This past summer, National Economic Council Director Larry Summers laid out a new vision for the next American economy: one that is export-oriented, low-carbon, innovation-fueled, and opportunity-rich. Dr. Summers mentioned the export goal at the December job summit export session and President Obama made it clear in his State of the Union this year:
“We will double our exports over the next five years, an increase that will support two million jobs in America. To help meet this goal, we're launching a National Export Initiative that will help farmers and small businesses increase their exports, and reform export controls consistent with national security.”
Following on this commitment, the president launched the National Export Initiative last week at the Export-Import Bank’s annual conference. This is a rather typical export promotion policy, focused on increased trade financing, advocacy, and assistance for American businesses, especially small- and medium-sized businesses interested in expanding their markets abroad. The promotion of services exports is a new addition, reflecting the increased importance of service exports in U.S. trade.
One of the enduring mysteries about White House chief of staff Rahm Emanuel is why he took the job in the first place. At the time he accepted it, he was the fourth-ranking Democrat in the House of Representatives, a position he’d attained with considerable effort. Two years earlier, Emanuel had chaired the House Democrats’ campaign arm and led the party to a 31-seat majority after a decade of futility.
Andrew Sullivan, in his diligent and sentimental response to my complaint against him the other day, retreats immediately to the personal. “I have Irish blood and a Catholic conscience.” “There will be times in which the emotion of the moment will overwhelm me.” “Am I insensitive? At times, I’m sure I am.” “I’m a South Park devotee, for Pete’s sake.” What, precisely, does any of this extenuate?
I defer to Noam on the administration’s motives for announcing this spending freeze and on the real impact of the freeze on spending. But I want to say two things about it. First, if it was done to appease bond traders (where have we have heard that before?), it is ridiculous. Interest rates aren’t exactly soaring these days. It is not 1993.
The big news today is that Obama plans to propose a freeze on domestic discretionary spending in Wednesday's State of the Union address. For what it's worth, I talked to some administration officials about the thinking behind this in December, not long after the idea was first floated. Here's the gist of what I found:
Barack Obama has been compared to almost every American President of the last hundred years--favorably to Franklin Delano Roosevelt, John Kennedy, and Ronald Reagan; and unfavorably to Jimmy Carter and George H.W. Bush. I want to put another name in the hat: Herbert Hoover.
There's an interesting back-and-forth between Dan Gross and Tim Geithner in Newsweek's year-end interview issue:
GROSS: There have been, and continue to be, calls for you to go. How do you deal with those?
As of late this summer, Democrats in Washington shared a tidy consensus about the economy: The stimulus was working more or less on schedule, and the job market was gradually recovering. That meant the administration could start thinking about how to rein in the country’s yawning budget deficit, if not actually scale it back yet.
What followed turned that tidy consensus into a pigsty. On October 2, the Labor Department announced that September’s job-loss total was roughly 60,000 higher than the previous month's, prompting a hastily convened powwow between the president, House Speaker Nancy Pelosi, and Senate Majority Leader Harry Reid. (The number has since been revised downward.) Then, in early November, Democratic candidates handily lost gubernatorial elections in New Jersey and Virginia, with independents deserting the party in droves. “For those up next year, it was a wake-up call on the deficit,” says one Senate Democratic aide. Suddenly, spending more money on jobs didn’t look so appetizing. That is, until the following Friday, when the next jobs report showed the unemployment rate jumping from 9.8 percent to 10.2 percent--clearing a psychological threshold that was no less terrifying for being foreseeable. And on and on it went. “The entire town is more schizophrenic than I’ve ever seen,” says one senior administration official. “Everyone cares about jobs, and everyone cares about fiscal discipline. The weight shifts week by week, unemployment report by unemployment report.”
A few weeks after the 2008 presidential election, United Steelworkers President Leo Gerard got a call from an Obama transition aide frantic for advice on the collapsing auto industry. Gerard put his numbers guy on the call, a former investment banker named Ron Bloom, who proceeded to offer a detailed disquisition on the financial situations of GM and Chrysler. Unlike other experts the transition team had consulted, Bloom was refreshingly blunt about the companies’ prospects, which he deemed grim. “We were like, ‘Wow, who is this guy?’” recalls the aide.
