Why the 99 Percent is Crying Out

Oct 5, 2011Bryce Covert

Occupy Wall Street is right to be angry. Americans are falling farther and farther behind.

The biggest controversy over Occupy Wall Street is about what they stand for. Are they a bunch of dirty hippies with no agenda? Do they really think they can change the entire system? Why won't they just put out a concrete list of demands and policy prescriptions?

Occupy Wall Street is right to be angry. Americans are falling farther and farther behind.

The biggest controversy over Occupy Wall Street is about what they stand for. Are they a bunch of dirty hippies with no agenda? Do they really think they can change the entire system? Why won't they just put out a concrete list of demands and policy prescriptions?

While signs at the protests have many, many messages -- from BP to Iran to capital punishment -- the affiliated Tumblr, We Are the 99 Percent, exposes what's motivating people to get on the streets. With over 700 submissions at this point, Americans from all over have been writing down personal stories to explain their frustrations. While those protesting on Wall Street have grievances that are far ranging, those on the Tumblr are almost all sparked by a combination of a few common things: joblessness, debt, and low wages. They are the stories of those who can't make ends meet. These days, that covers a lot of us.

Here's a sampling just from the most recent page (my bold):

My mother (leader in her field of pathology, MA) is upside-down on her house. My father (multiple PhD's) lives in his car so that he can do what he loves for a living rather than be a slave to the system.

I am 45 years old. I was laid off twice in 18 months... I am "unemployable" because of layoffs. I have not worked since November 2008.

I am 27 years old with $100,000 in debt. I was laid off in 2009 and have been struggling ever since then. I have not made more than $10,000 a year since then.

My husband and I have $80k in student loan debt. I am in the process of being diagnosed with Multiple Sclerosis, a hard enough thing in and of itself. I also have over $30,000 in medical debt because of that... We own cheap cars, live frugally, have a roommate to help, and try hard to keep up... I work when I'm not too sick, and he works full time.We have a combined annual income of less than $40k annually.

I have an MS from a top state university- & $135k in student loans (& growing). I've lost 2 jobs in 3 months.

Lost my job in 2006. Sold my home and moved in with my 87-year-old mother.... Cancer survivor. Need medical care. Can't afford health insurance... TOO YOUNG TO RETIRE. Watching my retirement funds and savings shrink.

As a newer, less established member of the faculty I was out of work when my college cut classes. Over a year later and I still can't find work... Because of deferments my $41,000 loan has become $62,000.

Adjusted for inflation, a smaller American reality than that of my dad -- a civil servant who dropped out of college... My son is learning to speak Mandarin.

I am 29 years old. I have a Master's degree. I am $120,000+ in student loan/medical debt. In the past 18 months I: was diagnosed with cancer, lost 2 jobs, worked 70 hours/wk and unable to keep up. I get more calls from creditors than I do friends... I have $4 in my bank account and no job.

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And I find this one perhaps the most emblematic of the average American's experience:

We live within our means, we own our cars, yet cannot accumulate much savings. We live responsibly, and consider ourselves "citizens" and not "consumers." We find it troubling that living simply can still accrue so much debt... We are one emergency away from financial ruin.

"Living simply can still accrue so much debt." That's been the American experience for years now. As Ezra Klein put it, the Tumblr is full of "small stories of people who played by the rules, did what they were told, and now have nothing to show for it."

For those who are lucky enough to work, the money we take home has been either stagnating or decreasing, and it's getting worse in the aftermath of the recession. As reported by Bloomberg:

Take-home pay, adjusted for prices, fell 0.3 percent in August, the third decrease in five months, and personal income dropped for the first time in two years, the Commerce Department reported last week. The declines followed news from the Census Bureau that median household income in 2010 fell to $49,445, the lowest in more than a decade, and the poverty rate jumped to 15.1 percent, a 17-year high.

That figure, $49,445, isn't going to cut it. A recent report showed that a household with two working parents and two young children needs to earn $67,920 to meet basic needs without relying on public support. It only drops to $57,756 for a single parent with two young kids. Not to mention that rent, food, and health costs are rising. On top of this, 14 million Americans don't even have jobs. When we don't bring in enough money to pay for the basics, the next place we have to turn is debt. Our total revolving debt comes to $796.1 billion, with the average household carrying $14,743 in credit card debt. Household debt is currently 90 percent of GDP, up from 70 ten years ago. It's no wonder, then, that despite making some headway in paying down our debt loads, consumers are still struggling to do so.

