Alan Krueger: Obama Finally Picks a Leader

Sep 1, 2011Bo Cutter

He brings strong personality, new thinking, and policymaking know-how to a struggling economic team.

Alan Krueger is a great appointment to Obama's economic team. He is a heavyweight in the economics profession, deeply experienced in policy making, and an innovative, often contrarian thinker. A professor at Princeton, former chief economist of the Department of Labor, and former assistant secretary for economy policy at Treasury, Alan is exactly what the Obama administration needs right now for several reasons.

He brings strong personality, new thinking, and policymaking know-how to a struggling economic team.

Alan Krueger is a great appointment to Obama's economic team. He is a heavyweight in the economics profession, deeply experienced in policy making, and an innovative, often contrarian thinker. A professor at Princeton, former chief economist of the Department of Labor, and former assistant secretary for economy policy at Treasury, Alan is exactly what the Obama administration needs right now for several reasons.

First, he is a modern labor economist, fully attuned to several new waves of thinking about labor, jobs, work, and incomes in the U.S. economy. The country and the Obama administration both need a profoundly different approach to the whole jobs issue, and Alan brings the capacity to design that approach.

Second, he brings gravity, presence, and personality to the public face of the administration's economic policy. In its almost principled avoidance of a clear economic story, this administration reminds me of the high school football team down 49 to 0 whose coach keeps yelling across the field, "Give Tommy the ball." After a few minutes, a voice from the field yells back, "Tommy don't want the ball." Alan Krueger will take the ball, and, if allowed, will become a respected and trusted public presence for an administration badly in need of one.

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Finally, Alan knows how to "do" public policy. When I worked with him in the Clinton administration, he had ideas -- but everyone in and around a White House has ideas. He knew how to formulate a broad policy, debate it civilly, accommodate the views of others, and come out with something real.

As I said, this is a very good choice and I think we can credit it to Chief of Staff Bill Daley's insistence that the administration not just settle, but look hard for a leader.

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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What’s “Perfect” About Perfect Competition? A Prosperous Economy Needs Innovators

Sep 1, 2011William Lazonick

workers-200In the latest installment of his “Breaking Through the Jobless Recovery” series, economist William Lazonick explains why pushing big corporations to transform their products is just what our economy needs.

workers-200In the latest installment of his “Breaking Through the Jobless Recovery” series, economist William Lazonick explains why pushing big corporations to transform their products is just what our economy needs.

To claim that something is "perfect" is to say that it cannot be done better. With the start of another academic year, hundreds of thousands of college students who take introductory microeconomics courses will learn from their professors that the best possible allocation of society's resources occurs when "perfect competition" characterizes the organization of industry.

It is a well worked out theory that has been around for over a century. Unfortunately, the theory of perfect competition is nonsensical when applied to an economy such as the United States, dominated as it is by large corporations. The theory of perfect competition enables economists to ignore the conditions under which, through innovation, business enterprises grow large and often come to dominate their industries. As a result, these economists lack a theory of how government policy should respond when the top executives of the large corporations, upon which we rely for our prosperity, fail to invest in innovation and job creation in the United States.

The theory of perfect competition can be found in any conventional economics textbook. In a nutshell, households, who work and consume, maximize "utility" (their satisfaction) in supplying paid labor services and capital (their savings) on input markets as well as in demanding goods and services on output markets. Firms, which buy inputs to produce outputs, maximize profits on the basis of cost structures -- a combination of technologies and input prices -- available to all firms that want to participate in the industry. "Perfect competition" is achieved when, in a particular industry, all firms have exactly the same cost structures and there are a sufficiently large number of these identical firms so that the output decision of any one firm has no discernible impact on the price at which its product is sold.

The basic problem with the theory of perfect competition is that as consumers and workers, not to mention as taxpayers, we want some firms in an industry to transform technologies to generate higher quality, lower cost products than their competitors. We do not want firms to maximize profits subject to given technological conditions. Firms that can achieve these technological transformations are innovative enterprises that drive a society's economic growth.

By creating new sources of value (embodied in higher quality, lower cost products), the innovative enterprise makes it possible (but by no means inevitable) that, simultaneously, all participants in the economy can share in the gains of innovation. Employees may get higher pay and better work conditions, creditors more secure paper, shareholders higher dividends and stock prices, governments more tax revenues, and the innovative firm a stronger balance sheet, even as consumers get higher quality, lower cost products. Indeed, from this perspective, a key issue for economic analysis is the relation between the generation of innovation and the distribution of its gains among participants in the economy.

There are countless examples of innovative enterprise in the history of the U.S. economy. Think of, to mention only a few prominent ones, General Electric's innovations in electrical power systems and light bulbs in the first decades of the 20th century, General Motors' closed car in the 1920s, Du Pont's nylon in the 1930s, Boeing and Douglas in the modern aircraft in the 1930s, RCA in television in the 1940s and 1950s, IBM in computers in the 1950s and 1960s, Intel in microprocessors in the 1970s and 1980s, Cisco Systems in Internet routers in the 1990s, Amazon in electronic retailing in the late 1990s and 2000s, Google in Internet search engines in the 2000s, and Apple in digital devices in the 2000s.

Today, many of these companies remain substantial resource allocators in the U.S. economy. They are innovative enterprises, not "perfect" competitors. To be sure, there are always small firms in the economy, but through innovation the best among them can quickly become very large. For a few well-known examples, Cisco Systems, founded in 1984, grew from 254 employees in 1990 to 34,000 in 2000; Amazon, founded in 1995, had 33,700 employees in 2010; while Google, founded in 1998, had 24,400 employees in 2010.

More generally, large corporations, some dating back to the 19th century, dominate the economy. In 2010, the top 500 U.S. corporations by revenues had combined sales of $10.8 trillion, profits of $702 billion, and employment of 24.9 million people worldwide. That's a per company average of $21.6 billion in sales, $1.4 billion in profits, and almost 50,000 employees. The operation and performance of these corporations, not "perfect competition," need to be at the center of economic analysis.

