We Can All Do Better

by Bill Bradley

  Some of the people I encountered, to be sure, were unreasonable, angry zealots. The great majority were not. You would stand before an audience, with all eyes on you. I loved the eyes, in which I could read doubt or hope or anxiety or anger or support. I loved connecting with people in the audience until you had the whole room going with you as you tried to persuade them of your views. Most Americans will give you a hearing if they sense that you’re putting the country ahead of your party and telling them the truth. I enjoyed sharing stories from my life and my hopes for the country. I especially enjoyed listening to their stories, which were full of unexpected twists, sometimes sad, occasionally funny, and frequently inspirational. When you are a politician who tries to feel the heartbeat of your district, or your state, or your country, you get a sense of the whole, a feel for what binds us together as citizens. The knowledge that hope is still alive outside our nation’s capital balances the cynicism of the club and reminds us of what we have done and can do again.

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  Breaking the Logjam

  The economic crisis confronting America requires action in the public and private sectors alike. We face a deterioration of the middle-class standard of living, a weakened economy that needs to be stimulated (even if that temporarily increases the cyclical deficit), and an unsustainable long-term deficit driven by inadequate tax revenues and explosive entitlement spending. To deal effectively with the crisis, we need a three-part strategy: immediate, proximate, and long-term.

  The State of the Economy

  In 2008–2009, in response to the worst financial collapse since the 1930s, the federal government used its economic tools to keep the nation out of a depression. The Federal Reserve injected a massive amount of liquidity into the economy so that banks could resume lending and businesses could resume hiring, creating three times as much money in one year as it had since it came into existence. In addition, the Congress passed a $700 billion bailout of banks and a $787 billion spending bill, most of which stretched over 2009 and 2010. Still, unemployment remained above 9 percent. Might it have gone to 11 percent without the stimulus? No one really knows. President Obama chose to go with what he thought he could get. In retrospect, it appears that the stimulus should have been bigger. If we had done as much as China did with its 2009 stimulus as a percent of GDP, ours would have been $1.9 trillion. The lesson is clear. China has bounced back from the downturn. We’re still stuck in it.

  In the hope of getting the economy moving again and people back to work, the Congress passed a bipartisan lame-duck tax agreement in December 2010. The bill kept income tax rates at their current level until 2013, reduced employee Social Security taxes by a third to 4.2 percent for one year, and extended unemployment benefits through the end of 2011. The result is unclear: Unemployment hasn’t budged much, but the bill did increase the deficit by $450 billion per year.

  Even though 58 percent of Americans thought the stimulus would work, according to a Washington Post–ABC News poll taken shortly after its passage, that confidence in Washington is gone. Only 26 percent of the people believed Washington could solve the country’s economic problems, according to another Washington Post–ABC News poll, in August 2011. There are several explanations for the growing unease: In November 2011, according to the Bureau of Labor Statistics, nearly 22 million Americans who wanted full-time jobs couldn’t find them. Banks still aren’t lending to small businesses; housing is still flat on its back. But the relentless attack on the stimulus by Republicans has also played a role. People see Washington irrevocably divided into two warring camps that care more about political advantage than about the country.

  A New America Foundation study in October 2011 by Daniel Alpert of Westwood Capital, Robert Hockett of Cornell, and Nouriel Roubini of New York University points out that since the 1980s the entry of 2 billion low-wage workers into the world economy from high-savings, export-oriented economies like China and India has produced an excess supply of labor in the world. Asian economies, remembering the lesson of the 1997–1998 financial crisis in which they were caught with inadequate currency reserves, have built up substantial holdings of dollar assets and other currencies, leading to another excess supply—a glut of capital. Instead of spending that money to generate economic growth for their citizens, they’re putting it away for a rainy day. Global production capacity now exceeds demand by a sizable margin. There are too many sellers and not enough buyers. Currency wars are not impossible. Given the financial volatility and general uncertainty of our times, business investment isn’t filling the gap. These factors, combined with the dramatic increases in productivity driven by information technology, the development of global supply chains, and the erosion of organized labor’s bargaining power in the private sector have led to stagnant wages in the United States and a growing income inequality that has only been accentuated by the high return on capital at the expense of labor over the last fifteen years. A world burdened with an over supply of capital and labor is not a world of rapid economic growth.

