Occupy Wall Street’s Outrage at Greed Can Expand to Corporate Stock Manipulation

Oct 6, 2011William Lazonick

stockmarket-1500001Rather than invest profits in building a strong economy, corporate execs invest in their own pay.

stockmarket-1500001Rather than invest profits in building a strong economy, corporate execs invest in their own pay.

Occupy Wall Street is keeping our focus on the insatiable greed and undemocratic influence of those who run our major financial institutions. But the quest for personal wealth and political power by the top executives of U.S. business corporations goes well beyond the Wall Street banks. It pervades industrial as well as financial corporations.

Even though, as Table 1 shows, the pay of top corporate executives is down from its pre-financial-crisis levels, it remains out of control. The average remuneration of the top 100 highest paid corporate executives (named in annual proxy statements) was $33.8 million in 2010, up 10 percent from a 2009 average of $30.1 million (in 2010 dollars). Since the financial meltdown, executive pay has remained far higher than it was in the early 1990s, when it was already viewed as extraordinarily excessive.

Table 1.  Mean pay of the highest paid corporate executives and percent of pay from exercising stock options, 1992-2010


As can be seen in Table 1, much, and in many years most, of this exorbitant pay comes from the exercise of stock options. The gains from stock options depend on rising stock prices. What better way for corporate executives to give a manipulative boost to a company's stock price than to spend hundreds of millions, or even billions, of dollars buying back its stock.

As Figure 1 shows, in 2003 buybacks were already substantial among S&P 500 companies, with an average of $300 million. But over the next four years, that amount quadrupled, so that on the eve of the financial crisis these companies averaged over $1.2 billion in buybacks. During the financial crisis, they dropped back down to about $300 million per company, but in 2010 doubled to around $600 million. In 2011, buybacks of S&P 500 companies are on pace to hit an average of $900 million, and there is every indication that they will continue to escalate in 2012 and beyond, as happened in 2003-2007. For overpaid U.S. corporate executives, this form of stock-price manipulation has become an addiction.

Figure 1.  Repurchases (RP) and dividends (DV), 1997-2010, of 419 companies in the S&P 500 Index in January 2011 that were publicly listed back to 1997; mean distributions and proportions of net income (NI)

lazonick-figure-11As shown in Table 2, the top 50 repurchasers from 2001-2010 represent a range of industries. Combined, over the decade they spent more than $1.5 trillion repurchasing their own stock.

Of these 50 companies, 11 spent more than 100 percent of their net income over the decade on buybacks, 32 more than 50 percent, and 43 spent 30 percent or more. When dividends are added to buybacks, half of these 50 companies expended all of their profits and more in distributions to shareholders from 2001 through 2010.

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Table 2. Top 50 stock repurchasers among U.S. corporations, 2001-2010


Research on these various industries and companies has revealed the deleterious impacts of stock repurchases on economic performance. For example, over the decade 11 of the 12 ICT companies on this list spent more on buybacks than on R&D, while for the twelfth, Intel, the proportion was 93 percent. Most of the financial services companies on the list had to be bailed out by the federal government in 2008-2009. Led by Exxon Mobil, the three petroleum refining companies in the top 50 wasted a combined $222 billion on buybacks while charging high oil prices and neglecting substantial investments in alternative energy. For the three aerospace companies, defense contracting generates much of the profits that they then use to manipulate their stock prices through buybacks. Pharmaceutical companies charge drug prices that are twice as high in the United States as in the rest of the world, yet use much or all of their profits for buybacks. Health insurers use their profits to jack up their stock prices, and executive pay, while giving us high cost, low quality health coverage.

Executives like to say that buybacks are financial investments that signal confidence in the future of their company as measured by its stock price performance. In fact, however, companies that do buybacks never sell the shares at higher prices to cash in on these investments. To do so would be to signal to the market that their stock prices have peaked, something that no executive would ever do. Executives often say that they do buybacks because of a lack of more attractive investment opportunities. Yet we live in a world of rapidly changing technology, burgeoning new product markets, and intense global competition. Any CEO of a major U.S. corporation who says that buybacks are the best investments that his or her company can make should take the next logical step: fire him or herself!

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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America's Misguided Obsession with Shareholder Value: Q&A in Madrid

Sep 29, 2011William Lazonick

money-question-150Maximizing shareholder value through stock buybacks has become an economic religion in the U.S., and corporate executives and board members are its chief acolytes.

money-question-150Maximizing shareholder value through stock buybacks has become an economic religion in the U.S., and corporate executives and board members are its chief acolytes.

Europeans have always been wary of the ideology that business corporations should be run to "maximize shareholder value." In advance of a public lecture that I am giving in Madrid on the financialization of the U.S. corporation, one of the city's financial papers, Expansión, sent me a string of questions on the subject and published my answers.

1. Why do companies think of their shareholders only?

Until the mid-1980s, top executives in the U.S. did not espouse the ideology that corporations should be run to "maximize shareholder value." (MSV) During the 1980s, however, financial economists working at politically conservative business schools at universities such as Chicago and Rochester developed the ideology out of free-market economic theory, and then imported it into more liberal business schools such as Harvard and Wharton.