Via Matt Yglesias, I see that Alec MacGillis had an interesting piece on this question in yesterday's Washington Post. There are a variety of ways the administration could target employment directly, of course, from a WPA-style federal jobs program to tax credits that subsidize hiring.
Continuing my look at b.s. stories aimed at provoking parents' angst, today's NYT "Thursday Styles" takes time off from obsessing about high-end retail to explore the disturbing trend in parental yelling.
The piece suggests that, deprived of the outlet of spanking, frustrated parents are increasingly turning to yelling to discipline their kids. As one parenting expert is ominously quoted, "yelling is the new spanking." Afterwards, many mommies and daddies feel bad about all the shouting. Also suggested is that yelling may eventually prove to be just as detrimental to little pscyhes as a good whalloping.
Except that the piece doesn't really offer evidence that any of this is true. There are no surveys suggesting that parents are yelling more than they used to--or that yelling is ruining America's youth. In fact, the piece points out that few studies even exist on the effects of yelling, and the only finding it cites from one of these is that occasional parental yelling is a near universal phenomenon. (Keep in mind here that we're not talking about chronic, abusive yelling at children. The study cited asked parents if they had yelled at their tot once in the past year.)
Just wanted to engage in a little crass self-promotion for those who come directly to The Stash, or who took the Internet off for Columbus Day: I have a piece in our current issue about the tennis-playing habits of the Obama economic team--Larry Summers, Tim Geithner, and Gene Sperling, et al--which, I half-seriously suggest, can be understood as a metaphor for their West Wing interactions. It turns out most of the group has attended tennis camp together for the last several years:
On Friday morning, Diana Farrell--a senior White House official--made a significant statement on NPR’s Morning Edition, with regard to whether our largest banks are too big and should be broken up.
“Ms. DIANA FARRELL (Deputy Assistant for Economy Policy): We understand Simon Johnson’s views on this, and I guess the response is the following….
“Ms. FARRELL: We have created them [our biggest banks], and we’re sort of past that point, and I think that in some sense, the genie’s out of the bottle and what we need to do is to manage them and to oversee them, as opposed to hark back to a time that we’re unlikely to ever come back to or want to come back to.” (full transcript)
Ms. Farrell is Larry Summers’s deputy on the National Economic Council and the former director of McKinsey Global Institute, and she has a strong background on banking issues--based on extensive professional experience with global financial institutions.
Her statement contains three remarkable points.
For the handful of people in charge of saving the U.S. economy, it’s been a grueling season. The last eight months have featured endless back-and-forths, tense stalemates, and spirited confrontations. Larry Summers, the president’s chief economic adviser, has drawn blood with his lacerating quips. Treasury Secretary Timothy Geithner has dropped expletives to signal his frustration. Even their aides have gotten in on the action.
And, in those rare instances when the wonks get a break, they step outside their conference rooms, loosen their ties, and do the same thing all over again. On a tennis court. For years, Summers, Geithner, and a variety of deputies have stared each other down from opposite sides of a three-foot-high net. These tennis relationships have played out on courts from Jackson Hole, Wyoming, to Davos, Switzerland, and on pretty much every flat surface in Washington, D.C. It turns out that tennis is the unofficial sport of the Obama financial team. And, if you want to understand the way its members go at it behind closed doors, it’s worth watching them go at it with tightly strung rackets.
The shock of the financial meltdown has had congressional committees scrambling for their gavels for the better part of a year. Politicians have been discussing how to make sure that such a near-cataclysm never happens again, and, for the most part, they've focused on the need for new regulation. What's called for, President Obama said in March, is "a financial regulatory mechanism that prevents the kind of systemic risks that have done so much damage over the last several months."
But all the talk of regulation misses a key point: If we don't know which institutions are doing what--if we don't actually monitor what we've regulated--then that regulation won't work.
The Department of Labor’s release last week of the worse-than-expected job numbers for the month of September set off the now typical back and forth debate about whether the federal stimulus is working. Joe Biden, Larry Summers, and Christina Romer have commented that the economy is still moving in the right direction and the loss of 263,000 jobs last month could have been worse had there been no federal stimulus at all. Another army of usual suspects claims that the dismal jobs report is proof that the stimulus package has yet to produce economic recovery.
