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How Bad is the Job Situation, Really?

Posted on July 14, 2010September 18, 2024 by The Progressive Policy Institute

When it comes to economic conditions, I’m generally a glass-three-quarters-full kind of guy. Take unemployment. Quick—what was the risk in 2008 that an American worker would experience at least one bout of unemployment? Chances are you thought that that risk was higher than one in eight.* But figures from government surveys indeed suggest that thirteen out of fifteen workers (or would-be workers) had not a single day unemployed during the first year of the “Great Recession”.** (Incidentally, the recessions of the mid-1970s and the early 1980s were also called the “Great Recession” by some commentators.)

The 2009 data won’t be out until later in the year, but if last year ends up comparable to the depths of the early 1980s recession, then the average worker will “only” have had a seven in nine chance of avoiding unemployment.*** But these figures overstate economic risk because some unemployment is voluntary and much of it is brief. According to the Congressional Budget Office, the chance that a worker experienced an unemployment spell lasting more than two weeks during the three years from 2001 to 2003 was just one in thirteen—a period covering the last recession.

So as I’ve been following the debate about unemployment insurance and whether it actually worsens the unemployment rate, I’ve actually been open to the idea that being able to receive benefits for up to two years might create perverse incentives. The research is not as uniformly dismissive of the idea as some liberal assessments have implied (go to NBER’s website and search the working papers for “unemployment” if you want to check this out yourself).

In particular, the idea that there were 5 people looking for work for every job opening struck me as sounding overly alarmist. So I started looking into the numbers to determine whether I thought they were reliable. The figures folks are using rely on a survey from the Bureau of Labor Statistics called the Job Openings and Labor Turnover Survey, which unfortunately only goes back to December of 2000. But the Conference Board has put out estimates of the number of help wanted ads since the 1950s. Through mid-2005, the estimates were based on print ads, as far as I can tell, but the Conference Board then switched to monitoring online ads. You can find the monthly figures for print ads here and the ones for online ads here. The JOLT and unemployment figures are relatively easy to find at BLS’s website.

When I graphed the two Conference Board series (which requires some indexing to make them consistent–the print ad series being an index pegged to 1987 while the online series gives the actual number of ads) against the number of unemployed, and then the JOLT series against the unemployed, here’s what I found:

I’ll just say I was shocked and that I am much more sympathetic to extension of unemployment insurance than I was yesterday.

*The post originally said one in ten, which was wrong (the result of mistakenly using a figure I had computed for an older age range). Technically, the the figure was 13.2%, or 1 in 7.6.
** The original post said nine out of ten.
*** The original post said that if it reaches the depths of the 1990s recession, then the average worker will have had a five in six chance of unemployment. I located data for the early 1980s recession, which is a better comparison to the current one.

This item is cross-posted at https://www.scottwinship.com/1/post/2010/07/how-bad-is-the-job-situation-really.html.

Andy Grove and a Needed Conversation

Posted on July 13, 2010September 18, 2024 by The Progressive Policy Institute

The recent Bloomberg BusinessWeek cover story by former Intel CEO Andy Grove, “How to Make an American Job,” has stimulated no shortage of reaction in the blogosphere. From the even-handed and the thoughtful, to the politely skeptical and the sharply critical, bloggers and commentators have weighed in on Grove’s essay.

What precipitated this running debate is Grove’s apparent suggestion that, to spur job creation and innovation, the United States should instigate a national-level industrial policy which favors some companies over others. He points to successful Asian economies as potential models. The distinguishing characteristic of the favored companies would be, what Grove asserts is the real engine of job creation, the scaling process:

Equally important is what comes after that mythical moment of creation in the garage, as technology goes from prototype to mass production. This is the phase where companies scale up. They work out design details, figure out how to make things affordably, build factories, and hire people by the thousands. Scaling is hard work but necessary to make innovation matter.

Other commentators have already pointed out that Grove perhaps focuses too much on manufacturing (and specifically technology manufacturing such as semiconductors), and that he misses the critical importance of startup firms to job creation and innovation.

I agree that the long-running lament over the loss of manufacturing jobs in the United States is overdone—much of that employment reduction has come about through productivity gains rather than offshoring. The scaling process Grove celebrates is in fact partly responsible for the loss of technology manufacturing jobs. Since 2000, industry concentration in Silicon Valley has increased dramatically in sectors such as computer equipment manufacturing and semiconductor manufacturing while employment has fallen. Just last week, my colleague Tim Kane published a report on just how much startups matter to net job creation in the United States. As Tim puts it, startups aren’t everything, they’re the only thing.

Finally, Vivek Wadhwa offers what is probably the best take on Grove’s article—Vivek is hugely knowledgeable about innovation in China and India, and offers, as others have not, actual concrete suggestions for how we can reignite economic growth in the United States.

Despite the flaws in Grove’s essay, it should not be dismissed. For one thing, he is a highly intelligent and highly successful entrepreneur who has lived through—indeed, helped shape—dramatic transformations of the U.S. economy.

Furthermore, scale companies are important to economic growth. No one can talk about the economic history of the United States without mentioning the scale companies that, at each stage of development, pioneered innovations, reduced costs and generally helped spread prosperity: Union Pacific, Standard Oil, Ford Motor, Wal-Mart, Intel, Microsoft, Google. Obviously, economic growth cannot solely be ascribed to such firms—they are only one piece of the economic ecosystem and while Grove may have overemphasized scale, he certainly was not wrong to discuss it. But the process of scaling must be contextualized: startups are essential in part because, without them, we do not even get to the scaling process. Competition helps ensure that scaling is accompanied by innovation and efficiency. Once they reach a certain level of scale, large firms depend on the acquisition of startups as a source of innovations and new jobs.

Scale firms can also be merely seen as incidents of deeper factors driving growth. After I gave a presentation on the economic contribution of high-growth firms a few months ago, an eminent economist dismissed everything by saying, “well, yes, but this is all simply explained by information technology; that’s the real story of growth.” The IT-as-the-root-of-all-prosperity argument has been popular in recent years but, as Paul Kedrosky later pointed out to me, this is a “turtles all the way down” type of argument. Behind IT is cheap energy, behind cheap energy is access to natural resources, behind natural resources … and so on. (Scale companies, in fact, could even be seen as a fertile source of knowledge for economists themselves: Thomas McCraw, inter alios, has argued that the rise of scale firms in the second half of the 1800s helped prompt the marginal revolution in economic thought.)