And student debt is a whole other story. The total is on track to reach $1 trillion this year, more than our combined credit card debt. Alongside this surge is a rise in delinquencies post-recession. This is partly fueled by the government, schools, and hard-pressed parents pulling back on support. It is also certainly fueled by the dismal job market and graduates' unemployment rate -- which will have ramifications for their earning capacity for years to come.

I'm not surprised that people are at their wit's end over personal finances. I'm not surprised that they're blaming the banks that make money from keeping us in debt. I'm just surprised it took this long for the anger to find its voice.

Bryce Covert is Assistant Editor of New Deal 2.0.

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Occupy Wall Street: Not Anarchy, But Beautiful Sincerity

Oct 4, 2011Jeff Madrick

The media may mock the Wall Street protesters, but their commitment and their cause are no joke.

The media may mock the Wall Street protesters, but their commitment and their cause are no joke.

The contrast between the press accounts of Occupy Wall Street and the reality is stark. That is what I noticed first when I was invited there to speak on Sunday and joined Joe Stiglitz in a teach-in. At first it indeed looks like anarchy. People are sleeping there overnight. You think you may never find an organizer, but my wife and I were guided by the young man who invited me. Soon you find that amid the seeming confusion there is organization. It is, I must say, organization of a most beautiful kind.

There are “facilitators,” who somehow round up the people, pick a spot and, oops, spontaneously, the teach-in begins. These facilitators organize who will speak at the general assembly, which addresses the entire crowd. And they create the now-famous echo, which overcomes the seemingly major obstacle that the police have not allowed the protesters and their guests any microphones or other amplification.

The echo chamber is extraordinary. You must speak in half sentences, which the group then repeats. In the general assembly, each phrase is repeated twice, once by those nearest the speaker, then again for those behind the front group. This has produced surprising benefits: People are engaged, they pay attention, and they force the speakers to talk briefly and get to the points. Ah, the benefits of no technology.

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The other characteristic of the crowd is how friendly and courteous it is. The young people (though they were not all young) that Joe Stiglitz and I spoke to, perhaps a hundred or more, were very attentive, very much wanting to absorb what information and opinions we had to offer. We talked about income distribution, predatory lending, and ways to get out of the mess. They were eager and they were grateful. Finally, they asked good questions. They were also, after all, talking to a Nobel laureate standing on the wet grounds of Zuccotti Park.

Later, as dark descended, I spoke to the general assembly. It seemed like perhaps 500 people. I spoke briefly, telling them about how much money the top 1 percent make, about how steep the Great Recession is, about the lack of prosecutions, about the inadequacy of reregulation, and about how we need a serious conversation about what Wall Street is for.

As I left, I heard one sincere "thank you" after another.

Many criticize the protesters for not having formal objectives or an agenda. That is just fine for now. But many of the protesters are concerned about specific issues. They may well develop agendas over time, and people like Joe and myself may help them get better informed and focus their views.

What is most aggravating is how the press has mischaracterized this group and treated it as an event with no meaning and the participants as clowns. Even the progressive press often has a tone of condescension. Many of these people are educated, but all of them are frustrated and angry. Is there some reason they should not be? Try to get a good job if you are in your twenties today. Try to make sense of why Washington has not been harder on Wall Street. Try to understand why the unemployment rate is still 9 percent and may rise in 2012, not fall. Dressing up as zombies to mock Wall Streeters -- is that so wrong for capturing attention, letting off steam, and fighting wealth not with violence, but with humor?

Roosevelt Institute Senior Fellow Jeff Madrick is the author of Age of Greed.

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The Young Are on the Streets Because They Have the Most to Lose

Oct 3, 2011Mike Konczal

mike-konczal-newWhy are so many of the protesters on Wall Street college-age kids? Because their futures are at stake.