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That large corporations dominate the US economy is hardly news (except perhaps to the economics professors who write the conventional microeconomics texts). In 1977, business historian Alfred D. Chandler Jr. published a Pulitzer Prize-winning book, aptly entitled The Visible Hand, in which he documented that already by the beginning of the 1920s, the "managerial revolution in American business" was complete. The innovative investment strategies of these corporations drove the consumer durable boom of the 1920s. At the same time, sectors such as textiles, coal mining, and agriculture that were characterized by large numbers of perpetually small firms were known as "sick industries" precisely because of the inability of a few firms to set themselves apart from the rest through innovation.

Today, in my view, the greatest economic policy challenge is how to keep major business corporations innovative. Once they have become successful, the executives who run these mammoth companies may choose to allocate resources in ways that live off the past rather than invest for the future. Indeed, justified by the free market ideology of "maximizing shareholder value," in the United States we reward top executives with unindexed stock options that give them strong personal incentives to do massive stock buybacks to jack up their companies' stock prices even as they eschew investments in innovation.

Here's an example that has recently been in the news. Hewlett-Packard (HP), the world's largest information technology company and an icon of  U.S. business, announced that it intends to exit the personal computer industry, including the rapidly expanding smartphone and tablet segments. HP's top executives deem that the investments required to compete with the likes of Apple pose too great a burden on HP's cash flow. But that's because HP's executives decided to squander $11 billion on stock buybacks in 2010 and another $7.3 billion in the first half of 2011. During the same 18 months, HP spent only $4.6 billion on R&D, just 25 percent of what it forked out to manipulate its stock price through buybacks. Over the past decade, HP has wasted 118 percent of its net income on buybacks. HP was once a great technology company, but in the 2000s it expended only 4.2 percent of sales on R&D, compared with 7.6 percent in the 1990s and 10.5 percent in the 1980s. In 2010, HP's R&D as a percent of sales was a meager 2.3 percent, the lowest in the company's 62-year history.

What determines whether a company invests for the future or lives off the past? Our college students won't find any answers to this crucial question in the conventional economics textbooks. In a world of "perfect competition," there is no room for innovative enterprise. By the same token, the textbooks make the pretense of analyzing "big business" through the theory of monopoly, put forth as the proof of the superiority of perfect competition. The argument is that compared with perfect competition, a firm that has a monopoly restricts output and raises prices to consumers.

To get this result, however, it is assumed that the monopolist firm maximizes profits subject to the same cost functions as perfectly competitive firms. This comparison entails an amazing leap of illogic, ironic for an academic profession that claims to be rigorously scientific: If it is possible for perfectly competitive firms to exist, how did the monopolist get to be a monopolist?

In contrast, in the theory of innovative enterprise a firm can become dominant by transforming its cost structures, gaining competitive advantage over firms that do not. In the process, the innovating firm generally contributes to an expansion of industry output and a reduction of product prices -- just the opposite of what the textbook theory of monopoly predicts.

That the illogical argument of the superiority of "perfect" competition has been ensconced in the microeconomics textbooks for over six decades attests to the failure of orthodox economists to come to grips with an economy dominated by large corporations. Applied to such an economy -- and the United States has been one for over a century -- perfect competition is perfect nonsense.

What then accounts for the persistence of the theory of perfect competition as a linchpin of economics erudition? In brief, there are two mutually reinforcing explanations for what I have called "the myth of the market economy": the ignorance among economists about how the actual economy functions and the ideology that "free markets" can solve all our economic problems. It is about time that we got rid of both.

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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Unemployed and Taking on Debt to Stay Afloat? Don’t Expect to Get a Job

Aug 31, 2011Bryce Covert

Anyone can lose their job and fall behind on bills in this economy. But now that may keep them from finding new employment.

This week's credit check: Six out of 10 employers use credit reports to vet job applicants. More than 20 million Americans may have material errors on their credit reports.

Anyone can lose their job and fall behind on bills in this economy. But now that may keep them from finding new employment.

This week's credit check: Six out of 10 employers use credit reports to vet job applicants. More than 20 million Americans may have material errors on their credit reports.

There are about 14 million people unemployed in this country, and 6.2 million of them have been unemployed for more than 27 weeks. Where should they turn when they've lost a steady paycheck, but still have to keep up with bills such as mortgage payments, student loans, and the basics like rent and food? With no money coming in, many understandably have to turn to debt.

But taking on debt -- and being unable to pay it back, or pay back any of the debt they may have took on when things looked better and they had a job -- could be the exact thing that keeps the unemployed from becoming re-employed. In a massive Catch-22, many employers are looking to credit reports when they do background checks on prospective employees, and a bad mark due to an unpaid medical bill or lapsed student loan payment could make the difference in getting the job. In 2010, The Wall Street Journal reported that more employers are relying on these checks before making hires. Nothing has changed in the intervening year -- except perhaps that the problem is getting worse. Marketplace recently told the story of Sarah Sholar, just one of those employees with bad credit who has been turned down by prospective employers. "I can't pay my student loans because I don't have a job," she told them. "I can't get a job because I can't pay my student loans."

The companies in charge of reporting on consumer credit records are extremely opaque and have little oversight. Some studies found that 25 percent of credit scores -- based on credit reports -- have errors in them. More than 20 million Americans may have material errors on their credit reports. And good luck trying to fix errors -- or to even figure out how these scores are calculated. Both will lead you down a labyrinthine path.

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But it's not just consumers who get suckered by reporting agencies. As Amy Traub wrote in The American Prospect, "Credit checks have been aggressively marketed to employers by for-profit credit bureaus," but "[t]he only available rigorous study of employment credit checks concluded that there's no correlation between credit history and job performance." Even those who are concerned about whether to trust a new employee with fiduciary responsibilities may not learn much from a credit report when trying economic times have landed even the most responsible people in difficulty. On top of this, because African Americans and Hispanics, for a variety of reasons, disproportionately have low credit scores, they can be excluded from jobs that run credit checks, leaving the door open for discrimination charges. In fact, as Traub points out, Bank of America was found to have discriminated against African Americans in just this manner in 2010, and there's such a case pending against Kaplan Higher Education Corporation.