All of this still overlooks the most important part of Grove’s article, a point that escaped me upon first reading: “A new industry needs an effective ecosystem in which technology knowhow accumulates, experience builds on experience, and close relationships develop between supplier and customer.” The reason that the scaling process—rather than simply scale itself—is economically important is the learning-by-doing path by which it proceeds. Knowledge accumulates, innovations come and go, companies iterate back and forth—this is the messy process by which economic growth happens. If this reading is correct, Grove is claiming that the offshoring of technology manufacturing jobs threatens such learning-by-doing. In this formulation, productivity gains in manufacturing can actually undermine future cycles of learning and iterating.

The conversation Grove is trying to stimulate is worth having. It is probably too much to extrapolate technology manufacturing to the entire U.S. economy. There are certainly sectors, aside from manufacturing, in which learning-by-doing drives growth and it is not clear that those sectors have lost such capacity. Software development and certain institutions in the world of health care rely on this process. Yochai Benkler’s work can be seen as emphasizing the extent to which learning and iteration underwrites a great deal of innovation across the economy today.

But Grove’s point should be taken seriously in the sense that real barriers exist to innovation and the scaling process in many areas of the economy. Rather than seeing his article as a call for a government-driven competitiveness agenda or industrial policy, we should read it as a starting point for seeking out release valves at which small changes can be made that would release huge amounts of pent-up entrepreneurial energy. The stunted process of commercializing innovations out of universities leaps to mind as an area ripe for such analysis, as does current immigration policy. The national conversation about innovation and economic growth should be engaged in exactly this type of search.

Photo credit: jurvetson

On Immigration, Obama Ready to Lead — But Will the Public Follow?

Posted on July 9, 2010September 18, 2024 by The Progressive Policy Institute

It’s puzzling that President Obama keeps returning to the combustible subject of immigration. You’d think that, with big financial reform and energy/climate bills hanging fire, he’d have his hands full. And with unemployment stuck at nearly 10 percent, it’s not exactly a propitious time for a national debate over legalizing millions of immigrants who are living and working illegally in this country.

So what gives? Maybe it’s simply that Obama is the son of an immigrant father. Republicans, of course, have a more cynical explanation. They say Obama is throwing a bone to Latino advocacy groups disappointed by his failure to redeem a campaign pledge to move comprehensive immigration reform. Facing a very difficult midterm election, Democrats can’t afford to give Latino voters reasons to stay home.

After the Justice Department sued Arizona this week over a controversial immigration law, the Wall Street Journal accused Obama of being “more focused on branding the GOP anti-immigrant than he is on signing a reform bill.”

It’s true that immigration has opened up a fault line between Republican restrictionists and moderates like former President Bush, who won a substantial chunk of the Latino vote in 2000 and 2004. But give Obama some credit: He’s consistently ignored advice from Washington wise men to postpone politically risky undertakings – like health care and the climate bill – until the economy turns up again. His determination to take on the nation’s biggest problems, rather than “kick the can down the road,” is admirable, if impolitic.

But while Obama may be ready to lead, it’s not clear the public is ready to follow. A new Gallup poll finds Americans closely divided on immigration reform. By a 50-45 margin, they favor halting the flow of illegal immigrants over “developing a plan to deal with immigrants now in the U.S. illegally.” The survey also found that immigration is far from uppermost in voters’ list of concerns.

In a major speech on immigration last week at American University, Obama once again showed a fine instinct for the middle ground. He chided restrictionists who imagine that all 11 million illegal immigrants can simply be rounded up and sent home. But he also criticized immigrant advocates who call for a blanket amnesty for all people here illegally. “It would suggest to those thinking about coming here illegally that there will be no repercussions for such a decision. And this could lead to a surge in more illegal immigration. And it would also ignore the millions of people around the world who are waiting in line to come here legally,” Obama said. And he added: “Ultimately, our nation, like all nations, has the right and obligation to control its borders and set laws for residency and citizenship. And no matter how decent they are, no matter their reasons, the 11 million who broke these laws should be held accountable.”

That kind of moral clarity has been missing from liberal discourse on immigration, and it gives Obama a chance to be heard by Americans worried that the flow of undocumented immigrants across our southern border have eroded U.S. sovereignty and made a mockery of our laws. Once that has been stipulated, it’s easier to engage people in rational discussion about a compassionate way to deal with the millions of illegal immigrants working in our communities.

So far, so good. But Obama’s speech contained two large blind spots. One has to do with developing our capacity to enforce immigration laws in the workplace. After all, what attracts undocumented immigrants is the opportunity to work in the U.S. Until we have reliable systems for establishing the identity and legal status of workers, it will be difficult to hold employers accountable for hiring those who came here illegally.

Second, and even more important, the president seemed oblivious to the fundamental mismatch between U.S. immigration laws and our economy. America needs to import more skilled labor to plug gaps for scientists, engineers and technicians throughout our high-tech, high-wage economy. Our immigration system, however, gives priority not to skills, but to family unification.

Rather than simply urge Congress to take up comprehensive immigration reform where it left off back in 2006, the administration needs to think more creatively about modernizing immigration policy, and aligning it more closely with the requirements of U.S. economic innovation and competitiveness. I’ve offered some ideas along these lines, but more fundamental change is needed.

President Obama’s instincts on immigration are sound, but he needs to bring our policies and laws up-to-date in addition to finding a fair and compassionate way of dealing with people who came here illegally to find a better life.

A Nation of Pilot Projects?

Posted on July 7, 2010September 18, 2024 by The Progressive Policy Institute

More news this weekend that the Obama administration continues to pursue its unheralded campaign to reverse retrograde Bush-era policies and put the nation on a more sustainable footing. The president announced that the Department of Energy will award $2 billion in conditional commitments from the Recovery Act to two solar companies for plants in Arizona, Colorado, and Indiana, which together will create over 5,000 jobs.

The president’s heart is clearly in this cause. In his address, he said, “Already, I’ve seen the payoff from these investments. I’ve seen once-shuttered factories humming with new workers who are building solar panels and wind turbines; rolling up their sleeves to help America win the race for the clean energy economy.”

However, as good as it is, the announcement leaves a lingering question: On cutting-edge infrastructure issues such as solar, will we continue to be a nation of pilot projects? Or will we take any quantum leaps and achieve actual national policy?

