This is how societies have progressed over many centuries: from Silk Road traders traversing the Middle East to Asia, to explorers crisscrossing from the Old World to the New World, to the millions of students who flock to the United States to attend college and graduate schools. Free trade has freed us from the tyranny of our own narrow ideas and ways of living. The movement of peoples across national boundaries has transformed religion, technology, and political thought for many centuries.

Now, free trade and the free movement of people is under attack. In Trump’s America, coinciding with Brexit and perhaps with an impending “Frexit” from the European Union, many of us are wanting to crawl back into our shells, hoping the distance that we create, both economic and cultural, will protect us from the dislocation, and redistribution of wealth.

It will not.

Demonstrators, one dressed in a Theresa May puppet head, pose near parliament in London, March 13, 2017, to express their concern that the Prime Minister is whipping members of parliament to endorse a “blank cheque Brexit.” Photo by Kirsty Wigglesworth/Associated Press.

The forces of technology have always been powerful and are likely to become even more so in the future. Robots carry no passports and don’t need visas to invade our shores. Artificial Intelligence (AI) does not even need to travel by sea, air, or land. It will arrive on our computers, tablets, and smartphones while we are asleep.

So factory workers in Detroit or Ohio should no longer be worried about the threat of exported Chinese, Japanese or South Korean manufactured goods. The real threat comes from factories that will be largely run by robots, and the tsunami-like advance of AI.

Is it not our moral duty to protect those who are deeply hurt by free trade, immigration, and, now, by the ever-accelerating free movement of technology? Of course it is. But our focus should be on protecting workers, not old jobs or dying industries. The best way to protect workers is to make them ready for the new, ever-changing world we live in.

Endless cavalier talk about job retraining can sound patronizing. It isn’t easy to learn new trade or skills, especially as one gets older. But there are fresh ideas worth considering about how to protect people and help them to adapt, and at least a few of these are worth trying.

First, even if we cannot re-train ourselves so easily, we certainly can make sure that our children are equipped to navigate the new world with more agility and ability. This means making sure they receive a modern education. How do we make sure that education remains affordable and within reach for all, especially those being displaced?

Here’s one idea: When a worker is laid off, we should do more than simply protect her basic needs by providing unemployment insurance and other social security benefits. We should also offer her vouchers that allow her to send her children to school, college, or vocational training schools; the voucher could cover her own education if she is so inclined.

Second, we can make unemployed workers eligible for micro-finance loans that encourage them to start a small business of their own. Entrepreneurship is not a panacea, and is still riskier than having a stable job, but society can help shoulder the risk of failure with them.

Third, we must now embrace the idea of Universal Basic Income (UBI) to make sure that no one is hungry, without adequate healthcare or a roof over their heads. Such guarantees need not add to the taxpayers’ burden if we reallocate the existing transfers and subsidies that have favored the upper middle-class and the rich. We can begin by targeting agricultural subsidies and the tax-deductibility of corporate debt and mortgage interest.

Of course, entrenched interests will fiercely oppose such moves. But the Trump-led transformation into a protectionist and parochial society, if enacted, would be far worse. We can ignore a thousand years of history only at our own peril.

The post Want to Really Help Workers? Then Embrace Free Trade appeared first on Zócalo Public Square.

That’s a shame, because the Obama-era efforts hold important lessons about what’s possible in addressing inequality and how we must do better in the future.

As Obama entered office, public consciousness of inequality of income and wealth was on the rise and the Great Recession brought disastrous economic consequences for tens of millions of Americans. In the past 40 years, inequality of income rose faster in the U.S. than in any other nation and the inequality of wealth exceeded that found in any other advanced economy.

Obama tackled the problem of inequality from the beginning. The first bill he signed as president was the Lilly Ledbetter Fair Pay Act—an equal pay legislation. Ledbetter had worked for Goodyear for 20 years before learning she was paid less than men for the same job. The law removed the requirement that a petition regarding discriminatory pay be filed within 180 days of the discrimination; it also made any discriminatory paycheck actionable.

The American Recovery and Reinvestment Act, the administration’s 2009 stimulus bill, has not received enough credit for assisting poor families and for preventing more people from falling into poverty. The act added $20 billion for food stamps and food banks, support for poor neighborhoods, an increase in unemployment insurance, and $3.5 billion for job training. With an unprecedented 45 million Americans in poverty today, one enduring criticism is that Obama should have focused on a second stimulus rather than his health care bill.

Yet the Affordable Care and Patient Protection Act also helped reduce inequality to a degree. The law’s redistributive features are not generally recognized by the public, but they help explain the unrelenting opposition from its reactionary opponents. Obamacare contains higher Medicare payroll taxes on individuals with incomes above $200,000 and families with incomes above $250,000 and it levies fees on the healthcare industry (which has gained millions of new customers from the ACA) and on drug and medical device manufacturers.

