The passage of the Dodd-Frank Act was a historic effort in the wake of the 2008 financial crisis to modernize and tighten federal oversight of the nation’s financial services sector.
Among these reforms were a variety of much-needed new rules to bring more transparency and accountability to the derivatives industry. The new law, for example, provides regulators with more power to regulate the over-the-counter (“OTC”) derivatives market, requires more derivatives to be traded on exchanges rather than in private transactions, and requires data collection to improve market transparency.
As sweeping as it is, this new regulatory framework for the derivatives industry is more a framework than a detailed set of rules, and there are many blanks for regulators to fill. As a consequence, policymakers must still be wary of unintended consequences as they implement the law.
A particular example deserving of this special attention is the pending regulations of so-called “end users” in the OTC derivatives market. No one doubts that the abuse of some forms of exotic derivatives contributed to the systemic risk that led to the 2008 crisis. But derivatives are an important tool used by major American manufacturing and service companies (“end users”) to manage and protect against risks—not create them. These derivatives contribute little—if anything—to systemic risk.
Last week, President Obama vented his frustration at Congressional Republicans for storming out of White House budget talks over raising the debt ceiling. Anyone who thinks the president overreacted should look to the Congressional Budget Office’s (CBO) latest budget forecast, which warns that the national debt is poised to spiral out of control.
Released on the same day GOP negotiators abandoned their post at the budget talks, CBO’s “Long-Term Budget Outlook” predicted that the debt will reach 100 percent of GDP in less than a decade, then zoom to twice the size of the U.S. economy by 2037. In other words, we are moving inexorably toward the unsustainable level of debt (about 150 percent of GDP) that has plunged Greece into crisis.
CBO’s grim forecast, said the fiscal hawks at the Committee for a Responsible Federal Budget, “should erase any thoughts of waiting until after the election – or worse, until markets force our hand – to make the needed changes to our budget.” Such warnings, however, have fallen on deaf ears among Republicans, who refuse to even talk about debt reduction if it includes tax hikes.
GOP intransigence boosts the odds that Congress will fail to raise the debt ceiling by the August 2 deadline set by U.S. Treasury Secretary Timothy Geithner. If that happens, the federal government would have to cut government programs drastically, or else risk defaulting debts to foreign creditors — “the first-ever failure by the United States to meet its commitments,” notes Geithner.
But even if the White House and House Republicans somehow strike a deal over the debt ceiling, the larger challenge of closing America’s enormous fiscal gap will remain. Before the Republicans quit the talks, the goal was to cut the debt by as much as $2 trillion over the next decade. The president’s Fiscal Commission, however, concluded that we need to close the gap by closer to $4 trillion. There’s no politically responsible or feasible way to get to that number by cutting government spending alone; that’s why tax revenues have to be on the table.
So do entitlements. The CBO report makes clear that we need a comprehensive deficit reduction plan that not only stabilizes and reduces the debt over the medium term, but also grapples with long-run spending on healthcare and Social Security. The CBO projects that by 2035, health care spending under both the baseline and alternative scenarios will grow 5.1 to 9.2 percent and 8.5 percent of GDP respectively. Similarly, the CBO expects Social Security to grow to from 4.8 to 6.1 percent of GDP under both scenarios.
President Obama is right: With the deadline for raising the debt limit only a month away, it’s time for an outbreak of fiscal sobriety in Washington. In truth, there is neither time nor political will to forge a comprehensive solution to America’s exploding debts before August 2. But lawmakers could put together a reasonable down payment that would include temperate cuts in domestic and defense spending; more tax revenues from closing backdoor spending through the tax code, such as oil and gas subsidies; and adoption of the “chained CPI” something I wrote about earlier, would lower spending growth on big entitlements like Social security, Medicare and Medicaid.
Either way, the debt ceiling must be raised, and a grand bargain on deficit reduction must be struck. So President Obama is right to reject the invitation from Senate Minority Leader Mitch McConnell to come hear Hill Republicans rehearse their undying opposition to raising taxes. We’re in the fiscal red zone now, and the time for posturing is behind us.
As the key gatekeeper for pharmaceutical and device innovation, the Food and Drug Administration (FDA) has a tough job. If it is too lenient, it will allow the sale of drugs and medical technology that could harm vulnerable Americans. Too tight, and the U.S. is being deprived of key innovations that could cut costs, increase health, and create jobs.
With this in mind, this paper addresses the question: Is the FDA unintentionally choking off cost-saving medical innovation? First, I discuss the difficulty of assessing whether the FDA is under-regulating or overregulating new drugs and devices, given the desire for safety. I then show how the FDA is clearly applying “too-high” standards in the case of one noninvasive device currently under consideration—MelaFind, a handheld computer vision system intended to help dermatologists decide which suspicious skin lesions should be biopsied for potential melanoma, a lifethreatening skin cancer. I then draw analogies to development of the early cell phones and personal computers.
Governor Chris Christie has decided to pull New Jersey out of the Regional Greenhouse Gas Initiative (RGGI), the Northeast’s carbon cap-and-trade program. New Hampshire’s legislature has also voted to leave, though the governor may veto the bill. Other states are considering their positions. As states leave RGGI and its market gets smaller, the advantages of linking up diminish, eroding its economic and political viability. Meanwhile, California’s attempt to implement cap and trade is under attack from the left and, as a result, has hit procedural roadblocks. These events have come as a surprise to many who follow this sort of thing—but are they important? Maybe. Three reactions are possible.
1) Despair(Cap and trade gets a knife in the back to match the one in the front)
RGGI and California’s AB32 are reminders that once, not so long ago, climate change was politically relevant and the best policy for avoiding it—pricing carbon—appeared not only possible but inevitable. RGGI and Europe’s Emissions Trading Scheme (ETS) are the only carbon cap-and-trade programs of any size anywhere in the world. (New Zealand also has a nascent scheme.) RGGI, to date, has survived the political tides that turned cap and trade into “cap and tax” and likely make any new carbon policy impossible in this country. In short, the states would carry the torch until, one day, Washington wakes up. It would be depressing irony, this story goes, if those state programs should die not by outside political force but by suicide.