So why have the credit reporting agencies pushed employers so hard to use this information? There's good money in credit reporting, and the business segment growing fastest is consumer reporting. About 600 credit reporting agencies, along with 4,500 credit collections agencies, generate annual revenue of $20 billion in the U.S. The top four reporting agencies -- Equifax, TransUnion, FICO, and Experian -- bring in $1.8 billion, $1.2 billion, $744 million, and $282 million in annual sales, respectively.

But the larger problem with this practice is that it is based off the tired assumption that getting into debt is a reflection of bad character, not the inevitable result of a bad economy coupled with tricks and traps employed by banks to keep consumers in debt. The WSJ article explains that the rise in employers who check credit reports for prospective employees is due to concerns "about rising rates of employee theft and fiduciary issues" and that "[c]ompanies say the financial information can offer insight into a candidate's level of responsibility." But in reality, anyone can lose their job these days and fall behind on bills. Many people were seduced into subprime products before the boom without fully understanding the traps they were getting into. And long before that, wages were falling for the past three decades, so families have had less and less to spend on basics like food and shelter -- leading to the need to take on debt to plug the gaps.

The stigma around being in debt is unfair at any time, but is even more distressing when the economy has landed so many in financial disaster. If these very financial difficulties then keep people from getting the jobs that can help pull them out of the morass, there will be no lifeline left.

Bryce Covert is Assistant Editor at New Deal 2.0.

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Rob Johnson: American Dream Can't be Restored with Sky-high Inequality

Aug 30, 2011

At a recent event at the Hammer Forum, Roosevelt Institute Senior Fellow Rob Johnson joined Andy Stern to answer the question: Can we restore the American Dream? In his presentation, Rob pointed out that we can't simply return to our past, particularly given how much has changed in the aftermath of the financial crisis. "The challenges are not just simply going back," he points out, "but drawing on the best traditions of our past to create a new vision."

At a recent event at the Hammer Forum, Roosevelt Institute Senior Fellow Rob Johnson joined Andy Stern to answer the question: Can we restore the American Dream? In his presentation, Rob pointed out that we can't simply return to our past, particularly given how much has changed in the aftermath of the financial crisis. "The challenges are not just simply going back," he points out, "but drawing on the best traditions of our past to create a new vision."

So what's changed since the boom times of the American Dream? For one thing, the financial system sucks up about 40 percent of corporate profits. "The servant of finance, which is supposed to serve the economy and the economy and markets are supposed to serve social goals, has become the master," Rob says. Another is our staggering income inequality. Between 1917 and 1978, 70 percent of GDP growth went to the bottom 90 percent of our society. Now that equation has all but reversed. Over the past 30 years, the bottom 90 percent has seen its income growth decline, while "one percent of the population is getting two-thirds of the gains," Rob points out.

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This inequality comes with high costs. Rob points to a study that shows a correlation between high levels of income inequality with such tragedies as higher mental illness, obesity, high school dropout, incarceration, infant mortality, and homicide rates, while public trust declines. Unequal societies are also far less likely to foster social mobility. And the U.S. isn't just slouching along with other unequal nations, but is a real outlier toward bad outcomes, Rob points out.

Yet in the face of all of this, the government continues to be in Wall Street's pocket, enforcing an austerity agenda even with soaring unemployment rates. So Rob has some sympathy with some of the Tea Party's motivations. "They look at the government as an insurance agency for the rich and the powerful with the premiums paid by them," he says. "Can you imagine belonging to a golf club where you paid dues but only the rich and powerful got to play the course?" DC should take a hard look at FDR's Second Bill of Rights, particularly given our high levels of unemployment. Otherwise, we have a big problem on our hands.

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Roosevelt Fellows React: Will Krueger's Common Sense Break Through?

Aug 29, 2011

As President Obama just announced, Princeton Professor Alan Krueger is his pick to be the next Chairman of the Council of Economic Advisers. Will Krueger's background in labor bring a fresh perspective to the table? Or will he too be stymied by business as usual? Roosevelt Institute Fellows weigh in.

As President Obama just announced, Princeton Professor Alan Krueger is his pick to be the next Chairman of the Council of Economic Advisers. Will Krueger's background in labor bring a fresh perspective to the table? Or will he too be stymied by business as usual? Roosevelt Institute Fellows weigh in.

"At a time when the economic and political hurricane in Washington appeared to cause all people with any economic training or talent to evacuate the administration, it is welcome news to see that Princeton economist Alan Krueger has joined as the head of the Council of Economic Advisers. He is a fine economist with government experience at the Treasury and the Labor Department and he should be very familiar with the people and practices of government. There are no issues more important to address than the persistent and devastating high levels of unemployment, and Krueger's academic strengths are ideally suited to meet the challenge. Dr. Krueger has also done a great deal of work on the economics of popular music. One hopes that he can change the tune of austerity that is currently a hit in Washington D.C. and refocus our nation on the need to eliminate the tolerance of so many idle resources." -Senior Fellow Rob Johnson

"I think the choice of Krueger is great, but a little too late. He's well respected across the ideological spectrum within the mainstream economic discipline, and he's generally a liberal economist, concerned about issues of economic and racial inequality, and not zealously anti-labor. (In fact, he's probably slightly pro-labor.) He's not a Krugman or Stiglitz or Sachs politically, but he's not far behind them. His work has been important in debunking right-wing ideology about the effect of the minimum wage. In fact, one of the most important studies of his career may be a highly influential paper and book he wrote with David Card using a 'natural experiment' of a minimum wage increase in New Jersey and not Pennsylvania to empirically assess whether or not an increase in the minimum wage had an adverse affect on unemployment, finding it did not. The method and evidence used were of the highest and most cutting-edge within the discipline, forever changing the debate.