There’s nothing to quarrel with in the announcements themselves. Abengoa Solar will build the plant in Arizona, which, when complete, will provide enough clean energy to power 70,000 homes. Over 70 percent of the components and products used in construction will be manufactured here in the U.S.

Abound Solar Manufacturing is building the Colorado and Indiana plants, which will produce millions of state-of-the-art solar panels each year—in Indiana’s case, using an empty Chrysler factory.

In announcing the plants on July 4^th weekend, the president said, “But what this weekend reminds us, more than any other, is that we are a nation that has always risen to the challenges before it. We are a nation that, 234 years ago, declared our independence from one of the greatest empires the world had ever known. We are a nation that mustered a sense of common purpose to overcome Depression and fear itself. . . I know America will write our own destiny once more.”

But the question is whether the scale, scope, and ambition of our solar policy rises to the level of the president’s language. The Recovery Act monies, and the policies underlying them, have been attacked left and right for failing to deliver on a set of clear national priorities. The stimulus dollars have been spread so wide and thin that they’ve been vulnerable to attacks both on pork and policy grounds.

That two solar plants are heralded as helping America “win the race for a clean economy” is the same pattern we’ve seen elsewhere in the collision between the clean economy campaign and today’s toxic budgetary and political environment. We saw the pattern in high-speed rail. As PPI’s Mark Reutter has noted, the administration announced $8 billion in stimulus funds that would go to a handful of projects. But without additional administration pressure, those funds are only being followed by $1 billion of congressional authorization. As 100 members of Congress wrote the president recently, “[G]iven budget constraints, we cannot continue to rely on general authorizations and appropriations to finance high-speed rail. We need to identify a dedicated revenue source for high-speed rail, and we need your help to do that.”

We have also seen the pattern in nuclear energy, where the administration took the bold step of announcing loan guarantees for two new nuclear plants in Georgia, the first built in a generation. However, the president’s language again made the actual commitment pale in comparison to the challenge. In announcing the guarantees, he cited the fact that there are, today, 56 nuclear reactors under construction around the world: 21 in China; six in South Korea, and five in India. He said, “Whether it’s nuclear energy or solar or wind energy, if we fail to invest in the technologies of tomorrow, then we’re going to be importing those technologies instead of exporting them. We will fall behind. Jobs will be produced overseas instead of here in the United States of America. And that’s not a future that I accept.”

The ambitions are noble and the rhetoric stirring, but the question is whether we really are shaping a future here—or just a set of ambitious but singular pilot projects.

Yes, there is too little money in annual authorizations for serious infrastructure. But as infrastructure expert Norm Anderson has recently written for PPI, “The financing issue — not a surprise for anyone in the infrastructure business — is the number one problem facing the industry.”

This is all the more reason the administration should follow the stirring rhetoric about competitiveness and “writing our destiny” by creating a new institution, such as an infrastructure bank of the type proposed by Sen. Chris Dodd (D-CT) and Rep. Rosa DeLauro (D-CT) and supported by the president in the past, that would create a long-term funding source and the energy for true national policy.

Photo credit: Bilfinger Berger Group

Recommendations on Curbing the National Deficit

Posted on July 2, 2010September 18, 2024 by The Progressive Policy Institute

The following is the is an excerpt from Will Marshall’s June 30 testimony before the National Commission on Fiscal Responsibility and Reform during the commission’s first public listening session:

Chairman Bowles, Chairman Simpson, and Members of the Commission, I appreciate the opportunity to appear before you to discuss ways to put America on a fiscally sustainable course.

Once unemployment rates start to fall, U.S. policy makers must be prepared to pivot sharply from fiscal stimulus to fiscal restraint. Otherwise, a large and growing federal debt will deplete our capital stock and thereby limit future economic growth. It will divert resources from productive investment to interest payments on the debt, half of which is already held by foreign lenders. And it will shake investor confidence, here and abroad, in the fundamental soundness of the U.S. economy, eventually driving interest rates up and the dollar down.

Despite these dire and entirely foreseeable consequences, too many federal policy makers remain in denial about the need for fiscal discipline. You have taken on what many consider a Mission Impossible: forging a bipartisan consensus on how to defuse the nation’s debt crisis. That’s put you in the crosshairs of extreme partisans of the left and right, who imagine this problem can be solved strictly at the other side’s expense. By refusing either to cut spending or raise taxes, the two have joined in a tacit conspiracy to bankrupt the country.

Common to both is the assumption that you can have fiscal responsibility, or you can have progressive government, but you can’t have both. We at the Progressive Policy Institute have always rejected this false choice. We believe that a progressive government can and must live within its means, and that if it instead chases the illusion of borrowed prosperity, it’s not really progressive.

To paraphrase Franklin Roosevelt, Americans know instinctively that borrowing routinely to consume more than you produce is both bad economics and bad morals. I don’t think it’s an accident that, as public worries about deficits have been mounting, public trust in government has been plummeting.

So there’s a lot riding on your ability to forge consensus behind a bold and balanced plan to restore fiscal responsibility. Let me offer some thoughts on what that plan should include from the perspective of a “progressive fiscal hawk.”

Read the entire testimony.

Good Ol’ Days

Posted on July 2, 2010September 18, 2024 by The Progressive Policy Institute

When House Republican leader (and would-be Speaker) John Boehner claimed the other day that Democrats were “snuffing out the America I grew up in,” it didn’t cause much reaction (or at least far less than his remarks on Social Security and on financial regulation), since it’s the kind of thing conservatives say all the time. But as Mike Tomasky quickly noted, it was a very strange statement if you actually think the problem with Democrats is their addiction to big government and their subservience to unions:

Boehner was born in November 1949. Let’s take a look at the America he grew up in.In the America John Boehner grew up in, the top marginal tax rate on wealthy earners was 90%. It had gone up there during the war, and five, 10, 15 years after armistice, no sizable group, Democrat or Republican, felt any strong urge to lower it.

In the America John Boehner grew up in, private-sector union membership was around or above 30%. Today’s figure is 7%. The right to form a union was broadly accepted. Outside of a few small turbulent pockets, there was no such thing as today’s union-busting law firms hired by management to go into workplaces and intimidate workers.

