Bo Cutter

Roosevelt Institute Senior Fellow and Director of the Next American Economy Project
Roosevelt Institute Profile

Recent Posts by Bo Cutter

  • The Fiscal Cliff Deal: Useless Little Battles and a Worse Government

    Feb 7, 2013Bo Cutter

    The year ahead will be full of petty budget battles that solve nothing and distract from the real issues.

    On the one hand, the last minute December 2012 fiscal cliff deal was in no respects a policy breakthrough, but on the other hand, it didn't solve any process issues either. There will be no grand resolution, which pleases the ideologues on both sides. God forbid that we come to any workable compromises. And there is no framework. So the 2013 stage is set for a series of useless little budget/deficit/debt wars.

    The year ahead will be full of petty budget battles that solve nothing and distract from the real issues.

    On the one hand, the last minute December 2012 fiscal cliff deal was in no respects a policy breakthrough, but on the other hand, it didn't solve any process issues either. There will be no grand resolution, which pleases the ideologues on both sides. God forbid that we come to any workable compromises. And there is no framework. So the 2013 stage is set for a series of useless little budget/deficit/debt wars.

    We face, in turn, (1) the sequestration battles starting in March (over irresponsible cuts we agreed to 15 months ago as a way of avoiding doing anything then), (2) continuing resolution battles starting in April (a series of confrontations over spending this year because Congress couldn't pass spending bills), (3) 2014 budget battles starting in May (but then we haven't actually agreed on a budget for years), and (4) the return of the debt limit debacle sometime around August. (You thought this was over because Congress has declared that the debt limit has been suspended, but it's coming back.)

    These little battles will not -- either singly or together -- lead to a resolution of the deficit/debt/budget debacle. No actual problems will be solved. Everything will be kicked down the proverbial road. My bet is that each of the impending possible battles will wind up the same. There will be high drama moving toward farce, forecasts of doom, tense last-minute negotiations in which various congressional and executive leaders will try to act as though something important is happening. Each time the Republican House will back down, because if your approval rating is lower than cockroaches, you have surprisingly little political leverage.

    We are seeing this whole drama playing out now in the run up to the sequester. To remind everyone, these are cuts (roughly $85 billion in 2013 divided between domestic and defense programs) Congress and the president agreed to because they were thought to be so awful that the same two parties would agree to solving the whole budget problem to keep these cuts from happening. So now they are likely to happen and we've decided we hate them.

    I hated them a year ago and said so at the time, but predicted that we would in the end make the domestic cuts and finesse the defense cuts. To be clear, I believe we must, over a 10 year period, slow down the growth of public debt, and this has to mean budget cuts. But these reductions will occur at the wrong time, they are done in the wrong way, they hit the wrong part of the budget, and they do nothing whatsoever to alter the 10 year picture of debt growth that impends. They are a wholly symbolic and harmful ritual dance.

    We should not make these cuts now. We should, if necessary, make smaller cuts so Congress can say it got a "down payment." Then Congress and the president should agree there will be no debt ceiling fight this year and should publicly and together commit to a process that might work.

    In my dreams.

    We seem intent on having these useless little battles. They will not actually lead to disasters. On the other hand, they won't make anything better. But they will take up time, consume political capital, raise the level of distrust in government, maintain a high level of economic uncertainty, lower our economy's growth rate, and impede the administration's and the Congress's focus on the real issues of our future. Both parties will look worse after all of this.

    Roosevelt Institute Senior Fellow Bo Cutter is formerly a managing partner of Warburg Pincus, a major global private equity firm. Recently, he served as the leader of President Obama’s Office of Management and Budget (OMB) transition team. He has also served in senior roles in the White Houses of two Democratic Presidents.

    Read more

    Share This

  • The Inaugural Address and a Vision of America

    Jan 28, 2013Bo Cutter

    President Obama's second inaugural had soaring language but fell short of a transformational vision of the future.