In a way, both camps are right.
Several commentators have noted that temporary stimulus rebate programs--namely “Cash for Clunkers”--propped up the economy through July and August. Car dealers credited this effort for boosting their sales to the highest levels of the year. The First-Time Homebuyer’s Credit is said to be having a similarly positive impact through the real estate and construction sectors. So, in this sense, short-term federal stimulus has been working.
Yet, because these temporary programs are short-lived, so too are the positive economic benefits they generate. The abrupt end of “Cash for Clunkers” led to a rapid reversal of growth in the auto market with the Big Three automakers seeing their sales decline 33 to 37 percent from August levels. And, the looming November 30th expiration of First-time Homebuyer’s Credit has already sparked concern that without this federal support, the housing markets will just reverse on any recent improvements. Sustained economic recovery, it seems, will likely not result from this sort of short-term stimulus.
There's been some teeth-gnashing in the liberal blogosphere over Ryan Lizza's New Yorker profile of Larry Summers, the general thrust of which is that he supposedly went too easy on Summers, particularly on the issue of bank nationalization. Here's Dean Baker over at his American Prospect blog:
In terms of the bank bailout, some of us were worried that we were effectively taxing the whole country to support the rich bastards that put the economy in the toilet. Bank profits now stand at a record share of GDP and the bonuses at Goldman are as big as ever. What did the critics get wrong?
I didn't get into the nationalization debate in my earlier post about Ryan's piece, both because I think he got it right, and because I've pretty much said everything I have to say about nationalization already. But as this is apparently still very contentious, I'd just make a couple points in Ryan's (and Summers's) defense:
1.) Are the optics/politics of having taxpayers subsidize banks back to profitability pretty lousy? Yes, they're lousy. But much worse politics, I think, is a botched attempt to nationalize banks.
2.) Is having taxpayers subsidize banks back to profitability offensive from the standpoint of distributive justice? Yes, very offensive. But much worse from the standpoint of distributive justice is spending a couple trillion dollars to nationalize banks and failing to solve the problem--possibly making it much, much worse.
3.) Were there good reasons to believe that bank nationalization would fail? Yes, extremely good.* In fact, when Larry Summers grilled Tim Geithner on whether his plan was aggressive enough--and whether nationalization might be something worth considering--Geithner came back and laid out all the numerous ways that nationalization could be a fiasco. And Summers, who is not known for his credulousness in discussions of economic or financial policy, was persuaded.
You simply cannot talk to these guys and not appreciate how much some of them wanted to be more aggressive with the banks at various points--Geithner would say as much when he got agitated in internal discussions--but realized they couldn't in good conscience recommend that course to the president. And they were right. (For what it's worth, I say this as someone who initially supported nationalization.)
Did easy credit drive the three-decade rise in the price of basic necessities?
There’s a growing consensus that the U.S. needs to export more, and import less. The basic argument here is that huge recent imbalances between the consumption-mad U.S. on the one side and exporting China, Japan, Germany, and the Persian Gulf on the other can’t go on and that we need to “rebalance” the global economy. And it sounds good, especially when Larry Summers says it. The only problem is, it’s not clear to whom we would do all this new exporting. After all, if every other nation adopts the same goal, how would this massive reset really work? No wonder there’s a good bit of head-scratching and wondering about this underway.
Yet today, a good page 1 story in the Wall Street Journal sheds some light on this critical question for metropolitan economies, and suggests that one answer may well be China--within reason.
According to Andrew Batson’s report “China Inc. Looks Homeward as U.S. Shoppers Turn Frugal,” plummeting U.S. consumption is forcing more Chinese manufacturers---such as the bike manufacturer Tandem Industries--to turn to a new market: the Chinese themselves. Tandem, to take the Journal’s example, has seen its American sales tumble by 40 percent or more since last year’s credit panic, and so the company has out of necessity begun to offer its bikes in its home province, Guandong, under its own brand and at its own stores. And yet, the move appears to grow out of more than necessity, and involves opportunity too, because Chinese spending is holding up quite well, partly because of the government’s stimulus spending, but also because spending by Chinese urban households has been growing has been growing due to the nation’s economic run-up. All of which gives a little more reality to the “reset” debate. Just as depressed consumption in the U.S. is pushing China to become more inward-focused, perhaps the new dynamics will allow the U.S. to become little more outward-oriented and export more to China and other developing nations.
