It's Time to Stop Tinkering with the Economy

Sep 28, 2011Bo Cutter

The solutions being offered by both sides are too small and small-minded to meet the challenges we face.

The solutions being offered by both sides are too small and small-minded to meet the challenges we face.

I liked the president's jobs speech, but I was deeply disappointed with his budget speech on September 19. The president is missing an immense opportunity, and what may have been the last chance of his first term, to build a workable economic strategy. The undeniable truth is that nothing currently on the political agenda comes close to being sufficient to meet our problems.

When President Obama gave his jobs speech, I thought he would follow it with a budget speech that would change both the budget and the tax game, and then with an infrastructure speech that would provide a genuine bridge to long-term economic growth. There's a lot more to do than jobs, budgets, and infrastructure, but those three are not a bad start, and I thought there was an opening to build a real strategy -- one a president could both run on and govern by.

I may or may not have been right about the opening for a strategy; we will never know. But President Obama doesn't seem to be looking for that opening, and I was wrong about the path he was on. I think we are about to waste a year debating trivialities.

There is a fundamental mismatch today between the issues we are debating and the problems we are facing; between the issues the two parties are willing even to consider and what is developing as a grinding, long term economic crisis. We are still in the relatively early stages of what Carmen Reinhart and Kenneth Rogoff have called the "Great Contraction," an excruciatingly long period of slow growth and high unemployment that -- unless we act -- could easily become America's very own lost decade. We may be facing a European-led double dip recession. But wait, there's more: When this period -- this "Great Contraction" -- is over, we will not simply return to the world of the past. We are losing competitiveness, the middle class is hollowing out, we are not creating the right kinds of jobs, we are not preparing the next generation, and inequality continues to grow.

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In the face of these impending waves of real crises, both parties are displaying an instinct for the capillary, not the jugular. They are retreating to their core ideologies and refusing to budge from their different received wisdoms. Meanwhile a huge potential force is gathering in the center and looking around for a real set of solutions.

What is a "real set of solutions?" To characterize them in general, I agreed completely with what David Brooks wrote yesterday in the New York Times: "Try to reform whole institutions... there are 6 or 7 big institutions that are fundamentally diseased... The Simpson-Bowles report on the deficit was an opportunity to begin a wave of institutional reform." To say this another way, we should stop tinkering.

Here are more specific thoughts that take us beyond tinkering:

  1. Move now toward a combination of Simpson-Bowles/Rivlin-Domenici;
  2. Establish an infrastructure bank with a capitalization of $500 billion;
  3. Reform the income tax code; bring personal and corporate rates way down; create a super rate for super high personal earnings -- say above $5 million;
  4. Introduce a consumption tax and/or tax "bads" (fuel, green house gases);
  5. End the current employer tax exclusion for employee health care costs; put a ceiling on costs by converting it to a credit; move employees to the health exchanges which should be the central feature of President Obama's health insurance program;
  6. Require much higher capitalization -- say 15 percent -- of major banks;
  7. Create a jobs tax credit focused on small new businesses, which create the vast percentage of America's new jobs.

That's enough for starters. These are the kinds of big changes we need. They derive from ideas of both the left and the right. All of them land squarely on some "third rail" of American politics. None of them will actually be proposed by either of the current major parties. Together they show the need for a force or party of the radical center. But despite that word "radical," none of these are truly radical; we could do all of them. Together, they would together be a project for American renewal.

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.

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No More False Choices: Christina Romer on Fiscal vs. Housing Policy

Sep 27, 2011Mike Konczal

mike-konczal-newRomer refuted four of the most popular objections to President Obama's jobs plan. Any other takers?

Christina Romer wrote an excellent New York Times article on Sunday, "A Plan on Jobs Deserves a Hearing." In it, Romer discusses four objections to the new Obama jobs plan. In keeping with developing a map of demand and supply explanations for the weak economy, I want to specifically address how Romer discusses the different demand-side approaches. First, let's take another look at that demand-side map:

Romer refuted four of the most popular objections to President Obama's jobs plan. Any other takers?

Christina Romer wrote an excellent New York Times article on Sunday, "A Plan on Jobs Deserves a Hearing." In it, Romer discusses four objections to the new Obama jobs plan. In keeping with developing a map of demand and supply explanations for the weak economy, I want to specifically address how Romer discusses the different demand-side approaches. First, let's take another look at that demand-side map:

Romer argues for the job plan, which is centered around solutions in the fiscal circle (infrastructure, tax cuts) and doesn't primarily include solutions in the housing circle (except for housing refinancing, which is unlikely to go anywhere). Romer addresses this head-on:

WE NEED A HOUSING PLAN, NOT MORE FISCAL STIMULUS The bubble and bust in house prices has left households burdened with too much debt. Until we deal with this problem — perhaps by providing principal relief to the 11 million households whose mortgages are larger than the current value of their homes — we’ll never get the economy going.

The premise of this argument is probably true: recent evidence suggests that high debt is holding back consumer demand. But it doesn’t follow that the government needs to directly lower debt burdens to stimulate job growth.

Recent research shows that government spending on infrastructure or other investments raises demand even in an economy beset by over-indebted consumers. Another effective approach is to aim tax cuts and government payments at households that would like to spend, but can’t borrow because of their debt loads (such as the poor and the unemployed).

History actually suggests that the “tackle housing first” crowd may have the direction of causation backwards. In the recovery from the Great Depression, economic growth, which raised incomes and asset prices, played a big role in lowering debt burdens. I strongly suspect that fiscal stimulus will be more cost effective at speeding deleveraging and recovery than government-paid policies aimed directly at reducing debt.