    President Obama's second inaugural had soaring language but fell short of a transformational vision of the future.

    Inaugural addresses are poetry and vision. They are not about governing and programs. Judged this way, President Obama's second inaugural speech was wonderful poetry. The president excels at these big set pieces and he delivers them magnificently. In these moments he is magnetic, and it would take a very crabbed spirit not to acknowledge this. To quote Newt Gingrich, it was a good speech. But the vision of America in the speech is disappointing -- not because it is wrong, but because it isn't sufficiently penetrating and insightful. It is far too incomplete. It does not rise to the quality of his mind or of his poetry.

    Some thoughts about the president's speech itself before expanding on my concerns about the president's vision:

    The headline instant analysis of the speech all said this was a defiantly progressive statement. Maybe history will see it that way, but I doubt it. This was a very, very conventional restatement of progressive thought and values. It can only be thought of as some sort of signature statement because of how far toward the right debate in Washington shifted after the arrival of the Tea Party.  

    I'm not a "progressive" in today's terms, but nevertheless I'd argue that the values the president emphasized have become conventional because they are right. And after a completely unedifying and at times ugly presidential campaign, and then a really dispiriting congressional lame duck session, some of these values needed to be reasserted. We do face problems requiring government and collective action, as the president discussed. The nation is not divided neatly into givers and takers as Governor Romney believes. Equal opportunity for every American ought not to be a question we debate. And even in the middle of a bitter immigration dispute about who are or can become Americans, we have to act decently. We ought to be able to resolve our immigration problem without seemingly taking delight in making good and decent men and women miserable, even if they are here "illegally."

    I even found the president's statement of support for Medicaid, Medicare, and Social Security completely traditional and unexceptional. The statement that "The commitments we make to each other – through Medicare, and Medicaid, and Social Security – these things do not sap our initiative; they strengthen us" is hardly a call to the barricades. Who out there expected the president, after winning a second term, to say anything differently? Who put the odds very high above zero that the president would suddenly acknowledge that Paul Ryan was right after all?

    And I'm delighted that the president finally returned to climate change -- although it is very, very late. I'll acknowledge a high degree of self-interest here. I chair Resources for the Future, a 65-year-old economic think tank that is one of the world's leading centers of thought on climate, energy, and the environment. I believe there are more and less effective ways to approach climate and environmental issues, but I think the problems are real and have to be addressed. It is depressing that much of the Republican Party -- once again never missing a chance to miss a chance -- has decided, immediately after the president's speech, that the whole climate issue is a ruse, part of a deviously clever plot by the president to expand the regulatory state. I guess I'm glad for the human species that there are climate deniers like Holman Jenkins and George Will who are so awesomely smart that with 1,000 words and a few anecdotes they can disprove a quarter century of climate science. But I don't take a word of any of this as serious commentary. Since we are, right now, trashing the planet, I hope forging a long-term creative approach to this central question is how the president chooses to be transformational.

    But this brings me to the incompleteness of the president's vision. America is a great deal more -- and is entering times more challenging -- than today's conventional progressive vision suggests or the president said in his speech. I'd underline three subjects the president left out: change, business and economic growth, and our decentralized society.

    To start with, we are facing immense simultaneous changes in our economy, the world economy, technology, the diversity of our population, the nature of work, and our environment. Any vision you choose to have about America has to be put in the context of these changes.

    But we are experiencing a very low rate of economic growth, and we cannot cope with these big changes unless our economic growth rate rises. The only way that can really happen is through business and the private sector. We have the most dynamic and innovative private sector in the world. Unless it stays that way, as a nation we won't be able to afford all of that collective action the president wants. However, the president never mentions the private sector and it seems conspicuously excluded from his insistence that we have to work together. To have the only mention of the private sector focus exclusively on rules and regulations just isn't remotely appropriate.