  The sizable monetary and fiscal stimulus of 2008–2010 has not produced a sustainable economic recovery. The intractability of today’s unemployment is worrisome. The time gap between losing a job and getting another one is now over forty weeks—the highest it’s ever been.1 Houses bought over the past decade and a half are unlikely to regain the pre-bust prices anytime soon, and banks exposed to these declining asset values and rising default rates will remain vulnerable, unlikely to lend much more for years. The economists Carmen Reinhart and Kenneth Rogoff, in their 2009 book This Time Is Different: Eight Centuries of Financial Folly, point out that “major banking crises take four to five years to work out and raise government debt levels by about 80 percent over pre-existing levels.” The recent bursting of the credit-fueled asset bubble is that kind of crisis. This is not your normal recession.

  The deteriorating economy manifests itself in people’s everyday lives. Tim Cook, pastor at the Church of Conscious Harmony in Austin, Texas, reflects on his own journey: “In my first post-college decade, I had a good job and made good money. I had a company car, an expense account, and great credit that I learned how to leverage to maximize the cash flow. I owned a home and was accumulating assets. My debts did not seem like a problem because I learned how to keep refinancing them in order to have sufficient cash to be financially free to do all the things I loved doing and to have all the things I loved having. I worried about money constantly, but I never really saw it as a problem because I could always get more of it . . . until I lost my job. Suddenly, I had no cash flow and huge debts . . . I filed for unemployment benefits and began to receive $135 per week to live on. To my great shame, humiliation, and embarrassment, collection agencies began phoning me at all hours of the day and night. I sold everything I could, including furniture, just to try to keep the house.”2 Tim Cook’s story is familiar to millions of Americans who can’t find a job. The details take the dry unemployment statistics to another, more compelling level.

  Jobs, Housing, and Infrastructure

  No modern president has ever been re-elected with the unemployment rate above 7.2 percent. It will take large, targeted action to get unemployment below that level anytime soon. Putting money in people’s pockets by cutting their taxes makes sense only if that money gets spent, thereby increasing demand for goods and services and stimulating job creation. Most of the cut in Social Security taxes will not be spent on consumption in a world where people fear being laid off, housing prices have plummeted, and nearly one in four Americans with mortgages owe the bank more than their home is worth. Most people will use the money to pay down debt or simply put it aside as savings.

  When it comes to proposed federal action to create jobs, every dollar spent in the current environment of declining confidence in government should go to the establishment of a specific job; people have to see the connection between their tax dollars and job creation. Our economic pundits often fail to consider that in a democracy people have to be brought a
long. The times require a more direct approach. When a government’s credibility has been damaged for whatever reason, it cannot shrink from boldness. It must act in a big way to generate more jobs with a short-term, mid-term, and long-term strategy.

  The President should announce a short-term program whereby, if company X is employing five hundred people and chooses over the next year to hire thirty additional employees (without laying anyone off), the federal government will pay 30 percent of the cost of hiring the new workers, up to a maximum of $25,000 per worker per year for two years. Companies would not simply be taking the government’s money; since they’d have to pay 70 percent of the cost, they wouldn’t hire unless they were certain that an additional worker would add to their productivity. The two-year program would be capped at $50 billion per year, and the subsidy would be granted on a first-come, first-served basis, thereby encouraging immediate hiring. If enough employers respond to the program, unemployment could drop dramatically; an average $15,000 subsidy per job would create over 3 million jobs. If no companies stepped forward, there would be no cost to taxpayers—so not one federal dollar would be spent without creating a job. The net cost would actually be below $50 billion per year, because as people went to work they would no longer receive unemployment benefits and they would pay higher taxes. Lower unemployment delivers a lower federal deficit.