2) Indifference (“Wait…New Jersey had a carbon policy?”)
Another view is that you can talk all you want about “carrying the torch” without changing the fact that RGGI was and is a mere drop in the bucket. Its goals were always modest, and emissions caps were set so high that allowances never had any real value. If it weren’t for price floors, they would have been worthless. The program didn’t result in enough emissions cuts to be regionally relevant, much less have an effect on the climate problem. RGGI hasn’t had political success either. It’s chosen form—cap and trade—has become much less popular since the program started. If RGGI was supposed to show the country that cap and trade could work and wasn’t so scary after all, it’s either failed or nobody was paying attention in the first place. When and if pricing carbon becomes politically plausible again in Washington, it will be because politics and national public opinion have changed, not because New Jersey lit the way. The programs don’t seem to have had any effect internationally, either—they aren’t touted by U.S. climate negotiators and seem to have had no persuasive power during climate talks.
3)Optimism (Playing the long game)
Michael Levi argues that there may be more positives than negatives in Gov. Christie’s announcement:
…in the course of rejecting RGGI, Christie embraced the reality of the climate problem. Last fall, he said he was skeptical that human-caused climate change was a real problem. In his withdrawal announcement, though, he made it pretty clear that he thought climate change was a serious matter. This is no small thing for a rising star in a party that has increasingly made climate denial a litmus test for its leadership.
Christie’s about-face on this issue makes former Minnesota Governor and GOP presidential hopeful Tim Pawlenty’s recent turn in the opposite direction look like ham-handed pandering.
Just as with every other environmental issue, the U.S. will have a climate policy when the center-right accepts that one is necessary, and not before. RGGI is doing very little to change that. In other words, RGGI matters only if you care more about the tool (cap and trade) more than the problem (climate change). It is odd, though, that a deficit hawk like Christie would spike a revenue generator like RGGI. That does not bode well for those who think that a carbon tax is the key to a grand environmental-fiscal compromise.
Which of these three is right? Perhaps unsurprisingly, all three to some extent. Pricing carbon is the most effective climate policy—so it is troubling to see it lose ground. RGGI itself is largely irrelevant to both the science and politics of climate. And the long view matters most of all. If you want a meaningful federal climate policy, you are looking for one thing: a 60th vote in the Senate. Could that one day be Christie?
U.S. elected leaders are desperately searching for ways to reduce the nation’s colossal debt without casting career-damaging votes for hiking revenues and slashing spending. Policy-makers are now turning to a technical fix in how the government measures inflation not only to fight the deficit, but also to circumvent political backlash.
Currently, the Bureau of Labor Statistics accounts for changes in the cost of living through the Consumer Price Index (CPI). The traditional CPI measures the overall average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. But there’s a hitch: many economists say CPI overstates inflation, resulting in higher cost-of-living adjustments for people who receive public benefits, especially Medicare and Social Security, while simultaneously increasing federal deficits unnecessarily.
The problem with the traditional CPI is its dubious assumption that consumers continue to purchase the same basket of goods regardless of relative prices. That is where the so-called “Chained CPI” comes in. Many economists believe it more accurately measures inflation by taking into account something called “consumer substitution bias.” Simply, what this means is that when the price of food or some other good rises, people will look for a cheaper alternative.
According to a new paper by The Moment of Truth Project, a bipartisan effort focused on overcoming the nation’s debt problem, switching to the Chained CPI would save the government serious money — $12 billion in Social Security, $33 billion in other federal retirement plans and $23 billion in deficit reduction from other areas of the budget. Chained CPI will conserve another $87 billion in a ten-year period, because it slows the growth of tax bracket thresholds and other factors. All told, using Chained CPI to gauge inflation and index the federal budget would reduce the deficit by $300 billion total over the next decade.
No wonder the switch to the Chained CPI has been endorsed by both the National Commission on Fiscal Responsibility and Reform’s and the Domenici-Rivlin deficit reduction plans. The fiscal commission’s co-chairs, Erskine Bowles and Alan Simpson, set up Moment of Truth to advocate for the Bowles-Simpson commission’s plan.
According to the authors of the Moment of Truth report, Adam Rosenberg and Marc Goldwein, Chained CPI can fully account for the substitution bias that arises from consumer behavior by using market baskets from two successive months. The combination of baskets creates a chaining effect that links price changes to shifts in consumption.
Even though it is a technical fix, Congress still needs to approve adopting Chained CPI. In today’s hyper partisan times, fixing the CPI would be a less painful way politically to reap budget savings while providing a more accurate understanding of how inflation changes consumer behavior.
Whether U.S. Presidents succeed or fail often depends on a big factor beyond their control: the timing of the business cycle. Lucky Presidents – Ronald Reagan, George W. Bush – experienced downturns early in their first term, leaving plenty of time for an economic rebound to lift them to reelection.
Barack Obama, who took office months after the Great Recession started, must be cursing his luck. Just at the point when investment and jobs normally would be coming back, the U.S. economy has taken a sickening swoon.
Last month’s feeble job numbers – just 54,000 jobs created, far short of the 300,000 or more needed each month to return unemployment to pre-crisis levels – reinforced the public’s growing economic gloom. They also suggested that the administration has erred in viewing the economy’s problems as cyclical.
If that were true, the White House strategy of waiting for the economy to heal itself might make sense. But if America faces structural impediments to growth, we can’t just wait for the economy to revert to normal.
Since the Great Recession officially ended in the fall of 2009, the economy has grown just 2.8 percent per year, well below the average 4.6 percent growth that follows typical recessions, economist Lawrence Lindsey said. And instead of declining steadily, unemployment is rising again.