This Occupy Wall Street sign is my favorite:

The sign has a clever double meaning. The young have the most to lose by standing idle and not having their voices heard in the political process, and they have the most to lose by actually being idle -- or unemployed.

Why are so many of the protesters on Wall Street college-age kids? Because their futures are at stake.

This Occupy Wall Street sign is my favorite:

The sign has a clever double meaning. The young have the most to lose by standing idle and not having their voices heard in the political process, and they have the most to lose by actually being idle -- or unemployed.

The media hasn't learned the lessons from the 1960s, as there is still a tendency to dismiss young people protesting because they are young. You can see this phenomenon in the original New York Times coverage, and it appears in much of the rest. But at the heart of dismissals of young college kids in the 1960s was the idea that they had a very bright future ahead of them that they were taking for granted. For instance, here's President Nixon in the New York Times, May 1970:

You know, you see these bums, you know, blowin' up the campuses. Listen, the boys that are on the college campuses today are the luckiest people in the world, going to the greatest universities, and here they are, burnin' up the books, I mean, stormin' around about this issue, I mean you name it -- get rid of the war, there'll be another one.

Can it be argued that young people, college educated or not, are particularly lucky in this recession? Every category of worker is doing terribly in the Lesser Depression. My former editor Derek Thompson has a must-read article, "Who's Had the Worst Recession: Boomers, Millennials, or Gen-Xers?," which compares the three age categories across employment, income and wealth, and finds that everyone is suffering across the board.

But let's focus on the young. The issue of debt, especially student debt, hovers over the protests. How is the employment ratio looking for young people with a college degree? Here's data from last year:

And that doesn't factor in the fact that many college educated workers are working jobs that don't require college degrees. They are essentially using their degrees to crowd out those with a high school diploma or some college education from the jobs they would normally take. And no matter what jobs they are able to get, student debt hangs around their necks like an albatross.

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This impacts everyone who is young. Here's a summary of the recent 2010 Census' American Community Survey by PBS:

  • Employment among young adults between the ages of 16 to 29 was at its lowest level since the end of World War II. Just 55 percent were employed, compared with 67 percent in 2000.
  • Nearly 6 million Americans between the ages of 25 to 34 lived in their parents' homes last year.
  • Young men are nearly twice as likely as women to live with their parents.
  • Marriages among young adults hit a new low. Just 44 percent of Americans in that age group were married last year.
  • Other trends were also headed in the wrong direction. In 43 of the 50 largest metro areas -- often a magnet for 20-and-30-somethings -- employment declined.

In our desperate bid to replicate Japan, we are also replicating the poverty and joblessness among Japanese youths. This 2010 AOL article, "Japan's Economic Stagnation Is Creating a Nation of Lost Youths," can give you a sense of our trajectory.

Will we get our own version of the hikikomori? Young people are doubling up and not moving out of their parents' houses in this recession. If we looked at solely their own income, their poverty rates would be astounding. From the Census Bureau:

These “doubled-up” households are defined as those that include at least one “additional” adult -- in other words, a person 18 or older who is not enrolled in school and is not the householder, spouse or cohabiting partner of the householder...

In spring 2007, there were 19.7 million doubled-up households, amounting to 17.0 percent of all households. Four years later, in spring 2011, the number of such households had climbed to 21.8 million, or 18.3 percent...

Young adults were especially hard-hit, with 5.9 million people ages 25 to 34 living in their parents’ household in 2011, up from 4.7 million before the recession. That left 14.2 percent of young adults living in their parents’ households in March 2011, up more than two percentage points over the period.

These young adults who lived with their parents had an official poverty rate of only 8.4 percent, since the income of their entire family is compared with the poverty threshold. If their poverty status were determined by their own income, 45.3 percent would have had income falling below the poverty threshold for a single person under age 65.

Even if we can ever move out of the short-term recession, it will impact young people for years to come. Looking at a research summary compiled previously by Roosevelt Institute super-intern Charlie Eisenhood, Beaudry and DiNardo (1991) found “that every percentage increase in the [national] unemployment rate is associated with a 3-7 percent drop in entry-level contract wages.” Kahn (2009) found an estimate on the high end of that spectrum, discovering an “initial wage loss of 6 to 7% for a 1 percentage point increase in the unemployment rate measure.”