We should, however, be thinking hard about whether the president’s stimulus plan is the best one for a debt-heavy economy. It may be too tilted toward broad tax cuts, when bigger increases in government investment spending and more targeted tax cuts would promote faster growth.

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I tend to think there's enough space for advancement on all three fronts, especially as they are three distinct battlefields -- Congress and budgets for fiscal, the FOMC and expectations for monetary policy, and regulators and the foreclosure industry for housing. If all three approaches had to go through one place I could understand the need to pick our battles, but they exist in different spaces with different arguments. As such, I've always thought liberals need to take them all on at once.

But in general, those who think that we have a housing debt hangover think that running a larger fiscal deficit is a good thing. This is a representative argument: "If the private sector is incapable of absorbing all desired savings the government has to jump in – at least temporarily, while the private sector is paying down its excess debts. The government offers savers a safe asset (government bonds) and uses the funds to directly boost aggregate demand."

Or as Richard Koo puts it:

Indeed the key lesson from the Japanese experience is that fiscal support must be maintained for the entire duration of the private-sector deleveraging process. This is an extremely difficult task for a democracy in a peacetime, because when the economy begins to recover, well-meaning citizens who dislike reliance on government will argue that since fiscal pump-priming is clearly working, it is time to reduce (what they see as wasteful) government spending. But if the recovery is actually due to government spending and the private sector is still in balance-sheet-repair mode, premature fiscal

reform will invariably result in another meltdown, as the Japanese found out in 1997 and the Americans in 1937...

Although government deficit spending should be avoided when the private sector is healthy and forward looking, once in several decades when the private sector gets carried away in a bubble and damages its financial health, a prompt and sustained fiscal medicine from the government is essential in minimizing both the length of recession and the eventual bill to the taxpayers.

Romer adds an interesting argument to this overlap -- that the best way to deal with the housing hangover is to boost wages and employment, which can be done through fiscal policy. Unemployment is well-correlated with deleveraging, foreclosures and underwater mortgages, so relief through this channel will go toward the areas most in need. I'd add that even places where there wasn't a housing bubble -- say, Texas -- have very high unemployment rates in excess of 8 percent, indicating something larger at work than simple deleveraging.

I agree with what Romer hints at, that the job plans is too tilted towards tax cuts. Building in infrastructure will have a payout years down the road that will make this an even better investment, but with real interest rates negative we should be getting as much of it out the door as we can until output returns to trend.

With the Romer editorial in hand, what are the arguments against this job bill again?

Mike Konczal is a Fellow at the Roosevelt Institute.

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The Twisted Logic Behind the Federal Reserve Dissenters' Arguments

Sep 22, 2011Mike Konczal

Three members are living in a world very different from what the unemployed are experiencing.

Three members are living in a world very different from what the unemployed are experiencing.

I made the case that liberals should engage monetary policy more directly in The New Republic today. I want people to pay special attention to the Evans Rule, which derives from Chicago Fed President Charles Evans's fantastic speech "The Fed's Dual Mandate: Responsibilities and Challenges Facing U.S. Monetary Policy." The rule proposes that the Federal Reserve could simply state that it will keep interest rates at zero and tolerate three percent average inflation until unemployment gets down to seven percent. I'd consider going further and announcing a targeted transition to a permanent four percent inflation target, while keeping rates near zero until unemployment is at least 6.5 percent. But these are the areas where liberals need to focus their energy when it comes to monetary policy.

Because Operation Twist won't cut it, especially with the housing market a complete mess. But even this mediocre action had three dissenting votes: Fed Presidents Richard Fisher, Narayana Kocherlakota, and Charles Plosser.

Having a map of the demand-and-supply sides of the policy debates is crucial to analyzing their arguments, and I'll allude to it throughout this post. The dissenting arguments aren't in the demand side, but instead in the supply side. Instead of thinking we have a demand problem but that monetary policy is ineffectual in this environment -- an opinion held by many people -- their explanations for why they are against future monetary policy use the language of the supply-side.

We don't know yet exactly why they dissented this time, but there are clues from their previous statements. To understand Fisher's perspective, there is this clue from the August 20th FOMC meeting (my bold for the following three quotes):

Voting against this action: Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser... Mr. Fisher discussed the fragility of the U.S. economy but felt that it was chiefly nonmonetary factors, such as uncertainty about fiscal and regulatory initiatives, that were restraining domestic capital expenditures, job creation, and economic growth. He was concerned both that the Committee did not have enough information to be specific on the time interval over which it expected low rates to be maintained, and that, were it to do so, the Committee risked appearing overly responsive to the recent financial market volatility...

He said something similar in an August 17th speech applauding Texas' job growth. "Those with the capacity to hire American workers -- small businesses as well as large, publicly traded or private -- are immobilized. Not because they lack entrepreneurial zeal or do not wish to grow; not because they can’t access cheap and available credit. Rather, they simply cannot budget or manage for the uncertainty of fiscal and regulatory policy." That logic falls under the "government-induced uncertainty" circle in my map.

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For Kocherlakota, a clue lies in his big paper "Labor Markets and Monetary Policy," which states:

There are good reasons to believe that expected after-tax productivity p fell. Over the past three years, the U.S. economy has experienced large increases in the federal budget deficits, contributing substantially to the overall federal debt. In addition, many states and municipalities are facing budgetary challenges. It is natural for firms to expect that these budget challenges at all levels of government may be met at least partially by future increases in tax rates. Both in the model and in reality, firms know that hiring a worker is a multiyear commitment, and so what matters for that decision is productivity, net of taxes, over the medium term of the next several years. If firms expect to face higher taxes in this time frame, then their measure of p has fallen.