"Which brings me to my second point: as Krugman recently pointed out, science doesn't matter to today's right. So although Krueger is an excellent economist and a great appointment, it doesn't seem like it will matter much in terms of the policy debate and policy choices on the agenda. And frankly, it's not as if Christina Romer, his predecessor, really had much influence relative to the Summers and Geithners in the administration. So I'm really less sanguine about his influence now (and that of Rebecca Blank, one of the top poverty scholars of her generation over at Commerce) on issues of economic policy and inequality." -Fellow Dorian Warren

"It's good to have a highly competent labor economist running the place. He has long been concerned with unemployment, wage stagnation, and inequality. Whether he can break through the political wall at the White House is another question." -Senior Fellow Jeff Madrick

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All the Cars in China: How American Workers Can Gain from Chinese Growth

Aug 25, 2011William Lazonick

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In the latest installment of his “Breaking Through the Jobless Recovery” series, economist William Lazonick explains how the US needs to take a lesson from China and align the interest of its multinational corporations with the interests of the country.

If you want to talk job creation, let's talk China. While the United States suffers through a prolonged jobless recovery, with another recession on the horizon, the Chinese economy has continued to boom. In the second quarter of 2011 the China's GDP growth rate slowed to 9.5% year-on-year, down from 9.7% in the previous quarter and 11.9% a year earlier.

Double-digit growth rates are nothing new for China. Since launching  game-changing economic reforms in 1978, China's GDP has grown at an average of almost 10 percent per year. One driver of that growth has been vast additions to China's productive capacity. For example, in 1979 China accounted for 4.6% of world crude steel production compared with 16.6% for the United States and 15.0% for Japan. China surpassed the United States in steel production in 1993 and Japan in 1996. In 2010 China's crude steel production was 6.6 times its level 15 years earlier, and represented 44.3% of the world total, compared with 7.7% for Japan and 5.7% for the United States.

China's growth has been also been sparked by technology transfer from the advanced economies. A prime objective of the 1978 economic reforms was to build the nation's science and technology infrastructure, which was especially in need of modernization after the tribulations of the Cultural Revolution (1966-1976). In addition to launching a massive educational effort to increase the supply of scientists and engineers, from 1985 the Chinese government invited multinational corporations to invest in joint ventures with Chinese state-owned enterprises under the policy of "trading markets for technology" (TMFT). As the phrase suggests, the lure for multinationals was the potential to gain access to burgeoning product markets in a rapidly growing nation with one-sixth of the world's population.

Quick to grasp the opportunity was the German automaker Volkswagen, which entered China in a joint venture with Shanghai Automotive International Company in 1985, followed by another one with First Automotive Works in 1987. By 2000 Volkswagen produced 52% of the passenger cars in China, most of them for government and taxi fleets. At the time, however, China's car production represented only 1.5% of world production, and China ranked a distant 13th among all national car industries.

The past decade has changed all that. In 2010 China produced 13.9 million cars, 23.8% of the world total, about 37,000 cars greater than the combined production of Japan (8.3 million) as number two and Germany (5.6 million) as number three. Volkswagen produced 1.7 million cars in China in 2010, 2.8 times its production a decade earlier but now representing only 2.9% of total Chinese production. In the Chinese market Volkswagen was now second to (guess who?) the much maligned General Motors.

Back in 2000 GM produced just 30,000 cars in China, one-tenth of Volkswagen's China output, and just one-third of one percent of GM's worldwide production. By 2006 GM had surpassed VW in China, and in 2008 produced just over one million cars there, 17% of its worldwide total. Then in 2009 came GM's bankruptcy, with its worldwide car production falling by 17%, even though its Chinese production rose by 69%! In 2010 GM boosted its worldwide car production up to 6.3 million, about a quarter of a million more than in 2008, before it went bankrupt. The 2010 total now included 2.2 million cars produced in China, 1.2 million more than in 2008 and 35% of GM's worldwide production.

Bottom line: Without China, GM would still be in bankruptcy, and maybe even out of business.

At the same time, GM, VW, and other multinational corporations face lots of indigenous competition in the Chinese car industry. In 2010 no indigenous Chinese companies were represented among the top 15 car producers in the world, although combined the top 15 companies (six Japanese, three German, two each American and French, and one each South Korean and Italian) produced 8.6 million cars in China. Of the next 25 largest car producers in the world, however, 17 were Chinese, with a total output of 5.9 million cars, or 42% of China's car production. (Note: There is some double-counting between foreign and indigenous producers because of joint ventures.)

These indigenous Chinese companies are the ones to watch. According to research by Kaidong Feng in his recent Sussex University Ph.D. dissertation on indigenous innovation in China, it is the indigenous Chinese car companies, and in particular nongovernmental enterprises such as Geely, Chery, and Brilliance, that have not been involved in joint ventures with multinational corporations, that are the most innovative in the industry, particularly in product innovation. Why?  In joint ventures, domestic companies give up strategic control to multinationals. While under TMFT, multinationals are supposed to transfer technology to the Chinese, but they tend to keep the latest developments to themselves. When, as has typically been the case in joint ventures, the Chinese partners are state owned enterprises, the strategic mandate from the government has been to expand production capacity (stressing process innovation) rather than generate higher quality products.

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In contrast, the nongovernmental enterprises can tap into the state-funded science and technology infrastructure for knowledge and people. They can access the national banking system for finance capital while maintaining their strategic autonomy from the government in the allocation of resources and returns. These indigenous companies, some of which succeed and many of which fail, seek to set themselves apart from the competition through innovation.

Dr. Feng has found similar results for the communications equipment industry, in which Huawei Technologies and ZTE are the most prominent examples, as well as, in collaboration with Qunhong Shen of Tsinghua University, for the electric power industry. A just completed study on the development of the Chinese semiconductor industry by UMass student Yin Li shows similar results. This recent research builds on and confirms the pioneering work of the late Qiwen Lu. In his book, China's Leap into the Information Age, published in 2000, Lu documented and analyzed indigenous innovation in the rise of China's first successful computer electronics companies during the 1980s and 1990s, including Legend (now Lenovo) and Founder (for a summary of Lu's findings, see my paper, "Indigenous Innovation and Economic Development"). Going forward, state-of-the-art work on the subject will be the focus of a workshop on "Chinese ways of innovation" in Los Angeles in October.