Underlying this new orientation toward corporate governance was the shift of Wall Street in the 1970s from investing to trading and the growing dependence of U.S. households as savers on stock market returns. Top executives of established corporations embraced the new MSV ideology; it gave them a free hand to do large-scale employee layoffs in response to foreign competition, underperforming conglomerates, and hostile takeovers. As advocated by the academic proponents of MSV, an increasing proportion of the remuneration of corporate executives took the form of stock-based compensation, particularly stock options. Now these executives had a direct personal interest in boosting stock prices.

Legitimizing the focus on shareholder value as a measure of superior economic performance was the rise of "New Economy" startups in the 1970s and 1980s that used stock options to lure managers and engineers from what was then secure career employment with Old Economy companies to inherently insecure employment. In addition, the existence of NASDAQ (launched in 1971) lured investment capital to high-tech startups through venture capital (which itself emerged as a major actor only in the 1970s), thus associating innovation with stock-market returns.

And indeed, driven in part by innovation but increasingly by speculation and manipulation, from 1982 to 2000 the U.S. stock market had its longest "bull run" in history. For the financially trained business analysts who flocked to Wall Street during this period, MSV was a religion and the movement of a company's stock price the only measure of its economic performance.

2. What is the greatest danger if they go on behaving thus?

Over the past two decades U.S. companies have sought to generate returns to shareholders by not only distributing large portions of earnings as dividends but even more importantly by expending huge amounts of resources on buying back their own companies' outstanding stock. The purpose of these repurchases or buybacks is to manage earnings per share and boost stock prices -- or, put differently, to manipulate the stock market.

Over the past decade, the 500 companies in the S&P 500 Index, accounting for over 70 percent of the market capitalization of U.S. corporations, have wasted almost $3 trillion on stock buybacks. In allocating resources to buybacks, many companies forgo investment in innovation and high value-added job creation in the United States.  These same corporations and the exorbitantly compensated executives who run them also fight against paying taxes, thus undermining the ability of government to support innovative enterprise.

3. How did we reach this situation?

The three main drivers were:

  • the ideology of free-market individualism that comes out of almost every economics department and business school;
  • the greed of those who run the country's major corporations;
  • the complicity of the SEC in permitting manipulation of the stock market through buybacks and the taking of "quick swing" profits by top corporate executives when exercising stock options.

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4. Is it the fault of the top officers of the companies that companies only think of shareholder value and top officers' earnings?

Yes. Top corporate executives in the United States have almost unconstrained power over the allocation of corporate resources. Any rising corporate manager who aspires to a top position will surely be eliminated from contention if he or she is critical of MSV.

5. How could this problem be solved?

The SEC could ban stock buybacks by large corporations, and it could demand that executive pay be based on real performance criteria related to innovation -- the generation of higher quality, lower cost products than had previously been available.

6. How should officers be remunerated?

NOT on the basis of stock-price performance. Stock prices are driven by innovation, speculation, or manipulation. Corporate executives should be rewarded ONLY for innovation, with the recognition that innovation is typically a highly collective and cumulative process involving the contributions of thousands of employees and extensive government (i.e., taxpayer) support.

7. And board members?

See the answer to question number six.

8. Some of these are supposed to be independent, but are they really?

No. Board members are almost always hand-picked by incumbent management. They sit on each other's boards. They are an exclusive club, to which the recitation of the MSV mantra is a necessary condition for membership.

9. Are there examples of companies that behave this way, that behave as they should, and that behave as they shouldn't?

Just look at the companies that are among the leaders in buybacks: IBM ($15.4 billion in 2010), Wal-Mart ($14.8 billion), Exxon Mobil ($13.1 billion), Microsoft ($11.3 billion), and HP ($11.0 billion). The list goes on. They are sacrificing the future of the U.S. economy for short-term manipulative boosts to their stock prices. An important exception is Apple, which has not done any buybacks for almost two decades after wasting $1.8 billion on them between 1986 and 1993. Then there are successful employee-owned companies (known as ESOPs) that do not engage in this stock-market behavior. A prime example is Nypro Inc., a high-end contract manufacturer based in Clinton, Massachusetts with 17,000 employees worldwide. In Spain, of course, for over a half century Mondragon Corporation has become the most famous example of employee ownership in action.

10. If not shareholders, what should be companies' main concern?

I'll quote Jack Welch, former CEO of General Electric, from a March 2009 interview in the Financial Times: "On the face of it, shareholder value is the dumbest idea in the world. Shareholder value is a result, not a strategy... your main constituencies are your employees, your customers and your products."

11. How would companies improve if they followed this alternative rule of behavior?

They would focus on generating higher quality, lower cost products, while distributing returns to taxpayers, workers, and financiers who contributed to the innovation process. This type of corporate behavior would provide a foundation for equitable and stable growth in the economy as a whole.

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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There Went the Sun: Renewable Energy Needs Patient Capital

Sep 23, 2011William LazonickMatt Hopkins

electric-tower-150Solyndra's bankruptcy is a lesson in the need for more than political points and investors out to turn a profit.

electric-tower-150Solyndra's bankruptcy is a lesson in the need for more than political points and investors out to turn a profit.