What about the utility that a person derives from not working? In response to the recession, the federal government extended the duration of unemployment insurance benefits. Thus, it is plausible that z has risen in the past three years. This increase -- in and of itself -- means that firms must offer higher wages... In this scenario, nominal rigidities are playing a much less important role in suppressing the creation of job openings. Correspondingly, monetary policy should be considerably less accommodative... However, if (p−z) has fallen by 0.15, then the implied u* is 8.7 percent. This is indeed a wide range of possibilities.

The biggest factors for him are government-induced uncertainty created by budgetary challenges, future tax increases, and unemployment insurance. In Kocherlakota's models, the natural rate of unemployment might be 8.7 percent or higher, so in his mind he's gotten us to Full Employment. Congrats!

Mind you, the models he uses don't even really leave room for insufficient demand to be part of the story, which is kind of a problem. But either way, he falls into the overlap between "government-induced uncertainty" and "productivity."

What about Plosser? Here's a February 2011 interview with the Wall Street Journal:

Mr. Plosser’s answer is unequivocal: This mess was caused by over-investment in housing, and bringing down unemployment will be a gradual process. “You can’t change the carpenter into a nurse easily, and you can’t change the mortgage broker into a computer expert in a manufacturing plant very easily. Eventually that stuff will sort itself out. People will be retrained and they’ll find jobs in other industries. But monetary policy can’t retrain people. Monetary policy can’t fix those problems.”

Scott Sumner has devastated the argument that this is about unemployed carpenters with a passing glance at the data, and as far as I can see Plosser has offered little additional data on this matter. And again, even if the "natural" rate of unemployment has jumped up to 6 percent or 7 percent, there are still millions of people who are unemployed and who can be affected by policy. But either way, he's operating from the "labor productivity" circle in the map.

So the three dissenters don't have a demand story in which monetary policy can't work. They have a story in which things would be fine if the government just got out of the way and stopped trying to regulate the financial sector, focused on balancing the budget immediately, and also stopped preventing people from moving to new careers by giving them unemployment insurance.

How did these people ever end up being some of the most crucial players with control over whether or not our country will leave the Great Recession and get back to full employment?

It would have been great if Charles Evans had dissented on behalf of the unemployed. It is important for the public to understand that the dissenters aren't balancing out a Fed that is too active, but instead holding a Fed that could be setting more aggressive expectations in check. They have their biases and are seeking out whatever stories and data will fit into it, and their biases end up being against trying to close the unemployment gap. And thus our unemployment crisis continues on.

Mike Konczal is a Fellow at the Roosevelt Institute.

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Mapping Out the Economic War of Ideas

Sep 21, 2011Mike Konczal

A literal take on the ideological bubbles that have formed in our economic debate.

For the next few posts, I will allude to an ongoing battle of ideas about what is troubling our economy and what solutions are available to fix it. So it might be a good idea to create a sort of topological map of the clusters of ideas and policies that constitute these arguments, as well as the overlap among them. This is a preliminary version of this map; I’d really appreciate your input about what is missing and how to make it better.

A literal take on the ideological bubbles that have formed in our economic debate.

For the next few posts, I will allude to an ongoing battle of ideas about what is troubling our economy and what solutions are available to fix it. So it might be a good idea to create a sort of topological map of the clusters of ideas and policies that constitute these arguments, as well as the overlap among them. This is a preliminary version of this map; I’d really appreciate your input about what is missing and how to make it better.

From those who think that the problem is related to demand and Keynesian theories, there tends to be three areas of focus: fiscal policy, monetary policy, and the debt hangover in the broken housing market. One can think all three are important -- I certainly do -- but most think one has priority over the others. Many will think one of the three isn’t in play or particularly useful as a focus of policy and energy. Here’s a rough map of all three. Quotations are ideas, non-quotes are policies, and parentheses are people associated with each:

konczaltopo1

(Click for larger image.)

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The flip-side to a demand crisis is a supply crisis, and there’s been a large effort to explain our high unemployment and below-trend growth as the result of supply-side factors. Having surveyed the arguments, I’ve split them into two categories. There are those who think that the government has created an increase in uncertainty. This results from a combination of deficits that scare bond vigilantes/job creators, new regulations that have killed all the potential new jobs, government-created disincentives to work. The second area of focus is on the productivity of the labor force, with special emphasis on a skills mismatch, the characteristics of the long-term unemployed, and the idea that something has fundamentally changed in our economy that will keep so many unemployed for the foreseeable future.

konczaltopo2

(Click for larger image.)

I’m making the productivity circle conceptually expansive enough to include “recalculation” stories, though I tend not to find these arguments convincing. I suppose I could add a third circle in the next version.

So what did I miss?  What should go in the next version of this chart?

Mike Konczal is a Research Fellow at the Roosevelt Institute.

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A Transformative Jobs Plan: What’s Good for IBM’s Top Executives is Not Good for the U.S.

Sep 15, 2011William Lazonick

stockmarket-1500001The president needs to take on the ways corporations beef up stock prices instead of employing Americans.

stockmarket-1500001The president needs to take on the ways corporations beef up stock prices instead of employing Americans.

With the unemployment rate still at over 9 percent and the U.S. economy facing a possible double-dip recession, President Obama's jobs plan can only help. If, however, the main point of the plan is to put the employment situation in decent shape by a year from now, I would not bet on its success. The U.S. jobs problem is deeply structural, and requires a transformative plan for a solution.