Last month I wrote a piece noting (a la Paul Krugman) that it was tough to see where growth would come from absent some technological breakthrough that attracted a wave of business investment. I went on to argue (not a la Krugman) that the imperative for such a breakthrough was so strong we might want to consider something as crude as industrial policy to expedite the process.
At the time, I conceded that the White House appeared to be thinking along similar lines, if not quite as ambitiously as I'd prefer. Now, in a blog post (blog post!) that just went up on the White House site, National Economic Council director Larry Summers fleshes out the White House view on this question:
Long before Martin Wolf became the chief economics columnist for the Financial Times, he wrote the newspaper letters--lots and lots of letters. It was the early 1980s, the height of the Thatcher era, and Wolf was running research at a think tank in London that was sympathetic to the government's pro-trade agenda. The FT's letters section became the ideal place to take to task all those who would stand in the way of the first waves of globalization.
With speeches by White House economic advisor Larry Summers on Friday and President Obama today on Wall Street, the Obama administration is moving from triage as the chief aim of economic policy to recovery.
Which is good: The job picture remains dismal, and many economists now assume any recovery will feature weak hiring and strong productivity growth as it did from 2001 to 2003. No wonder a lot of people are asking: From where will the next round of high-quality growth come?
Which brings me to my answer: The next round of high-wage growth will come from metropolitan areas. In good times and bad, metros are where the action is. Because they are where the nation’s productive assets concentrate, they are the hubs from which the growth will flow. And now, as the economy regains stability, the fundamental drivers of medium- and longer-term renewal come even more into play, with none mattering more than the nation’s innovation inputs--things like R&D flows, the presence of dense clusters of interlinked firms, the availability of venture capital and highly-trained people.
These inputs, it turns out, are especially concentrated in metropolitan areas, the largest 100 of which pack in 70 percent of the nation’s research universities, 77 percent of U.S. knowledge jobs, 78 percent of all patents, 82 percent of federal health and science research funding, and 96 percent of venture capital investment.
But what is really important is that commercial innovation drives productivity growth, which in turn--as my colleagues Rob Atkinson and Howard Wial have argued along with many other economists—tends eventually to improve wages, national competitiveness, and the standard of living. Which is why we will spend quite a bit of time here on The Avenue on the nation’s other economic crisis--its innovation crisis--and ways to break out of it. On innovation, these are the critical questions:
So I think I agree with pretty much every point Paul Krugman makes in yesterdays' Times magazine about where economics went off the rails. Including his big prescriptive point:
Economics, as a field, got in trouble because economists were seduced by the vision of a perfect, frictionless market system. If the profession is to redeem itself, it will have to reconcile itself to a less alluring vision — that of a market economy that has many virtues but that is also shot through with flaws and frictions. The good news is that we don’t have to start from scratch. Even during the heyday of perfect-market economics, there was a lot of work done on the ways in which the real economy deviated from the theoretical ideal. What’s probably going to happen now — in fact, it’s already happening — is that flaws-and-frictions economics will move from the periphery of economic analysis to its center.
There’s already a fairly well developed example of the kind of economics I have in mind: the school of thought known as behavioral finance. Practitioners of this approach emphasize two things. First, many real-world investors bear little resemblance to the cool calculators of efficient-market theory: they’re all too subject to herd behavior, to bouts of irrational exuberance and unwarranted panic. Second, even those who try to base their decisions on cool calculation often find that they can’t, that problems of trust, credibility and limited collateral force them to run with the herd.
On the first point: even during the heyday of the efficient-market hypothesis, it seemed obvious that many real-world investors aren’t as rational as the prevailing models assumed. ... Behavioral finance, drawing on the broader movement known as behavioral economics, tries to answer that question by relating the apparent irrationality of investors to known biases in human cognition, like the tendency to care more about small losses than small gains or the tendency to extrapolate too readily from small samples (e.g., assuming that because home prices rose in the past few years, they’ll keep on rising).
I'd just add one word of caution:
