A Big Banker’s Belated Apology

Jul 30, 2012Jeff Madrick

This op-ed originally appeared at NYTimes.com.

This op-ed originally appeared at NYTimes.com.

Last week, in a CNBC interviewSanford I. Weill, the former chairman of Citigroup, said that America should separate investment banking from commercial banking. This separation, of course, was the prime purpose of the Glass-Steagall Act of 1933, a piece of legislation that Mr. Weill and other bankers had successfully watered down, with Alan Greenspan’s support, before Mr. Weill helped engineer its official demise in 1999. Now, Mr. Weill, the creator of what was once the largest financial conglomerate in the world, suggests that Citigroup and others should be broken up. Banks can no longer “be too big to fail,” he told CNBC.

But what was most eye-catching was Mr. Weill’s claim that the conglomerate model “was right for that time.” Nothing could be further from the truth.

Mr. Weill’s original business concept — the justification of financial conglomeration — was to provide one-stop shopping to any and all customers. This could now include clients for investment banking, stock research, brokerage and insurance. Then, with the 1998 merger of his Travelers Group with Citicorp, it could include savers, business borrowers and credit card users, too. But few, even among his own executives, ever believed the strategy would work.

Rather, conglomeration bred conflicts of interest in Mr. Weill’s firms, and others — the very conflicts that the original Glass-Steagall Act was designed to prevent. This inevitably led to investment in and promotion of risky, poorly run and, in some cases, deceitful companies that brought us the high-technology and telecommunications bubble of the late 1990s.

Indeed, Mr. Weill’s Citigroup was a primary underwriter of and one of the two largest lenders to the oil and futures trading firm Enron, whose accounting charade resulted in what was in 2001 the biggest bankruptcy of its time. Citigroup was a major underwriter for the telecommunications giants Global Crossing and WorldCom, which would later go bankrupt as a result of flagrant accounting deceptions. There were many other, if less visible, debacles.

Read the full article here.

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Investing In and Invigorating Head Start

Jul 11, 2012Amy Baral

Head Start is a good start to revitalizing national education but there is still room for improvement. 

Head Start is a 8 billion dollar federal grant program that provides preschool and other early childhood learning opportunities to about 1 million 3 and 4-year-old children that meet federal poverty guidelines.  When Head Start was first created, as part of President Johnson’s War on Poverty, the program was designed to help improve the child development and developmental needs of disadvantaged children.

Head Start is a good start to revitalizing national education but there is still room for improvement. 

Head Start is a 8 billion dollar federal grant program that provides preschool and other early childhood learning opportunities to about 1 million 3 and 4-year-old children that meet federal poverty guidelines.  When Head Start was first created, as part of President Johnson’s War on Poverty, the program was designed to help improve the child development and developmental needs of disadvantaged children.

While Head Start has grown slowly since its inception in the 1960s, critics have never been far behind to challenge the programs successes and budget.  Most recently, TIME’s Joe Klein challenged Head Start as a failing to “yield results” and called for the end of the program.  Klein opined that because some studies show that children in Head Start do not see sustained academic and developmental growth after they have finished the program, that the program itself was a failure and a waste of money.  Klein raises some interesting points. First, is $8 billion a year for poor preschoolers a valuable use of the federal government’s money?  Second, does Head Start actually improve academic outcomes long-term? And finally, is there a way to improve the Head Start program or should it just be scrapped as wasteful government spending?

First, is the federal government justified in spending $8 billion a year on preschool education for American’s poorest children?

America provides a system of free public education, usually Kindergarten through Grade 12.  However, most young children often attend a series of private preschool programs before starting Kindergarten.  In contrast, most European countries provide about 2 years of pre-school or early childhood development programs for all young children before the kids begin primary school.  Instead, in America, mostly all preschools are privately run, with average costs of about $3,000 - $12,000 per child per year. 

America does provide limited subsidized preschools at the state and federal levels, usually based on poverty level, and Head Start is one of these programs. But, Head Start only serves about 1 million children a year and in 2010, there were 6.3 million children in poverty.  So maybe the question is not whether the federal government is justified in spending $8 billion a year on preschool programs for poor children, but whether $8 billion is enough to serve the needs of these children.  With potentially 5.3 million children going without adequate access to preschool services every year, it is clear that America’s early childhood education programs benefit those that have the means to access these private programs and harm those without similar access.