The dearth of jobs, even in an economic recovery, reflects the cumulative impact of three structural changes in the employment practices of U.S. industrial corporations. From the beginning of the 1980s, rationalization, characterized by plant closings, eliminated the jobs of blue-collar workers. From the beginning of the 1990s, marketization, characterized by the end of the norm of a career with one company, placed the job security of middle-aged and older white-collar workers in jeopardy. And from the 2000s globalization, characterized by the offshoring of employment, left all members of the U.S. labor force, even those with advanced educational credentials and substantial work experience, vulnerable to displacement.

The problem that these structural changes pose for the prosperity of the U.S. economy is evident in the history of employment at International Business Machines (IBM). From the 1920s through the 1980s, IBM's system of lifelong employment offered all personnel -- including clerical and production workers -- a career with one company. At the end of 1989, IBM employed 383,220 people worldwide. At the end of 1994, just five years later, that number had been reduced by 43 percent to 219,839. At first, IBM downsized by offering voluntary early retirement packages, thus clinging to the principle of lifelong employment. By 1993, however, with the recruitment from RJR Nabisco of Louis Gerstner as IBM's CEO, the company fired tens of thousands outright. By 1994, as a result of the marketization of the employment relation, lifelong employment was a relic of the past. A truly transformative jobs plan will crack down on the self-interested ways in which U.S. executives allocate corporate profits so that they can be used instead to employ American workers.

IBM's history goes back 100 years, but by 1980, when a microcomputer startup named Apple did its initial public offering, IBM -- number eight on the Fortune 500 list -- had $3.6 billion in profits and 341,729 employees. Relying on Intel's microprocessors and Microsoft's operating system, IBM moved quickly to become dominant in personal computers, defining the open-system architecture of the PC. In 1982, IBM's PC sales were $500 million, and just two years later they were 11 times that amount, more than triple the 1984 revenues of its nearest competitor, Apple, and about equal to the revenues of IBM's top eight rivals. Subsequently, however, IBM lost market share to lower-priced PC clones produced by companies such as Compaq, Gateway, and Dell.

In this open-systems environment, IBM shifted its business strategy from hardware to software and services. This change favored the employment of younger professionals whose higher education was up-to-date and who had work experience at other high-tech companies over older employees who had spent their careers working on proprietary technologies at IBM. It was this fundamental change in IBM's business strategy that underpinned the decision in the early 1990s to downsize its labor force dramatically, ridding the company of the once hallowed system of lifelong employment. Subsequently, it shed much of its manufacturing capacity.

IBM's rationalization of manufacturing employment is evident in data on the diversity of its U.S. labor force that the company posted on its website for 1996 through 2008 as part of its annual corporate responsibility reports. Blacks were particularly hard hit by the shift out of manufacturing. They represented 9.9 percent of IBM's 125,618 U.S. employees in 1996, but only 7.5 percent of 120,227 U.S. employees in 2008. On net, blacks had 3,439 fewer U.S. jobs at IBM in 2008 than in 1996, while Asians had 5,281 more jobs. The main reason for the decline of black employment at IBM was the elimination of manufacturing positions; in 2008 IBM employed only 78 black operatives in the United States, down from 3,474 in 1996.

Meanwhile, over the past decade globalization has rapidly eroded IBM's U.S. employment (USE), even as IBM's worldwide employment (WWE) has grown significantly. From 1996 to 2000, the final year of the Internet boom, as WWE increased from 240,615 to 316,303, USE rose by about 28,000 people, with USE as a proportion of WWE falling slightly from 52 percent to 49 percent. From 2000 to 2008, however, IBM employment outside the United States soared by 116,000 people while USE plunged by 33,000, and the share of USE fell to just 30 percent, with employees in BRIC countries, preponderantly in India, accounting for 28 percent of WWE in 2008.

IBM was highly profitable in 2008, with net income of $12.3 billion (up 18 percent from 2007) on revenues of $103.6 billion (up 5 percent from 2007). The company was particularly flush in the fourth quarter of 2008 (ending December 31), with net income of $4.4 billion on revenues of $27 billion. Yet in January 2009, as part of a process to transfer jobs to lower wage countries, IBM terminated the employment of about 4,600 people in the United States and Canada. It would cut another 5,000 a few months later.

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At the beginning of February 2009, IBM offered the first round of displaced workers "Project Match." As described in an internal document, the purpose of Project Match was to "help you locate potential job opportunities in growth markets where your skills are in demand." The document went on to say, "Should you accept a position in one of these countries, IBM offers financial assistance to offset moving costs, provides immigration support, such as visa assistance, and other support to help ease the transition of an international move." Eligible for Project Match were "satisfactory performers who have been notified of separation from IBM U.S. or Canada and are willing to work on local terms and conditions." That is, an eligible American worker laid off by IBM could apply to IBM for a job in, for example, India, and if rehired by IBM, would be paid the wages prevailing there.

So what proportion of its worldwide labor force does IBM now employ in the United States? We don't know, because as of 2009 IBM ceased to include its U.S. employment data in its corporate responsibility reports. It even removed the 1996-2008 employment data from its website. IBM clearly does not want the American public to know its U.S. employment record.

Is IBM investing in the United States? It has been highly profitable over the past decade, with net income of $96 billion on sales of $933 billion. But 84 percent of its profits -- almost $81 billion -- have been spent buying back its own stock. The buybacks account for 50 percent more than what it spent on R&D over the decade. Another 19 percent of its profits have been paid out as dividends, so that over the past decade it has given all of its profits and more to shareholders. In the first half of 2011 the beat went on: IBM wasted $8 billion on buybacks, equivalent to 123 percent of its net income and 254 percent of its R&D expenditures.