Obama’s critics, and the president himself, have said he hasn’t done enough to tell the story of this battle against inequality. But it’s not for lack of trying. In December 2011, Obama confronted the unfairness of our economic system in a speech at Osawatomie, Kansas, where ex-President Theodore Roosevelt in 1910 made his historic “New Nationalism” speech calling for a “Square Deal” for the American people. The next month, Obama’s State of the Union focused on restoring America’s promise of opportunity. Always cautious during his first term, Obama waited until after his re-election to talk directly about “income inequality.” Instead, he emphasized fairness and everyone “playing by the same rules.” At the time, billionaire Warren Buffett pointedly disclosed that he was taxed at a lower rate than his secretary (who Obama invited to sit with the First Lady Michelle Obama in the House gallery for the State of the Union), and Obama called attention to the unfairness of hedge fund earnings being taxed at 15 percent; anyone earning over $1 million, he said, should pay an effective tax rate of at least 30 percent. The Republican-controlled House predictably ignored his suggestion.

In his campaign for re-election, Obama hammered away at the same themes, while successfully painting his opponent Mitt Romney as an out-of-touch rich guy, with help from Romney’s own mistakes. Once re-elected, in his 2013 State of the Union, Obama spoke directly about income inequality, calling it “the defining challenge of our time.” He promised then, and at other times throughout the year, to devote the rest of his presidency to attacking inequality. The Congress he addressed had reached a milestone: more than half its members were millionaires and the body’s total worth was approaching $5 billion.

Obama’s second term is often portrayed as an exercise in futility: the president proposes and the Republican Congress opposes. But that’s not the whole story. In 2013, the president’s give-and-take with Republicans on budget priorities succeeded in increasing tax rates on the highest earners.

This happened in two ways: Money in tax shelters got treated like other income and limits were imposed on the deductions high earners can claim. While the “Bush tax cuts” were extended for most Americans, the cuts for those making over $500,000 expired. The so-called 1 percent are now taxed at pre-Ronald Reagan levels. Although most capital gains are still taxed at only 15 percent, more affluent taxpayers in the 39.6 percent income-tax bracket now face a 20 percent rate on their capital gains. The result—the 400 highest earners among American taxpayers are now paying an effective tax rate of 22.9 percent, up from 16.7 percent in 2012, but still down from 26.4 percent in the late 1990s.

Obama has also made effective use of his office and executive powers to address inequality. Unable to persuade Republicans in Congress to raise the federal minimum wage, (stuck at $7.25 an hour, and worth far less in real terms than the minimum wage in 1968), Obama has used the “bully pulpit” to advocate higher wages and encouraged a growing movement among states and cities to raise their minimums on their own.

In 2014, the president issued an executive order raising the minimum for workers hired by federal contractors to $10.10 an hour. The president also required federal contractors to report wage data to the Labor Department, to prevent abuses and serve as fuel for future action.

In early 2015 Obama again resorted to an executive order to give federal workers up to six weeks of paid maternity leave, and asked Congress to extend this to private workers. The president also advocated a Healthy Families Act giving workers in the private sector up to seven days paid sick leave; some 44 million, or 40 percent of the workforce, do not have paid sick leave. Just four states and the District of Columbia, along with 18 cities, have passed laws requiring employers—usually with 15 or more employees—to give such paid leave.

Obama’s Labor Department also issued guidelines to help states establish savings plans for private-sector employees whose employers don’t offer them. And Obama has sought to reverse regulations that burden unions. While organized labor was disappointed that the president and Senate Democrats failed to enact legislation making it easier to unionize workplaces, Obama delivered a huge gain for low-wage service workers in his appointments to the National Labor Relations Board.

In August 2015, the board delivered a series of decisions by a 3-2 partisan vote making it easier for unions to represent workers in fast food restaurants and retail giants like Wal-Mart. And this May, the Department of Labor announced sweeping new overtime rules that could affect as many as 12.5 million workers. The regulatory action will make it almost impossible for employers, even smaller firms, to avoid paying overtime to workers who put in more than an eight-hour workday.

Meanwhile, even as the more progressive wing within Obama’s party would have liked to see more energetic action taken against Wall Street, there is evidence that the complicated financial reform known as the Dodd-Frank is having some effect in reining in the financial sector. Bank earnings are down, and the biggest banks are lending more while preserving healthier balance sheets under tighter regulation.