But, America is in a recession and the federal government is struggling to allocate money for even well supported government programs, like subsidized student loans.  Before one advocates for expanding a program such as Head Start, it is important to ensure that the program actually works.  This leads to the second question, is Head Start achieving educational and development success among the children it serves?

Head Start’s successes in early childhood development and long-term academic and social outcomes for poor children are disputed.  While there are some studies that highlight the successes of Head Start in terms of keeping people out of prison and leading to higher education rates, other studies, like the Head Start Impact Study show only minimal long-term effects.

Still, many of these minimal long-term effects can be attributed to the weak schools that Head Start graduates will attend upon program completion.  Faced with failing schools, a lack of resources, overcrowded classrooms, and even bad teachers, it is of no surprise that the students targeted for Head Start programs cannot maintain their academic improvements over time because the odds are simply against them.

It’s clear that America has many poor children who go without access to quality preschool programs due to their poverty level and the limited reach of the Head Start program.  Further, poor children who do have access to Head Start often do not see sustained academic outcomes throughout their time in public education. Maybe the true issue is that early childhood education through Head Start is only one part of the process to improve educational and life outcomes for poor children in the United States.  This leads into the third question, can Head Start be improved to ensure effective program performance and long-term benefits or should the program just be scrapped?

Obviously, Head Start should not be scrapped unless the federal government and the states figure out a better way to provide access to high-quality preschool programs for our nation’s poorest preschoolers.  There are too many preschoolers in this country who go without access to early childhood development programs, and while Head Start is just one option, it’s an option that is helping 1 million of these preschoolers.

Still, as with any government program, it is necessary to ensure that federal money is being spent correctly.  In 2007, Congress passed “Improving Head Start for School Readiness,” an act that allows the government to take a stronger federal oversight role of Head Start programs and requires teachers in Head Start programs to hold associates and bachelors degrees.  The Obama Administration has already used its power under this bill to close unsuccessful Head Start programs and provide more funding for programs that were succeeding.  To ensure that federal money is being spent correctly and that children are receiving high-quality preschool education, it is essential that federal oversight of Head Start programs continue.

Finally, the federal government should work to expand access to free and reduced preschool programs for poor children.  Preschool has a profound impact on the educational attainment and development of children.  Further, because most middle-class children have the ability to attend preschool, expanding access to preschool programs for poor children could help close socioeconomic achievement gaps.  Most importantly though, gains made in preschool need to be sustained overtime through strong primary and secondary public education for all students.  American needs to work towards improving its K-12 educational opportunities for all students to ensure that all children have access to high quality education from preschool to college.

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Amy Baral is a Roosevelt Institute Pipeline Fellow.

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Health Care Reform and the Supreme Court: Politics Over Constitutionality

Jun 26, 2012Richard Kirsch

The Obama administration's neglect did not cause this constitutional challenge to the individual mandate. Republican strategy did.

The Obama administration's neglect did not cause this constitutional challenge to the individual mandate. Republican strategy did.

On the eve of the Supreme Court's decision, after numerous lower court opinions and treacherous questioning by conservative justices, the overwhelming consensus in the legal community remains that the requirement in the Affordable Care Act to buy health insurance is unquestionably constitutional. As recently as mid-June, Bloomberg News asked law professors at the nation's top law schools whether they thought there was any question that the Affordable Care Act’s individual mandate requiring the purchase of health insurance was constitutional; 19 of the 21 who responded replied that it was. They were only confirming the opinions of two very conservative appeals court judges, who upheld the provision last year.

But the widespread view that the only reason we have a question before the Supreme Court is their receptivity to right-wing political manipulation of the law was not the story told by the New York Times on Sunday, under the headline, "Supporters Slow to Grasp Health Law's Legal Risks." The Times's Peter Baker faulted the Obama administration and Congressional Democrats for being unprepared for the legal challenge.

Some would view the fact that the Court is seriously debating a question that is so far out of the political mainstream, even among the most respected conservative jurists, as a testament to the groundbreaking work of a small set of conservative lawyers to change jurisprudence. They would compare their work to the careful strategy that led to decisions like the Warren Court's Brown v. Board of Education. I am not so generous. The legal arguments against the individual mandate remain flimsy and there is no comparable history of carefully plotted legal strategy. What has become more solid is the ground that the arguments are being made on, a Supreme Court majority whose magnet is not the Constitution or precedents, but the U.S. Chamber of Commerce.