From GOP presidential aspirant Jon Huntsman to liberal columnist Paul Krugman, commentators across the spectrum are rightly talking about a “lost decade” of economic growth. According to the Wall Street Journal’s Gerald Seib, America has endured 11 straight years of lackluster growth since 2000, the last year in which economic growth exceeded four percent.
The job picture is even worse. As this useful chart shows, the U.S. economy created 23 million jobs on Clinton’s watch and 16 million on Reagan’s. Bush’s job-creation record is a paltry 3 million. And we can’t just blame the Great Recession. Even before it hit in December 2007, the rate of job growth lagged well behind the record of the previous decades.
No doubt about it: the aughts under Bush were a lost economic decade. While no president can be blamed for cyclical downturns, it is fair to say that Bush’s economic policies did little to address the structural roots of slower economic and job growth. On the contrary, his purblind economic policy mix – coupling a spending binge with deep tax cuts – helped dig America into a deep fiscal hole.
Nonetheless, the lingering economic malaise has cast a shadow over Obama’s reelection prospects and boosted Mitt Romney’s political stock – the two are now running neck-in-neck in the polls. The 2012 election will largely be a contest over which party has the most credible plan for reviving U.S. economic dynamism.
The Republicans have a simple fiscal theory that leads to an equally simple solution. They see the size and cost of government as the chief obstacle to growth. Cut public spending, and the economy will sit up on its haunches again and roar.
Many liberals, including Krugman, seem stuck in the Keynesian paradigm, arguing that the problem is inadequate demand, which means government needs to spend more until the economy recovers its “animal spirits.”
Obama is smart enough to reject a witless choice between less or more government. He has, however, yet to develop a plausible plan for restructuring the U.S. economy to unleash economic innovation, capture its benefits in good jobs that stay in America, and boost our ability to win in world markets.
Above all, Obama needs to spell out big, concrete initiatives that can inspire public confidence that his administration has properly diagnosed the economy’s structural ills and prescribed realistic remedies.
PPI has developed bold proposals that meet this standard: An independent National Infrastructure Bank, to unlock hundreds of billions of private investment in state-of-the-art transport, energy and water systems; pro-growth tax reform that closes inefficient tax expenditures and reduces the corporate tax rate; and a base-closing style commission charged with periodically pruning regulations that impede economic innovation and business start-ups, the engine of most new American job creation.
America can’t afford another lost economic decade – and neither can progressives. This is an FDR moment for Obama – a time for “bold, persistent experimentation” to get America’s economy moving again.
Last week’s less-than-positive jobs report revived ever-hopeful mainstream media talk that economic issues would decisively trump cultural or constitutional issues in the Republican Party’s councils. And indeed, some reporters saw this long-awaited sign even in the entrails of the Christian Right: the annual Washington get-together of Ralph Reed’s Faith and Freedom Coalition, which attracted most of the GOP presidential field. Here’s how Reuters described the confab, under the title, “Social issues fade as Republicans court conservatives”:
Christian conservatives looking to put a Republican in the White House heard a lot about the economy on Friday in a sign that their social issues may take a back seat in 2012…. In contrast to some previous presidential campaigns, social issues like gay marriage and abortion have not been prominent topics for Republicans hopefuls seeking to replace President Barack Obama in next year’s election.
That’s a Beltway wish-fulfillment view of the FFC event, and of contemporary Republican politics generally.
But it’s also not exactly right: There was lots of talk about those supposedly forgotten “social issues” at Ralph’s soiree. The proto-candidate for president who defines the left wing of the GOP these days, Jon Huntsman, did not consign these issues to the “back seat.” Here’s what he had to say:
“As governor of Utah I supported and signed every pro-life bill that came to my desk,” Huntsman said, rattling off legislation that made second trimester abortions illegal, a bill that he said allowed “women to know about the pain that abortion causes an unborn child,” a bill “requiring parental permission for an abortion,” and another piece of legislation “that would trigger a ban on abortions in Utah if Roe vs. Wade were overturned.”
“You see,” Huntsman explained, “I do not believe the Republican Party should focus only on our economic life to the neglect of our human life.”
Turning the “social issues don’t matter” meme on its head, another supposedly non-social-conservative candidate, Mitt Romney, argued that economic and fiscal problems represented a “moral crisis.”
Most MSM treatment of the FFC event missed the rather central point that Ralph Reed’s organization is not a full-on Christian Right group purely devoted to social issues, but instead a “teavangelical” effort explicitly designed to merge the religious and limited-government impulses of the GOP. There is already a massive overlap of affiliation with Tea Party and Christian Right identities. And there’s a more important if less understood overlap in the Tea Party and Christian Right theories of what’s gone wrong with America: an emphasis on alleged judicial usurpations of state and private-sector powers going back to the New Deal, and a hostility to supposed cultural elites who favor both secularization of American society and maintenance of the progressive legacy of New Deal/Great Society programs.
There’s really not that much tension between the economic and social wings of today’s conservative movement. And both appear to converge in an aggressive foreign policy, focused especially on the Middle East. FFC Speaker Rep. Michele Bachmann ended her remarks with a prayer that concluded:
Our nation hangs precariously in the balance financially, morally and also in our relationship with the rest of the world — with our position toward Israel.
Another already-announced presidential candidate, who reportedly received the most impressive response, Herman Cain, told FFC attendee:
“The Cain doctrine would be real simple when it comes to Israel: You mess with Israel, you mess with the United States of America,” he said to a long standing ovation.
In general, bad economic indicators don’t seem to be tilting the conservative movement or the Republican Party in any sort of economics-only direction. Indeed, to the extent that Republican economic policy now focuses on short-term federal spending cuts and long-term elimination of New Deal/Great Society entitlements, it converges with non-economic policies aimed at a cultural counter-revolution remaking America according to mid-twentieth-century values and opportunities. The very people who want to criminalize abortions and restore “traditional marriages,” also want to get rid of unions and collective efforts to make health care or pensions universally available.