Solyndra, a venture-backed solar panel maker founded in 2005, was the poster child of the Obama administration's American Recovery and Reinvestment Act (ARRA). It was the first company to receive federal loan guarantees under the already existing Energy Policy Act of 2005. A hefty $535 million in government-backed loans was going to provide 73 percent of the funds to build Solyndra's second manufacturing plant in Fremont, California, with the rest of the financing coming from private equity. It was said that 3,000 workers would find employment in the plant's construction and 1,000 workers in its ongoing operation.

The factory was built, but, overburdened with capacity, Solyndra went bankrupt in August 2011. The company's 2010 sales of 65 megawatts of power were not even 60 percent of the capacity of its first factory, making the 500-megawatt capacity of the second factory totally redundant. As Yuliya Chernova has written in the Wall Street Journal, some investors with knowledge of Solyndra's operations see the government-backed loan as the source of the company's downfall.

There is little doubt that Obama's team could not resist the opportunity to score political points through a deal that promised to stimulate the economy while investing in our renewables future. As President Obama put it when he visited Solyndra in May 2010, "Before the Recovery Act, we could build just 5 percent of the world's solar panels. In the next few years, we're going to double our share to more than 10 percent. Here at this site, Solyndra expects to make enough solar panels each year to generate 500 megawatts of electricity."

But Solyndra was not the only U.S. solar company to go bankrupt last August. Seventeen-year-old Evergreen Solar Inc., a Massachusetts-based company that had received $58 million in state subsidies, closed its factory last March, and then in August entered Chapter 11 with almost $500 million in debt. Also in August -- in between the bankruptcies of Evergreen and Solyndra -- another solar manufacturer, SpectraWatt, called it quits. These three failures resulted in the loss of 2,000 U.S. jobs. As it was, Evergreen had already moved some of its manufacturing to China in an effort to remain competitive.

The global market for solar power was over $71 billion in 2010, double what it was in 2009. Yet there is no question that the future is bleak for solar manufacturing in the United States. According to the Poughkeepsie Journal, in late August SpectraWatt asked the bankruptcy court to permit it to auction off its plant and equipment quickly because "within six months, used solar cell manufacturing equipment and related assets could flood the market and lower its auction bids."

The manufacture of solar panels is a capital-intensive business that requires huge plant-level economies of scale for competitive success. The Chinese have become the leading producers of solar panels for both their home and global markets. Allegations of corruption aside, is it possible for a high-wage economy such as the United States to compete as a global manufacturer in the solar industry?

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In the case of Solyndra, besides its government-backed loans the company raised over $1 billion in venture capital from 11 major sources. Beyond government subsidies, it is these financiers upon whom we rely for the committed finance required to sustain the operations of a solar manufacturing plant until it can achieve sufficient scale to be profitable. If a venture like Solyndra had not promised eventual success, why would this "smart" business money have flowed so abundantly into it?

The answer is the stock market. The holders of private equity were betting that they could recoup their investments and make a handsome profit for themselves when Solyndra did its initial public offering (IPO) on NASDAQ, even if at that point Solyndra itself might be a long way from attaining profitability. In 2005, when Solyndra was founded, the IPO market was heating up after a sharp slump with the Internet bust at the beginning of the decade, and 2007 was the strongest year for IPOs since 2000. Then the financial meltdown of 2008 killed the IPO market. In December 2009, with the economy in recovery and with its $535 in government-guaranteed loans in hand, Solyndra registered its IPO.

At the time, however, the company had accumulated $558 million in losses since its founding, and in a filing to the Securities and Exchange Commission in April 2010 Solyndra's accountant, PriceWaterhouseCoopers, wrote that its financial condition raised "substantial doubt about its ability to a continue as a going concern." That nixed the possibility of an IPO. Now, with Solyndra in bankruptcy, the investors have lost their money and U.S. taxpayers are on the hook as the company's largest creditor.

For solar manufacturing in the United States to be profitable, it will need committed finance that the U.S. venture capital community -- still by far the world's richest -- is unwilling to provide. They have learned that solar companies require more capital and a longer incubation period than they are willing to endure. If we want advanced solar research to go forward in the United States, we need to engage in advanced manufacturing here as well. In renewable energy, as in other high-tech fields, government and business both need to be involved in providing the "patient" capital required to develop and utilize productive resources. At present, however, notwithstanding its massive wealth, the United States lacks the financial institutions that can cope with the 21st century world of high-technology and global competition.

Matt Hopkins is a research fellow at the UMass Center for Industrial Competitiveness, focusing on issues of clean technology and economic development. He has written a soon-to-be-released report on the U.S. wind turbine industry.

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 was awarded the 2010 Schumpeter Prize.

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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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How September 11 Called the Millennial Generation Into Action

Sep 9, 2011Reese Neader

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Obama's Jobs Speech: Is He Finally Coming to Grips With the Recession?

Sep 8, 2011Mike Konczal

Obama's ideas matter, and they may now be moving in the right direction.

Obama's ideas matter, and they may now be moving in the right direction.

Over the weekend, Jonathan Chait wrote an article critical of "the Left's" critique of Obama's economic policy. He criticized the "magical thinking" shown by people who assume the president is more powerful than he is and can push things through Congress, as well as people like Drew Westen who argues that Obama needs to be a better rhetorician when it comes to talking about unemployment and the government. It's worth reading because it's likely to be a conversation that will be with us for some time.