As both response and encouragement to these developments in China's technological capability, in 2006 the Chinese government made the promotion of indigenous innovation central to its Medium- and Long-Term Plan for the Development of Science and Technology (2006-2020). China's progress in indigenous innovation is apparent in its advanced technology product trade with the United States. In 2000, 5.5% of US advanced technology product imports came from China, while 17.8% came from Japan and 10.4% from Canada. A decade later China's share of US advanced technology imports had ballooned to 32.6%, compared with 6.6% from Japan and 3.6% from Canada. Among the ten advanced technology product categories, US imports from China are highly concentrated in information and communication technology (88%  in 2010). China alone accounted for 50% of all US information and communications technology imports. Over the past decade China has also become much more important in US advanced technology product exports, rising from a share of 2.4% in 2000 to 7.9% in 2010.

These advanced technology product imports and exports reflect the globalization of production since they include international trade in value-added components and work-in-progress along the global value chain. Through these production relationships, the economies of China and the United States are tightly intertwined, although with very different impacts on national economic performance. While China is leaping ahead, the United States is falling badly behind.

As William Greider warned in his best-selling book of 1998 on "the manic logic of global capitalism", we live in "One World, Ready or Not". In 2011 China's innovative trajectory is ascendant, while the United States faces tough times. And don't wait for China to implode: it won't for a long time. Instead Americans should be thinking about how the United States can respond to the new competitive challenge.  For a start, we need to invest the massive profits from globalization of US multinationals back in the United States.

That means not only policies for the repatriation of a substantial proportion of the foreign profits of US corporations, but also a coordinated and concerted national strategy for how these profits can be invested in innovation and job creation to get the United States back on track. The United States needs a national program of business-government cooperation to recreate what Harvard Business School professors Gary Pisano and Willy Shih have called the "industrial commons". Or to echo Ralph Gomory, former president of the Sloan Foundation and head scientist at IBM, America's response to the Chinese challenge requires an alignment of the interests of its companies with the interest of the country.

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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Recession Has Lit the Fuse on Explosive Student Debt

Aug 24, 2011Bryce Covert

Troubling long-term trends have gotten even worse as schools, government, and families cut back and student loans skyrocket.

This week's credit check: Average student debt can spiral up to $100,000 with interest and late payments. Room and board charges at colleges have doubled in actual dollars since 1982.

Troubling long-term trends have gotten even worse as schools, government, and families cut back and student loans skyrocket.

This week's credit check: Average student debt can spiral up to $100,000 with interest and late payments. Room and board charges at colleges have doubled in actual dollars since 1982.

It's no great secret that student loan debt is exploding. The total amount is set to top $1 trillion, more than total credit card debt. But accompanying that post-recession surge in student debt (as all other consumer debt is being paid down) is a surge in delinquencies. As The Wall Street Journal reports, "In the second quarter, 11.2% of student loans were more than 90 days past due and the rate was steadily rising, according to data from the Federal Reserve Bank of New York. Only credit cards had a higher rate of delinquency -- 12.2% -- but those numbers have been on a steady decline for the past four quarters."

The rise in student borrowing is a longtime trend, but things have clearly gotten worse in the recession. A lot of it is because of decisions schools are making. In a recent Atlantic Monthly article, Andrew Hacker and Claudia Dreifus explain that higher tuition -- paid for by student loans -- "keeps most colleges going." Private colleges Loyola University and Franklin Pierce see 77 and 85 percent of students enroll with loans, respectively. Historically black colleges, which tend to have lower endowments and a poorer population, are closer to 90 percent. Part of this, they report, is not because the actual education is more costly, but because "room and board charges have doubled in actual dollars since 1982 to enhance campus life." That's a long-term trend. But part of it is unique to the recession: As endowments tanked, priorities changed. They note:

Recent actions by Dartmouth and Williams, two wealthy schools, convey a lot about academic priorities. In the past, both schools announced that anyone they accepted would be able to enroll without having to take out loans. That is, the colleges would ensure all the aid that was needed to make attendance possible... That was before 2008. But when Dartmouth and Williams' endowments tanked, hard decisions had to be made. Among the first was telling their needy students they would henceforward have to borrow.

The government has taken much the same tack in looking at its own shrunken budget post-recession. Back in March, President Obama proposed a budget that ended an experiment that gave Pell Grants for summer courses and eliminated a subsidy for paying interest on student loans for grad students. His plan was better than the GOP's, which wanted to cut the maximum Pell Grant payment by $845, end funding to other aid programs, and kill AmeriCorps. This comes on top of a longtime trend in which student debt has come to replace grants. As Roosevelt Institute Fellow Dorian Warren reminded his host Melissa Harris-Perry on MSNBC, "When we were in college, Melissa, Pell Grants paid almost half our college in the 90s. Now Pell Grants barely cover a quarter. It's all student loans." Grants used to cover two-thirds of financing an education; now two-thirds comes from loans. Post-recession, the government is looking to shrink that even more.

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Families have also reacted to the recession by, understandably, socking less away for college and pitching in less for tuition. As Hacker and Dreifus note, "Fully two-thirds of our undergraduates have gone into debt, many from middle class families, who in the past paid for much of college from savings." Those savings have likely dried up. A typical family spent only about $2,055 on education last year. Only half of freshmen entering college said their parents had put anything aside for their education, and of those who had, half had saved less than $20,000.

With so many sources of aid pulling away either out of necessity or stupidity, students are left hanging at just the time they need more help. The College Board puts average debt at $27,650, but that figure can spiral up to $100,000 due to interest and late payment penalties, which are even more likely in a recession. This is on top of the bleak job market graduating students face. The New York Times writes, "The median starting salary for students graduating from four-year colleges in 2009 and 2010 was $27,000, down from $30,000 for those who entered the work force in 2006 to 2008... Among the members of the class of 2010, just 56 percent had held at least one job by this spring, when the survey was conducted. That compares with 90 percent of graduates from the classes of 2006 and 2007." It's hard to pay student loans when you don't have a job.