…
On the presidential campaign trail, Mitt Romney formally declared his candidacy, but on the same day, in Boston, Sarah Palin spoke out against the Massachusetts health reform plan. Palin’s impossible-to-divine ambitions received vast attention. … Michele Bachmann has reportedly recruited Ed Rollins, Mike Huckabee’s 2008 campaign manager, to her cause. … Newt Gingrich followed up his disastrous campaign launch by suddenly announcing a two-week vacation to the Greek Islands, subsequently losing his Iowa political director. … Jon Huntsman became the first candidate to officially announce he was skipping Iowa. And polls consistently show Mitt Romney narrowly leading a field of candidates who will soon be attacking him on many grounds, most notably RomneyCare. While Romney appears to think his economic message and resume will make him ultimately irresistible to both primary and general election voters, it’s unclear he can overcome hostility to his health care record among the former, and coolness towards his Wall Street Republican orientation among the latter. We’ll soon know if what Romney has to do to get the Republican presidential nomination will prove to be too much for him, or too much for the November 2012 electorate.
Last week reports emerged about attempted cyber attacks against the internal networks of three major U.S. defense contractors: Lockheed Martin, L-3 Communications, and Northrop Grumman. All of the attempted hacks tried to access the companies’ internal networks using compromised remote-access security tokens, which are believed to be linked to yet another hack that occurred at a different government contractor, RSA, in March.
Amidst news of last week’s attacks, DoD is preparing a formal cyber strategy and a list of deployable cyber weapons. The strategy is not in response to the incursions, but as the first formal cyber strategy written by the Pentagon, it obviously has bearing on USG’s response to them, as well as future assaults.
The strategy is not yet public, but two important provisions are known: First, that the Pentagon may use conventional force to respond to a cyber attack against the U.S.; second, that the strategy explicitly contains an authorization framework, reportedly requiring the military to obtain presidential approval before deploying cyber weapons.
While it’s time that the U.S. government assembled clear policies to respond to cyber attacks, it is important to recognize the unique challenges contained therein. Two of the most important are 1) assigning responsibility for an attack and 2) assuring that any retaliation avoids excessive collateral damage.
First, unlike attacks with conventional weapons, an attacker has more opportunities to hide his origin in cyberspace. For example, state actors can create plausible deniability behind contracted criminal groups, a tactic likely used by Russia and China. It’s unclear how the new strategy will deal with this point.
Second, if the U.S. government is able to correctly attribute an attack, its response would have to comport with international law, specifically a statute known as the Law of Armed Conflict (LoAC). The United States is bound to the LoAC through multiple treaties such as the 1907 Hague Conventions and the 1949 Geneva Conventions, as well as through customary international law. Two elements of the LoAC pose particular challenges in the cyber realm: proportionality and distinction.
Proportionality may be a particularly tough nut to crack, as we know that the Pentagon’s policy will permit retaliating against a cyber attack with conventional weapons. It’s new ground, and the argument could be made that launching a missile in response to a computer-based attack is inherently disproportionate. However, we must recognize that a cyber attack has the ability to cause actual loss of life if, for example, it were aimed at air traffic control systems and caused planes to crash. Under the new policy, only an attack of this magnitude would allow a conventional response to a cyber attack, and it is imperative that such a response be proportionate.
Distinction is another problematic element of the LoAC because cyber weapons can have unintended consequences. The amount of damage that a conventional weapon does is known before it is used even though it may damage unintended targets. Not so in the cyber world: Vital military and civilian assets may reside on the same network, thus making it difficult to limit damage to the legitimate military target. Furthermore, cyber weapons are different because entities that reside in cyberspace are interconnected on a global scale: attacking a target on a server in China can also cause damage to another server in Canada. This actually happened in 2010 when the U.S. military took down a jihadist website hosted in Saudi Arabia that led to disruption to more than 300 servers in Saudi Arabia, Texas, and Germany.
These are only a couple of considerations that complicate the use of cyber weapons, and developing a strong cyber capabilities must occur within the context of these considerations. With so much of its vital national assets relying on the Internet, the U.S. must equip itself with both the strong defensive capabilities and project power in cyberspace, as well as with robust policies to regulate these capabilities.
Amid the high drama of fiscal brinkmanship in Washington, it’s easy to forget that reducing budget deficits isn’t the biggest economic challenge we face. Even more important is kick-starting the great American job machine and reversing our country’s slide in global competition.
Critical to both goals is shoring up the decaying physical foundations of national prosperity. Without world-class infrastructure, the United States won’t be able to attract private investment, sustain rapid technological innovation and productivity growth, or keep good jobs from going overseas.
According to a new Gallup poll, general economic concerns (35 percent) and unemployment (22 percent) top voters list of worries, with federal deficits and debt a distant third at 12 percent. Fiscal restraint is important, but it must be balanced against the larger imperatives of jobs and global competition. Among other things, this means leaving room for public investment to replenish the nation’s stock of physical capital.
America can’t build a more dynamic and globally competitive economy on the legacy infrastructure of the 20th Century. Thanks to their parents’ far-sighted public investments, baby boomers grew up in a country that set the world standard for modern infrastructure. But after a generation of underinvestment, compounded by politicized spending decisions, we now face a massive infrastructure deficit that exerts a severe drag on U.S. productivity.
Meanwhile, China and other fast-rising countries are building gleaming new airports and bullet trains. To keep from falling farther behind, the United States needs to make large-scale capital investments in repairing decrepit roads and bridges; upgrading air and sea ports; building “intelligent” transportation systems and smart energy grids; modernizing the air traffic control system; speeding up our pokey rail networks; and leading the world in deploying ultra-fast broadband.
But with the government strapped for cash, it’s reasonable to ask where the money to rebuild America will come from. The answer is that we need to look more to the private sector. U.S. companies are sitting on $2 trillion in idle cash, and pension funds, overseas investors and sovereign wealth funds also are looking for places to invest. Although the federal government will have to put up seed capital, its main role should be to leverage private investment in state-of-the-art infrastructure.