One major problem with Chait's critique is that there is an excellent case to be made that the Obama administration has had the wrong ideas about both the nature of the unemployment crisis and what the government's response should be since the get go. Drew Westen has a specific theory about presidential rhetoric; if we expand Westen's definition to include ideas, beliefs, and assumptions about the economy, then there is a stronger case to be made against the administration.

To start at the beginning, it looked like the administration thought this would be a shallower recession than it was. The stimulus was thought of as an insurance mechanism against the worst case scenario, rather than something to bring the economy back up to full employment. There was an emphasis on restoring confidence in the financial sector immediately rather than working out the housing market issue, with the administration even proposing some strong steps to find funding that sidestepped Congress (like PPIP). This is consistent with the idea that the financial sector would lead us out of the recession, rather than just sit on a record level of reserves.

Given that we had a housing bubble, it would have been essential to formulate some process to deal with the losses from the housing crash. Housing is a key part of the business cycle, a major channel for monetary policy, and the bank servicing model created during the bubble is currently set up in a way that is designed to exacerbate fraud and corruption. But HAMP and other programs meant to deal with the housing and foreclosure crises failed even their modest goals and didn't even spend the money they had. And how could they have worked well? They were designed to float the housing problems out a bit and manage the rate of foreclosures while Wall Street and the economy, in a shallow recession, bounced back. Liberals like Elizabeth Warren and Damon Silvers pointed out that these programs were too little and too late at the time, though they were ignored.

The rush to austerity and the appeasement of the confidence fairy hit early. By December 2009, Treasury officials were telling Chait's colleague Noam Schieber at the New Republic that they needed "some signal to U.S. bondholders that it takes the deficit seriously" and "spending more money now [on stimulus] could actually raise long-term rates, thereby offsetting its stimulative effect." A senior administration official told Chait that the "reality is that it’s not too hard to find a Wall Street analyst that says a second stimulus basically cancels itself out almost immediately because of the impact at this stage on government financing costs." In case you didn't notice, we've just hit some of the lowest 10-year rates on government bonds in history, at least until I look again in a month.

Brad Delong, like many liberals, flagged that piece as a reason he was becoming increasingly bewildered by the administration's thinking (Scheiber responded). But if you are worried first and foremost about bond vigilantes, it makes sense. That's just the wrong thing to be worried about.

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The administration was overly optimistic throughout 2010. By 2011, they put most of their rhetoric in full-on confidence mode. Obama is wonky and it is often easy to trace the origins of his ideas, and he went around promoting the most nihilistic interpretation of Rogoff/Reinhart's book (rightfully flagged as the most dangerous set of ideas in the world by Joe Weisenthal). Obama gestured towards structural unemployment arguments and a skills gap, Gene Sperling was all about restoring confidence as an end-goal, and of course stimulus is sugar. The centerpiece of the 2011 State of the Union was a Win the Future that focused on long-term growth rather than getting back to the short-term trend. Liberals countered by arguing unemployment is a major problem that can be impacted by both fiscal and monetary policy.

For many who liked Westen's piece, they were probably reacting more to a reading that says Obama needs to get serious about liberal ideas more than one that gives a theory of how politics works. For these were all choices about how to view the world, choices to accept one set of ideas over another set of ideas. And they were all ideas that focused on a neoliberal model of financial sector confidence, rather than the liberal Roosevelt program of reworking mortgages and implementing aggressive monetary and fiscal policy. Even with a reactionary opposition and a deadlocked Senate, ideas matter.

Tonight's speech was a chance to reboot these ideas. How did it go?

Let's go through some specifics:

- It eliminates the payroll tax for workers in a way tilted towards small businesses and cuts it in half on the employer side. The employer side tax cuts are a bad way to go about it, but if they pass they can do some good. There should be additional worry that it will be difficult to raise this at a later date, putting pressure on the way we fund Social Security. The emphasis on tax cuts, which make up the majority of the bill, is consistent with moderate GOP stimulus package plans of the kind we saw in the Bush tax cut extensions.

-  Jared Bernstein should be happy -- there's $25 billion targeted at school infrastructure rebuilding.

- It punts on housing. It looks like a refinancing plan, which is good. It targets the worst hit areas, its effects will feel like a permanent tax decrease, and consumers are well incentivized to do it quickly. But it's not a sufficient idea, it will be carried out through HARP rather than a new initiative, and it isn't clear how the FHFA will deal with it.

-  $75 billion in infrastructure spending, including an infrastructure bank.

- "The most innovative reform to the unemployment insurance program in 40 years." I'll cover this in detail in the future, but work-sharing looks interesting while the "bridge to work" is potentially troublesome.

- "A $4,000 tax credit to employers for hiring long-term unemployed workers... Prohibiting employers from discriminating against unemployed workers when hiring." I think this is great on the first read. Tackling long-term unemployment is an important item, and this is likely to have a significant effect in getting the long-term unemployed back to work.