Unfortunately, the recession’s effect is not limited just to the initial job search and wages. The negative impact persists far beyond that. Kahn found that the effect “falls in magnitude by approximately a quarter of a percentage point each year after college graduation. However, even 15 years after college graduation, the wage loss is 2.5% and is still statistically significant.”

Job mobility is also affected. Kahn found a “negative correlation between the national unemployment rate and occupational attainment (measured by a prestige score) and a slight positive correlation between the national rate and tenure.” She concludes that “workers who graduate in bad economies are unable to fully shift into better jobs after the economy picks up.” Worse, Oreopoulos found permanent wage effects on workers with low expected earnings (based on occupational prestige).

So yes, young people have an important stake in what happens going forward. Do we continue policies that benefit Wall Street and the top 1 percent? Do we tax the rich to rebuild America? Do we reform a financial sector that dominates the economy? The list of choices in front of us goes on and on. Their whole future, indeed all of ours, depends on it. It's no wonder that they've taken to the streets.

Mike Konczal is a Fellow at the Roosevelt Institute.

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Make Way (Again) for the "Job Creators"

Sep 28, 2011John Paul Rollert

the-situationWhat do Bill Gates and the Situation have in common? Republicans think they're equally vital to our economy.

the-situationWhat do Bill Gates and the Situation have in common? Republicans think they're equally vital to our economy.

With the announcement last Monday of President Obama's plan to pay for his jobs bill with, among other things, the so-called "Buffett Rule," we're going to be hearing a lot more about the "job creators." Over the last year, Congressional Republicans have consistently invoked them as a hex of sorts against any proposal to raise new tax revenue. "I am not for raising taxes in a recession," Eric Cantor declared last November, when the Bush tax cuts were a bargaining chip in the protracted budget debate, "especially when it comes to the job creators that we need so desperately to start creating jobs again."

Ten months, no new taxes, and one debt ceiling crisis later, Cantor said the same thing last week in response to the president's jobs bill: "I sure hope that the president is not suggesting that we pay for his proposals with a massive tax increase at the end of 2012 on job creators that we're actually counting on to reduce unemployment." Given that 44 percent of the nation's unemployed have been without work for at least six months and more Americans are living below the poverty line than at any time in the last 50 years, one marvels at Cantor's faith in the truant "job creators" as well as his forbearance in the face of human misery. To the jobless, he is counseling the patience of Job.

But who exactly are these "job creators?" The phrase is not new. Republicans have been using it for years to underscore a particular vision of capitalism in which those who have benefitted most by the system are also most essential to its continued success. As long ago as 1991, Newt Gingrich characterized Democratic opposition to a cut in the capital gains tax as evidence that liberals reject this vision. "They hate job creators," he told a gathering of Senate Republicans, "they're envious of job creators.  They want to punish job creators." With no apparent sense of irony, Gingrich added this was proof liberals "believe in class warfare."

A more telling example for our current political impasse is the debate over the 1993 Clinton budget plan, which aimed to cut the deficit by, among other things, raising the top income tax rate. Congressional Republicans fought the bill tooth and nail, no one more so than former Texas Senator Phil Gramm. On the eve of its passage, he expressed the hope that the bill would "defy history" and prove that "raising taxes on job creators can promote investment and promote job creation." Gramm, of course, did not think this was very likely to happen. "Only in Cuba and in North Korea and in Washington, D.C., does anybody believe that today," he said, "but perhaps the whole world is wrong."

Hindsight suggests that the world wasn't wrong so much as Phil Gramm, along with every other Republican member of Congress. Not one of them voted for the bill, which cleared the House by only two votes and required Al Gore's tie-breaking vote in the Senate. While higher taxes on the "job creators" proved no obvious hurdle to economic growth -- the economy grew for 116 consecutive months, the most in U.S. history -- it did cut the deficit from $290 billion when Clinton took office to $22 billion by 1997 and helped put the country on a projected path to paying off the national debt by 2012.

