. This makes the long term likelihood of a meaningful international agreement much smaller.
EPA regulation is not the first, best option for US climate policy; it is above all likely to be more costly over the long run than a pricing mechanism. But neither this admission, nor the fact that EPA regulations are legally required, are good reasons not to forcefully and frequently articulate their emissions benefits. Perhaps we as a country should be embarrassed that we cannot adopt a national climate policy that more closely approaches the ideal in terms of both costs and benefits. But the administration should not let any embarrassment about what the country cannot currently do prevent them from talking about what it can.
As my colleague Dallas Burtraw pointed out in his talk here this week, US credibility on climate requires that the administration be a lot bolder — not by making new commitments that it lacks the domestic powers to back up, but simply by publicly, loudly, and clearly saying what it can and will do with the tools it already has.
Last Friday the AFL-CIO and several big unions came out against the U.S.-Korea free trade deal. As news, this was strictly “dog-bites-man” stuff. The bigger story is the appearance of cracks in Labor’s usually monolithic opposition to trade pacts.
Several unions, namely the United Auto Workers and the United Food and Commercial Workers, endorsed the agreement after President Obama wrung concessions from Seoul on cars and U.S. beef earlier this month. Ford Motor Company, which strongly opposed the original deal negotiated by the George W. Bush administration on the grounds that it didn’t do enough to pry open South Korea’s auto market, is also on board.
The unusual split in Labor’s ranks makes it easier for Congressional Democrats to back Obama. Although voting treaties up or down is the exclusive prerogative of the Senate, it’s significant that the deal also has the support of Rep. Sandy Levin (D-Mich), a tireless defender of the U.S. auto industry and long the House’s leading skeptic of free trade agreements.
If the Senate approves the treaty next year, it will be a major boost for Obama’s pledge to double exports over the next five years. It may also signal a shift in trade politics within the Democratic Party. As a candidate, Obama played to his party’s anti-trade gallery, even pledging to re-negotiate the 1994 North America Free Trade Agreement. Now, as President, he recognizes that opening overseas markets is integral to economic recovery. With consumers still winding down their debts, and businesses hoarding cash, a good part of the economic demand we need to create jobs must come from abroad.
In fact, the Commerce Department reported Friday that U.S. exports rose to their highest levels in more than two years. The U.S. trade deficit (in goods and services) fell to $38.71 billion, a more than 13 percent drop over the previous month and considerably less than the $44 billion economists had predicted. Best of all, U.S. exports to China grew nearly 30 percent to reach a record high of just over $9 billion. Along with a slight decrease in Chinese imports, that narrowed the monthly U.S. trade deficit by 8 percent, to $25.52 billion. This was the best economic news we’ve had for some time, and it sent stocks soaring.
South Korea has the world’s 12th largest economy. By lowering its high tariffs and dealing with non-tariff barriers to U.S. communications and financial services firms, the deal could boost U.S. exports to South Korea by $10 trillion annually, the administration says. Crucially, thanks to Obama’s success in getting South Korea to modify its auto provisions, it exempts up to 25,000 U.S. vehicles from Seoul’s environmental and fuel economy standards, and builds in safeguards against a surge of imported cars from South Korea.
That was enough to satisfy the UAW and Ford though not, it seems, the rest of organized labor. Intriguingly, the automakers’ union also parted company from the AFL-CIO in backing another controversial Obama deal: his tax-cut compromise with Republicans. It’s another sign that, even within the progressive camp, arguments for spurring job-creating growth are prevailing over class warfare themes.
South Korea is more than a major trading partner. It’s also a key U.S. ally. North Korea’s recent artillery attack on one of its islands – and China’s refusal to condemn it – seems to have made Seoul more tractable about negotiating changes in the treaty. In any event, the free trade pact also offers the United States an opportunity to cement relations with an prosperous market democracy that increasingly shares our apprehensions about Beijing’s propensity for throwing its weight around in the Asia Pacific.
The U.S.-South Korea free trade agreement would be worth ratifying on foreign policy grounds alone. But unlike several previous bilateral trade pacts with small nations, this one will deliver real benefits to America’s struggling economy.