Why do I say "wasted"? The only purpose of these buybacks is to manipulate its stock price. Who gains? Over the past decade, IBM's CEO and other four highest paid executives have made a combined $271 million from exercising stock options. That includes $120 million to Gerstner in his last two years at the company in 2001-2002, and over $47 million to Samuel Palmisano, who became CEO in March 2002. In 2010, IBM's five highest paid executives raked in over $23 million exercising their options.

Unfortunately, among major U.S. corporations, IBM's financial behavior is not unique. In 2010, IBM was the biggest repurchaser of stock among U.S. companies, with $15.4 billion, followed by Wal-Mart with $14.8 billion, Exxon Mobil with $13.1 billion, Microsoft with $11.3 billion, and HP with $11 billion. In all, the 500 companies in the S&P 500 Index, which account for about 75 percent of the market capitalization of publicly listed companies in the United States, squandered $299 billion on buybacks in 2010. Over the past decade, S&P 500 companies have blown in excess of $2.5 trillion on buybacks.

Which takes us back to America's need for a transformative jobs plan. We cannot reverse the rationalization, marketization, and globalization of employment, all of which (as I have explained elsewhere) often have productive rationales. But we can eradicate the "financialization" of corporate resource allocation that places stock-price manipulation in the name of "shareholder value" ahead of job creation for the American labor force.

The transformative jobs plan that I advocate has four steps:

1. Ban stock buybacks. The U.S. Securities & Exchange Commission already views large corporate buybacks as a potential manipulation of the stock market, but back in 1982, under Rule 10b-18, it gave business corporations a safe harbor to do them anyway.

2. Give special tax credits for expanded U.S. employment. U.S. companies can be rewarded for year-to-year increases in the number of people employed at home as well as for investments in human capital that enhance the capabilities of the augmented labor force. Over the long run, the taxes that these workers pay on their incomes will provide a return on these government subsidies.

3. Revoke the tax deferral on U.S. corporate profits kept abroad. The existing tax code gives U.S. companies a totally unnecessary incentive to invest overseas while it deprives the U.S. government of much-needed tax revenues that can be used to support job creation in the United States.

4. Tie executive performance pay to real productivity rather than stock price. The stock market is driven by a combination of innovation, speculation, and manipulation. We want executives to be rewarded only for innovation: investments in real productive capabilities that can result in higher quality, lower cost goods and services.

Properly implemented, this jobs plan could be transformative. The only problem is that rich corporate executives will oppose the banning of buybacks, the elimination of overseas tax breaks, and restrictions on stock-based pay. And unfortunately we do not have a transformative president in the White House who is willing to take on these powerful interests.

William Lazonick is director of the UMass Center for Industrial Competitiveness and president of The Academic-Industry Research Network. His book, Sustainable Prosperity in the New Economy? Business Organization and High-Tech Employment in the United States (Upjohn Institute 2009) was awarded the 2010 Schumpeter Prize.

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Jeff Madrick "Pleasantly Surprised" by Obama's Jobs Act Strategy

Sep 13, 2011

Appearing last night on Countdown with Keith Olbermann, Roosevelt Institute Senior Fellow Jeff Madrick said he was pleasantly surprised by President Obama's announcement that he would pay for the American Jobs Act by increasing taxes on the rich. Jeff notes that the plan still has flaws and may not be as effective as some economists are projecting, but "at least he's coming out fighting. At least he's sounding like he's for the working man and not the wealthy guy."

Appearing last night on Countdown with Keith Olbermann, Roosevelt Institute Senior Fellow Jeff Madrick said he was pleasantly surprised by President Obama's announcement that he would pay for the American Jobs Act by increasing taxes on the rich. Jeff notes that the plan still has flaws and may not be as effective as Obama hopes, but "at least he's coming out fighting. At least he's sounding like he's for the working man and not for the wealthy guy."

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When it comes to getting the bill passed, Jeff expects Republicans to fight back. He thinks Obama will get the payroll tax cuts and small business tax credits he's asking for, since the GOP likes those ideas anyway, but he'll encounter resistance on the spending side, which gives the most bang for the buck. "We've still got a dilemma," he says, "but at least the boxing gloves were on. At least we're out of the corner and swinging a little bit."

**ND2.0 Alert: If you want to meet the man himself, Jeff Madrick will be making appearances in Washington, D.C. and New York City this week. First, he'll be joining Congresswoman Rosa DeLauro tomorrow night for an informal conversation on the state of the economy and financial reform. The event will be held at 7:30 p.m. at 816 East Capitol Street, NE in D.C. To RSVP, contact delaurodinners [at] gmail [dot] com.

And on Friday, September 16, Jeff will be appearing at a breakfast forum on financial regulation, co-hosted by the Century Foundation and the World Policy Institute. The forum runs from 8:30 a.m. to 10:00 a.m. and will be held at the Century Foundation headquarters in New York City, located at 41 East 70th Street. To RSVP, e-mail events [at] tcf [dot] org.

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The Jobs Speech: Obama Starts Telling the Right Story

Sep 12, 2011Bo Cutter

On display Thursday was a president willing to engage and demand action.

In the context of normal politics -- miserable as they are today -- Obama's speech last Thursday was a very good start toward a reset of this presidency. In the context of reality based politics -- which don't exist -- a great deal more was required. But that's a topic for another day.

On display Thursday was a president willing to engage and demand action.

In the context of normal politics -- miserable as they are today -- Obama's speech last Thursday was a very good start toward a reset of this presidency. In the context of reality based politics -- which don't exist -- a great deal more was required. But that's a topic for another day.

How did he do contrasted against what I thought he had to do? Here's how I would grade his performance:

  • He was fairly honest -- give him a 7 out of 10.
  • He went long, as judged by what is possible today -- a 9.
  • He didn't break much china -- a 6.
  • He didn't really roll any dice, but he changed tone and demanded action. Give him a 7.