So much for ancient history. If the term "job creators" is no new addition to the lexicon of American politics, it has enjoyed quite a renaissance since President Obama took office. A Lexis-Nexis search of U.S. newspapers and wire services turns up 1,082 individual mentions of "job creators" in the month before the debt ceiling deal was reached, or just 175 fewer mentions than for George W. Bush's entire second term.

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Jon Stewart, for one, did not fail to notice the uptick. "Republicans are no longer allowed to say that people are rich," he noted during the deficit ceiling debate, "You have to refer to them as 'job creators.'" Stewart's observation is funny only to the extent to which you believe that saying you're a member of the top tax bracket and saying that you create jobs is not an obvious redundancy. If you believe, however, that the cast of Jersey Shore has just as much claim to being called "job creators" as Bill Gates or Steve Jobs, then Stewart's joke not only falls flat, but misses the point. The wealthy are the "job creators," whether or not they spend their time actually trying to create jobs.

The problem, of course, with upholding a definition of "job creators" that does not turn on the dedicated effort to create jobs is that it becomes hard to figure out what distinguishes the "job creators," as a group, from everyone else -- at least beyond their relative wealth. All Americans spend, save, and invest in varying degrees; most just do so with a lot less money.

In this light, the "jobs creators" rhetoric highlights a theory of capitalism in which those at the very top of the economic pyramid end up supporting the base. We might call this theory the Visible Hand of Capitalism in order to distinguish it from Adam Smith's Invisible Hand. In The Wealth of Nations, he famously located the enduring success of capitalism in an increasingly complex system of work and exchange that sees "the assistance and co-operation of many thousands." In such a society, no single group can be meaningfully called the "job creators." They are as much the managers of capital as the men on the factory line.

As an intellectual matter, the Visible Hand of Capitalism has enjoyed support from figures as disparate as Destutt de Tracy, the French philosopher and economist whom Thomas Jefferson championed, to the steel baron and indefatigable philanthropist, Andrew Carnegie. As a rhetorical matter, however, the phrase "job creators" appears to come directly from the work of Ayn Rand. She favored the term "creators" to describe an elite caste in society and her highest human ideal.

John Boehner made reference to Atlas Shrugged, Rand's most famous novel, in a speech he gave recently to the Economic Club of Washington, D.C. "Job creators in America are essentially on strike," he said, in an obvious nod to the decision by the "creators" in the novel to go on strike in defiance of an intrusive federal government. The nation immediately begins to falter, and the books concludes with its hero, John Galt, giving a marathon address in which he explains to the rest of the country why America is crumbling. The nation, in brief, has scared away the very people who keep the economy working, leaving behind those who are ill-equipped to fend for themselves. Describing the economic and social theory underpinning this vision, Galt says:

In proportion to the mental energy he spent, the man who creates a new invention receives but a small percentage of his value in terms of material payment, no matter what fortune he makes, no matter what millions he earns. But the man who works as a janitor in the factory producing that invention, receives an enormous payment in proportion to the mental effort that his job requires of him. And the same is true of all men between, on all levels of ambition and ability. The man at the top of the intellectual pyramid contributes the most to all those below him, but gets nothing except his material payment, receiving no intellectual bonus from others to add to the value of his time. The man at the bottom who, left to himself, would starve in his hopeless ineptitude, contributes nothing to those above him, but receives the bonus of all of their brains.

For all that it lacks in human decency, Rand's vision of who makes capitalism work at least has the advantage of isolating a group of people who actually create something. By contrast, the current "job creators" rhetoric seems to elevate a group of people whose shared tax bracket is their only outstanding trait.

As the debate over the president's jobs bill takes shape, the "job creators" rhetoric is certainly deserving of a little more scrutiny, especially by those who don't qualify for the distinction. Otherwise, they might as well accept the judgment of a far greater authority than even John Galt:

The fault, dear Brutus, is not in our stars,
But in ourselves, that we are underlings.

John Paul Rollert is a doctoral student at the Committee on Social Thought at the University of Chicago.  His essay, "Does the Top Really Support the Bottom? - Adam Smith and the Problem of the Commercial Pyramid," was recently published by The Business and Society Review.

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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.)

Join the conversation from the comfort of your own computer on September 25 as noted experts discuss FDR's inner circle.

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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