And don't forget, this debt isn't going anywhere, no matter how little students are able to pay it back. Unlike almost all other forms of consumer debt, student loans can't be discharged. Barmak Nassirian of the American Association of College Registrars and Admissions Officers told Hacker and Dreifus, "You will be hounded for life... They will garnish your wages. They will intercept your tax refunds. You become ineligible for federal employment." They can also dock Social Security checks when you retire, he adds. No matter when the economy finally pulls out of this stagnation, students will still be saddled with a heavy load.

Bryce Covert is Assistant Editor at New Deal 2.0.

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Verizon Strike is About All of Our Economic Futures

Aug 24, 2011Richard Kirsch

When a company making big profits squeezes its workers, we all pay.

For now, Verizon's striking workers are back on the job. A two-week walk-out by 45,000 Communications Workers of America (CWA) and International Brotherhood of Electrical Workers (IBEW) members from Massachusetts to Virginia led to Verizon finally agreeing to seriously engage the unions at the bargaining table. But the tough bargaining is just beginning. The issues at hand are about more than just a labor dispute -- they are at the heart of the problems facing our economy.

When a company making big profits squeezes its workers, we all pay.

For now, Verizon's striking workers are back on the job. A two-week walk-out by 45,000 Communications Workers of America (CWA) and International Brotherhood of Electrical Workers (IBEW) members from Massachusetts to Virginia led to Verizon finally agreeing to seriously engage the unions at the bargaining table. But the tough bargaining is just beginning. The issues at hand are about more than just a labor dispute -- they are at the heart of the problems facing our economy.

So what about the rich getting richer while average Americans tread water? The Chairman of Verizon, Ivan Seidenberg, made $18 million last year, 300 times that of the average worker (see Verizon proxy statements). Verizon made $3 billion in profits for the first half of this year alone and $22.5 billion in the past four years. Still, the company is asking its workers for $1 billion in annual concessions, which work out to about $20,000 a worker. Verizon's list includes cuts in pensions, holidays, sick leaves, and benefits for workers injured on the job. The company is asking workers to pay thousands of dollars more for health care each year, while Seidenberg and his wife get free health care for life.

Corporate America is doing fine while paying fewer taxes at home and shipping jobs overseas. Verizon got corporate tax refunds from the IRS totaling $1.3 billion in 2009 and 2010, years in which it made $7.5 billion. Verizon has outsourced thousands of jobs and is asking in the new contract for provisions that would make that outsourcing even easier.

Unions are a shrinking part of the American work force, leading to lower wages and benefits. CWA and IBEW represent Verizon's landline business. Despite repeated attempts to unionize Verizon, only 70 Verizon wireless workers belong to a union. One bright spot is that the unionized members of Verizon are also installing the company's FiOS product, which delivers cable television and Internet. But Verizon is competing with big, non-unionized cable companies like Time Warner and ComCast, where wages and benefits are significantly lower. There is better news in the broader wireless industry, where 40,000 employees of AT&T wireless are unionized. But that represents about one-third of the industry, whereas virtually the entire landline business is unionized.

Is new efficient technology replacing the old and displacing jobs? Verizon wants to make it seem like its unionized landline workers are working for a dying technology. But much of what we think of as new technology relies on the landlines installed and maintained by Verizon's unionized workers. Did you realize that your wireless signal actually goes through landlines that carry it from a cell tower? Or that when you use Skype or make a call on Gmail that they are carried by landlines? Severe limits on available spectrum force wireless companies to constantly find new ways to transmit signals over wired connections.

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Where did Verizon get the funds to start Verizon Wireless? From the cash generated by its traditional landline business. But while Verizon shareholders continue to reap the benefits of that investment, Verizon wants to stop the landline workers from sharing in the returns.

In short, what's at stake in the labor dispute between Verizon and its unions are the middle class jobs that drive the economy but are fast disappearing. It's not a surprise that Verizon's Chairman, Seidenberg, is also the Chairman of the Business Roundtable, the organization that represents the CEOs of America's biggest companies. Verizon is working hard in its proposed contract to keep up with all the corporate Joneses that have reaped record profits by cutting wages and benefits, shipping jobs overseas, and legally bribing Congress to create huge loopholes in the corporate tax code.

In two weeks we will mark the tenth anniversary of the attacks on the World Trade Center. Will we remember that in the days following the catastrophe, Verizon technicians resurrected the entire communications infrastructure of lower Manhattan, allowing the stock market and world financial markets to resume business with barely a hitch? In the last decade, Wall Street did great -- even after crashing the economy and getting government bailouts. It's the Main Street workers who kept the Wall Street infrastructure going who remain under attack, just as our entire economy remains under attack by companies like Verizon that would destroy middle class jobs in the United States to protect their multi-millionaire CEOs and corporate shareholders.

Next time you pick up your telephone, remember that the fight that Verizon's workers will continue to wage with the company over their contracts in the coming weeks and months is not just about whether the men and woman who make that call possible will continue to hold decent jobs that provide security for their families. It's about whether one more middle class engine of America's puttering economy will be wrecked.

Richard Kirsch is a Senior Fellow at the Roosevelt Institute and a Senior Adviser to USAction, whose book on the campaign to win reform will be published in 2012. He was National Campaign Manager of Health Care for America Now during the legislative battle to pass reform.

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Bloomberg Case: Open Season to Discriminate Against Mothers?

Aug 23, 2011Joan Williams

working-mother 150Judge Loretta Preska rolled back the clock on mothers seeking justice for straightforward discrimination.

working-mother 150Judge Loretta Preska rolled back the clock on mothers seeking justice for straightforward discrimination.