    More broadly, we have the richest and most diverse civil society in the world, strong state and local governments, and an ethos that is insistently individualistic and decentralized. These are mostly strengths. Big government and big companies really do have a strong tendency to take all of the air out of the room, to homogenize everything, and to relentlessly oppose innovation and change. It is our decentralization and diversity that makes us a uniquely dynamic nation.

    We are a very complicated mosaic and much more of it should be celebrated than the president chose to in his speech. I wish he had put his insistence on the timeless quality of the values he underlined in the context both of the need to retain the dynamism of American society and the American economy and in the context of the immense changes we are facing. How to keep these values fresh in the midst of the changes we have to navigate -- that's a topic made for a second inaugural.

    Finally, a brief specific point. The president said, "[W]e reject the belief that America must choose between caring for the generation that built this country and investing in the generation that will build its future." Great. But that's exactly the choice we are making now, and there is no sign we are changing. Our national government is already mostly about defense, transfer payments to the elderly, and the cost of our (growing) debt. On current trends we will spend all of our tax revenues on those three functions in the year 2020. And the president's speech was decidedly lukewarm about resolving the state of our fiscal health. If I were in the generation that "will build America's future," I'd be gratified by the sentiment and all, but I'd worry a lot more about the numbers.

    Roosevelt Institute Senior Fellow Bo Cutter is formerly a managing partner of Warburg Pincus, a major global private equity firm. Recently, he served as the leader of President Obama’s Office of Management and Budget (OMB) transition team. He has also served in senior roles in the White Houses of two Democratic Presidents.

    Read more

    Share This

  • The Path to the Next American Economy: The Cult of Scale

    Jan 22, 2013Bo Cutter

    An obsession with the largest economic players distracts us from the smaller companies that should drive our future economy.

    An obsession with the largest economic players distracts us from the smaller companies that should drive our future economy.

    Both Richard Fisher, the president of the Dallas Federal Reserve Bank, and Alan Blinder, arch-economist and former vice-chair of the Federal Reserve Board, had fascinating commentaries last week on "too big to fail," the big banks, and financial stability. Fisher's was a reform proposal; Blinder's a set of lessons to remember. Both dealt explicitly or implicitly with our cult of scale. 

    The business, popular, political, think tank, and NGO cultures of America are all infatuated with big enterprise and its leaders. As a society, we pay ritual and theoretical attention to small business and entrepreneurs, but with a very few exceptions we court big company CEOs almost exclusively. Every presidential economic statement or study has its requisite CEO centerpiece. When presidents (of all political persuasions) want to show that they are really, really serious about the economy, they have pictures taken of themselves with big company CEOs. The most frequently quoted business organization, the one whose policy pronouncements are taken as the last word in economic wisdom, is the Business Roundtable -- the insiders club for big business CEOs. The big news talk shows always have big business CEOs as their private sector representatives. The lobbyists whom congresses and governments pay attention to are from the biggest businesses. The same set of CEOs are always invited to presidential state dinners for visiting heads of state. The board development committees of think tanks, NGOs, and foundations covet the same set of CEOs. 

    Why? 

    Certainly not because big businesses play an actual dominant and dynamic role in our economy. Essentially 100 percent of all new jobs in America are created by new medium and small businesses. Even though large companies dominate R&D spending, revolutionary breakthroughs come almost exclusively from small entrepreneurial companies. If you look back just at the business history of the last 20 years, the pathbreaking innovations were always driven by small and medium companies -- never by the giant incumbents of an industry. 

    So what benefits does scale bring us? Richard Fisher raises this question dramatically in the case of banking. Banks with less than $10 billion in assets -- 98 percent of all banks -- held only 12 percent of total bank assets in America but they made 51 percent of all small and medium business loans. Banks with less than $10 billion in assets continued lending to these businesses during the financial debacle; the big banks stopped. Lending, I'll remind you, is basically what banks are supposed to do.