That’s all very true. But as Matt Yglesias observes, the country was in fact a lot more conservative back then on the cultural front:

[In] many other respects the America of John Boehner’s youth was a much more right-wing country. Gays and lesbians were stuffed deep into the closet, and there was no suggestion that they should be allowed to serve openly in the military or in any other role. African-Americans were subjected to pervasive discrimination in housing and employment, and in the southern states they couldn’t vote or exercise any basic rights–all this backed by the state, and also by collusion between state authorities and ad hoc terrorist groups. It was a whiter country with dramatically fewer residents of Asian or Latin American descent. It was a more religiously observant country, and it was a country in which Jews were far from fully accepted into American life.I’m not nostalgic for that era at all. There are a few areas of policy in which I think we’ve moved backwards since the mid-sixties, but I wouldn’t want to return to an America with almost no immigrants or to an America with a single monopoly provider of telecom services. I’m glad airlines can set their own ticket prices and I’m glad black people can sit in the front of the bus. What is it that Boehner misses?

What indeed? Let’s all remember Boehner’s regret for the passing of the good ol’ days of high taxes, strong unions, Jim Crow and homophobia next time we are told that the GOP wants to declare a truce in the culture wars, or only cares about economic or fiscal issues.

This item is cross-posted at The Democratic Strategist.

A Red Card for Airbus

Posted on July 1, 2010September 18, 2024 by The Progressive Policy Institute

Referees often make costly mistakes, as we’ve seen in the World Cup. But the World Trade Organization (WTO), which umpires international commerce, got a big decision right yesterday. It handed the United States a thumping victory in a long-standing, high-stakes dispute with Europe over aircraft subsidies.

At issue were some $20 billion and below-market lending rates — known as “launch aid” – that several European governments had provided to aircraft manufacturer Airbus. The WTO deemed launch aid to be an illegal subsidy, upholding a September 2009 interim ruling.

The largess of European taxpayers was critical to Airbus’ development of several of the companies’ main commercial jets. Without such favorable financial assistance, the WTO’s ruling said, it “would not have been possible for Airbus to have launched all of these models, as originally designed and at the times it did.” In other words, without government subsidies, Airbus would have never have become the world’s number 2 player in the lucrative market for commercial airframes. U.S. Trade Representative Ron Kirk has said that the subsidies have done “great harm” to competing U.S. manufacturing firms, especially number 1 Boeing.

The ruling is welcome, not just for Boeing and American manufacturers but because it boosts the credibility of the rules-based global trading system, which lately has shown signs of fraying at the edges. If the rules aren’t enforced, trade will become a zero-sum game as countries resort to mercantilist and protectionist strategies to protect their economic interests. That in turn could bring global prosperity crashing down. The WTO’s decision is important too because it serves as a warning to other countries — China, Brazil, and Russia — who might or want to subsidize their own aircraft producers.

In an ironic twist, even the unions were on board in support of freer trade in the Airbus case. As Will Marshall and I wrote back in September (when the interim ruling was announced), “Although organized labor often has taken a skeptical if not hostile stance toward international trade, Boeing’s unions strongly backed the U.S. government’s decision to file the case in 2004. The unions realized that Boeing competitiveness was suffering and that only fair and enforceable trade rules would ensure it.”

The WTO has no mechanism for enforcing its rulings, but rather provides the legal justification for the United States to even the playing field. It would be best, of course, if Airbus and its European patrons bowed to the WTO’s judgment and end the illegal subsidies. It would be a tragic irony if Europe were to embrace an economic unilateralism even as President Obama has put the United States back on a course of multilateral cooperation. But if Europe won’t play by the rules, the United States has three options.

First, our government could levy tariffs on Airbus imports to the United States. Second, it could spread the pain by taxing other European imports. And third, Washington could subsidize aircraft production by U.S. firms.

The first is far and away the best choice — taxing Airbus limits the trade dispute to an isolated sector of the market, and avoids a broader trade war over other products. Government subsidies for U.S. firms are the least attractive option, because other companies in other sectors may lobby for money based on that precedent, further distorting trade.

I don’t expect Europe to just roll over and play dead. Though the EU hasn’t officially decided whether or not to appeal the ruling, and there is the possibility that some governments will just ignore the ruling and continue to subsidize production. That’s a big gamble of course, because it would just provoke more stringent U.S. tariffs on imports.

But for now, the good news is that the worlds’ trade ump is on the job, sending off those who break the rules.

Photo credit: Caribb’s Photostream

Give Innovation Economics a Chance

Posted on July 1, 2010September 18, 2024 by The Progressive Policy Institute

Budget deficits are emerging as one of Washington’s chief economic obsessions, with both liberal and conservative economic camps opining about the deficit’s effect on the economy. Robert Samuelson’s recent column in the Washington Post describes how the major economic doctrines—particularly Keynesian and monetarists (or supply-siders)—interpret the fiscal impact of budget deficits.

Keynesians believe budget deficits (either from increased spending or reduced taxes) can stimulate the economy, leading to more demand and therefore more jobs. As Paul Krugman’s recent arguments have demonstrated, they believe that when unemployment rates are high job creation should not be sacrificed on the altar of deficit reduction. In contrast, many neoclassical economists, especially conservative supply-siders, argue that big government deficits reduce national savings and increase interest rates while also contributing to financial uncertainty and reducing private sector investments.

While Samuelson rightly points out the differing perspectives of the Keynesian and supply-siders, he misses what they have in common. Neither of them considers the role of innovation in their growth models or distinguishes between spending and investment. And with this omission they fail to see what particular types of deficit spending can be harmful to the economy and conversely what kinds can be beneficial.

Innovation economists argue that the long-term benefits of investments, particularly in innovation, outweigh the costs of temporary budget deficits. For example, as the Information Technology and Innovation Foundation recently demonstrated, expanding the R&D tax credit, while costing the government money in the short run, would actually lead to more revenue for the Treasury in the medium term. Innovation economists support direct investments, such as government research, and indirect public investments, such as an expansion of the R&D tax credit. Robust investment in innovation and technology are essential to long-term growth. This is because innovation increases productivity, and productivity gains have accounted for the lion’s share of economic prosperity over the last several decades.