  The political value of this proposal stems from its clarity. An unemployed worker, his future employer, and voters can understand what the government is doing to create a new job. It is paying 30 percent of the costs, making it easier to hire more workers. Economists suggest cutting taxes, but it’s not clear to most people how that will create jobs, because the government has no direct tie to the new job. If President Obama were to propose such a large subsidy and the Republicans were to reject it, even with over 8 percent unemployment, he would win on an issue that 82 percent of Americans say is a top priority.3 If Republicans, on the other hand, agreed to the proposal (since it does benefit Republican employers), unemployment would drop and America would be stronger.

  The President should also immediately do something about housing, which continues to drop in value. In February 2011, housing starts hit one of their lowest levels since 1946, when record-keeping began. In the short term, the quickest and easiest course would be to refinance all government-backed mortgages at 4 percent, today’s typical fixed thirty-year mortgage rate.4 The total amount of mortgages with interest rates at 4.5 percent or above held by Freddie Mac and Fannie Mae, the two quasi-governmental mortgage guarantors, is $2.4 trillion. Refinancing them could save homeowners an estimated $85 billion per year.5 Such refinancing would reduce defaults but not increase the deficit, and some of that $85 billion could find its way into either additional personal spending, higher savings, or lower debt burdens. Fannie and Freddie might have lower income and asset values, but the country would be better off.

  There are other helpful ideas to reduce foreclosures. Creditors can be encouraged to refinance a home at its current market value, thereby giving the hard-pressed owner a reduced monthly payment and the bank a greater likelihood that it will not have to foreclose on the home. To incentivize banks to refinance mortgage principal, they should be given participation in any capital gain above the new mortgage level. By letting the bank share in any appreciation, the homeowner might be able to stay in his home and still retain some upside potential in an eventual sale. Many borrowers who bought a home they couldn’t afford lived in newly built subdivisions and foreclosures have turned the subdivisions into graveyards. In the current economic climate, it is unlikely that any bank will find buyers for the subdivision homes that sit empty, deteriorating rapidly. But rent-to-start-over plans are a solution falling between principal reduction and foreclosure/liquidation. These plans allow people to deed their house back to the bank and get from it in return a five-year market-rate rental contract with payments often lower than the mortgage payments. The former homeowners can buy their house back at any time during the period of the contract, and the bank can sell the house during the same period, but only subject to the terms of the lease.

  At the beginning of April 2011, the Federal Reserve reported that U.S. nonfinancial companies had $1.84 trillion in cash and other liquid assets sitting in their treasuries—some of it held offshore. If 20 percent of that were to be spent on hiring new employees at the median U.S. household income level of $49,445, we’d create a minimum of 7 million new jobs and unemployment would drop to under 5 percent. But companies won’t hire if they can’t sell their goods. It’s a chicken/egg situation. When people are out of work, or afraid that the pink slip could arrive any day, they hold back on spending. Because companies can’t sell goods, they don’t invest and lay off more workers, which only adds to the number of people who don’t buy cars, homes, and washing machines. Eventually, home sellers and companies cut prices, but people still don’t spend, because they expect that prices will drop further tomorrow. It’s a downward spiral. The single most important way to solve our economic problems is to get people back to work, in jobs that have a future. The wealthy don’t spend enough to get the economy moving. Only the vast middle class—those Americans making, say, between $30,000 and $120,000 a year—has that power, and public policy for decades has done nothing but deliver them body blows.

  To those worried that inflation will result because of the Fed’s large-scale money creation and the entitlement spending increases on the horizon, I’d say simply that we’re unlikely to experience inflation if consumers and businesses are not spending. And I’d remind those who fear a return of the “stagflation” of the 1970s that even as the economy back then was doing poorly, wages and consumer credit were rising.