All told, the administration’s higher income tax rates on the affluent, subsidies for health insurance, expanded tax breaks for poor families with children, and other measures, amount to an impressive government counterattack on advancing inequality. Nevertheless, the administration faces two problems in selling its narrative: the fact that public opinion is a lagging indicator to economic reality (things can turn better before the benefits are widely appreciated), and the more daunting reality that there are limits to what government can do in the face of structural forces (such as technological change) creating deeper income and wealth inequality in our society.

As Obama prepares to leave office, Americans are only now beginning to consider his overall legacy, and may soon come to appreciate his efforts to combat economic inequality and restore a sense of fairness and opportunity to American life. Whether his successor will try to build on Obama’s effort, or be able to do so, remains to be seen.

The post Obama’s Unsung Legacy in the War on Income Inequality appeared first on Zócalo Public Square.

This is the downside of regulations, enacted after the Great Recession, that made banks safer than ever. Unfortunately, those same regulations also caused banks to focus on mortgages and publicly traded loans, rather than lending to growing private companies. This dislocation may explain why the economic recovery since 2007 has been the most tepid in the past 50 years.

Middle market companies in the U.S., defined as companies with between $10 million and $100 million in revenues, account for 24.6 percent of all U.S. jobs and almost $6 trillion in total revenues. These 351,148 companies have been left behind by requirements that banks hold larger reserves against potential losses. This effectively penalizes banks for providing customized loans to private companies which must be retained on their books, and encourages banks to engage in activities that can be bundled up and sold to investors. Banks today will also lend to companies owned by private equity firms, because they are deemed to be less “risky” since they are under the control of professional investors, who have become huge players in buying control of middle market companies.

So when you operate a firm independently or family-owned and without a major financial sponsor such as a private equity firm, you fall under the category of “non-sponsored.” If you’re “non-sponsored,” banks won’t lend you enough to grow to seize the emerging opportunities in the economy.

The result: while large corporate behemoths like General Motors and Apple are sitting on piles of cash and still raising more with cheap debt, their suppliers and partners—smaller private companies that make car seats or manufacture iPhone accessories—don’t have financing for working capital or capital expenditures to keep up with growth.

Banks are required by regulators to hold a minimum amount of cash in reserve and they can lend the rest to borrowers. Under Basel III rules adopted by the Federal Reserve, banks are required to hold at least 8 percent of cash against the simplified measures of risk in their loan portfolios as determined by the regulations. Prior to Basel III, the minimum was 2 percent. The result? A giant chunk of money that could be going to borrowers is now sitting idle, in bank reserves. In 2011, bank reserves zoomed to $2.6 trillion, from just $55 billion in 2008, according to the Federal Reserve.

It gets worse. For loans to small and medium-sized businesses, banks must hold up to five times more in cash reserves than for rated public debt to larger companies. If a bank makes a loan to a small business, it must hold the equivalent amount of cash in reserve in case the business defaults. In contrast, if a bank provides a commercial mortgage or a large company loan, it only needs to hold 20 percent of the value it lends. That is because those loans can be packaged and sold by the bank in large bundles to the public markets, (For those of you who have read or watched The Big Short, this process is called securitization). And for the biggest banks, which account for 95 percent of the industry, Basel III requires those institutions to maintain double the ratio of cash reserves to their total potential losses.

As a result, banks avoid unrated and highly customized middle market loans that can’t be bundled up and securitized. Instead, they now focus heavily on the syndicated loan and public bond market, where the loans range from $100 million to $1 billion. Bank lending peaked in 2000 at $500 billion in quarterly volume and remains below that level today.

In contrast, corporate bond issuance has grown from $2 trillion quarterly in 2000 to $4.5 trillion quarterly this year. Banks prefer to take lower returns from potentially risky bonds and syndicated loans because they don’t have to maintain the same level of reserves to cover potential losses. Banks can buy five times as many of these readily available bonds and syndicated loans with lower operating costs than is required to maintain a national network of loan underwriters and the required reserves.

These realities have made the local community bank an endangered creature; the number of banks in the U.S. fell from 15,000 to 5,000 over the past 30 years. The shrinking number of institutions has been driven by consolidating branch networks, community bank failures, and by the rise of non-bank finance companies specializing in consumer mortgages, once the bread-and-butter for local banks. Adding to the problem is the Dodd-Frank legislation. Named after its co-sponsors, Senator Chris Dodd and Congressman Barney Frank, the act aimed to curb the financial risk that led to the meltdown in 2008, but it has had multiple unintended consequences, among them additional costs and compliance pressures on community banks, forcing them to engage in further consolidation.

Finally, there’s the Volcker Rule, which is nested inside of Dodd-Frank. First put forth by former United States Federal Reserve Chairman Paul Volcker, the rule clamps down on banks’ ability to make speculative investments by prohibiting them from engaging in proprietary trading activity.