In drafting what became The Patient Protection and Affordable Care Act, Democrats in Congress and the White House had myriad complex policy and political factors to juggle. The implication that they should have added in the minuscule chance that the mandate would be successfully challenged on its constitutionality is as silly as the opponents' legal arguments.

What might have given the law's drafters pause was the ruling on Citizens United, in which the Court majority dynamited a century of precedent to overturn the ban on corporate campaign contributions. But that decision was handed down in January of 2010, three days after Scott Brown won election to the Senate from Massachusetts, in a seeming repudiation of health care reform, which deprived Democrats of their filibuster-proof majority. At that point, there was neither the time nor the legislative maneuverability to consider changing the structure of the mandate, even if someone had raised their head and said that this Court is capable of doing anything it wants to further the corporate agenda.

In contrast with the Times article, Ezra Klein has a piece in The New Yorker titled "Unpopular Mandate: Why Do Politicians Reverse Their Positions?" Klein points out that the question of the mandate's constitutionality on the right changed when conservative politicians jettisoned their own idea, the mandate, after Obama accepted it. He describes how the Republican message machine legitimized the constitutional challenge once Republican politicians did an about-face.

Two days from now the Court will weigh in. Many of those same law professors surveyed by Bloomberg predict the Court majority will ignore precedent and overturn the mandate. The have reached the same conclusion as many Americans that the Court is driven by politics, not the Constitution. I'm hoping they will be proven wrong, and that the Court will put our founding document and two centuries of precedent before the partisan, corporate agenda. But whatever they decide, I won't blame the fact that the case has gotten this far on Democrats in the White House or Congress.

Richard Kirsch is a Senior Fellow at the Roosevelt Institute, a Senior Adviser to USAction, and the author of Fighting for Our Health. He was National Campaign Manager of Health Care for America Now during the legislative battle to pass reform.

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Paul Krugman: Europe has Made a Terrible Mistake and Republicans are Completely Mad

Jun 22, 2012

In the latest Next American Economy breakfast series, Roosevelt Institute Senior Fellow Bo Cutter interviews Paul Krugman, Nobel-prize winning economist and New York Times op-ed columnist.

In the latest Next American Economy breakfast series, Roosevelt Institute Senior Fellow Bo Cutter interviews Paul Krugman, Nobel-prize winning economist and New York Times op-ed columnist. Krugman discusses how and why the “two great centers of world economic activity, of democracy, and of everything else are both in deep trouble.” He says, "Europe made the terrible mistake of having a single currency without a single government, and the United States has one of its two major political parties that has gone completely mad.”Watch Krugman explain these two major structural problems causing global economic crisis:   

Interview : Paul Krugman from Roosevelt Institute on Vimeo.

According to Krugman, we are in a “classic depression” for the first time in 80 years, and it is high time for increased government spending to help our economy while our private sector builds itself back up. But “instead, because of the way our politics have worked, we’ve actually had unprecedented fiscal austerity.” He argues that this dangerous paralysis is “exactly what 80 years of economic analysis tells us we should not be doing.” Krugman sighs at the continual Republican assertion that we can’t spend because of our deficit and we instead need to focus on long-run fiscal responsibility. Meanwhile, 8.2 percent of Americans are unemployed, and as Keynes said, “in the long run we are all dead.”

At the same time, Europe is sliding further and further into economic catastrophe. “It’s unthinkable that anybody should leave the Euro, and yet it’s becoming increasingly unthinkable that policymakers will take the steps needed to prevent that from happening.” Europe is basically demanding that Spain slash wages as well as spending, “which is a recipe for depression.”

European will to properly solve this problem is just not there, since “Europe is a currency but not a country.” In contrast, he discusses the fiscal bailouts of Florida and Texas that worked because in America, “we are a nation.” As Cutter notes, “it would be good if we stayed so.”

For more, watch Krugman’s full presentation:

Paul Krugman :: Lecture from Roosevelt Institute on Vimeo.

 

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Paul Krugman: Europe has Made a Terrible Mistake and Republicans are Completely Mad

Jun 22, 2012

In the latest Next American Economy breakfast series, Roosevelt Institute Senior Fellow Bo Cutter interviews Paul Krugman, Nobel-prize winning economist and New York Times o

In the latest Next American Economy breakfast series, Roosevelt Institute Senior Fellow Bo Cutter interviews Paul Krugman, Nobel-prize winning economist and New York Times op-ed columnist. Krugman discusses how and why the “two great centers of world economic activity, of democracy, and of everything else are both in deep trouble.” He says, "Europe made the terrible mistake of having a single currency without a single government, and the United States has one of its two major political parties that has gone completely mad.”Watch Krugman explain these two major structural problems causing global economic crisis:   

Interview : Paul Krugman from Roosevelt Institute on Vimeo.