    And of course big banks are the riskiest and most costly part of the banking sector. Their failures or near failures nearly cratered our economy, they received the vast bulk of the bailout money, and they continue to hold the riskiest assets. The five largest banks in America hold $4 trillion in non-deposit liabilities, 26 percent of U.S. GDP. Among other problems posed by these liabilities -- for example, that virtually no one understands them -- they are the reason for the excess leverage of the big banks.

    Blinder usefully underlines 10 commandments for avoiding the next financial crisis. They all make sense. But when you look closely at his commandments, at least eight out of 10 are directly linked to unavoidable problems of scale and complexity. Consider this: the five biggest banks operated through over 19,000 subsidiaries in a minimum of 50 countries each. The simple fact is that Blinder's very intelligent commandments can't work in this world. I begin with a prejudice: compared to the directors of the five giants (and these are highly sought after and highly compensated directorships), directors of America's smaller community banks are every bit as smart,  know more about the banks they direct, hold the CEOs of their banks in far less awe, are much more likely to discipline their management effectively, and are closer to the customers. None of this is just a role of the dice. According to Richard Fisher, J.P.Morgan Chase has about 5,000 subsidiaries. I'll grant that many of these are meaningless. But no set of directors on earth can really understand or guide well an entity with thousands of subsidiaries. In these circumstances, the amount of arbitrary, mostly unchecked authority given to senior management and the CEO is enormous. A single director is rarely going to risk either losing his or her directorship or simply being humiliated in the club by challenging the CEO on anything.

    Which gets me back to the general problems of mega scale in business. While the biggest banks pose particular problems and the biggest dangers, all the evidence seems to say that as businesses get very, very big, four developments are inevitable. The businesses become sclerotic and bureaucratic. The businesses lose the creativity and dynamism that initially drove them. The businesses become extraordinarily complex. The businesses become less market-driven and more dominated by CEOs with a fair amount of arbitrary power. Some businesses and some extraordinary leaders -- Steve Jobs -- delay all of this, but the trends are inevitable. 

    So once again, why the fascination with big companies and their chiefs? Awe, power, and money. The heads of the biggest companies are the real masters of our universe. They are treated like heads of sovereign states. A lot of them think of themselves that way and, in fact, a heck of a lot of big company CEOs have more actual power than the heads of government of all but 30 to 50 countries. And within a range the power is fairly arbitrary. The biggest companies have the widest range of  choices about products, locations, suppliers, public and community relations money, and foundation money. There is lots of economic "rent" buried among all those choices and everyone wants a little bit of it. I think the resources most big companies allocate through these choices mostly do an enormous amount of good and have a significant function in our strange society, but that's not the same thing as believing these companies are the future of our economy.

    To be clear, big companies play big, real, valuable roles in our economy. We need a mix. But the balance has gone too far in our infatuation with bigness. The true path to the Next American Economy does not go in that direction. We will not grow as fast as we must with an increasingly big company economy. Equity and social mobility won't increase that way. We will need more breakthrough innovation, more new companies creating good jobs, more highly specialized value-added products and services, and more diversity and localization of businesses. The dream should be an economy driven by thousands of companies growing from dozens of very different urban platforms, not by a few dozen giants. But achieving that dream will be much harder if our political and intellectual culture is perpetually fascinated and seduced by the non-economic glamor of the wrong part of the private sector. 

    Roosevelt Institute Senior Fellow Bo Cutter is formerly a managing partner of Warburg Pincus, a major global private equity firm. Recently, he served as the leader of President Obama’s Office of Management and Budget (OMB) transition team. He has also served in senior roles in the White Houses of two Democratic Presidents.

    Read more

    Share This

  • We Could Use More Public Servants Like Jack Lew

    Jan 16, 2013Bo Cutter

    Despite criticism from the left, Jack Lew has a commitment to public service and a deep understanding of public finance.