This rule led to the dismantling of large proprietary trading desks at major banks, which engaged in both private equity and private debt activity. That means fewer avenues of financing for mid-sized firms.

That’s why I left a career in private equity, where there is an overabundance of capital and talent chasing a handful of big ideas and too many small ones. Instead, I started a firm, Lateral Investment Management, that addresses the growth capital needs of growing and independent companies that have no private equity sponsor.

The company is built on the belief that there is a huge opportunity to partner with great owner-operated private companies that want to stay independent. Opportunities abound for growth amid upheaval in the healthcare industry, the rebirth of domestically oriented manufacturing firms, and pressing needs for infrastructure upgrades. For investors, non-bank lending to the most successful middle market companies may be the most compelling investment opportunity available today.

While the stock market continues at all time highs, the U.S. economy sputters along and struggles from the bottom up. There’s no question that the U.S. banking system is much safer than it was in 2007, but the price tag of the solutions cobbled together by the Bush and Obama administrations, Congress, and the Fed may have been more expensive than we can afford. The American ideal of the successful and thriving independent proprietor business—which has traditionally been an important engine of growth for the U.S. economy—is at risk.

The post Why Your Bank Wants No Part of Your Business appeared first on Zócalo Public Square.

The last decade of the previous millennium is suddenly all the rage, claiming a growing slice of our cultural mindshare. Monica Lewinsky is on the speaking circuit. American cable networks have served up series based on the O.J. Simpson trial and Anita Hill confirmation hearings, as well as remakes of everything from Twin Peaks to the X-Files. And, as we contemplate sending the Clintons back to the White House, the ’90s are framing many of the policy debates underlying this year’s presidential election. Clinton-era economic globalization, anti-crime efforts, welfare reform, and financial deregulation are all on trial this election year.

Nostalgia for the ’90s is triggered by plenty of contemporary prompts, but the trend is also a matter of generational scheduling. We’ve acquired the requisite amount of distance from the decade to allow it to come into focus as a distinct, coherent period of time, the way the 1980s came into focus for us in the last 15 or so years, and the way the “aughts” will in another decade or so. In addition, the children of the ‘90s are now coming into their own as cultural gatekeepers in movie studios and media, able to indulge in and share their personal nostalgia.

More than anything, the ’90s in retrospect were an exuberant interlude between the Cold War and the post-Sept. 11 era. Hardly anyone would dispute that. The debate is over whether you think we wasted this exuberant interlude by indulging in mindless pursuits of no lasting impact, or whether the decade stands, as Bill Clinton asserts, as a consequential time of sound governance, impressive innovation, expanding opportunity, and prosperity.

I am with Clinton in this debate, but it isn’t hard to see the appeal of the counterargument that this was a decade—as Seinfeld, the iconic TV sitcom of the ’90s referred to itself— “about nothing.” The notion is that American society, liberated from the decades-long nuclear standoff with the Soviets, was allowed to exhale, and focus on frivolity. Even in the political realm, the Inquisition of Clinton for his sexual peccadillos (or the peccadillos themselves, if you insist) can be interpreted as an admission that this was a new era of lowered stakes, when politics wasn’t constrained by the exigencies of confronting existential threats.

As a society, we struggled in the ’90s to assess risk, and this was as true in foreign policy as it was in the business world and in politics. The decade that started with much angst about declining American economic power (remember the odd popularity of Paul Kennedy’s history tome on the decline of great powers and worries about how Japan was taking over?) and a stubborn recession would end with strong economic growth and soaring financial markets amidst what then Federal Reserve Chairman Alan Greenspan called “irrational exuberance.”

In foreign policy, the end of the Cold War allowed America to consolidate our capitalist model as the default for the international order. It also made policymakers far more tactical and opportunistic about weighing the costs and benefits of engaging American military power around the world, especially since we were no longer in a global contest with the Soviet Union. We oscillated between being enamored of our sole superpower status and being mindful of our historic reluctance to play global policeman. We were stunned at how easy it was to defeat Saddam Hussein’s army in the first Gulf War, but then chastened by the loss of 18 soldiers in a task force under the Joint Special Operations Command in Somalia. Soon thereafter, we tragically stood by as genocide took place in Rwanda. Later in the decade, somewhat belatedly, we led NATO to destroy ethnic Serbian militarism in the Balkans, but allowed looming threats from non-state terrorist actors to fester elsewhere, like Afghanistan, with fatal consequences in the 2000s. When it came to national security, it was the case-by-case decade.

However, the sense that we were no longer stuck in a divided, zero-sum world proved enormously beneficial for cross-border collaboration and economic expansion around the world. The Europeans transformed their common market into a full-blown union, with a shared currency; closer to home, the North American Free Trade Area was born; in Asia, the world’s most populous nation became more integrated into the global economy; and a loose set of governing trading rules became the World Trade Organization.