When you consider the circumstances -- an embattled president facing an opposition hostile to the point of derangement -- the substance of this speech was very good. In terms of immediately actionable stuff, he proposed the right kind of stimulus (even though the administration can't call it that) within the middle of the range I suggested: $450 billion, or around 3% of GDP. The stimulus is "efficient." It lowers the costs of employment, it is targeted in part toward the long-term unemployed, and it sends the right kind of money, to employ teachers, to the states. I think he will actually get a fair amount of this passed, and while it won't reverse our ugly unemployment picture, it may keep this meager recovery going.

He will get none of his infrastructure proposals passed, but I felt as though they were almost proposed as a loss leader. And he deferred the budget reckoning.

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The best part of the speech was its tone and style. In watching President Obama over the last two years, I sometimes felt as though I were looking through the wrong end of binoculars. But Thursday night's president was not that disengaged president, all too ready to outsource to the Congress or strike the wrong deal at the wrong time. This was a fully engaged president, presenting an adult message, quite ready to define his opposition as it truly is, and willing to demand action. I can't overstate how much I wish that president had been around more over the last two years.

I also think that in this speech, as President Obama returns to one of its themes in particular, he will discover the truth of the Wizard of Oz. Just as Dorothy discovered that the Wicked Witch of the West was a fake, so the president and the nation will learn that the Tea Party and House Republicans aren't the tsunami they have so feared. The administration will also discover that to some degree it can choose to whom it gives power. If you give power to the Tea Party, it will take it. If you describe the Tea Party accurately -- as clueless, hypocritical nihilists -- it will wither. If the president had moved decisively in March, closed the government, and forced the Tea Party to fight on ground of his choosing, we would never have had the deficit/default debacle in August.

I hope and believe that the president really will follow through on this speech. He can construct a convincing counter narrative if he builds on it. Even better, he can go beyond this speech and build a more complete story. Time and time again, what this administration has whiffed on is establishing a narrative, telling it, and convincing the public of its own sense of economic direction. They have another chance. And I hope Bill Daley is putting together a team to plan, as a coherent whole, the president's follow up. Don't leave this to normal White House operations.

At its core, this is where this speech was a success. The president gave himself a chance: to reset his administration's direction, to build a narrative, and to contrast himself against an opposition that the American people distrust even more than they distrust him. He can't outrun the bear, but he damn sure can outrun the Republican far right.

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.

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How Georgia Works Gives Employers Free Labor at the Expense of the Unemployed

Sep 12, 2011Mike Konczal

One of the key tenets of Obama's jobs plan rests on a program that is dubious at best.

In his jobs proposal, President Obama called for a modification of unemployment insurance based on Georgia Works, a proposal the administration refers to as the "most innovative reform to the unemployment insurance program in 40 years.” Georgia Works is a program wherein workers on unemployment insurance:

One of the key tenets of Obama's jobs plan rests on a program that is dubious at best.

In his jobs proposal, President Obama called for a modification of unemployment insurance based on Georgia Works, a proposal the administration refers to as the "most innovative reform to the unemployment insurance program in 40 years.” Georgia Works is a program wherein workers on unemployment insurance:

have the opportunity to train with a potential employer for a maximum of 24 hours per week for up to eight weeks. The Georgia Department of Labor (GDOL) provides a stipend and workers compensation coverage to participating job seekers. Employers pay nothing to these trainees. GW$ provides employers the opportunity to train and appraise candidates at no cost. There is no obligation to hire any given trainee...

Congressional conservatives such as Eric Cantor like the program, so there's a good chance it might pass. I actually missed the debate about this from a few weeks ago -- Zaid Jilani at Think Progress has a summary of some pros and cons from the time.

I'm fascinated by the terms under which people might justify this as a good program or would say it is a failed program. Its ideology works well for people who are concerned that our workforce lacks the training for 21st century jobs: it allows workers to brush up their skills at no wages so they'll be prepared to take on a job at the end. But even a quick glance at the underlying data shows that, instead of a program to jump-start education and training for skilled jobs, it looks like the Georgia Department of Labor is running a low-skills temp agency out of its UI fund for the benefit of employers.

Do the Numbers Fail?

How would you use the data to justify taking this program to a large, national scale? There are three hypotheses I can imagine being in play, and all of them turn out to have major problems.

The first hypothesis is that people who go through the program get hired for jobs. Now the comparison to be made isn't between getting hired and not getting hired; the comparison should be between those who do the program versus those who just keep on looking without using the program. Turns out that is problematic. As Jesse Rothstein told Arthur Delaney:

From its 2003 launch to the end of 2010, some 30,866 trainees entered the program, according to data provided to HuffPost by the Georgia Department of Labor. Of that total, 5,089 workers -- 16.4 percent -- were hired by the company that trained them during or at the end of the training period. (The department says that among workers who completed the full eight-week training, the employment rate is 24 percent.)...

Census Bureau data show that in 2007 and 2008, 15 percent of Georgians who'd been out of work for six months or longer found work within one month of a survey, according to Jesse Rothstein, an associate professor of economics and public policy at the University of California at Berkeley. In 2009 and 2010, the number fell to 10 percent.

So the transition from unemployment to employment looks to be very similar between those who do the program and those who don't, with the big difference being that those who do the program spend upwards of 24 hours a week working for free. Around 70% of Georgia Works participants are women. In so much as the workers in this program will have low skills and thus low resources (more on this in a second), it is likely much of their "leisure" time is spent on child care, uncompensated work in the household, or economizing household purchasing power -- there probably isn't much superfluous time to just give away to employers.