According to Krugman, we are in a “classic depression” for the first time in 80 years, and it is high time for increased government spending to help our economy while our private sector builds itself back up. But “instead, because of the way our politics have worked, we’ve actually had unprecedented fiscal austerity.” He argues that this dangerous paralysis is “exactly what 80 years of economic analysis tells us we should not be doing.” Krugman sighs at the continual Republican assertion that we can’t spend because of our deficit and we instead need to focus on long-run fiscal responsibility. Meanwhile, 8.2 percent of Americans are unemployed, and as Keynes said, “in the long run we are all dead.”

At the same time, Europe is sliding further and further into economic catastrophe. “It’s unthinkable that anybody should leave the Euro, and yet it’s becoming increasingly unthinkable that policymakers will take the steps needed to prevent that from happening.” Europe is basically demanding that Spain slash wages as well as spending, “which is a recipe for depression.”

European will to properly solve this problem is just not there, since “Europe is a currency but not a country.” In contrast, he discusses the fiscal bailouts of Florida and Texas that worked because in America, “we are a nation.” As Cutter notes, “it would be good if we stayed so.”

For more, watch Krugman’s full presentation:

Paul Krugman :: Lecture from Roosevelt Institute on Vimeo.

 

Broken Euro image via Shutterstock.com.

 

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Reagan Redux: The Truth About Romney Economics

Jun 15, 2012Jeff Madrick

The oversimplification of Romney’s economic plan avoids calling it out for what it really is: an extension of failed Republican economic policies.

In the home of Sarah Jessica Parker and Matthew Broderick this week, The New York Times reported that President Obama described Romney’s campaign attacks, which claim all current problems are “the fault of the guy in the White House,” as “an elegant message. It happens to be wrong.”

The oversimplification of Romney’s economic plan avoids calling it out for what it really is: an extension of failed Republican economic policies.

In the home of Sarah Jessica Parker and Matthew Broderick this week, The New York Times reported that President Obama described Romney’s campaign attacks, which claim all current problems are “the fault of the guy in the White House,” as “an elegant message. It happens to be wrong.”

This is as clear an example as we have of Obama’s inability to make a powerful message in a few words. Sounding professorial, he uses the word “elegant” as if referring to a mathematical proof. Clean and simple, I suppose. But to many a listener and reader, elegant only has positive connotations. Why this loftiness when plain, honest, focused language will do the job?

The fact is that almost all of our current situation is a result of economic policies that were put into effect before Obama took office. Not only is Romney’s message not elegant, but his economic plan will boldly extend these failed policies. His central message is simplistic, ignorant, and, to use a lofty word, ahistorical. In actuality, the plan has been underway since the 1980s and even before, and look where it’s gotten us. It serves the interests of the wealthy very well, but has it served America at all? It’s not the collapse of the welfare state, but the ravages of a rising oligarchy, that are undoing America.

Which brings me to another New York Times piece, today’s David Brooks column. Brooks’s methodology as a “thinker” is to develop arguments that he knows will sound plausible to his readers and maybe to a significant swatch of centrists. He is good at these over-simplifications. Today’s column is as unaware or deliberately neglectful of history as ever. What Democrats don’t understand is that the system is broken, he says. Republicans understand this and want to return us to some early (if mythological) economic state. The welfare state is on the cusp of failing; he quotes a Weekly Standard piece on this idea that he thinks definitive. This welfare model, he goes on, “favors security over risk, comfort over effort, stability over innovation.”

This is breathtaking nonsense. The so-called welfare state—whose main features are benefits to the elderly, by the way—favors opportunity for those who have no access to it,  substantial government investment in education and research, which are the great sources of innovation, adequate transportation to enable business to operate efficiently, and fewer and more moderate recessions so that the nation does not lose investment, human capital, and many good businesses due to short-term fluctuations.

And, oh, yes, the welfare state does promote some compassion for the less fortunate—those thrown out of work through no fault of their own—and a sense that all of us owe something to each other. And, yes, it does require government.