With nationalism resurgent in 2016, and even well meaning First World elites fetishizing locally sourced everything, I miss the spirit of those days: the recognition that we are all in this together, and the ambition to raise living standards around the world.

Globalization and technology exacerbated inequality within many countries over time. But it’s less often acknowledged that the single most important economic story of the past two decades is the unprecedented decline in dire poverty around the world, and the expansion of a global middle class. Many of the institutions and approaches from the ’90s may be under siege in today’s political climate, but their legacy continues to be impressive.

On the domestic front, too, the ’90s were the opposite of a wasted decade. The U.S. economy registered its longest economic expansion ever, from March 1991 to March 2001, creating nearly 25 million jobs in the period. Americans enjoyed rising wages, low inflation, and accelerating productivity growth, thus almost forgetting about economic cycles and the concept of risk. Uncle Sam benefited from the good times, as government deficits gave way to healthy surpluses. The financial exuberance around the internet’s adoption proved to be irrational in the end, with all the buzzy talk about a “new economy,” but the hype around the transformative power of the new technologies was well deserved.

For Americans living in cities, the decade saw a vast improvement in our physical surroundings as well. I lived in New York in 1990, then mired in the fearful mood captured in Bonfire of the Vanities, Tom Wolfe’s 1987 novel. When I returned near the end of the decade after a stint away, I found Manhattanites as likely to be worried about the Disneyfication of their city as they were about their personal safety. Violent crime in New York declined by more than half in the 1990s, and public spaces throughout the city were reclaimed for public enjoyment. The same was true in cities across the country.

It’s as reasonable to second-guess the decade’s bipartisan anti-crime legislation and strategies as it is to second-guess our embrace of globalization in those years. But the conversation should start with a recognition of how much things improved. Pretending the 1990s were a wasteland of frivolity is a recipe for losing sight of that exuberant decade’s bountiful, lasting legacies.

 
*An earlier version incorrectly referred to the 18 Americans who died in Somalia as Marines. They were Army soldiers in a task force assembled from several branches of the military.

The post The ’90s Were an Exuberant Interlude Between the Cold War and Sept. 11 appeared first on Zócalo Public Square.

We have so many indicators to measure, you’d think the answer to that question would be as straightforward as the answer to the question of “How’s the weather?”

It never is, of course, for a number of reasons. The “economy” in the aggregate covers many activities and sectors, some of which can be booming while others are in a rough patch. Similarly, some individuals suffer economic hardship in supposedly good times, while some people manage to thrive in down times, so one’s feelings about “the economy” don’t always correlate with the latest macro statistics and headlines.

But there is a more novel reason for the confusion surrounding how people feel about the economy: the perceived seesaw relationship between the U.S. economy and the rest of the world. For the past decade, our fortunes and those of nations beyond our shores haven’t been moving in tandem. Even more worrisome, in the political realm the two are increasingly described as being in a zero-sum, adversarial relationship.

The 2007-to-2009 financial crisis was a rare case of an economic catastrophe inflicted by the United States on the rest of the world, as opposed to earlier foreign contagions that struck the U.S. Ever since then, however, the U.S. has been outperforming most other places. We at UCLA’s Anderson Forecast continue to believe our economy remains on track for moderate growth, at a 2.5 percent rate for fourth-quarter over fourth-quarter GDP growth. The country remains on track to create 2.4 million jobs this year and 1.5 million jobs next year as the economy reaches near full employment. We estimate unemployment will stand at 4.6 percent by year’s end.

The Federal Reserve appears to be ready and willing to raise interest rates this year, partly because it is about to get the inflation it has been praying for, a sign of healthy demand for workers, goods, and services. Consumers are out and they’re spending, managing their debt loads appropriately, and the housing market is recovering from the disastrous financial crisis of the past decade.

It all speaks to a solid, if not spectacular, outlook, and yet it’s hard not to feel that there is an ominous disturbance in the force lurking somewhere out there, seeking to undermine our steady upwards trajectory. And this ominous disturbance in the force for the past few years has been the global economy.

Not long ago, the rise of China and other emerging markets, combined with the stability of Europe’s developed economies, made the rest of the world seem more like an opportunity than a threat to U.S. investors. But no longer—these days it’s mostly economic threats that seem to be washing up on our shores from distant lands.