Once economists recognize innovation as the most important part of economic policy, the impact of budget deficits becomes clearer. For example, neoclassical economists worry that deficit spending will increase interest rates and reduce the amount of capital available for private sector investment. Innovation economists believe that investments in technology and knowledge spur economic growth and will generate more capital. The problem is that the market doesn’t always allocate as much capital to these endeavors as it should. Indeed, the extremely low interest rates in the early 2000s did little to boost these kinds of investments. Instead, people used low interest rates to increase capitalized spending, specifically in housing, which created the housing bubble. Instead of emphasizing access to capital, innovation economics argues that if investment in technology (including new capital equipment used by business) is the goal, then policy makers would do better to focus on policies that incentivize such investments, such as allowing first-year capital expensing—even if doing so temporarily increases the budget deficit.

Samuelson frets that the differing opinions on how to handle the budget deficit indicate that “[w]e may be reaching the limits of economics.” Indeed, if in the knowledge-based economy we are limited by theories that still define the production process as only land, labor or capital, as Adam Smith did, these legacy economic doctrines will likely offer little advice on the budget. On the other hand, the new-growth theory of innovation economics that puts knowledge and innovation at the center of the contemporary production process is more able to intellectually navigate the modern, global economy and dictate appropriate policy decisions.

Photo credit: TheTruthAbout…’s Photostream

The State of U.S. Infrastructure: A Snapshot

Posted on June 30, 2010September 18, 2024 by The Progressive Policy Institute

We all want the infrastructure market to pick up dramatically and generate jobs, build productivity, and create competitiveness. But there is a yawning gap between public expressions of optimism and what infrastructure executives have been telling me about the state of their business. We continue to hear good news about the infrastructure industry in the media and from the administration, yet head counts at infrastructure firms are still down by as much as 25 percent, and executives say that the U.S. market is still essentially flat.

To get a granular picture of the state of infrastructure, my firm, CG/LA Infrastructure, last week sent out a survey of about 11,000 infrastructure executives and professionals throughout the U.S. and in all sectors of the industry. While only a fraction of the responses have come in so far, I’d like to share some preliminary results, which affirm the pessimistic mood that I’ve picked up in conversations. Here’s a snapshot of the state of U.S. infrastructure through the eyes of the men and women running our top firms:

1.) What is your current perception of the U.S. infrastructure market? Fifty-one percent of executives who have responded so far say that the market is “getting worse,” while 33 percent said that it is essentially flat and 15 percent said that it is improving.

The grim results may seem surprising, but it makes sense when you think about it. Most states have not recovered from last year’s cataclysm and continue to cut their budgets across the board. Considering that 70 percent of infrastructure spending is the responsibility of states and municipalities, it would be a surprise if infrastructure spending didn’t go down.

2. In your day-to-day infrastructure work, what are the most problematic issues in terms of improving project development speed? The U.S. needs to dramatically increase investments in infrastructure. Our survey question tried to get at the barriers to that kind of increased investment, and the current problems for restarting the market.

In our menu of options — respondents were allowed to choose as many as they wished from a list of factors — fifty-four percent of infrastructure executives mentioned “financing” as a problem. Meanwhile, 30 percent highlighted weak public sector capacity. This is significant. If we are going to invest in infrastructure, then we need a highly capable public sector.

Additionally 30 percent of executives also highlighted permitting issues as a barrier. Surprisingly, environmental issues, normally the biggest ‘problem’ on any industry survey, ranked fourth, highlighted by only 24 percent of executives.

Clearly the overriding issue is financing. How is that going to be addressed, and who will benefit? These are questions for another survey, and deserve a lot more attention than they are getting – particularly given the preponderant role of state and municipal budgets, and the dramatic weakness in those budgets. And lurking behind these concerns is a question few people are asking: What has become of the Obama administration’s initial National Infrastructure Bank proposal?

3. High-speed rail (HSR) is a signature initiative of the Obama administration. How do you rate this proposal in terms of current progress, and future potential, on a scale of 1-10, with 10 being excellent and 1 being poor? Another striking result: 53 percent of respondents clustered their answers in the 1-3 range (97 percent scored the high-speed rail program “7” or below). The results reflect my experience with industry, where the initial excitement about the program has rapidly given way to doubt and incredulity.

This question allowed for comments, and those comments clustered into two groups: justifications for their scores, and constructive comments on what is wrong with the program. Under the first category, one commenter noted that there were “serious issues…of whether the funding provided will be sufficient to implement a meaningful program and whether the funding will be concentrated on the most promising HSR opportunities.” Another, more critical respondent wrote, “I have not seen any significant developments since the topic was broached.”

On the constructive side: “Existing rail corridors that host HSR should be exempt from most of the overly burdensome environmental laws. This is unnecessary and needless bureaucracy and is slowing everybody waaaaaay down.” Another comment noted that the program “needs a long term funding source; it will not survive as a jobs program.” Perhaps the most critical comment, in terms of strategy, was the following: “There are a few corridors where high speed rail makes a lot of sense; the Northeast corridor in particular. However, there is no national consensus on its utility in other parts of the country.” Without consensus, at a time of tremendous austerity, it is indeed difficult to see this “man on the moon” initiative moving forward. Note that nothing has been spent from the original authorization of $8 billion.

4. In infrastructure, where are the greatest [geographic] opportunities for your firm over the next 12 months? The answers to this question were surprising and underscore that the U.S. infrastructure industry is focused on the home market – and at the same time, does not see much future for itself in that market. Overall, 42 percent of executives surveyed see their greatest opportunities in the U.S., a market that they qualify as depressed. After the U.S. market, 32 percent of respondents see the greatest opportunities in Latin America (a region with four percent of global GDP), followed by North America (the U.S., Canada and Mexico), with 29 percent. Europe and the Middle East were each ranked at 20 percent, while non-China Asia was ranked below 10 percent. None of the infrastructure executives surveyed see opportunities in the closed Chinese market.

5. You expect your firm’s gross revenue in 2010 to _____. Only seven percent believe that their firm’s revenue will grow “significantly” in 2010, with 48 percent projecting moderate growth, and 32 percent stating that economic performance will remain flat. Two facts stand out: It is a cause for concern that 13 percent of executives see their firm’s performances actually declining and 80 percent see moderate or no revenue growth for their firms in 2010. Considering their point of comparison is 2009, the worst year for infrastructure in 80 years, this is dismal news.

All in all, the survey results speak for themselves. U.S. infrastructure executives don’t see much hope for revival this year – in fact, they see things getting worse. President Obama’s signature program, high-speed rail, does not receive anything like passing grades and it is increasingly not being taken seriously. The financing issue — not a surprise for anyone in the infrastructure business — is the number one problem facing the industry.