What does this signal on the ideas front? We'll see where the deficits speech goes in the next week, but it certainly looks to be a move against the austerity/confidence games that the administration lost 18 months playing and toward the government moving on creating jobs. There's a need to give an extra lifeline to a weak economy and it's the government's job to do it. The fundamentals -- low inflation, low wage growth, high unemployment, low job vacancies, record-low borrowing costs -- all demand this plus even more. Obama also identified the enemy: those that would opportunistically use this moment to dismantle the parts of government they don't like and shift power and wealth to the top. Significantly more than I asked for in a speech; let's see where it goes now.

Mike Konczal is a Research Fellow at the Roosevelt Institute.

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The President's Speech: "Getting It" is Not Enough

Sep 8, 2011Mark Schmitt

Voters want to know their president cares about people like them, but they also want to know he's going to get something meaningful done.

Voters want to know their president cares about people like them, but they also want to know he's going to get something meaningful done.

The smartest Democratic political operative I've ever known once told me that the only thing that matters in a poll is how a politician scores on the question "cares about people like me." By that standard, Barack Obama has been doing just fine: In the recent Pew poll, 60 percent said he "cares about people like me," a rating higher than George W. Bush achieved at the peak of his popularity.

In tonight's speech, we're told, Obama has to show that he cares about the crisis of joblessness, that he gets it. "Getting it," or empathy for the plight of economically struggling Americans, has been at the core of American politics for the last several decades. Empathy was the central drama of the 1990s, and the main genius of Bill Clinton. From George H.W. Bush accidentally reading his subtextual notes -- "Message: I care" -- in the 1992 primaries to the debate later that year when he looked at his watch while Clinton walked down into the audience to listen directly to a questioner who was having trouble articulating her distress, "getting it" was all that mattered. "I feel your pain" -- Clinton's answer to a heckling AIDS activist -- became the shorthand summary of his political method.

Clintonian governance wasn't just words -- it was also a policy agenda of empathetic gestures. Welfare reform to show the middle class that he understood their anger about poor people, modest demonstration projects on ideas like school uniforms to show that he understood parents' anxiety about school discipline, tax credits for college tuition to show that he (or Democrats) understood families' worries about rising college costs. None of them were big enough to solve the problems, but that wasn't the point. The point was to identify the party with those concerns.

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The problem with a politics of empathetic gestures is that it spreads all over the place. There's a gesture for everything, a small tax credit for every good behavior. All Democratic politicians of the modern era play the politics of the empathetic gesture, even those who claim to reject it, and Obama was a master of it, offering a half dozen tax credits during the 2008 campaign for things like "responsible fatherhood." In recent months, he's gestured toward deficit reduction while also gesturing in the direction of investment and protecting vital social programs. But the result is a governing agenda that does a little bit of everything and not enough of anything, and one whose priorities are invisible to most citizens.

Many critics of the president are also locked into the politics of empathy. They favor more populist language, such as an attack on Wall Street bonuses, or a more pugnacious posture toward congressional Republicans, as if seeing those things would convince Americans that the president is on their side.

But Americans already know the president's on their side. It doesn't matter. When a president has a 44 percent approval rating, and a 41 percent reelect rating (in the recent Pew poll), but a 60 percent rating on "cares about people like me," it's a sign that the conventional Democratic approach to politics is exhausted. Empathy isn't enough. Now all that matters is action. I hope the president tonight, rather than gesturing in all directions, will pick one big direction -- not necessarily one program, but one big vision, and stick with it. If Republicans block it, they block it, but at least it's clear what they're blocking. Bring it back, and bring it back again. Take incremental successes and come back for more. Drop all the rest for now -- deficit reduction in particular (though there will be a time for that) -- and construct everything around a single, clear vision of a recovering economy, one whose benefits are broadly shared and that creates opportunity for everyone. Anything that doesn't tie into that vision goes to the back burner.

I'm not naïve; it's not likely that even a clear and convincing policy initiative can pass Congress. But if it doesn't, at least we'll all understand what the choices were, and who's actually responsible for the ongoing debacle of the American economy.

Mark Schmitt is a Senior Fellow and Director of the Fellows Program at the Roosevelt Institute.

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Nine Government Investments That Made Us an Industrial Economic Leader

Sep 8, 2011William Lazonick

flag-150The U.S. does have an investment problem, but the blame lies with Big Business, not Big Government.

flag-150The U.S. does have an investment problem, but the blame lies with Big Business, not Big Government.

Remember when the United States led the world in industrial technology? The peak of U.S. supremacy was back in the 1960s, when the "military-industrial complex" was in full force. Then in the mid-1970s the Japanese mounted a successful economic challenge to the United States in a range of industries, including steel, machine tools, memory chips, consumer electronics, and automobiles. Since then, among Asian nations, South Korea, Taiwan, China, and India have become major global competitors in industries that the United States used to dominate. In historical retrospect, U.S. industrial power has never been quite the same.

A prominent explanation for the competitive success of Japan and other Asian nations, first argued by the late Chalmers Johnson in the 1980s, was the crucial support for industrial investment provided by the "developmental state." In contrast, Johnson and others characterized U.S. government involvement in the economy as merely "regulatory." The United States was no longer number one, so the argument went, because its government would not invest sufficiently in the physical infrastructure and human capital that global competition now required.

The history of U.S. government support of industry, however, presents a very different picture. Far from eschewing a developmental role, it is plausible to argue that from the 19th century up to the present the United States has possessed the world's foremost developmental state.