Late last summer and early this year, we saw sharp declines in our stock market due to fears of what a slowdown in Chinese growth might mean for the world economy. Tensions within the European Union—over its handling of the Ukraine, Greece’s unsustainable debt load, and the Syrian refugee crisis—have also been a source of recurring worry to our financial markets. Other once-ballyhooed economies like Brazil have also been facing a slump, contributing to a decline in commodity prices and a rise in the value of the U.S. dollar, which makes our goods more expensive around the world, thereby hurting our exporters. Falling oil prices are another symptom of the funk much of the world economy is in.

The next disturbance in the force may again come from China, or from Europe, as the United Kingdom will vote in June on whether or not to stay in the European Union. Whether such a “Brexit” is a wise move or not, the transition period will likely be marked by increased market volatility.

The United States cannot indefinitely remain an island of exceptional economic tranquility in our interconnected age. Our economic fate is linked to that of the rest of the world.

Unfortunately, our politics don’t reflect this reality. There has been much talk on the campaign trail this election year about who’s “winning” and “losing” in our economic relationships, with no acknowledgment that trade can be a win-win scenario. As a result, the lurking threats posed by weakness overseas are presented by fear-mongering politicians as being more serious and sinister than they really are. Certainly there is no acknowledgment that it was America and its mortgage mania that dragged down much of the world’s economy in the Great Recession. And a time when the rest of the world yearns for steady economic leadership from the U.S., two of our leading presidential candidates want to fence off the country from the world, and blow up the global trading system we designed in the aftermath of World War II.

All these intangibles make it difficult to be in the economic forecasting business, especially when many of these intangibles are more political than economic in nature. We are used to thinking of “political risk” in the context of emerging markets (say, an election in India, South Africa, or Argentina), but now you have to say that political risk must be an asterisk attached to any U.S. economic forecast. If Donald Trump or Bernie Sanders is elected president and sticks to his campaign rhetoric and worldview once in office, we could see the second major “made in the U.S.A.” global recession of the young century. And we would discover that the true disturbance in the force lay within the whole time, as the threat to our well-being proved not to be the outside world and its woes, but how we reacted to them.

The post The U.S. Can No Longer Remain an Island of Economic Tranquility appeared first on Zócalo Public Square.

New York Times columnist Roger Cohen—formerly a Berlin-based correspondent—talks with Anne-Marie Slaughter about Angela Merkel’s victory in Germany and how it will affect the nation’s place on the world stage. New America Foundation economic growth program director Sherle R. Schwenninger and Washington Post financial reporter Ylan Q. Mui talk with Slaughter about what the U.S. Federal Reserve’s announcement that it will continue pushing cash into the economy (rather than “tapering” the stimulus) means for the country.

The post Rely on Angela Merkel; Don’t Rely on the Fed appeared first on Zócalo Public Square.

With all the hype, and the Wile E. Coyote-evoking image of the cliff, it’s hard to remember that the potential year-end hit to the economy is not an act of nature or something forced on the United States by cruel outsiders. The Fiscal Cliff is instead a crisis manufactured by a divided Congress that doesn’t trust itself to do the right thing in the absence of a crisis. So, absent a financial deal between the two parties, we’ll get hit with a bruising double-whammy of higher taxes and automatic cuts to government spending. As a form of motivation, it’s both brilliant and perverse, like a diet that requires you to shoot yourself in the foot in three months unless you have started running daily.

As for the backstory, each faction in this drama has its own partisan CliffsNotes (sorry, couldn’t resist), but some facts are unassailable. The first is that democracies have an easier time raising spending than they do raising taxes, especially when credit is readily and cheaply available, as it has been these past few years. Second, federal deficits of the past three years have been alarmingly high (this year’s is projected to come in at more than 7 percent of Gross Domestic Product), and they contribute to a mounting national debt (now in the neighborhood of 100 percent of GDP). And the third unassailable fact, confusingly enough, is that Washington’s biggest problem in dealing with its fiscal mess may be that financial markets don’t appear to think there is much of a problem.

Before delving into that last head-scratcher, step back and consider the overall pie. Over the past 40 years, federal tax revenues have averaged 19 percent of GDP. This percentage, measuring the slice of the overall economy claimed by Uncle Sam, has held remarkably steady, despite dramatically varying policies and tax rates (top marginal rates were well over 50 percent for much of the postwar era). Only once, in the capital-gains-rich year of 2000, did tax receipts exceed 20 percent of GDP. Federal spending, meanwhile, has averaged about 22 percent of GDP over the past 40 years.

In the past few years, we’ve deviated from these trend lines, as the so-called Great Recession dried up tax revenues and necessitated extra spending. The amount Uncle Sam is currently hauling in amounts to only 17 percent of GDP, while Washington is spending an amount equal to roughly 24 percent. The long-term projections look even grimmer, on account of the coming spike in entitlement spending produced by an aging population and escalating healthcare costs.