When I was starting in the infrastructure industry a friend would tell me, over and over, that “nothing is as stubborn as a fact.” Well, these are the facts. We should all take them seriously if we are going to create jobs, generate competitiveness and build opportunities. And it seems like the executives in this most public of industries have a pretty clear grasp of reality, and some good ideas about what should be done.

Photo credit: SP8254

Dodd-Frank Hits and Misses

Posted on June 28, 2010September 18, 2024 by The Progressive Policy Institute

First the giant stimulus package, then the ambitious revamping of America’s health care delivery system. Now Congress, under the patient prodding of President Obama, is lurching toward passage of another stupendously complex bill, this time centered on financial regulatory reform. Whether you like them or not, you have to admit that big things are getting done in Washington on Obama’s watch.

If Congress passes the Dodd-Frank bill, it will be another major notch in the belt of a president who could use a political victory about now. But what’s a non-master of the universe like me to make of this 2,000-page behemoth?

It may do considerable good, but we ought to be clear about one thing: It won’t prevent the next financial crisis. As long as there are fortunes to be made in financial markets, there will be excessive risk-taking and speculation, new bubbles and panics, and powerful incentives for chicanery and fraud. No regulatory scheme can fully protect the public against ingenious new forms of human greed and folly.

That, however, is not an argument for doing nothing. The government had to react to Wall Street’s near meltdown in the winter of 2008-2009. Its interventions, beginning under President Bush and continuing into Obama’s administration, doubtless averted a full-bore financial collapse. But they also triggered a fierce and abiding public backlash against bailouts.

The Dodd-Frank bill doesn’t get everything right, but on balance it’s a reasonable response to the crisis. It imposes new disciplines on bank behavior, increases transparency for complex financial transactions and institutions, and offers consumers new protections against the clever breed of predators who have degrees from elite universities and sport $3,000 suits.

Some liberals are chagrined that the bill doesn’t break up the big banks. Conservatives echo the Wall Street Journal’s charges that the bill is a regulatory nightmare that will make it more expensive for banks to supply capital to businesses. It’s tempting to say that Sen. Chris Dodd (D-CT) and Rep. Frank (D-MA) must therefore have found some kind of centrist sweet spot, but there is something to the left-right critiques.

Most important, for example, the bill doesn’t slay the “too-big-to-fail” dragon. It leaves financial power more concentrated than ever in the hands of five mega-banks: Goldman Sachs, J.P. Morgan, Citigroup, Morgan Stanley and Bank of America. True, Dodd-Frank does impose the “Volcker Rule,” forbidding banks covered by federal deposit insurance from making bets (called “proprietary trading”) with their own money. It increases capital reserve requirements to keep banks from taking excessive risks. It also sets up a council of financial guardians to anticipate systemic risks, and gives federal authorities power to seize and oversee the “orderly liquidation” of financial firms whose collapse could bring other institutions down as well.

But it’s hard to avoid the impression that the big banks will henceforth operate with a tacit government guarantee against systemic failure. This not only intensifies moral hazard – making it hard for administration officials to claim the bill would bar bailouts in the future – it also risks creating a privileged class of quasi-public banking utilities that will be able to borrow money more cheaply. That will raise the bar for new entrants and dampen competition in the banking sector.

Elsewhere, the picture looks more positive. Dodd-Frank would move much of the trade in financial derivatives onto exchanges and clearinghouses, though banks could still trade in over-the-counter derivatives to hedge their own risks. This seems like a sensible compromise that brings derivatives trading out of the shadows while retaining the ability of firms to hedge against interest rate and currency risks. In another boost for transparency, the bill would require private equity firms and hedge funds to register with regulators.

Dodd-Frank also puts in place what Obama last week called “the strongest consumer financial protections in history.” It creates a new Consumer Financial Protection Bureau housed with the Fed to police mortgage lending, credit and debit cards and other consumer loans – though not by auto dealers, who somehow won an exemption from oversight. This agency presumably will prevent abuses like the “no doc” and “liar” loans that helped to trigger the subprime lending frenzy, which was the spark that started the financial crisis.

The bill doesn’t deal at all with Fannie Mae and Freddie Mac. This is a huge omission, considering that these giant mortgage finance firms still hold a pile of dubious assets and are essentially in federal receivership.

For all its imperfections, Dodd-Frank seeks to protect consumers without creating undue regulatory obstacles to innovation in the financial sector, which traditionally has been a source of comparative economic advantage for the U.S. Pragmatic progressives ought to support it, while retaining a sense of humility about the ability of new regulatory bodies to prevent future abuses.

Photo credit: Center for American Progress Action Fund

Ancient History

Posted on June 25, 2010September 18, 2024 by The Progressive Policy Institute

Bruce Bartlett has a column up in today’s Fiscal Times that drills home just how far the Republican Party has veered from the center over the last few years. Bartlett recounts the story of the 1990 budget deal, which saw President George H.W. Bush reach across the aisle and strike a compromise with Democrats in an effort to shrink the deficit. The compromise on Bush’s end is, of course, now legendary: a violation of his “read my lips” pledge during the 1988 campaign that there would be no new taxes.

Working with Democratic majorities in both houses, the president knew that getting through measures on the spending side of the ledger would require some concessions on his part. Bartlett sums up the outcome of the budget negotiations:

Budget negotiations finally concluded in late September. The final deal cut spending by $324 billion over five years and raised revenues by $159 billion. The most politically toxic part of the deal, as far as congressional Republicans were concerned, involved an increase in the top statutory income tax rate to 31 percent from 28 percent, which had been established by the Tax Reform Act of 1986. The top rate had been 50 percent from 1981 to 1986 and 70 percent from 1965 to 1980.

More importantly, the deal contained powerful mechanisms for controlling future deficits. In particular, a strong pay-as-you-go (PAYGO) rule required that new spending or tax cuts had to be offset by spending cuts or tax increases. There were also caps on discretionary spending that were to be enforced by automatic spending cuts.

The conservative base, of course, went ballistic. Their opposition was reflected in the House of Representatives, where 163 Republicans voted against the budget, while only 10 voted for it. The Senate was a little better — half of Republicans approved the deal. These days, getting half of the Republican Senate caucus to go along with anything the Democratic majority pushes would be a minor miracle.