It’s been one of those weeks in Washington. Just a few days ago, it appeared the tax deal between the president and Senate Republican leader Mitch McConnell had broken the lame-duck session logjam, resolving the stickiest problem and paving the way for late-session action on issues like DADT and START.
Now votes on the tax deal have been pushed into next week amidst a resolution of disapproval by House Democrats, and the DADT repeal has lost a key Senate floor vote once again.
It’s hard to say whether the President’s very early signals that he’d be willing to strike a deal to avoid the expiration of Bush’s tax cuts made the ultimate liberal backlash more understandable or puzzling. The only surprises in the final deal were the inclusion of a payroll tax holiday, the one stimulative proposal with significant support in both parties; extension of the enhanced EITC and child tax credits created in the 2009 stimulus package, a total concession to Democrats; and revisions in the resurrected federal estate tax—which didn’t exist in this calendar year—to create lower rates and higher exclusions than was the case before the Bush tax cuts first took place.
Some progressives (though not many) profess to oppose the payroll tax holiday on grounds that it’s part of a collateral attack on Social Security. Some also express moral outrage over the proposed estate tax concessions, pointing out (quite properly) that they will have zero positive impact on investment and growth. But the main complaint is that Obama never really went to the mats to defend the consensus Democratic opposition to high-end Bush tax cuts and their extension, and the main beef seems to be retroactive as much as prospective.
The tax-deal rebellion reflects gradually building liberal anger towards the Obama administration on topics ranging from the public option in health care to the unwillingness to pursue prosecution of Bush administration figures over civil liberties violations and treatment of terrorism suspects; the expansion of the U.S. troop commitment in Afghanistan; and above all, the President’s continuing protestations of bipartisanship. Furious injunctions to the president to “fight” for progressive principles, regardless of the legislative consequences, have spread far beyond the blogosphere to a wide array of congressional Democrats.
What’s unclear at the moment is whether the House Democratic action represented just a symbolic measure that won’t get in the way of House approval of the tax deal next week, or a more serious protest that will require some sort of modifications in the package that progressives can claim as a trophy. The latter contingency, of course, will give conservative Republicans a new excuse to walk away from the package and try to impose their own tax policies in the next Congress with their enhanced numbers.
In any event, the intra-Democratic rhetoric has grown so strong that it’s revived the immediate-post-election chattering classes talk about a primary challenge to Obama in 2012, with journalist Robert Kuttner being the most outspoken about dumping Obama lest he become the “Democrats’ Hoover,” and with anyone who defends the tax deal getting a lot of heat as a sell-out.
The most certain thing about the tax deal is that it has obliterated the attention that was being given to the Bowles-Simpson commission report and a variety of other deficit reduction proposals, even as the two parties appeared poised to approve measures that would create added deficits in the neighborhood of a trillion dollars. The lack of resistance (so far) by Tea Party Movement figures is as good a sign as any that its alleged total focus on debts and deficits is, like that of the Republican Party it dominates, a mirage that quickly fades once high-end tax cuts are on the table.
In other words, deficit-talk seems most useful in Washington as a way for partisans to excoriate their opponents’ priorities—i.e., the Democratic resistance to “entitlement reform” and the Republican resistance to progressive taxation and restrained defense spending. Actual concern on the topic, however, is harder to find, even at the end of a year where it’s rarely out of the headlines.
There has been much discussion this week about the launch of 
In the latest 
On the front page of the NYT this morning, Keith Bradsher 
With Congress about to enact a massive new tax package that may be the last attempt we make at any kind of fiscal stimulus anytime soon, what other approaches should we be looking to for the long-term changes we need to regain our economic vitality?
It’s no secret that the relentless polarization of U.S. politics has left independent and moderate voters politically homeless. Today a bipartisan group of activists gathers in New York to launch an effort to organize this “radical center” and amplify its voice in Washington.
The US was in an awkward position in Cancun. The administration clearly wanted to show leadership, but it was hamstrung by an inability to deliver legislation with any tangible commitments. Since that seemed unlikely to change in the new Congress, US negotiators were left playing defense on the key issue — mitigation.
Last Friday the AFL-CIO and several big unions came out against the U.S.-Korea free trade deal. As news, this was strictly “dog-bites-man” stuff. The bigger story is the appearance of cracks in Labor’s usually monolithic opposition to trade pacts.