That’s why America needs a National Infrastructure Bank. As proposed by the bipartisan trio of Senators John Kerry, Kay Bailey Hutchison and Mark Warner, the bank would use a modest, one-time appropriation of $10 billion to leverage enormous investments — $640 billion over 10 years — for projects with the greatest potential to put Americans to work and enhance U.S. competitiveness.
President Obama has repeatedly endorsed a national infrastructure bank and proposed the idea again in the budget he sent to Congress in February. But the Senate bill (and a separate House proposal championed by Rep. Rosa DeLauro) have decided advantages over President Obama’s proposal. The president’s approach starts with a smart idea to create programs that work more with the private sector to find financing solutions. But unlike the Kerry proposal, it does not focus enough on the most powerful tools for leveraging private investment: loan programs that include a reasonable cap on the federal share of project costs. Obama’s bank would also be housed within the Department of Transportation, whereas the Kerry bill would make the bank an independent, quasi-public entity. That’s an important difference, because to attract hard-headed capitalists who expect a real economic return on their investments, the government’s financing facility must be genuinely free of political interference.
An independent infrastructure bank would select projects based on their ability to generate real economic returns rather than their influential political patrons. As a self-sustaining entity that would not rely on future appropriations from Congress, the bank would not be subject to the pork barreling and earmarking that distorts federal and state infrastructure spending, especially on transportation.
It’s time to get serious about our dilemma: the U.S. economy is creating too few jobs to bring down unemployment to pre-recession levels. For that, we’d need nearly 12 million new jobs, or about 100,000 more on average than the 200,000 the economy is creating each month. Big capital projects would immediately create those jobs where they are most desperately needed–in the hard-hit construction industry, which is still struggling with a 20 percent unemployment rate.
In the short run, a big national push to build modern infrastructure could create high-skill jobs that can’t be exported. In the long run, it will ensure America’s return to being an engine of production, not just a global center for consumption. That’s why, as Congress struggles to contain federal deficits and debt, it needs to make room for a National Infrastructure Bank to rebuild America.
Many economists are racing to declare a ‘manufacturing revival.’ The latest to join the bandwagon is Paul Krugman. In his latest column, Krugman writes (my emphasis added)
Manufacturing is one of the bright spots of a generally disappointing recovery…..Crucially, the manufacturing trade deficit seems to be coming down. At this point, it’s only about half as large as a share of G.D.P. as it was at the peak of the housing bubble, and further improvements are in the pipeline…one piece of good news is that Americans are, once again, starting to actually make things.
Oh, how I wish Paul was right. Unfortunately, I still don’t see it in the trade numbers. In fact, the real trade deficits in capital and consumer goods are both nearing all-time (negative) records. Meanwhile, the real trade deficit for industrial supplies and materials has improved in large part because of an enormous surge in real exports of energy products, including coal, fuel oil, and other petroleum products (yes you read that right) and a sharp decline in imports of building materials. I don’t find either of these convincing proof of a resurgence of manufacturing.
As you might expect, time for some charts. Here’s a chart (below) of the real trade balance in capital goods in billions of 2005 dollars, calculated on a 12-month basis.
Capital goods include computers, telecom gear, machinery, aircraft, medical equipment–the heart of U.S. advanced manufacturing. Within a couple of months, if current trends continue, the capital goods trade deficit will be at a record level. What’s more, there’s no sign of any great domestic capital spending boom that could suck in imports.
And not to digress, these figures probably substantially underestimate the deterioration of the capital goods trade balance because of the import price bias effect , where the government statisticians do not correctly adjust for rapid changes in sourcing from high-cost countries such as the U.S. and Japan to low-cost countries such as China and Mexico (for a good reference see the new paper “Offshoring Bias in U.S. Manufacturing” by Susan Houseman, Christopher Kurz, Paul Lengermann, and Benjamin Mandel in the latest issue of the Journal of Economic Perspectives) .
Now let’s turn to consumer goods. Here’s the chart (right) of the real trade balance in consumer goods, in 2005 dollars.
No sign of any real improvement here either, I’m afraid. The trade balance retreated a bit during the recession, but since then has surged back. Once again, there’s no sign of a sustainable improvement in the trade balance.
The situation with motor vehicles is a bit more ambiguous. As the chart to the left shows, clearly there has been some gains in the motor vehicles and parts trade balance. However, it has started deteriorating again.
Finally, we come to the one area, industrial supplies and materials, where there has been a clear improvement in the real trade balance. Industrial supplies and materials includes fuel imports and exports; steel and other metals; building materials; chemicals; and a grab bag of other things including newsprint, audio tapes, and hair.
Since 2006, there has been roughly a $150 billion improvement in the industrial supplies and materials trade deficit, measured in 2005 dollars (I say roughly because this is one case where the chain-weighted procedures used to construct the figures gives quirky answers that aren’t additive. So when I give the following numbers, please please don’t divide them into $150 billion to get a share of the improvement). Part of that is a decline in real imports of crude oil, which fell by roughly $30 billion (measured from 2006 to the 12 months ending in March 2011). But another $30 billion, more or less, came from an increase in real exports of petroleum products such as fuel oil and lubricants. I’m not sure whether a gain in exports of fuel oil really tells us much about the fortunes of manufacturing overall.
Another contributor to the improved trade balance is a decline in the imports of building materials. Once again, not a sign of strength.
So I see no sign in the trade data of a great manufacturing revival. The topline improvement in the real trade deficit has mostly come from industrial materials and supplies, and within that from a swing in the energy sector imports and exports.
Let me finish with a quote from a piece that Paul Krugman wrote back in 1994. In that piece, he scoffed at worries that foreign competition was hurting U.S. manufacturing. He argued that
A growing body of evidence contradicts the popular view that international competition is central to U.S. economic problems. In fact, international factors have played a surprisingly small role in the country’s economic difficulties…. recent analyses indicate that growing international trade does not bear significant responsibility even for the declining real wages of less educated U.S. workers.