Let's look at some highlights of that history:

  1. Railroads: Under the Pacific Railroad Acts of 1862 through 1866, the U.S. government handed railroad companies 103 million acres of public land that could be sold or used as loan collateral to finance the construction of transcontinental railroad lines. These land grants were equivalent to 5.34 percent of the size of the continental United States and greater than the size of California.
  2. Universities: Under the Morrill Land-Grant Act of 1862, the U.S. government gifted every state in the nation 30,000 acres of land as an endowment for an institution of higher education for the "agricultural and mechanical arts." Besides many eponymous state universities, Cornell, MIT, Purdue, and Rutgers all originated as land-grant colleges. The Morrill Act of 1890 provided each state with annual federal financial support for the colleges. By the early 20th century, the success of "mechanical arts" education within this public system compelled elite private universities such as Harvard and Yale to launch engineering courses and degrees.
  3. Agriculture: The Hatch Act of 1887 provided federal funding for agricultural experiment stations, most of them set up in proximity to land-grant colleges, to engage in state-of-the-art research that could increase the productivity of the nation's farms. The Smith-Lever Act of 1914 funded cooperative extension services, including the employment of thousands of "county agents," to diffuse the latest knowledge to farmers.
  4. Aircraft: In the 1920s, the U.S. government played the leading role in not only supporting aeronautics research but also promoting air mail services. Under the Contract Air Mail Act of 1925, the U.S. Postmaster General gave subsidized air mail contracts to a select number of commercial airline companies to encourage the airlines to demand safer, quieter, and larger planes from aircraft manufacturers so that passenger travel would increase. Five years later, when little progress in the development of passenger-friendly aircraft had been made, the Air Mail Act of 1930 changed the subsidy from the amount of mail carried on a plane to the size of the plane in which mail was carried, even if the plane carried only one letter. This generous government incentive scheme worked: By 1933, plane manufacturers Boeing and Douglas had each developed the modern all-metal, two-engine monoplane for the airlines, and air travel for people took off.
  5. Jet engines: The turbojet engine, invented in Britain in the mid-1930s by Royal Air Force officer Frank Whittle, was given to the U.S company General Electric (GE) in 1942 to develop for use in World War II. GE was not in the aviation business, but, as the leading producer of electric power equipment, had been doing gas-turbine research since 1903. The jet engine was not put into service during World War II, but after the war GE continued to develop it for the U.S. military and also shared the technology with Pratt & Whitney, the leading producer of commercial airplane engines. In 1974, GE entered the commercial jet engine business through a joint venture, CFM International, with SNECMA, a French state-owned company, to provide engines to midsized Airbus planes. GE is now the world's leading producer of commercial jet engines.
  6. College-educated labor force: While the land-grant college acts created a national system of higher education in the late 19th century, it was only in the aftermath of World War II that a large proportion of the population gained ready access to it. In 1944, Congress passed the Serviceman's Readjustment Act, popularly known as the G.I. Bill of Rights, which provided funding to U.S. veterans of World War II to obtain college educations, buy homes, and start businesses. By the time the initial program ended in 1956, almost 50 percent of the 16 million veterans of World War II had received education and training benefits under the G. I. Bill.
  7. Interstate highway system: Under the Federal-Aid Highway Act of 1956, the government committed to pay for 90 percent of the cost of building 41,000 miles of interstate highways. President Eisenhower justified this expenditure on the grounds that the highways were needed to defend the United States in case of a military attack on U.S. soil. Whatever the rationale for this investment, the system has provided businesses and households with a fundamental physical infrastructure for civilian purposes.
  8. Computers and the Internet: A 1999 study, "Funding a Revolution: Government Support of for Computing Research," stated, "Federal funding not only financed development of most of the nation's early digital computers, but also has continued to enable breakthroughs in areas as wide ranging as computer time-sharing, the Internet, artificial intelligence, and virtual reality as the industry has matured." Among other things, the study details the now well-known role of the U.S. government in developing the ARPANET and the NSFNET for over three decades before it became available commercially as the Internet.
  9. Life sciences: The 2010 budget of the National Institutes of Health (NIH) for life sciences research was $30.9 billion, almost double in real terms the budget of 1993 and triple in real terms the budget of 1985. From the founding of the first national institute in 1938 through 2010, NIH spending totaled $738 billion in 2010 dollars. The 2011 budget is $30.9 billion, and the request for 2012 is $32 billion. In addition, federal and state governments provide many subsidies to the medical field. For example, the Orphan Drug Act of 1983 has been critical to the development of the biopharmaceutical industry.

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One could go on to talk about the U.S. government's support for nanotechnology and renewable energy, among other programs. None of these government programs is a secret. Indeed, prominent corporate executives lobby for them (and you won't find the Tea Party attacking them). Yet there is a widespread belief that the U.S. government plays at most a regulatory role in the economy.