  Along with the short-term actions related to job subsidies and housing, we need a mid-term approach that will create jobs over the next five to seven years and allow some time, as the New America Foundation study has pointed out, for mortgage holders to work down their debt, U.S. companies to strengthen their positions in international trade, Europe to resolve its sovereign debt and banking issues, China to orient its economy more toward consumption and less toward exports, and the world economy to reduce its excess supply of capital, labor, and productive capacity.

  What most people remember about President Franklin Roosevelt’s response to the Great Depression are the Works Progress Administration, the Public Works Administration, and the Civilian Conservation Corps, which created jobs for Americans in building schools, parks, roads, dams, bridges. In the small town in Missouri where I grew up, the high school was a PWA project built in 1939. Today, over seventy years later, it stands as testimony to far-sighted government leadership. We need new public investment in public goods that will last another seventy years. To get America back to work, strengthen our national security, and stimulate economic growth, the President should propose a massive nationwide infrastructure-investment program. The New America Foundation study estimates that a $1.2 trillion investment in much-needed infrastructure over a five-year period would generate 5.52 million jobs in each year of the program. There is no other stimulus that could create so many jobs and leave behind a seventy-year foundation for economic growth. Given low interest rates, there will never be a cheaper time to float thirty-year reconstruction bonds. Government-subsidized personal consumption (i.e., tax cuts) in the current climate of debt de-leveraging cannot work; public investment that directly creates jobs can.

  Without high-speed rail lines in key U.S. corridors of 750 miles or less—such as Boston to Washington on the Eastern seaboard and San Francisco to San Diego along the Pacific seaboard; the Texas triangle comprising Houston, San Antonio, and Dallas; the Orlando/Tampa/Miami corridor; and the Milwaukee/Chicago/Detroit route—we will become even more dependent than we are now on insecure sources of foreign oil, because people have no convenient mode of transportation except for their cars. Indeed, transportation now accounts for nearly 75 percent of U.S. oil consumption.6 Without investment in seaports and airp
orts, our points of entry will become increasingly clogged, expensive, inefficient, and even dangerous. Without investment in highways and bridges, we will be less productive and more inconvenienced. These investments interact positively with each other. If high-speed rail connects cities, then airlines can concentrate on longer distances and highways will be less jammed. If airports trade in their old traffic-control technology of the 1960s for what is possible today, delays will fall and productivity will rise.

  Just as it did in the nineteenth century, infrastructure investment can lay the foundation for the next wave of economic growth, even as it employs more hardworking Americans. It will also demonstrate to the American people that their tax dollars are being spent on behalf of all of us. In 1987, Ronald Reagan vetoed a transportation bill because it had a hundred earmarked projects. In 2005, George W. Bush, without uttering a word, signed a transportation bill with 6,229 earmarks. Such profligacy may be a good re-election strategy, and it might even employ a few more lobbyists, but it is not a transportation policy. There should be a limited number (under fifty) of projects, and they should be projects of national significance. Each should be costed out rigorously. Individual earmarks must cease; otherwise we’ll be wasting dollars with no real national benefit. A 2011 report from the Carnegie Endowment for International Peace by a committee on transportation solvency called for a Transportation Trust Fund that pays for highways, transit and passenger rail programs, and a National Infrastructure Bank—all fully funded, as in most other countries, by revenues from transportation.7 Specifically, it concluded that to fund infrastructure improvements, we need an oil-import fee that, as oil prices dropped, would morph into a gasoline tax, thus holding the price of gasoline stable.8 The price of gasoline would rise as the import fee is passed through to the consumer. When the market turns, the consumer will continue paying the former price with gasoline taxes making up the difference, thereby establishing a predictable floor and sending automobile companies the price signal to build more fuel-efficient vehicles. To add urgency to the program, all contractors should be offered completion incentives and asked to put up bonds backing the quality of their work.