The following is an anonymous piece by an economist at an international financial institution. The views expressed here are solely those of the author.
Despite what politicians across the political spectrum will scream at you, the United States’ screwed up finances haven’t yet reached the level of an existential debt crisis.
To be clear, America must get its fiscal house in order, and ongoing debates and collaboration across the legislative and executive branches are important to righting America’s budgetary ship over the next few years. But let us dispel the notion that unduly draconian debt-reduction measures–that only touch the discretionary budget no less–must be enacted yesterday. Big picture reform of entitlement spending, increasing federal revenue, and scrutinizing the Pentagon’s budget must, and will, happen. However, the shrill, mostly right-wing political calls to cast ideologically-motivated yet relatively tiny budget cuts as the solution to a spending emergency will not solve the debt crisis and could create a culture that chokes off needed investment in critical areas. As any CEO will tell you, a certain level of borrowing to fund strategic investment is a critical component to reaping higher future returns. The same is true of public borrowing to support America’s long-term economic growth.
Here are three unique reasons why the U.S. continues to be in a position to borrow:
(1) Liquid financial markets and the reserve characteristics of the U.S. dollar create a nearly inexhaustible supply of creditors for our public debt. In plain English, this means that U.S. dollar assets are the safest global investment and savings vehicle and are easily accessible, keeping the federal government’s cost of borrowing relatively low (i.e., the US can harness global, not just national savings).
(2) Confidence in our monetary system to keep a lid on inflation will preserve U.S. Treasuries as desirable assets. Fear of inflation stoked by printing money to finance deficits is a primary fear of investors and not concern for the U.S. due to an independent Federal Reserve. The Fed appears to be aware and prepared for potential inflationary risks, and its track record, through several business cycles, has been praiseworthy as inflation, measured by the consumer price index, averaged 3.1 percent between 1982 and 2011.
(3) We are saving more domestically and could replace external demand for US dollar assets. A surprisingly large percentage of U.S. Treasuries remained in the hands of U.S. residents as of December 2010, and with the household savings rate doubling since its trough in 2005, the capacity to fund our public liabilities domestically will improve.
Long-term economic growth constraints erode debt sustainability in the US
The resulting ongoing and outlandishly panicked fiscal debate ignores a critical measurement of the nation’s economic health: our long-term economic growth potential. Not only is it a source of wealth and power, it is a major component of assessing our level of sustainable debt. Nominal economic growth – a function of increases to our stock of labor and capital — reflects a nation’s capacity to repay debt. When it is faster than the growth of new net borrowing then there is no problem. In other words, if your family’s income is growing faster than the amount you are borrowing, then your indebtedness is declining – a good thing! This is the dual assessment employed by international investors and rating agencies.
Borrowing to fund investment is critical to fostering future economic growth. By ignoring crucial investments in the nation’s stock of capital and labor, our politicians are mortgaging our future. Investment in public infrastructure, education, and immigration reform foster more rapid growth as they increase our stock of capital and labor, expanding economic capacity and productivity. By failing to be cognizant of the basic investment needs to maintain and expand our growth potential, our political leaders are just making political hay.
Hence, the fiscal debate on the Hill, which ignores economic growth potential, could ironically contribute to long-term market insecurity by raising our interest costs, and possibly lead to a greater debt crisis. What’s needed is a balanced approach, one that puts our long-term fiscal policy on a sustainable path through a combination of controlled spending, entitlement reform, revenue increases and with a contribution from the Pentagon, while committing to invest in our future.
Here are three critical areas of investment where the United States is failing to maximize growth potential by under-investing in capital stock and labor:
Public infrastructure: The United States’ capital stock is suffering from decades of neglect, increasing the cost of doing business and decreasing our competitiveness. The 2009 American Society of Civil Engineers infrastructure report card gave us a grade of “D”. Compared to some of our competitors — who are investing in high-speed rail, clean energy production, and smart grids – we may appear to be standing still. For example, Europe invests 5 percent of GDP in infrastructure while the United States spends less than 2.4 percent.
Educating our future workforce: Sadly, our secondary education system compares poorly internationally and, while our universities are the envy of the world, we manifest an artificial brain-drain as we expel U.S.-educated, non-citizens to the benefit of our international competitors. Our education system is one of the most expensive but yields only average results. According to the OECD, the United States spent 7.6 percent of GDP on all levels of education in 2007, almost 2 percentage points above the OECD average, but secondary and tertiary completion rates remained below the average of other advanced countries.
Immigration: Immigration reform can and should be viewed through this economic lens – we must create a reliable system of immigration to expand our future labor pool, increase economic growth, and produce the resources we need to help finance unfunded public liabilities.
Our political class will continue to yell at one another on CNN and Fox, but keep in mind that all spending is not the same, and that there are sound economic arguments to support crucial investment in these discreet areas for the long-term economic health of the country.
In 1987 the G6 countries (Canada, France, Germany, Italy, Japan, and the UK) accounted for 55 percent of U.S. goods imports. That same year, China, Mexico and Brazil only accounted for 8 percent of imports.
In 2010 the U.S. reached a milestone–for the first time, imports from China/Mexico/Brazil exceeded imports from the G6 countries. In the year ending March 2011, imports from China/Mexico/Brazil equaled 32 percent of goods imports, compared to 31 percent for the G6 countries. Here’s another way of seeing the same thing. Please note that OPEC’s share, and the share of “all other countries,” don’t change very much. It’s really the G6 versus a handful of low-cost importers.
One final note. The shift in sourcing is most likely happening because the goods made in China/Mexico/Brazil are less expensive than the same goods made in France/Germany/UK. Unfortunately, the BLS import price statistics are not able to pick up the price drops from shifts in country sourcing.