Recent research has exposed this myth. In "State of Innovation: The U.S. Government's Role in Technology Development," based on a project funded by the Ford Foundation, Fred Block and Matthew R. Keller have thrown the spotlight on the "invisible" developmental state. Also attacking the myth is a pamphlet, "The Entrepreneurial State," produced by Mariana Mazzucato, my colleague in projects funded by the European Commission and the Institute for New Economic Thinking. In a similar vein, the Breakthrough Institute has documented the history of U.S. government support for technology and innovation. Based on research on the microelectronics and biotech industries, I have argued that entrepreneurial ventures such as those found in Silicon Valley and many other U.S. high-tech districts could not exist without the U.S. developmental state.

So why has the role of the state in the development of the U.S. economy been hidden from view? No doubt, many leading free market ideologues are just ignorant of U.S. history. But it's more than that. Back in the 1950s and 1960s, often with the Cold War as a motivation, business interests both provided a fairer share of taxes to support developmental expenditures by the U.S. government and invested complementary corporate resources in physical equipment and human capital in the United States. Today, business interests remain happy to have the government spend this money, but they refuse to pay a fair share of the taxes to support it, while the business investments in productive capability that build on U.S. government spending on science and technology are increasingly being made overseas.

Meanwhile, the prime type of corporate investment within the United States over the past two decades has been the stock buyback. Trillions have been spent jacking up stock prices and, in the process, inflating executive pay. Yes, America has an investment problem. But the problem is big business, not big government.

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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The CFPB Stands Up to Banks' Overblown Financial Firepower

Sep 7, 2011Bryce Covert

Republicans claim that allowing Richard Cordray to head the CFPB imbues him with too much power, ignoring the immense influence on the other side of the equation.

This week's credit check: The 10 Republicans blocking Richard Cordray's nomination have received over $31 million in campaign cash from the financial sector. The median American family saw yearly earnings fall $5,261 over the past decade.

Republicans claim that allowing Richard Cordray to head the CFPB imbues him with too much power, ignoring the immense influence on the other side of the equation.

This week's credit check: The 10 Republicans blocking Richard Cordray's nomination have received over $31 million in campaign cash from the financial sector. The median American family saw yearly earnings fall $5,261 over the past decade.

The least remarkable part of yesterday's Senate Banking Committee hearing on Richard Cordray, President Obama's nominee to head the new Consumer Financial Protection Bureau (CFPB), was Cordray's testimony itself. In fact, Republicans made it clear that his credentials are not what's up for debate. Sen. Bob Corker (R-TN) called a recent meeting with him "pleasant" and Sen. Richard Shelby (R-AL) said he has a "good background." Rather, they want to debate whether his post should exist at all. Their reasoning? That having one person in charge of this new watchdog will imbue Cordray with far too much power. As Shelby put it, "No one person should have so much unfettered power over the American people."

But what of the power of the opposition, the banks themselves, who stand to have new oversight and regulation from someone on the side of the average consumer? If we're going to talk about power imbalances, we might want to look at what the financial sector can marshal against the American people. Elizabeth Warren herself, the originator of the idea for the CFPB, estimates that it will police a $3 trillion consumer financial services industry. And Wall Street, along with its other corporate counterparts, is doing pretty well compared to the rest of us. Corporate profits have taken in 88 percent of the raise in national income since the recovery began, while household incomes only took in 1 percent.

It's not just profits banks wield in this fight, however. That money can easily turn into lobbying and campaign contributions. As Ari Berman reported in June, "According to the Center for Responsive Politics, 156 groups -- the vast majority representing corporate interests -- lobbied the government about the CFPB in the second half of 2010 and the first quarter of 2011. The list ranged from JPMorgan Chase to McDonald's." The Chamber of Commerce even has an entire division devoted to fighting Dodd-Frank, and it spent $17 million on federal lobbying in the first quarter of this year with a dozen lobbyists focused on just the CFPB.

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Individual Republican Senators are also getting lavish gifts from the financial sector while opposing its newest regulator. The 10 Republican members of the Senate Banking Committee, who signed a letter to Obama in May demanding debilitating changes to the CFPB before any candidate can be confirmed, have received over $31 million in campaign cash from the financial sector during their time in Congress. Meanwhile, Sen. Shelby himself has taken $6.2 million from the financial sector, including about $1 million from commercial banks. His top career donors include JP Morgan ($140,771), Citigroup ($109,199), and Goldman Sachs ($67.600).

Compare all that financial firepower to what's going on for everyday Americans. A new report from the Pew Charitable Trusts shows that nearly one in three Americans who grew up middle-class has fallen out of that group. It's not hard to see why so many people are moving down the ladder when wages have been heading in the same direction. While the financial sector is bringing in $3 trillion, the median American family saw yearly earnings fall $5,261 over the past decade, from $52,388 in 2000 to $47,127 in 2010.

Things are even worse for low-income families. Over the past 10 years, the percentage of children living in poverty has soared, increasing by 18 percent, or 2.4 million more, from 2000-2009. These children and their families are set to fall on even harder times, as states slash vital services to balance their budgets. They face the loss of unemployment benefits, income tax credits, and cash assistance, among other safety net supports.

Those who find themselves in such financial hardship have one place to turn when they can't make ends meet: debt. Credit card companies already employ a variety of tactics to entice middle-class families into debt and keep them there. But those tactics will be under strict scrutiny if the CFPB has its full powers. Low-income families often find themselves prey to unregulated non-banks like payday lenders and check cashers, but those will also come under the supervision of the Bureau.