The consequences of Bush’s budget deal are well known. The violation of his tax pledge would prove to be a devastating weapon for political opponents in the 1992 campaign. But the economic consequences are less heralded. President Clinton deserves credit for bringing sanity and surpluses to the budget in the 1990s, but budget experts agree that his predecessor’s budget deal contributed to that achievement.

Bartlett quotes the GOP’s tax-cutting commissar, Grover Norquist, to underscore conservative suspicion of budget deals: “Budget deals where they actually restrain spending and raise taxes are unicorns.” Only spending cuts, Norquist argues, are permissible. The way the right is moving these days, we’re more likely to see a unicorn than a GOP leader going against party orthodoxy on taxes.

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On Fiscal Reform, Can Pragmatists Trump Ideologues?

Posted on June 21, 2010September 18, 2024 by The Progressive Policy Institute

In a piece published this Sunday, Edmund L. Andrews and Eric Pianin serve up a profile in Fiscal Times of an odd couple who will be crucial to the effort to restore fiscal sanity to the country.

On one side is Andy Stern, labor firebrand and former head of the Service Employees International Union, the nation’s fastest-growing union. On the other is David Cote, chairman and CEO of Honeywell, a global technology firm. Both are members of President Obama’s deficit commission tasked with issuing recommendations to address the nation’s fiscal crisis. Both consider themselves pragmatists who believe they can bridge the partisan gap and help engineer lasting solutions to our budget problems.

But even the appearance of comity can’t hide the basic ideological differences between the two sides:

Cote emphasizes that economic growth is the key to fiscal stability, and Stern politely contends that it’s unrealistic to bank on economic growth alone as the solution. “There are some people who say, ‘Let’s grow our way out of it,’ ” Stern said. “Okay. Tell me how much growth we’re going to need? Has it ever happened before?”

The subtext of their exchange is clearly about the broader clash. Republicans warn that higher taxes will imperil economic growth and focus on the need for spending cuts. Democrats argue that some of the biggest GOP targets — safety-net programs — need to be protected and that deficits are too big to be closed without at least some tax increases.

That elemental difference looms in the background of any feel-good story of bipartisan agreement on fiscal reform. It would be tragic if the commission’s work and the administration’s efforts to forge a consensus on budget reform crash on the shoals of ideology. Everyone can agree that the country is on an unsustainable path. What everyone should also be able to agree on is the need for reform on both sides of the ledger. New streams of revenue need to be found. Entitlement reforms need to be made. And yet denial prevails over too many folks on both sides of the ideological divide.

Stern has a good record of reaching out to unlikely allies — see his work with Wal-Mart and the Business Roundtable on passing health care reform. But even his efforts might fail in the face of calcified dogmas and a lack of urgency among political and policy elites. How the commission’s efforts play out — it’s aiming to release its findings in December — will be one of the most compelling policy dramas in the coming months. Stay tuned.

Photo credit: Center for American Progress Action Fund

Divorce Washington at Your Peril, Silicon Valley

Posted on June 16, 2010September 18, 2024 by The Progressive Policy Institute

Washington, D.C. and Silicon Valley are separated by 3,000 miles and vastly different cultures. But if the Valley itself and, more broadly, the U.S. economy are to thrive, then Washington and Silicon Valley need to appreciate each other more than they currently do. From my perch inside the Beltway, I’d like to offer some words of advice for the Valley.

First, I salute your entrepreneurial and organic spirit. It has helped transform the world and create jobs and wealth. But while Washington doesn’t always understand what Silicon Valley does or needs, you need to abandon the myth that Washington had nothing to do with your creation.

Remember: the Internet emerged from the Defense Department’s Advanced Research Projects Agency (ARPA). Oracle got started doing work for the Central Intelligence Agency and Intel sold much of its early output to the Pentagon. Sergey Brin was working on bibliographic research with an National Science Foundation (NSF) grant when he conceived Google. The founders of Genentech and other Bay Area biotech firms relied in part on federal research money to universities. Granted, these and many other companies became forces in the market independent of government, but does anyone really think that the federal dollars that flowed into Stanford, U.C. Berkeley and the Lawrence Livermore Lab had nothing to do with the Silicon Valley of today?

Second, whatever tangential role the feds played years ago, many in Silicon Valley agree with Michael Arrington, editor of the widely read blog Tech Crunch, that it was time for Washington to “just leave Silicon Valley alone.” Oh really? No need for a more generous research and development tax credit? What about intellectual-property infringement? Are the busy people creating and running the companies in the Valley going to lead the charge for cracking down on IP theft in countries like China? What about federal funding for research? I don’t need to tell you that a lot of the best minds and ideas that end up in your companies were trained and/or nurtured at these prestigious California institutions, where federal money flows in from NSF, the Department of Energy, the National Institutes of Health and others. Imagine where the Valley will be in the future without the public private/partnerships and government research dollars. The countries with the fastest broadband are the ones in which government invested in the networks.

Third, don’t kid yourselves — while success in the IT industry in the past might have depended on private companies simply commercializing and marketing their good innovations, success going forward depends on robust public-private partnerships. Intelligent transportation systems, the smart electric grid, mobile payments, digital signatures, health IT and, of course, broadband all represent transformative changes in how we live and work. The commercial opportunities for private companies will be huge, but can companies alone lead the way? Probably not. As we have shown in a report, other nations are ahead of us in all these areas and it is because of smart public private IT partnerships. Only when government commits to the historic redesigns of how we travel, communicate, share data, conduct commerce and use energy will the vast commercial opportunities become accessible for Silicon Valley companies.

Fourth, don’t assume that if government simply loosens up H-1B visa restrictions and lowers taxes, everything else will take of itself. Yes, we need to be able to attract and retain the best minds in the world so we are not starved for talent in the U.S. And yes, we should lower corporate taxes to compete for mobile, high-value-added jobs with countries that have lower effective corporate tax rates. We need to make our R&D credit more generous (we now rank 18^th among OECD countries) and should explore tax incentives tied to investment and workforce training workers. But it’s important to note that these countries are matching tax cuts with proactive government efforts to marshal resources to establish leadership in IT and other key economic sectors. Silicon Valley is hanging its fate on a very narrow reed by focusing on worker visas and taxes, and giving short shrift to the many other ways where government plays an integral role in its future.