Suppose for example that goods made in China are sold for one-third less than the same goods made in Japan. Then for the same physical quantity of imports, that shift in sourcing will cause the nominal value of imports to be one-third lower. This imparts a significant downward bias to the import penetration ratio.
There’s been a lot of happy talk recently about the revival of U.S. manufacturing . According to an article in the New York Times, “manufacturing has been one of the surprising pillars of the recovery. “ In a Forbes.comcolumn entitled “Manufacturing Stages A Comeback,” well-known geographer Joel Kotkin talks about “the revival of the country’s long distressed industrial sector.” The Economistwrites that “against all the odds, American factories are coming back to life.”*
Truly, I’d like to believe in the revival of manufacturing as much as the next person. Manufacturing, in the broadest sense, is an essential part of the U.S. economy, and any good news would be welcome.
Unfortunately, the latest figures do not back up the cheerful rhetoric.
Newly-released data suggest that the manufacturing recession was deeper than previously thought, and the factory recovery has been weaker. On May 13 the Census Bureau issued revised numbers for factory shipments, incorporating the results of the 2009 Annual Survey of Manufacturers. The chart belows shows the comparison between the original data and the revised data (three-month moving averages):
The decline in shipments from the second quarter of 2008 to the second quarter of 2009 is now 25%, rather than 22%. And the current level of shipments in the first quarter of 2011 is now 9% below the second quarter of 2008, rather than only 5%. In other words, the new data shows that factory shipments, in dollars, are still well below their peak level.
The manufacturing recovery looks even more tepid when we adjust shipments for changes in price. Here are real shipments in manufacturing, deflated by the appropriate producer price indexes.**
Now that hardly looks like a recovery at all, does it? Real shipments plummeted 22% from the peak in the fourth quarter of 2007 to the second quarter of 2009. As of the first quarter of 2011, real shipments are still 15% below their peak. To put it another way, manufacturers have made back only about one-third of the decline from the financial crisis.
And while U.S. manufacturers have struggled, imports have coming roaring back. Here’s a comparison of real imports (data taken directly from this Census table) and real U.S. factory shipments (my construction, using Census and BLS data).
This chart shows that imports have recovered far faster and more completely than domestic manufacturing. Goods imports, adjusted for inflation, are only about 1% below their peak. That’s according to the official data. If we factored in the import price bias, we would see that real imports are likely above their peak (I’ll do that in a different post).
In other words, this so-called ’revival of U.S. manufacturing’ seems to involve losing even more ground to imports. That doesn’t strike me as much of a revival.
P.S. Oh, oh, what about all those manufacturing jobs that Obama’s economists are so proud of? This chart plots aggregate hours of manufacturing workers against aggregate hours in the private sector overall (the last point is the average for the three months ending April 2011).
What we see is that the decline in hours in manufacturing was deeper than the rest of the private sector, and the recovery has really not made up that much ground. Over the past year, aggregate hours in the private sector have risen 2.3%, while aggregate hours in manufacturing have risen 2.9%. That’s not much of a difference. In fact, probably the best we can say is that manufacturing has not held back the overall recovery.
**For those of you interested in technical details, I used the producer price indexes for 2-digit manufacturing industries, as reported by the BLS. Could these estimates be improved on? Probably–but they are good enough to get the overall picture.
America’s job drought is really America’s capital spending drought. As of the first quarter of 2011—a year and a half after the recession officially ended—business capital spending in the U.S. is still 23 percent below its long-term trend. If domestic businesses are not expanding and investing, they are not going to create jobs.
The weakness in domestic capital spending is both perplexing and disturbing. It’s accepted wisdom that we needed to work off the aftereffects of the housing and consumption bubbles, but very few economists believe that the U.S. suffered from an excess of business capital spending in the years leading up to the financial crisis. And there’s no sign of a credit crunch for large businesses, which mostly seem to have access to sufficient funds to invest if they wanted.
However, there is one important exception to the investment drought: the communications sector. To keep up with the communications boom and soaring demand for mobile data, PPI estimates that telecom and broadcasting companies have stepped up their investment in new equipment and software by 45 percent since 2005, after adjusting for price changes (see the chart “Communications: No Investment Drought”). By comparison, overall private real spending on nonresidential equipment and software is only up by 6 percent over the same stretch.
In fact, the big telecom companies head the list of the businesses investing in America (see the table “Investment Heroes”). According to PPI’s analysis of public documents, AT&T reported $19.5 billion in capital spending in the U.S. in 2010, tops among nonfinancial companies. Next was Verizon, with $16.5 billion in domestic capital spending in 2010. Comcast was seventh on the list, with about $5 billion in domestic capital spending (companies such as Google and Intel were a bit further down the list.).
It’s Earth Day, but as far as problems go, the environment now ranks last among 15 issues that the public thinks Congress and the President should deal with this year. Only 24 percent of Americans think the environment is an “extremely important” issue. On this score, the environment comes in behind “the situation in Iraq” (27 percent), “taxes” (27 percent), and “illegal immigration” (30 percent) and “gas and home heating prices” (31 percent).
Moreover, when it comes to the trade-off between the economy and the environment, meanwhile, the economy now wins hands down: 54 percent to 36 percent. This is actually a relatively new development. Prior to 2008, the public had never prioritized the economy over the environment. As recently as 2007, the public supported giving the environment priority over the economy 55 percent to 37 percent, and throughout the 1980s and 1990s public opinion was consistently 65-to-25 in favor of environment over the economy, with slight dips in environmental friendliness during recessions.
Not surprisingly, the changes have been most pronounced among Republicans and conservatives. In 2000, conservatives prioritized the environment over the economy 62-to-33 percent; Now they prioritize the economy 70-to-22 percent – a remarkable 38 point shift. Similarly, Republicans overall went from 60-to-34 percent environment first to 55-to-35 economy first.
But even liberals have become less environment first. In 2000, they supported the environment over the economy 74 percent to 22 percent; now it’s 55 percent to 35 percent economy over environment. Same with Democrats overall: In 2000, they favored the environment 69 percent to 27 percent; now it’s just barely: 46 percent to 42 percent.