Hypothesis two, the most important one, is that these jobs require unique skills and the potential workforce doesn't have the right ones. Thus a special training period is necessary. What kind of jobs would these be? They would require more education than normal low-skill jobs. They would be jobs that are difficult to be productive in right away. They would involve new technologies, especially in manufacturing, that go beyond the normal workforce. They would cluster in the "some college" category at least.

Eileen Appelbaum of CEPR looked into the jobs data and concluded that for those who

found employment between November 24, 2009 and September 30, 2010 shows two-fifths found jobs doing general clerical work. Hundreds more found jobs as non-professional child care workers, janitors, retail sales persons, restaurant and fast food workers, hotel clerks and maids, or drivers and chauffeurs. In total, 70 percent of the trainees hired after the end of the training program found employment in these or similar low-wage jobs.

I was able to get the same data on successful job hires through the Georgia Works program for the period from November 2009 to October 2010. The total number of successful hires was 7,997, and they are divided up by NCCI code for categories. Here's a chart showing some of the major jobs types that stood out. Sixty percent of Georgia Works hires belong to four broad job categories:

What does this tell us? All of these jobs, according to the Bureau of Labor Statistics' (BLS) Occupational Outlook Handbook (OOH), require a high school diploma or less. They are all jobs that are "de-skilled": the types of jobs someone can go into and out of and be relatively productive at day one. Many of them are high churn, high turnover jobs. Indeed, they seem more characteristic of a temp agency than an institution that is focused on jobs that require skills to accelerate productivity.

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Next I took the top 30 classifications in the data and cross-indexed them based on my reading to education requirements and hourly wage as found in the OOH. The top thirty job classifications represent 80% of the hires of Georgia Works, so it is a representative sample. As you can see, I had trouble finding jobs in the top 40 occupations that required even an associate's degree, much less a college degree. This is the percentage of jobs by education level:



Among the top 30 jobs in Georgia Works, it is more likely that a given job will require less than a high school diploma, or no formal education, than it would require an associate's degree. They are more likely to be jobs like janitors, restaurant servers, and maids than those that require new skills and specific training unique to the new century. Even the high school level includes a lot of jobs -- clerical work, storage warehouses, drivers, retail -- that allude more to temp agencies than high-tech.

third hypothesis is that workers will make more money if they are hired through this program than through normal job searches. In this hypothesis, giving labor away is a sign of being a non-shirking worker and employers will largely compensate back the lost hours in the post-hire salary.

That's a simple empirical question I don't have the data for. But I did notice this slide in this October 2010 presentation on Georgia Works, A Perspective Toward Job Growth and Training Initiatives in a Recovering Economy:

If, after examining the data closely, you can go around telling employers that they are saving over $20 million dollars -- savings that must come from not paying salaries -- it's hard for me to think that it ultimately nets out back to workers.

A Failure in Ideology?

Here's a cool thing about neoliberal policy: you can justify any kind of terrible proposal by invoking the idea of a market and throwing more weight on the back of that already overburdened word "choice."

So I could say, "This certainly looks like a way to run a low-skill temp agency giving weeks of free labor to employers, employers who already probably have monopsony power and labor that is effectively deskilled, with taxpayers picking up the tab." A neoliberal would then respond, "Well this program gives people the market dynamism of the choice to be choosing in the market of choice for the market of uncompensated labor, a choice market that synergizes with employer's full choice of market wages," and in our age that would somehow constitute a strong retort. Repeat that enough and the policy fellowships will just start falling into your lap.

But we have to step back and think: What kind of labor contract do we want the government creating, encouraging, and setting boundaries on? I've been discussing how our laws, courts, and institutions create the free-floating notion of a "free" labor contract. For all the talk about "choice," this program nudges people into working for free in what are likely already difficult, exploitative markets. What are already high-churn industries will now have wages depressed even further from taxpayers subsidizing unpaid labor. And the ideas that derive from it -- that the problem with our economy is that workers are lazy and stupid rather than that the fact that there are no  jobs, that employers should get more claims on work for free and that the spirit of indenture should be strengthened in the workplace -- are the ideas that liberals have to fight against in these dark times.

Mike Konczal is a Research Fellow at the Roosevelt Institute.

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How September 11 Called the Millennial Generation Into Action

Sep 9, 2011Reese Neader

The youngest generation is already working hard to transform the country in honor of those who lost their lives.

On September 11, 2001, I stood up and walked out of class. I was studying international relations at Heidelberg College in Tiffin, Ohio and my class had been invited by our professor to discuss what just took place. What had happened and why? But more importantly, what did September 11 represent?

The youngest generation is already working hard to transform the country in honor of those who lost their lives.

On September 11, 2001, I stood up and walked out of class. I was studying international relations at Heidelberg College in Tiffin, Ohio and my class had been invited by our professor to discuss what just took place. What had happened and why? But more importantly, what did September 11 represent?

September 11 did not change our lives in the way the terrorists wanted. We are still the strongest country in the world and we are still the leaders of a global system that represents the American experiment in higher ideals of democracy, liberty, and shared prosperity.

Instead of destroying our country, September 11 roused a generation. The children who witnessed the fall of the towers have grown up through the Longest War, the Iraq War, two contested national elections, the housing crisis, the battle over climate change, a credit and student debt explosion, Hurricane Katrina, the worst environmental disaster in U.S. history, and the Great Recession.

Our country is witnessing the long, slow breakdown of our systems. We are faced with an era marked by crises in energy, the economy, and national defense. As the world continues to look to America for global leadership, we find ourselves facing a crisis in leadership. Our government is paralyzed, our financial sector is rotten with corruption, and our corporate economy is choking under its own weight. Overseas, our soldiers continue to bravely fight the Longest War but are fighting with one hand tied behind their backs, facing 21st century enemies with 20th century weapons and rules.