What’s truly mind-numbing about the Brooks view, which clearly represents a Republican body of what is considered highly sensible thought, is that all the Romney proposals have been on the ascendancy since Ronald Reagan, and some of them before. These include lower progressive tax rates (Reagan and Bush); deregulation and weak regulatory implementation (Reagan, Bush I and II, Carter, and most important for financial regulations, Clinton); reduced social spending on many categories, notably welfare (Reagan and Clinton); few new programs even as social needs change; and inordinately tight monetary policy since Paul Volcker’s chairmanship at the Federal Reserve, to keep inflation and therefore wages in check. And what happened? Stagnating wages, modest capital investment, unequal public education, and collapsing infrastructure. These are the results of Romney economics.       

If there is theory at all in the Brooks view, it is of course the spurious generalization that individualism will win the day. Just make everyone take care of him or herself. Republicans love this notion. The other idea is that if business is just allowed to do its job, free of most regulation and taxes, everyone will do just fine.  The historical evidence clearly points to the opposite. Look at the levels of inequality in the good old regulation-free and low-tax days of post-Civil War America. Do you we need a better example?

Returning to Obama—he better fight this battle head on, not in professorial dignities, but on the sweaty mat where victory is won. He better understand that the Brooks's over-simplifications are appealing because they blame victims and relieve the rest of responsibility. Call these things what they are, Mr. President. Make America the responsible society once again. The Romney policies failed not just since George W. Bush, but since Ronald Reagan and even Jimmy Carter. 

Roosevelt Institute Senior Fellow Jeff Madrick is the Director of the Roosevelt Institute’s Rediscovering Government initiative and author of Age of Greed.

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What Lies Behind Clinton's Remarks on Private Equity

Jun 7, 2012Jeff Madrick

Bill Clinton's remarks about Romney's record and the Bush tax cuts demonstrate his fealty to the financial sector.

Bill Clinton's remarks about Romney's record and the Bush tax cuts demonstrate his fealty to the financial sector.

We can attribute Bill Clinton making trouble for President Obama to his unquenchable need for the limelight. He first praised Mitt Romney’s business record and private equity practices in general. He then said the Bush tax cuts should be extended, without indicating that he agreed with Obama that the tax increases on the wealthy should be retained.

Clinton’s concern about raising taxes in the weak economy while cutting federal spending is right on. America is now practicing austerity, if a milder version than Europe’s. If not reversed, we could well have a recession again in 2013. And then what happens to the still-strained financial sector?

But Clinton’s remarks are disturbing for what they suggest about his tolerance for the financial class, for lack of a better term. Was it an accident that he left out any mention of raising taxes on the wealthy? The financial class dominates that group, if we include business execs who make a great deal of money from their stock options.

The real giveaway about Clinton is how he supports the financial industry’s assertions about the good done by private equity. We’ve addressed some of that in this space before. Clinton says flat-out that they do a good job. Does he have any evidence to demonstrate that? Has he looked at the evidence that undermines those assertions? Does he really think private equity was all about saving companies rather than exploiting the ability to borrow against their assets, cut them down, and then sell the company? Was it all about making America more productive and innovative? Come on.

This is of course the Bill Clinton who wholeheartedly gave us financial deregulation—no regulation of derivatives, no restraints on bank expansion as Glass-Steagall was undone, little concern by his SEC about over-speculation and analytical lying in investment firms, allowing CEOs to get enormous stock options, and so on.

He has apparently bought the assertion that the financial engineering of the past 20 years was mostly good. Of course, Wall Street is where the campaign money is.

In his most recent book, Clinton argued for stronger government, a welcome call. But he was the one who gave us less government.

Next week, we will post a thorough piece by economist Eileen Appelbaum on the good and bad of privatization. In the meantime, keep in mind that the heyday of privatizations, then known as Leveraged Buyouts, was the 1980s, when productivity growth for America remained historically slow. It did not rise again until the mid-1990s, with the advent of the Internet. The large, large share of productivity gains was in high technology and companies like Wal-Mart, not in the buyouts of companies by Bain and others.

Roosevelt Institute Senior Fellow Jeff Madrick is the Director of the Roosevelt Institute’s Rediscovering Government initiative and author of Age of Greed.

 

Bill Clinton image via Shutterstock.

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Millennials' Lack of Faith in Government is Leading to a Grayer Congress

Jun 7, 2012Brad Bosserman

To get more young people on Capitol Hill we have to prove that government can play a positive role in American life.