Certainly, a sluggish economy has something to do with things. When unemployment flirts with double-digits and the economy is in recession, it’s much easier to see the top priority as creating jobs. Moreover, the visible environment is in pretty decent shape these days. The skies and rivers are not brown, thanks to environmental regulations passed in the 1970s. Whatever environmental disasters might exist lurk in the hypotheticals of global warming.
As for the environmental problems that people care about, drinking water comes out first (51 percent care a great deal about it), followed closely by soil (48 percent), and rivers, lakes and reservoirs (46 percent).
But even on the these issues, the public is a lot less worried. In 1989, 72 percent of Americans cared a great deal about the pollution of rivers lakes and reservoirs, as opposed to 46 percent today. Similarly, in 1989, 63 percent cared a great deal about air pollution; today it’s 36 percent. This is a success story, because public opinion reflects the fact that these issues just aren’t the big deal they used to be.
What’s troubling, however, is the extent to which public opinion is becoming less concerned about global warming. Only one quarter of respondents care a great deal about global warming, ranking it last among eight environmental issues. That’s down from 41 percent as recently as 2007.
Similarly, as recently as July 2006, 79 percent of respondents thought that there was solid evidence that the earth is warming, and 50 percent believed it was because of human activity. Now only 59 percent believe the earth is warming, and just 32 percent think it’s because of human activity.
What’s emerged is a partisan divide on the issue. Whereas Democrats have been largely consistent in believing the earth is warming, Republicans have increasingly become convinced that global warming is not a problem.
All of this, however, is too bad for Obama, because environmental stewardship is one of the issues the President polls best on: 55 percent of Americans think he is doing a good job “protecting the nation’s environment” as compared to 33 percent who think he is doing a poor job.
In today’s Washington Post, David A. Fahrentold marvels at what he calls the “Line Items That Won’t Die” – federal programs that benefit narrow interests, but somehow manage to keep getting funded: “One spends federal money to store cotton bales. Another offers scholars a chance to study Asian-American relations. Two others pay to market U.S. oranges in Asia and clean up abandoned coal mines.”
Fahrenthold attributes their success to having Congressional champions. The study of Asian-American relations, for example, takes place at a Honolulu nonprofit called the East-West Center, and enjoys the support of Sen. Daniel Inouye (D-Hawaii), who also happens to be chairman of the Senate Appropriations Committee.
But there’s also a broader story: the simple fact that when a government program benefits a narrow constituency, it’s very easy for that constituency to organize and make demands on legislators about why this program is worth keeping. The larger public, meanwhile is rarely aware, and even if it were aware, is unlikely to do anything.
Take the Market Access Program discussed in the article, which helps promote U.S. agricultural products abroad. A coalition of agricultural interests benefit greatly from this, and they are organized to advocate fiercely for its continuance and threaten to punish any Senator or Congressman who would vote against the program by withdrawing votes and campaign contributions. Nobody in the general public, however, is likely to care about or vote based solely on this single issue.
This is the difference in what congressional scholar R. Douglas Arnold has called “attentive publics” and “inattentive publics.” Attentive publics are the small groups that care deeply about particular policies, and as a result, are likely to be more influential because they care so intensely about that one issue. Inattentive publics are everyone else. The public might be outraged after reading about the Market Access Program, but the likelihood of most people following up are small. Think of it this way: If 1,000 people want money from you, but only one bothers to keep calling you up telling you why he’s so deserving and threatens to punch you in the face if you don’t give him the money, you’re probably going to give that one person money, especially if it’s likely the other 999 will not even notice or if they do, won’t remember.
Another way to think about it (borrowing from James Q. Wilson) is in terms of distributed costs and concentrated benefits. The benefits of a program that pays peanut and cotton farmers to store their bales and bushels in warehouses are solidly concentrated among peanut and cotton farmers. The costs are distributed to everybody else. But the cost per taxpayer is so small that it’s hard to imagine any group getting organized to fight this particular program. Whereas the farmers – well, they’re damn certain to do fight any cuts to the program. What results is what Wilson calls “client politics” – where small narrow interests work with the relevant congressional committee and executive agency staff to build a usually impenetrable consensus around the importance of a single program.
The challenge for governing is that the federal budget and tax code and regulatory apparatus are filled with thousands upon thousands of these programs, each protected by a small consensus, and without any public coverage. One only need to scroll through the Federal Register to see all the small issues that could potentially benefit small attentive publics at the expense of everyone else. Or better yet, look through the tax code to find all the little credits and deductions for very narrow benefits. It’s enough to make your head spin round and round and round. Jonathan Rauch has pessimistically called this condition “Government’s End.”
I don’t really have a solution. In part, this is the nature of our current system of government and the size and complexity of our economy. But the point is, these programs are very difficult to kill, and Fahrenthold’s story is just the tip of the iceberg.
Last week, President Obama vented his frustration at Congressional Republicans for storming out of White House budget talks over raising the debt ceiling. Anyone who thinks the president overreacted should look to the Congressional Budget Office’s (CBO) latest budget 
It’s been a bad month for cap and trade.
U.S. elected leaders are desperately searching for ways to reduce the nation’s colossal debt without casting career-damaging votes for hiking revenues and slashing spending. Policy-makers are now turning to a technical fix in how the government measures inflation not only to fight the deficit, but also to circumvent political backlash.
Whether U.S. Presidents succeed or fail often depends on a big factor beyond their control: the timing of the business cycle. Lucky Presidents – Ronald Reagan, George W. Bush – experienced downturns early in their first term, leaving plenty of time for an economic rebound to lift them to reelection.
Last week 
Despite what politicians across the political spectrum will scream at you, the United States’ screwed up finances haven’t yet reached the level of an existential debt crisis.
It’s Earth Day, but as far as problems go, the environment 
In today’s Washington Post,