When Sekiko Garrison told former boss Michael Bloomberg she was pregnant, his answer was simple: "Kill it." Allowing mothers flexible work arrangements, he commented, was like allowing a man time off to practice his golf swing. The CEO who took over when Bloomberg left the company demanded that managers "get rid of these pregnant bitches" (referring to two women on maternity leave). The Head of Global Human Resources commented that mothers "belong at home" and that "women [do] not really [have] a place in the workforce." The Head of News commented that "half these f**king people take the [maternity] leave and they don't even come back. It's like stealing money from Mike Bloomberg's wallet. They should be arrested." The Head of Global Data asked, "Who would want to work with an office full of women?"*

And yet Federal Judge Loretta Preska said last week there was so little evidence of discrimination that she would not allow the Equal Employment Opportunity Commission (EEOC) to proceed to trial to try to prove that Bloomberg had discriminated against mothers. Preska, a pro-business Bush appointee, ended her opinion with a severe scolding: "At bottom, the EEOC's theory of this case is about so-called 'work-life balance'... [T]he EEOC's claim...amounts to a judgment that Bloomberg, as a company policy, does not provide its employee-mothers with a sufficient work-life balance." Preska quotes (as binding authority?) former General Electric CEO Jack Welch: "There's no such thing as work-life balance. There are work-life choices, and you make them, and they have consequences."

Where to start? The plaintiffs in this case were not asking for work-life balance. They were asking that their employer not discriminate against them because they were mothers. Recent social science suggests that motherhood is the strongest trigger for gender discrimination in today's workplace. If you give people identical resumes, one a mother and the other not, the mother is 79% less likely to be hired, 100% less likely to be promoted, offered an average of $11,000 less in salary, and held to higher performance and punctuality standards, according to a study by Shelley Correll, Steve Benard, and In Paik. Note: identical resumes. This is not a measure of the desire for work-life balance. It's evidence of extraordinarily strong discrimination against mothers. And, as the quotes from Bloomberg management demonstrate, discrimination against mothers is not only very strong. Often, it's also very open.

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Discrimination at Bloomberg appears to have been very open indeed. Yet through a series of procedural rulings, Judge Preska threw out most of the EEOC's evidence and then held that it had so little evidence it could not take the case to trial. First, she rejected the EEOC's statistical evidence. Then she threw out statements like those above. Those statements she could not throw out for technical reasons she simply ignored. (The comments about leave-takers stealing Mike's money were not excludable for any of the reasons the judge identified. And by the way, it is illegal under the Family and Medical Leave Act to discourage people from taking FMLA leave. Would you be discouraged by these comments?)

I won't go deeply into the technical problems with the court's opinion. But the court got caught in a time warp. Ten years ago, suits against mothers were often stymied because courts could not find a suitable "comparator" -- a similarly situated pregnant man. Courts eventually solved this problem by abandoning their search for a comparator, instead allowing plaintiffs to prove discrimination by introducing evidence of stereotyping (e.g., comments about how mothers belong at home). But Judge Preska turned back the clock. She not only insisted on comparator evidence, but rejected the obvious comparison between people who took maternity leave and those who did not. Instead, she insisted that the plaintiffs compare their salary growth to that of employees who took leaves of similar length. But healthy men don't typically take long leaves, which means that plaintiffs' salary growth was compared to that of employees who, one assumes, either were seriously ill, seriously disabled, or else had gone on an extended vacation to discover themselves in Aruba. Not surprisingly, under these circumstances the significant salary disparity found by the plaintiff's expert magically disappeared.

But the most troubling thing about this case is Judge Preska's confusion about the difference between work-life balance and discrimination against mothers. "The law does not mandate 'work-life balance.' It does not require companies to ignore employees' work-family tradeoffs -- and they are tradeoffs -- when deciding about employee pay and promotions." True that.

What employers are not allowed to do is discriminate against mothers on the fast track because a different group of mothers decided to leave the fast track. If the judge doesn't understand that, she needs a refresher course on the basics of anti-discrimination law, set down in the 1970s. You can't penalize women who don't conform to stereotypes just because other women do conform to them.

If we abandon these basic principles of anti-discrimination law, it's open season on mothers. And that's a really, really devastating setback for women. Studies show what dooms women economically in the United States is not being a woman -- it's being a mother. If the courts refuse to protect mothers on the fast track simply because other mothers decided to leave, we are not going to have gender equality anytime soon. That's for damn sure.

*These quotes can be found in the EEOC brief.

Joan Williams is the author of Reshaping the Work-Family Debate.

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The Global Tax Dodgers: Why President Obama and Congress Lack Job Creation Plans

Aug 18, 2011William Lazonick

need-job-150In the latest installment of his “Breaking Through the Jobless Recovery” series, economist William Lazonick explores why American business leaders have taken a hike on the nation.

need-job-150In the latest installment of his “Breaking Through the Jobless Recovery” series, economist William Lazonick explores why American business leaders have taken a hike on the nation.

By now the story is familiar. For the last decade US-based business corporations have been engaged in the massive offshoring of good jobs to high-growth, low-wage areas of the world, especially China and India. In general, these companies have found offshoring to be immensely profitable. For working people in the United States to gain some benefit from this globalization process, US-based corporations must repatriate some of their foreign profits to invest in high value-added job opportunities back home.

Yet prevailing US tax law both encourages offshoring and discourages the repatriation of profits. In principle, US individuals and corporations are supposed to pay US taxes on their worldwide income. Through an overseas tax deferral law, however, a US company does not pay the 35 percent corporation tax on foreign earnings until it repatriates these profits to the United States. The tax law gives US corporations an added incentive not only to offshore employment but also to reinvest the earnings of offshored operations outside the United States.

The deferral law has a long history, dating back to 1960 when the Eisenhower administration wanted to encourage an expanded US business presence around the world. From 1961 to 1963, President Kennedy tried, without success, to get rid of the law, arguing that it resulted in the export of US jobs and deprived the United States of tax revenues. Since then, the Democrats have tried from time to time to rescind this corporate tax privilege.