    I've already been fairly widely quoted in support of Jack Lew's nomination as Treasury Secretary. And for full disclosure, I supported his appointment as head of OMB and Chief of Staff of the White House, and he's been a longtime friend.

    Despite criticism from the left, Jack Lew has a commitment to public service and a deep understanding of public finance.

    I've already been fairly widely quoted in support of Jack Lew's nomination as Treasury Secretary. And for full disclosure, I supported his appointment as head of OMB and Chief of Staff of the White House, and he's been a longtime friend.

    I don't much care what the hard right thinks about Jack Lew, but it is irritating to see the left instantly take up again its incessant twin rituals of circular firing squads and endogenous cannibalism -- dining on one's allies. Thus, Jack Lew is a dangerous budget hawk, responsible for Clinton administration financial regulatory mistakes, a "gofer" rather than an idea man, and nowhere near as good as the people on some other list someone can dredge up.

    So just to restate the points, Jack Lew has spent essentially his entire career in public life -- on the Hill, in the executive branch, and with universities --  though he did spend about 18 months with Citigroup, which I suspect he'll never live down. He has succeeded in every role he has taken on. He is not spectacular -- from my fairly close observations, as they used to say in my high school, he brings his lunch and does an all-day job. He believes deeply in the value of the public sector, and as deeply in the importance of a high-quality public sector, in the importance of getting it right. 

    He hasn't spent a lifetime in the financial private sector -- I'm personally delighted President Obama did not go that way -- but there is no one who knows and understands the complexities of our public finance better than Jack Lew. People always dismiss that as a green eye shade, low order kind of quality. Understanding budgets and public finance is for people who wear breast pocket pen protectors, not for the higher order idea men and women.  

    But this is a very good nomination, and the odds are high that Jack Lew will be a very good Treasury Secretary. Much more importantly, Jack Lew is the kind of person we all would like to see in public life. 

    Roosevelt Institute Senior Fellow Bo Cutter is formerly a managing partner of Warburg Pincus, a major global private equity firm. Recently, he served as the leader of President Obama’s Office of Management and Budget (OMB) transition team. He has also served in senior roles in the White Houses of two Democratic Presidents.

    Read more

    Share This

  • The Fiscal Cliff Post-Mortem, Part 1: Putting the Deal in Context

    Jan 15, 2013Bo Cutter

    The weakness of the fiscal cliff deal reflects the lack of direction coming from the White House.

    The weakness of the fiscal cliff deal reflects the lack of direction coming from the White House.

    I haven't written for a month largely because I thought it was one of those times when everything possible had been said about the fiscal cliff but not everyone had said it. Moreover, absolutely no one actually knew anything. Negotiations like this are "unknown unknowns" to everyone, including the participants. But with the fiscal cliff deal now done, I intend to write three brief pieces: The context of the deal, the deal and its immediate results, then the deal and its long-term results.

    I'll get to the deal later. For now, suffice to say that -- even granting its one big positive, a more progressive income tax system -- the deal represents something close to a new standard for the smallest amount above nothing it is possible for intelligent people to accomplish in a negotiation.

    But the most surprising and disappointing aspect of the post-election lame duck period was not this deal itself but the absence of a framework for any deal. This was a point on which I was simply wrong. I wrote in a number of places that I hoped a newly re-elected President Obama would quickly endorse Simpson-Bowles-Rivlin-Domenici. While I never predicted or expected this endorsement (I continue to believe the president has missed a huge opportunity here), I very clearly expected that he would create a framework, a road-map for where he wanted to go and what he wanted to do during his second term.

    He didn't. As a result, we do not have, and the president doesn't have, anything close to such a framework right now.

    The campaign and the election did not provide a framework. I've never really believed that campaigns were learning opportunities, and as I've come over decades to understand campaign consultants, I've realized that the last thing campaign managers want to do is have "teaching moments." And this particular campaign was even less of such a moment. Democrats wanted to tax whomever they defined as wealthy, but had no other ideas. And they faced a deeply flawed opposition candidate who was incapable of pushing them to develop any ideas. The Republican campaign from beginning to end was so completely incoherent that it is impossible, at least for me, to distill any organizing ideas or philosophy.