That leads to the fifth and final piece of advice: Play a more active role in shaping policy in Washington that is good for the country and good for Silicon Valley. Rather than wishing the government would simply cut taxes and leave, get behind government efforts to make innovation a more central part of economic policy. Support more robust investments in national laboratories and university research. Stand up for government efforts to kick start the development of “platform technologies” like the smart grid and intelligent transportation systems. Lead the charge for a better trade policy that defends U.S. innovators against foreign technology mercantilism. Silicon Valley has been the chief beneficiary of Washington’s research and vision, and stands to gain the most from these policies going forward.

Photo credit: caccamo

Report: High-Speed Rail Will Accelerate Economic Growth in Surveyed Cities

Posted on June 15, 2010September 18, 2024 by The Progressive Policy Institute

A report released yesterday concludes that high-speed trains would significantly boost economic activity and job creation over sped-up conventional Amtrak service. Released by the U.S. Conference of Mayors, the report examines how the introduction of different types of train service would impact business activity and jobs in two midsized cities – Albany, N.Y., and Orlando, Fla. – and a regional hub, Chicago.

Its findings clarify that the current debate over train speeds is not a dispute over “complementary means to the same end,” but a basic question of national aspirations that goes straight to the heart of 21st-century transportation and economic development.

Simply put, does the country want to pay less for an infrastructure that will make marginal improvements or does it want to spend more in order to multiply its gains?

Incremental vs. High Speed

Incremental improvements on existing railroad rights of way would cost about $15 million-$20 million a mile to build, whereas full high-speed rail (HSR) – with a dedicated right of way – might cost $40 million or more a mile.

Currently only Florida and California are pursuing the full HSR option. Some 15 states are developing projects that would result in what can best be called “higher speed rail” or “improving Amtrak on-time-performance rail.”

Joseph Szabo, head of the Federal Railroad Administration, has thrown his weight behind incremental improvements, saying in recent congressional testimony that trains that operate at 200 mph aren’t really necessary.

The calculations of the Boston consultancy, Economic Development Research Group, who prepared the new report, point to a different conclusion.

For Albany, the report looked at three scenarios in year 2035 – the introduction of marginally improved train speeds (79-90 mph), medium speeds (maximum of 110 mph) and full high speeds (maximum of 220 mph).

The report estimated that annual business sales would increase in the range of $358 to $534 million a year (in 2009 dollars) for incremental and medium-speed service, but would jump five-fold to $2.5 billion a year with full high-speed service.

The employment impact similarly varied, from 3,200 to 4,700 permanent jobs added for incremental and medium-speed service, compared to 21,360 jobs with HSR. Because the quality of jobs would increase with a more mobile workforce, roughly $1 billion a year would be added to Albany wages by 220-mph service.

Transformative Effect

The report attributed fast rail’s transformative powers on Albany to the fact that it would bring the region within the orbit of New York City. The two cities are separated by 140 miles, but Amtrak service currently takes 2 hours 35 minutes.

Reducing travel time to under an hour – possible when reaching a maximum 200 mph balanced with slower speeds in the urban districts – would spark a huge travel flow and make Albany a destination for commuters as well as tourists and business travelers. Connecting Albany to Buffalo, Boston and Montreal with fast trains would create additional opportunities.

This in turn would “support the growth of office activities and services that support state government, emerging nanotechnology, clean energy and computer chip-related industries,” the report concluded.

Growth projections for the three other cities studied:

In Chicago, 220-mph trains radiating to St. Louis, Detroit and St. Paul-Minneapolis would nearly triple yearly business activity to $6.1 billion and more than double employment to 42,200 new jobs compared to 110-mph service.
In Orlando, 220-mph trains from Tampa-St. Petersburg and Miami would bring $2.9 billion in yearly business sales, including 27,500 new jobs, compared to $2.1 billion in sales and 19,900 jobs from service operating at 168 mph.
In Los Angeles, 220-mph service to San Diego and San Francisco would generate $7.5 billion in new sales, including 54,000 new jobs. Because California is only planning a high-speed line, there was no economic comparison to slower service.

The economic benefits of HSR would grow over time as the new service was fully implemented and savings in travel time, expenses and congestion reduction were realized.

The new report is titled “Connecting America with High Speed Rail” and can be downloaded at https://www.usmayors.org/highspeedrail/.

Photo credit: Beto’s Photostream

No Quick Fixes

Posted on June 11, 2010September 18, 2024 by The Progressive Policy Institute

“At this point, there are no good solutions — only a choice among painful and distasteful ones.”

Steven Pearlstein’s words in today’s Post make for a glum start to the day, but there’s no better time than the morning to ring the alarm. And when it comes to our economy, you can’t sound the warnings often enough.

Pearlstein notes the infuriating lack of consensus among experts about our economic predicament. Do we spend more stimulus, or start cutting back on spending? Do we worry about deflation or inflation? Do we encourage more consumer spending to speed up the recovery, or should we orient our economy toward more saving and sustainable growth?

There’s confusion on where to go – but everyone can agree on how we came to this pass:

The controlling reality is that the global economic system is rebalancing itself after years in which the United States was not only allowed but encouraged to live beyond its means, consuming more than it produced and investing more than it saved. Now the bill for that is finally coming due — all the clever and seemingly painless ways for postponing that day of reckoning have pretty much been played out.

Pearlstein’s diagnosis brings to mind a headline from last week: “Save Us, Millennials.” Timothy Egan’s blog post covered a Pew survey on millennials, which painted a picture of a generation that is “confident, self-expressive, liberal, upbeat and open to change.”

If any generation had a right to be steamed at their predicament, it would be the millennials. Their parents may have given them cars and paid for their tuition, but they also left the kids with crippling obligations. They join an American economy that will be less generous to the children than it was to the parents. And yet the millennials, according to Pew, are “more upbeat than their elders about their own economic futures as well as about the overall state of the nation.” (The audacity of hope!)

They’ll need that sunny disposition to weather the coming storm. Egan’s plea seems jokey, but there’s more than a hint of justified desperation there. If we are to emerge from this economic mess, it’s the younger generation that will have to carry us. The bill has come due, and they will have to pay it.

There are no good solutions, as Pearlstein says, and a culture weaned on the happy ending has been throwing tantrums for the past year and a half. There has been not a hint of reflection, no acknowledgment that the American disconnect between what it expects from government and what it expects to be taxed is to blame for our problems. Instead we’ve been treated to a nonstop primal scream session. Thank god the kids are acting like grown-ups.

Photo credit: Lamtastic’s Photostream