To get more young people on Capitol Hill we have to prove that government can play a positive role in American life.

A recent survey conducted by Harvard University revealed that while 69 percent of 18-29 year olds believed community service was an honorable thing to do, only 35 percent felt that way about running for office. This has real ramifications for the make-up of our legislatures. A recent article in Salon explained that Congress is getting older not because incumbent members are sticking around longer, but because the age of incoming members is rising.

It is worth considering the impact of having telecommunications and Internet policy drafted by politicians who are still “learning to get online” and leaving foreign policy decisions to people whose views were shaped and developed during the Cold War. Stephen Marche made the case earlier this year that these trends have also led to “thirty years of economic and social policy that has been rigged to serve the comfort and largesse of the old at the expense of the young.” So where are the Millennials who should be beating down the doors to the Capitol?

Some have suggested that the absence of young people in elected office is all about economics. Older Americans have gone from out-earning their younger counterparts by 10 times in the mid-'80s to nearly 50 times in 2008. This migration of wealth from young to old has occurred alongside a dramatic growth in the cost of running a successful campaign, with political spending in House and Senate races increasing eight-fold between 1970 and 2000.

This alone does not seem to explain the systemic aging of our legislatures, however. The technology booms of the '90s and aughts also produced a record number of young millionaires and billionaires. Yet they have chosen to stay out of elected office in far greater numbers than wealthy members of previous generations. Why?

I have a theory. The Millennial generation has come of age in an America influenced by a conservative ideology that changed our views about the role of public and private civil society. Heather McGhee, the Washington Director of Demos, has observed, “[T]he most pernicious effect of the Reagan revolution was to take the horizon of public policy solutions off the table entirely. We know that there are problems, but we no longer imagine that there are public policy solutions to them.” This is a profoundly different vision of American government than that which animated the New Deal and Great Society.

The modern Republican Party’s commitment to shrinking the size and scope of the public sector has led them to shake our confidence in key government institutions. The GOP has been able to convince the public that the government is corrupt and ineffective, in part by making the government corrupt and ineffective. This campaign has disproportionately affected the generation of young people who have been forging their views about politics over the last 15 years. Gallup reports that cynicism and negativity toward the government has been building for over a decade, recently culminating in “record or near-record criticism of Congress, elected officials, government handling of domestic problems, the scope of government power, and government waste of tax dollars.”

This phenomenon parallels another recent trend: the rise of the independent voter. Research has long shown that despite the conventional wisdom, self-identified independents actually behave much more like weak partisans than they do like hyper-informed mavericks. The ranks of these “independents” have grown dramatically over the last 20 years, and much of that growth has been concentrated among young Americans. In 2009, Gallup found “more than one-third of the youngest Americans identify as independents, a percentage that drops steadily as the population ages, reaching a low of around 20% among those 80 years of age and older.”

This is not entirely bad news. Even as they have lost faith in our political parties, young Americans have flocked to other forms of civic engagement. The Corporation for National and Community Service reports that volunteer rates for 16- to 24-year-olds has nearly doubled over the last 20 years. In many ways, volunteerism has become second nature to the Millennial generation, taking the place of more traditional political involvement.

But the challenge remains for those who want to see young Americans in Congress. To reverse these trends, we must actively promote the belief that public policy and institutions of government have a powerful and positive role to play in American life. The graying of the House and Senate shows that allowing conservatives to demean public service, institutionalize gridlock, and breed public cynicism will drive away the young and idealistic. This vacuum hands power over to increasingly older politicians with entrenched views and distinct generational interests that do not represent the largest generation in American history.

Bradley Bosserman is a member of the Roosevelt Institute | Pipeline and a Policy Analyst and Director of the MENA Initiative at NDN and the New Policy Institute. 

 

Congress image via Shutterstock.

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Mike Konczal on “Fireside Chats”: Tough Times make Liberal Reform Tougher

Jun 5, 2012Danielle Bella Ellison

In the latest episode of “Fireside Chats,” Roosevelt Institute Fellow Mike Konczal talks with David Frum, Daily Beast writer and author of the new novel Patriots. In the clip below, they take on why Democrats have had trouble gathering support for stimulus programs during the current recession. “We’ve gone from Speaker Pelosi and the new Obama presidency and the idea of this wave of progressive energy to really trying to fight between the center and the center right,” Konczal notes.