But this is not the first time that America has faced down an existential challenge. We fought for our independence against the British Empire. We rooted out the disease of slavery. We built our way back from the Great Depression and defeated the Nazis. Our parents and grandparents marched together for Civil Rights. We have traveled to the moon and we ended the Cold War. Every one of these events was born from a generational struggle. On September 11, 2001, as Millennials saw our way of life being attacked, we dedicated ourselves to achieving the promise of America and building a country where everyone can speak with freedom, worship with freedom, achieve prosperity, and live in peace and security. Our generation will also meet the challenges of our time and we will do it by following in the our country's tradition of exploration and innovation. America has changed the world with its inventions and ideas, and we're not done yet.

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The Millennial Generation is rising to meet the challenges of our time.

We are designing the next generation of energy infrastructure in labs and offices across the country, developing cleaner fuels, smarter technologies, and new forms of transportation that will create jobs for millions of Americans and propel our country into a new era of prosperity.

In cities across the country, Millennials are designing job creation policies and financial services that invest in American workers and replenish local economies. Social entrepreneurs, green businesses, and technology specialists are building a new economy that will generate wealth for Wall Street and Main Street, while making it a priority that our profits are generated from social enterprise, energy savings, and conserving the environment, creating millions of American jobs for American workers in the process.

And always vigilant, our military is responding to national security threats by designing new fighting systems and making smart investments in renewable energy research and development.

America began a new chapter on September 11, 2001. Rest assured that our generation is fighting for our future by actively rebuilding our country from the inside out. We are changing the way we live, the ways that we make money, and the way we value money. The lack of security engendered by 9/11 has provided our generation with a strong resolve to overcome challenges.

In our time we will, as a country and as a world, hang together or hang separately. America needs leadership imbued with values and a long-term vision for the progress of our country. The Millennial Generation is busy at work while waiting for its turn to take control of the country. We will succeed in our mission to rebuild the United States and ignite a new era of national prosperity, and we will do it inspired by the men and women who lost their lives on September 11, 2001. In the words of President Obama, in his inaugural speech in 2009, "We say to you now that our spirit is stronger and cannot be broken; you cannot outlast us, and we will defeat you."

Reese Neader is the Roosevelt Institute | Campus Network’s Policy Director.

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Did Obama Address the Womancession Last Night?

Sep 9, 2011Bryce Covert

The plan isn't perfect, but women's poor employment outlook seems to be on Obama's radar.

There were a lot of rumors about what would be included in President Obama's speech to a joint session of Congress yesterday. Would it be mostly tax cuts? Would it extend unemployment benefits? How much will be spent on infrastructure projects?

The plan isn't perfect, but women's poor employment outlook seems to be on Obama's radar.

There were a lot of rumors about what would be included in President Obama's speech to a joint session of Congress yesterday. Would it be mostly tax cuts? Would it extend unemployment benefits? How much will be spent on infrastructure projects?

The last point had me slightly worried. Not because we don't have a huge need to spend vast amounts of money updating our dilapidated infrastructure. Not because we shouldn't be putting construction workers, architects, engineers, and factory workers back to work making it happen.

I was worried because those kinds of jobs are overwhelmingly held by men. And while the "mancession" meme had truth to it when the recession began -- men's unemployment rate was at 11 percent in August of 2009, while women's was 8.3 percent -- and men are still experiencing an unemployment rate of 8.9 percent, women have not been immune to the trend. And now they are sliding backward. Since the recession technically ended, women have lost 281,000 jobs, while men have gained 805,000. The percentage of women who have a job hasn't been this low since 1988.

A large chunk of their job loss has occurred in the public sector. Women lost 343,000 public-sector jobs between June 2009 and June 2011, accounting for 70 percent of the cuts. As Susan Feiner explains, women have been concentrated in this sector because many of the jobs don't challenge gender ideology (care giving roles and direct services are still seen as "feminine" work) and the schedules are often flexible, facilitating the care work that usually falls to them. So the cuts have fallen heavily on women, particularly teachers. As state budgets have been hit by shrinking tax revenues and increased spending on unemployment benefits and other safety net programs, they've slashed payrolls, often in education. About 290,000 school personnel have lost their jobs nationally since September 2008. And women make up about 78% of our pre-K to 12 teachers.

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Obama's jobs plan surprised me by taking direct aim at this phenomenon. It includes $30 billion to prevent up to 280,000 teacher layoffs. It will also help preserve or extend school days and the school year, as well as give support to after-school programs. This is really, really important. Women's unemployment won't be directly addressed by infrastructure spending, but anything to bolster schools will make a difference. It also helps us remain competitive as a country with a well-educated workforce.

But it doesn't give any relief to out of work teachers the way infrastructure spending is expected to put unemployed construction workers back on the job. And women aren't just losing teaching jobs in the public sector. They're losing jobs in the private sector as well, while men are making some small gains, with their layoffs often occurring in secretarial and administrative support roles. There are also other places women's jobs can be boosted, for example by investing in eldercare and childcare and raising the standard of living in poorly paid, low benefit service work. Meanwhile, we as a country need to work on dismantling the gender segregation in our workforce, including helping women into the construction industry and other male-heavy areas that pay well and usually come with good benefits. None of these are issues we can ignore.

But I'm happy to see that women are on Obama's radar, and it is extremely important that we save teachers' jobs. The package isn't perfect from any way you look at it, but it does hold signs that he is at least paying attention to many of the crises we face.

Bryce Covert is Assistant Editor at New Deal 2.0.

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