So, to recap, we’re having a hard enough time as it is getting back into equilibrium (defined not as balanced budgets but as manageable deficits in the range of 2 to 3 percent of GDP). But in the long term we’re in even bigger trouble, as federal spending is projected to creep past 30 percent of GDP in the next 20 years if current entitlement obligations and costs—or economic growth rates—don’t change dramatically. Jumping off the cliff addresses the short-term problem by raising revenue (via the expiration of Bush-era “temporary” tax cuts) and by implementing severe budget cuts. Great idea—unless, as economists are quick to caution, the economy contracts as a result of this self-imposed austerity and starves the government of the additional revenues it was hoping for, which would give us a short-term fix but bring us no closer to solving the longer-term crisis.

Mind you, that word “crisis” is one I use advisedly because, as teased earlier, the financial markets have remained nonplussed by the scary fiscal projections, credit rating downgrades, the political dysfunction, and the alarmist countdowns. Despite all of these red flags, it’s never been cheaper for Uncle Sam to take out a 10-year loan than it has been this year. The interest rate on the 10-year Treasury bill dipped below 2 percent earlier this year, an all-time low.

Countless future economics Ph.D.s will be minted seeking to explain how and why Uncle Sam’s cost of borrowing could have kept going lower as the federal debt burden (and indicators of federal dysfunction) kept shooting higher. Among possible theories: The United States still looked like a sound investment when compared to places like Europe; controlling the world’s reserve currency allowed Americans to have their cake and eat it too; a soft economy allowed Uncle Sam to soak up excess available cash that the private sector (and foreign central banks like China’s) didn’t want to invest; no one wanted to count out a nation capable of inventing a Fiscal Cliff to try to spook itself into getting its act together.

I would even offer up the Micawber Theory, a nod to the hard-up Dickensian character in Great Expectations who always believes “something will turn up” to transform things. We’re still considered, by domestic and foreign lenders, to be a charmed nation with a knack for coming out ahead—in short, a good credit risk.

Whatever the reasons for the stubbornness of the market’s confidence in Uncle Sam, we’re a long way from the ’90s, when Treasury Secretary Robert Rubin could point to an uptick in interest rates to insist that the administration and Congress get serious about embracing fiscal responsibility. While both parties at the time bought Rubin’s argument that government borrowing needed to be reined in because it “crowds out” borrowing by consumers and businesses, Republicans later took to mocking “Rubinomics” when they became the party of large deficits under President Bush. Democrats on the left don’t feel too differently.

All of this is maddening to Wall Street and Washington budget hawks (among whom I count a number of colleagues and friends), who understandably want us to live within our means and believe there will be dire consequences if we don’t. A couple of years ago I teased a budget-hawk colleague that she must, in her darker moments, wish for signs of inflation in order to get us all on the program. Of course, she denied having such hopes—and reminded me that it’s easier for you to get your house in order before a crisis forces you to do so. True, no doubt, but so difficult in a democracy (see “Global Warming, responses to”).

That’s why the smart money in Washington is on some short-term compromise at year’s end or in January—to buy some more space and time to procrastinate on any of the really hard stuff. Keep an eye on interest rates and the stock markets, for any real urgency to make meaningful decisions can only come from them.

And what about “the people” beyond the Beltway, the great American electorate that hired both President Obama and the Republican House? Voters are routinely mocked by Washington insiders and media elites for being out of touch with reality, for expressing concern about deficits but no real appetite to pay more taxes or to identify any material cuts to government programs. But does this make them naïve and spoiled, as is often assumed in my circles—or wiser? Could it be that most Americans look at the petty insider game and are right to scoff at the choices laid out by keepers of the conventional wisdom?

Maybe the American people keep electing a divided government so as to neutralize Washington while something else, something more ambitious and becoming of America, turns up, as Micawber would say. One game-changer that could alter all dire scenarios would be a combination of higher economic growth and declining healthcare costs. The healthcare sector has proven resistant to the efficiencies that new technologies have forced on most other industries, but is it crazy to think that could change?

For now, either way, the cliff is upon us. It may turn out to be as anticlimactic a crisis as Y2K, or it may yet trigger a panic. Living inside the Capital Beltway, though, I would be rude to pretend that the sanguine financial markets and disinterested American public were onto something my neighbors and colleagues are not. I should probably stock up on extra water, if only for the sake of appearances.

The post We’re Going To Fall Off A Cliff!!!! appeared first on Zócalo Public Square.

But at a Zócalo event at Grand Park in partnership with the Music Center, Grunwald, author of The New New Deal: The Hidden Story of Change in the Obama Era, offered a revisionist history of the stimulus. He rebutted its critics and the president’s reluctance to embrace a huge and hugely transformative piece of legislation. Grunwald said that the stimulus prevented America from falling into a depression, created thousands of jobs, and launched over 100,000 projects that are transforming America’s approach to healthcare, transportation, education, energy, and more.