In the latest episode of “Fireside Chats,” Roosevelt Institute Fellow Mike Konczal talks with David Frum, Daily Beast writer and author of the new novel Patriots. In the clip below, they take on why Democrats have had trouble gathering support for stimulus programs during the current recession. “We’ve gone from Speaker Pelosi and the new Obama presidency and the idea of this wave of progressive energy to really trying to fight between the center and the center right,” Konczal notes.

As Konczal explains, “The real New Deal that we think of – the core economic security and managing the business cycle and so on – occurred in ’35,” when the economy was expanding. Meanwhile, “the conservative agenda to roll back the Great Society and the New Deal” unfortunately becomes more feasible in tough economic times like ours. The public becomes more risk averse and prefers austerity policies to big and potentially risky spending programs. Major liberal reforms, however necessary and beneficial they may be, are just very hard to pass during bad economic times.

The current grim economic condition, as well as the increase in media culture and accelerating ethnic change, have caused a transformation of American politics. Watch the full conversation below in which Konczal and Frum discuss this transition, what a Romney budget would look like, and the future of Obamacare.

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Defending Krugman: The Importance of Keynesian Economics

May 25, 2012Jeff Madrick

Keynes was right: increased government spending in the U.S. is necessary to decrease unemployment and raise demand in the near-term.

Paul Krugman hardly needs defending, but his views about the need for Keynesian stimulus in the U.S. right now are coming under considerable fire from centrist and left-of-center economists. I find this disturbing because Krugman’s view abides by basic Keynesian principles that seem to have been discarded by many who profess themselves Keynesians. Is there a wide misunderstanding of Keynes?

Keynes was right: increased government spending in the U.S. is necessary to decrease unemployment and raise demand in the near-term.

Paul Krugman hardly needs defending, but his views about the need for Keynesian stimulus in the U.S. right now are coming under considerable fire from centrist and left-of-center economists. I find this disturbing because Krugman’s view abides by basic Keynesian principles that seem to have been discarded by many who profess themselves Keynesians. Is there a wide misunderstanding of Keynes?

What seems to upset people is that Krugman argues the government must spend more money now, almost regardless of what it spends it on. The Keynesian thesis is that economies can settle at a high level of unemployment rather than re-adjust to the optimum unemployment level—or level of economic activity—on their own. This was a response to the classical, pre-Depression view that the beauty of free markets was a self-adjustment process based on falling prices in downturns. But ultimately the problem is a lack of demand, and Keynes advocated budget deficits to support an increase in demand.

The lack of demand in the economy now is palpable. Krugman’s contention is that in the near-term, we can solve this problem if we have the will to do so. The economy can reduce its rate of unemployment fairly rapidly with adequate Keynesian stimulus. It is clear that monetary stimulus at this point is not enough.

This view is not incompatible with longer-term concerns about the economy -- inadequate education for too many, infrastructure decay, old energy technologies, and so on. Many seem to criticize Krugman for not acknowledging “structural” changes in the economy, and they implicitly agree with classical conservative observers that the unemployment rate really can’t fall much below 7 percent. I can’t speak for Krugman, but he seems to be saying that we should not mix up longer-term structural issues with near-term demand inadequacy. It’s very likely the unemployment rate can fall much farther without igniting inflation.

I can’t see how he is wrong about this; indeed, he is urgently right about it. We are facing a year or two when the federal government will likely contract spending and will certainly not increase stimulus markedly. Of even greater concern is the refusal in Europe to recognize that austerity—the opposite of Keynesian advice right now—will lead to further recession, which in turn could spill over to the U.S., jeopardizing Obama’s candidacy.

When so many commentators criticize Krugman’s view, insisting that any new spending must be investment in infrastructure, must not go to the military, or that there should be no new spending at all, they are ignoring the Keynesian process. Krugman will not advocate against military spending cuts (and I certainly wouldn't myself). But priorities are important here. Let’s keep them clear.

In sum, let’s understand that more aggregate demand now will reduce the unemployment rate. There is a near-term solution, not to America’s long-term issues, but to an economy that is sputtering and may lead to a political environment in which those who plan to do more damage win office.  

One of the true advances in contemporary thinking is that both a power and a duty of government is to use fiscal and monetary policy to ameliorate downturns and create economic expansions. This is the legacy of Keynes, well supported by empirical research.  

Roosevelt Institute Senior Fellow Jeff Madrick is the Director of the Roosevelt Institute’s Rediscovering Government initiative and author of Age of Greed.

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