The CFPB isn't taking on dictatorial powers. It's standing up to the formidable forces preying upon struggling American consumers.

Bryce Covert is Assistant Editor at New Deal 2.0.

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President Obama's Jobs Speech is His Last Real Chance

Sep 6, 2011Bo Cutter

If Obama doesn't go big in his jobs plan on Thursday, any proposals will disappear into the ether along with his chances for re-election.

President Obama has a big task ahead of him on Thursday. He has to be honest. He has to go long. He has to break some china. And he has to not care. Why? It's what the country needs. And he is a one-term president if he doesn't change the game.

Let's start with being honest. He must explain to the country where we are and where we will be if we do not act. Then he has to explain what we must do and why it seems contradictory.

If Obama doesn't go big in his jobs plan on Thursday, any proposals will disappear into the ether along with his chances for re-election.

President Obama has a big task ahead of him on Thursday. He has to be honest. He has to go long. He has to break some china. And he has to not care. Why? It's what the country needs. And he is a one-term president if he doesn't change the game.

Let's start with being honest. He must explain to the country where we are and where we will be if we do not act. Then he has to explain what we must do and why it seems contradictory.

What does all this mean?

This recession was different and this anemic "recovery" is different than our whole post-World War II experience. We will have high unemployment for years. (To bring unemployment down to five percent in five years, we would have to have monthly job growth higher than the 1993-2000 boom years.) This means a continuing squeeze on incomes and longer, higher long-term unemployment than we have seen for decades.

At the same time, our low rate of investment (both public and private), the state of our infrastructure, our eroding educational system, and the kinds of jobs we are creating combine to make achieving higher economic growth more difficult and virtually guarantee a continuing rise in inequality.

We really do have a deep debt and deficit problem. We do not have to solve it in the next year, but if we do not quickly get on the right path, markets will take the decision out of our hands.

There is a lot we can do to make this emerging situation better, but there is nothing we can do that will work quickly. And there is no indication of any kind that the political system is capable of producing the right mix of policies -- quite the opposite.

President Obama must say all of this. The nation has to have a context to understand why we are where we are and what we must do. Then he has to go long. If this is a speech about green jobs, the return of manufacturing, and the payroll tax, TV remote controls all over the nation will start switching channels, and the president and Congress will be talking to themselves.

The president should announce on Thursday night what I called a few weeks ago "The Project for American Renewal." Specifically, the president should demand the following:

(1) A short term stimulus of two to four percent of GDP to keep growth from cratering over the next year or so. The stimulus would be composed of a continued payroll tax holiday, including one for employers, and a jobs tax credit. I want something that spends fast and is not wrapped up in some fancy new program no one understands. And to be clear, this stimulus will not fundamentally alter our unemployment problem.

(2) Adoption now of the Simpson, Bowles, Rivlin, Dominici debt and deficit plan. (There isn't one unified plan, but there could be within a couple of weeks if the president asked.)

(3) A long-term infrastructure program amounting to about one to two percent of GDP per year for 10 years, with the money to be spent through a combination of an Infrastructure Bank and fund.

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I would prefer that the president announce the Project for American Renewal on Thursday, with an emphasis on short-term stimulus, and follow up with separate speeches on the debt and deficit and on infrastructure.

If he does all of this, the president will break a lot of china. He will be proposing a seemingly contradictory plan for short-term stimulus and longer-term debt reduction, changes in Social Security and Medicare, major income tax reform and lower rates, a new source of revenue that looks a lot like a Value Added Tax, 10 years of infrastructure spending, and a mechanism to avoid the Appropriations committees -- the heart of the feeding troughs today.

There is something big in this Project for everyone to hate. There is not the slightest chance it will pass before the election. No political adviser in this White House will be for it. The president cannot care.

In particular, the president cannot care about what his congressional Republican critics say or do. The level of hypocrisy they've attained cannot really rise any farther. But what the president can bank on is that their behavior is now widely recognized and understood. I was amazed to see the following comment by Martin Wolf of the Financial Times, perhaps the leading economic columnist in the world, and not close to a bomb thrower: "Mr. Obama wishes to be president of a country that doesn't exist. In his fantasy U.S. politicians bury differences in bipartisan harmony. In fact, he faces an opposition that would prefer their country to fail than their president to succeed."

Meanwhile, a Washington Post-ABC News poll published today says that:

• 20% of Americans believe the country is on the right track

• 17% of Americans think the president's economic policies are making the economy better

• 53% of Americans disapprove of the president's overall performance

• 62% of Americans disapprove of his handling of the economy

I have no idea if a big program, put forward with energy and defended consistently, can make a dent in these numbers. It is possible that by failing to put forward a clear economic story for two and a half years, the administration has dug too deep a hole for itself.

But these numbers are saying clearly that the president has to state a big, new course. A small, precious little program will disappear without a trace.

The polling numbers also say something else. While 53 percent of Americans disapprove of the president's performance, 68 percent disapprove of the Republicans in Congress. The president and the Republicans in Congress are in the same position as the two hikers and the bear. Bear charges. Hiker # 1 sits down to put on track shoes. Hiker # 2 says, "You're crazy, you can't outrun that bear." Hiker # 1 says, "No. But I can damn sure outrun you."

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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