    So we entered the post-election period absent any overall sense of direction. And I find it impossible to understand why the White House did not then provide such a sense of direction -- call it a governing philosophy -- immediately after the election.

    What would such a philosophy be? I think it's obvious.

    The second term of President Obama has to be focused on what is required to build the foundations for higher, more equitable, more sustainable economic growth. The difference between being caught for a long time in a two percent growth environment, as many predict, as opposed to a three percent to three-and-a-half percent growth rate -- which I think is possible -- is profound in terms of the health of American society.

    Clearly a necessary but completely insufficient condition of the path toward higher sustainable growth of this kind has to be a long-term solution to the debt/deficit trap in which we are caught. But there is much more we must do, and the debt issue cannot be the whole of President Obama's second-term governing philosophy. But only President Obama can say what that governing philosophy is -- and he hasn't.

    In the absence of such a philosophy or framework, it was completely inevitable that any fiscal deal would be the paltry, lowest common denominator result we ended up with.

    There seem to be three theories as to how we reached this dismal point. They are not mutually exclusive.

    First, the Obama covert socialist conspiracy, as promulgated by any number of conservative columnists: President Obama wants to make America into a new version of socialist Europe and this deal is step one. I give this about a 1 percent weight -- President Obama clearly did and does want a more progressive income tax system. But that's as far as it goes.

    Second, the we are doomed hypothesis. America has become hopelessly polarized and ungovernable, and none of those poor members of the House or Senate could do anything of any scale or scope because they would be "primaried" and lose their jobs. There is considerable truth to this. The left and the right have mutually exclusive views of America and the Republican House in particular has lurched its way into an impossible corner. This polarization clearly limited the freedom of movement President Obama or anyone else had to reach an agreement. I give this a 45 percent weight.

    But I think the third theory, the "if you don't known where you're going you'll get there" hypothesis, is at least as big a factor. This deal is the most a lame duck Congress -- indeed any Congress -- could conceivably ever come up with on its own. As we have learned time and time again, Congress does not make big policy, or establish major directions, or make trade-offs. It wasn't built to do any of this and it can't. The only possible source of intentional energy in our system is the presidency. If there is to be any sense of direction whatsoever, a president has to provide it. In this case, the president did not provide a sense of direction, Congress spun its wheels uselessly for a while, and inevitably the range of possible deals rapidly diminished until we reached this deal.

    This cliff deal has one substantial positive feature: it creates a more progressive tax system. In fact, it creates the most progressive tax code since 1979. In my view, given the increase in earnings inequality the country has experienced, this is an unqualified good direction.

    But it probably is very close to the last drop of new revenues that can be squeezed from this source. It is easy to be in favor of taxing someone else, which is why I never found it particularly interesting that the polling showed majorities in favor of taxing the wealthy. The next revenue increases will be much harder.

    Beyond this achievement, the deal solves no known problems. It does not raise enough revenues. It does not cut or even reduce the growth of any expenditures. It leaves an immense long-term debt problem. It does not resolve the sequestration problem that last year's Super Committee left us. It does not solve the debt limit problem. It leaves the nation's public finances in a state of high uncertainty. It reduces the 2013 rate of economic growth by about one-half of a percentage point. And it almost guarantees a series of completely unproductive fights throughout this coming year.

    If this is what you get when you try really hard, then a possible total closure of government in a few months looks pretty good.

    Roosevelt Institute Senior Fellow Bo Cutter is formerly a managing partner of Warburg Pincus, a major global private equity firm. Recently, he served as the leader of President Obama’s Office of Management and Budget (OMB) transition team. He has also served in senior roles in the White Houses of two Democratic Presidents.

    Read more

    Share This

Pages