Robert Kuttner

By Robert Kuttner
Co-Founder and Co-Editor of The American Prospect

Question for the day: Where is the economic recovery going to come from?

We are still at the stage of the recession where economic downdrafts are producing more downdrafts. Reduced purchasing power leads to fewer retail and factory sales and more layoffs, further reducing consumer demand. The Obama stimulus package, about 2.5 percent of GDP for each of two years, doesn’t make up enough of the difference. But the federal deficit, caused mainly by falling revenues and not by increased public spending, is alarming the budget hawks. The administration worries, correctly, that deficits will be high for several years to come and wonders who will keep lending Uncle Sam the money. Yet cutting back spending before recovery comes would be suicidal.

In addition, the financial sector has not yet returned to health, despite outsized profits (and bonuses) reported by the likes of Goldman Sachs. This is the kind of purely financial engineering that caused the collapse. The fevered activity at Goldman is a sign of lingering economic illness, not economic health. The rest of the economy, which depends on the financial sector for real investment capital, is still deeply depressed.

Louis Uchitelle’s piece in Sunday’s New York Times provides some instructive numbers.

Every major sector that reflects the purely private economy has been losing jobs, the only exception being energy extraction plus a tiny increase in computer systems design and management consulting. All of the other expanding sectors that are actually adding jobs reflect government spending – education, health, general government. But the declines in the workhorse parts of the private economy such as manufacturing, construction, and retailing are huge.

With purchasing power still declining and unemployment still rising, where will the recovery come from? White House economic chief Lawrence Summers, in a major speech at the Peterson Institute July 17, emphasized the good news.

“We were at the brink of catastrophe at the beginning of the year but we have walked some substantial distance back from the abyss,” he said. And, ever the empiricist, Summers reported that a Google search revealed that “hits for economic depression have returned to baseline levels.” That’s nice, but what Summers did not forecast was a robust recovery.

And if we stay on the present path, recovery will not come for a long time. Federal deficits will be large enough to raise questions about who will keep lending us the money – but not large enough to power a real recovery that increases real incomes and provides good jobs. The last time we had a massive financial meltdown like this, it took the hyper-stimulus of a war – World War II – to recapitalize industry and re-employ workers.

What, then, is the moral equivalent of war for the 21st century? Let’s think way, way outside the box.

We might begin with a serious strategy for rebuilding American manufacturing. American corporations and politicians have been cavalier about just letting manufacturing go. Uniquely among advanced and developing nations, we have no national strategy for nurturing manufacturing at home. There’s even an office in the Commerce Department that helps companies outsource.

As a result, even a modest uptick in purchasing power will not produce enough American jobs because there are so many things that America no longer makes.

We could start with clean energy, and move on to mass transit, and reclaim America’s capacity to make things. Right now, even if we massively shifted to wind and solar energy, other nations would get most of the production jobs because most solar panels and wind turbines are not made here, while Americans would just get the temporary installation jobs.

We could also get serious about insisting that other trading nations not coerce or bribe our manufactures to locate facilities overseas as a condition of doing business – a flagrant violation of trade law. We could start having a real industrial policy for commercial industry in the way that we have long had a tacit industrial policy for products deemed essential to the military.

The administration is confused about how to reconcile industrial goals with trade law. It had to do a lot of backing and filling so that tens of billions of taxpayer dollars to modernize the auto industry didn’t end up subsidizing more outsourcing of jobs to China. If trade law interferes with our ability to revive American manufacturing, then there’s something wrong with trade law and let’s change it.

For a fine summary on how to revive domestic manufacturing, take a look at the new book, Manufacturing a Better Future for America, edited by Richard McCormack and written by some of America’s best experts on reviving manufacturing.

The book is published by the Alliance for American Manufacturing.

After manufacturing, we need to get serious about investing in a new generation of public infrastructure – everything from smart-grid electrical systems to broadband and modern water and sewer and transportation systems. That will produce lots of good jobs, and make for a more efficient and productive economy.

As far as the deficit is concerned, it will probably need to get bigger before it gets smaller. During World War II, when the nation was a lot poorer and nearly half of our national output went to defeat the Axis powers, my parents and grandparents and tens of millions of Americans like them bought war bonds.

We didn’t depend on foreign borrowing, even though the deficits were far larger. Today, the government should create Recovery Bonds and market them to Americans, so that we can finance our own social investment and cease to be financial wards of foreign dictatorships.

The good people at Goldman Sachs can demonstrate their patriotism – not by offering to make money as financial middlemen – but by buying the first issue of these bonds as an investment. The government needs no investment bankers to market these bonds. It can sell them directly to citizens

Gentle reader, we are in a national economic emergency. This is not just about talking up the economy by emphasizing good news. The administration needs to stop smoking its own green shoots and offer strategies equal to the magnitude of the crisis.

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Robert Kuttner is co-editor of The American Prospect, and a Senior Fellow at Demos. His latest book is Obama’s Challenge.