Grunwald reports on energy, and he became interested in the stimulus because of the $90 billion it injected into clean energy—“the biggest energy bill in the history of the planet.” But once he began looking to see what else was in the stimulus, he was surprised by the scope of projects like education’s Race to the Top (which only a few audience members knew was part of the stimulus), high-speed rail, and the $27 billion it has invested in getting all Americans electronic health records by 2017. The stimulus also provided America’s biggest infusion of research money ever, and modernized unemployment insurance for the first time since the New Deal.

Yet despite the fact that the consensus is that the stimulus at its peak added 2 to 4 percent to the nation’s GDP and that “all the top economic forecasters agree it did help stop that terrifying free fall” of 2009, when job loss peaked, the common wisdom in Washington and the media until recently was that the stimulus was something of a joke. In reality, said Grunwald, stimulus projects have been on time, under budget, virtually fraud-free, and full of good-government reforms. “This is a big deal,” he said. “The stimulus is more than 50 percent bigger in constant dollars than the entire New Deal.” So why isn’t it being remembered more like the New Deal? For one thing, it lacks impressive monuments like the Grand Coulee Dam; instead, it’s going to leave behind what Grunwald called a “mundane legacy” of sewage plants, repaired potholes, and government workers who without the stimulus would have been laid off but kept their jobs instead.

Grunwald also thinks that the stimulus is a good way to evaluate President Obama’s first term. It is, he said, Obama making good on the promise of change he made in his 2008 campaign. The stimulus produced dramatic change on energy, healthcare, education, and in lessening the squeeze on American families—what Obama said would be the four pillars of his presidency when he first announced his candidacy in 2007 in Springfield, Illinois.

But neither the right nor left has viewed it in this light. Instead, the stimulus has proved to the left that Obama is just like any other politician, said Grunwald—more interested in cutting deals than chasing dreams. And to the right, it showed that Obama was a “Euro-socialist radical.”

Grunwald thinks Obama is neither of these things but is above all a pragmatist—and someone who knows how to institute genuine change.

In the final weeks of the election and beyond, the national debate, said Grunwald, should be about the real stimulus—not an imaginary one that outsourced wind turbine production to China or was all about shoveling money to cronies. The central question in the next election is going to be whether government is able to contribute positively to change, he said. The Republicans are using the stimulus as an example of why government can’t. But it should be the opposite.

In the question-and-answer session, the audience asked Grunwald to talk more about the gap between the perception of the stimulus and what it has accomplished. Why has the administration been so reluctant to talk about the good things that have come from the stimulus?

The stimulus, said Grunwald, was ultimately a jobs bill that passed at a time when jobs were hemorrhaging. Times are still tough, and the economy is still struggling—just not as badly as it would have been. “It was a 3-million-job solution to an 8-million-job problem,” he said. But the reception of the stimulus is also part of a larger problem in America, where we like the stuff government does—even as we complain about the government. All this has been compounded, too, by the way the stimulus has been portrayed in the media; Grunwald believes his colleagues blew the story as badly as they blew the run-up to the war in Iraq.

Was there something about the distribution of the stimulus that has made it unpopular—could the money have been leveraged differently? Grunwald doesn’t think so. Yes, there are parts of the bill he doesn’t like. Catfish subsidies, for instance, were included to get a vote in the Senate, and money for retrofitting and building schools was left out to ensure another senator’s vote. But Grunwald believes Obama’s approach was the right one. A lot of money was dumped into the economy quickly, he said, “but you can only shove so much pig into the federal python.” He has trouble imagining a vastly different stimulus having the same success.

Another audience member asked if there was a downside to such massive spending. Is the size of this debt going to lead to a bigger economic crash in the future? Grunwald said that it’s true that the stimulus added $800 billion to the nation’s debt (which is different from the $1.2 trillion deficit Obama inherited). But, he said, the debt is “very fiscally responsible”; much of the spending is going to save the country money in the long-run by doing things like increasing federal energy efficiency, which will lower utility bills, and repairing roads now instead of building new roads later. And, he said, what increases the debt more than spending is when the economy spirals downward—and tax revenue goes down. The recession itself—along with the Bush tax cuts, war and military security spending, and rising healthcare costs—are the real drivers of the debt. And, over the long term, if the United States is bankrupted, the primary cause will not be the stimulus—or even the tax cuts—but rather the skyrocketing costs of Medicare.

The post Well, I <em>Loved</em> the Stimulus appeared first on Zócalo Public Square.