In June 1976, for example, an attempt to overturn the law narrowly failed in the US Senate. As observed in the Wall Street Journal just before the Senate vote: "Closing some tax ‘loopholes' of corporations and the rich is required for its own sake, liberals say, and to help finance full extension of last year's tax cuts and an immediate tax break for retired persons." (From "Senate Liberals to Renew Attempts at Cut In Tax Benefits for Corporations, the Rich," June 28, 1976). On the day after the vote, the New York Times reported: "The defeat by a vote of 45 to 44 was another in a series for organized labor and its supporters in the Senate who charge that thousands of United States jobs are lost because multinationals are encouraged by the deferral tax advantage to build plants overseas." (From "Tax Law Retained for Multinationals," June 30, 1976).

Fast forward to February 2004 when Sen. John Kerry, a declared candidate for the Democratic presidential nomination, issued a press release that indicated his objection to the tax deferral law in no uncertain terms:

My economic policy is not to export American jobs, but to reward companies for creating and keeping good jobs in America. Unlike the Bush Administration, I want to repeal every tax break and loophole that rewards any Benedict Arnold CEO or corporation for shipping American jobs overseas.

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The preferred approach of the Bush administration to inducing repatriation of foreign profits was the Homeland Investment Act as part of the American Job Creation Act of 2004. It provided a corporate tax rate of 5.25% for profits repatriated in one fiscal year, with the stipulation that these profits had to be used for investments that create jobs. The Act expressly prohibited the use of these funds to pay dividends or do stock buybacks. US corporations responded by repatriating $299 billion in profits in 2005, compared with an average of $62 billion in 2000-2004, and a subsequent decline to $102 billion in 2006.

A study of the impacts of the tax break by Dhammika Dharmapala, C. Fritz Foley, and Kristin J. Forbes found, however, that "[r]ather than being associated with increased expenditures on domestic investment or employment, repatriations were associated with significantly higher levels of payouts to shareholders, mainly taking the form of share repurchases. Estimates imply that a $1 increase in repatriations was associated with an increase in payouts to shareholders of between $0.60 and $0.92, depending on the specification." The authors suggest that companies were able to make these distributions to shareholders without violating the terms of the repatriation legislation by using the repatriated funds "to pay for investment, hiring, or R&D that was already planned, thereby releasing [domestic] cash that had previously been allocated for these purposes to be used for payouts to shareholders."

A persistent promise in Barack Obama's campaigns for the Senate in 2004 and the presidency in 2008 was that he would end tax breaks for corporations that ship jobs overseas. True to his word, in a speech in May 2009, President Obama declared: "It's a tax code that says you should pay lower taxes if you create a job in Bangalore, India, than if you create one in Buffalo, New York." In June 2009, Microsoft CEO Steve Ballmer responded that an end to the overseas tax deferral would make "U.S. jobs more expensive" and that if the Obama administration insisted on changing the tax law, Microsoft would be "better off taking lots of people and moving them out of the U.S." In September 2009, the Obama administration met with US high-tech executives and agreed to shelve the plan to end the tax deferral.

Nevertheless, in his State of the Union address on January 27, 2010, President Obama insisted that "it is time to finally slash the tax breaks for companies that ship our jobs overseas and give those tax breaks to companies that create jobs right here in the United States of America."

This tax loophole has not yet been closed. Indeed, in October 2010, John Chambers, chairman and CEO of Cisco Systems, and Safra Catz, president of Oracle, published an op-ed in the Wall Street Journal in which they sought to counter criticism in the press that US corporations were sitting on one trillion dollars in cash instead of investing in jobs in the United States. The two high-tech executives claimed that US corporations were holding the cash in question overseas and recognized that these funds "could be invested in U.S. jobs, capital assets, research and development, and more" if US corporations had an incentive to do so. "But," they continued, "for U.S. companies such repatriation of earnings carries a significant penalty: a federal tax of up to 35%. This means that U.S. companies can, without significant consequence, use their foreign earnings to invest in any country in the world -- except here."

Having deftly transformed an existing government tax concession to US corporations into a tax penalty on US corporations, Chambers and Catz noted that, among other things, repatriated profits could "provide needed stability for the equity markets because companies would expand their activity in mergers and acquisitions, and would pay dividends or buy back stock." To lure the $1 trillion back to the United States, they proposed a 5% tax on repatriated profits that would yield the US government a quick $50 billion, which could then "be used to help put America back to work...[by giving] employers -- large or small -- a refundable tax credit for hiring previously unemployed workers (including recent graduates)." "Such a program," they crowed (their plan having saved their companies 30% in taxes on foreign profits), "could help put more than two million Americans back to work at no cost to the government or American taxpayers. How's that for a good idea?"

Along with other business executives, Chambers presented his "good idea" directly to President Obama at the White House on December 15, 2010. In mid-January 2011, Treasury Secretary Tim Geithner met with a dozen CFOs who pushed for an end to taxes on foreign profits on the grounds that it would make US companies more competitive internationally. In his State of the Union address on January 25, 2011, Obama mentioned innovation 11 times, but made no mention of the repeal of the tax deferral law to help finance it. Instead, he just exhorted Congress to simplify the tax system: "Get rid of loopholes. Level the playing field. And use the savings to lower the corporate tax rate for the first time in 25 years -- without adding to our deficit." This past July, in Congress, the "Gang of Six", lobbied by the Business Roundtable, pushed for an end to the taxation of foreign profits.

With this kowtowing to corporate interests and their constant quest for "maximizing shareholder value," it is no wonder that neither Obama nor Congressional Democrats can come up with a jobs plan. Like it or not, the US economy is an autocratic corporate economy in which the CEOs of major corporations must take the lead in investing in innovation and job creation for a jobs plan to have a significant and sustainable impact. That was true in the era of Dwight D. Eisenhower and it is true in the era of Barack H. Obama.

Back then, however, US corporations were still focused on investing in the US economy, and they had not yet succumbed to the debilitating ideology that corporations should be run in the name of shareholder value. Top corporate executives, not President Obama or Congress, are the ones who control the resources to create jobs in the business sector and pay the taxes to support job creation in the government sector. These business leaders have, however, taken a hike on the nation, and indeed even on the working people and taxpayers who built the very business organizations that have made them so incredibly powerful and rich.

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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