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Robert Reich

By Robert Reich
Former U.S. Secretary of Labor, Professor at Berkeley

It’s nonsense to think of the economy heading downward again into a double-dip recession when most Americans never emerged from the first dip. We’re still in one long Big Dipper.

More people are out of work today than were last year, counting everyone too discouraged even to look for work. The number of workers filing new claims for jobless benefits rose last week to the highest level since February. Not counting temporary census workers, a total of only 12,000 net new private and public jobs were created in July — when 125,000 are needed each month just to keep up with growth in the population of people who want and need to work.

Not since the government began to measure the ups and downs of the business cycle has such a deep recession been followed by such anemic job growth. Jobs came back at a faster pace even in March 1933 after the economy started to “recover” from the depths of the Great Depression. Of course, that job growth didn’t last long. That recovery wasn’t really a recovery at all. The Great Depression continued. And that’s exactly my point. The Great Recession continues.

Even investors are beginning to see reality. Starting in February the stock market rallied because corporate profits were rising briskly. Investors didn’t mind that profits were coming from payroll cuts, foreign sales, and gimmicks like share buy-backs — none of which could be sustained over the long term. But the rally died in April when investors began to see how paper-thin these profits actually were. And now the stock market is back to where it was at the start of the year. (more…)

Robert Reich

 By Robert Reich
Former U.S. Secretary of Labor, Professor at Berkeley  

The Great Recession could have spawned another era of fundamental reform, just as the Great Depression did. But the financial rescue reduced immediate demands for broader reform.  

Obama might still have succeeded had he framed the challenge accurately. Yet in reassuring the public that the economy will return to normal he has missed a key opportunity to expose the longer-term scourge of widening inequality and its dangers. Containing the immediate financial crisis and then claiming the economy is on the mend has left the public with a diffuse set of economic problems that seem unrelated and inexplicable, as if a town’s fire chief deals with a conflagration by protecting the biggest office buildings but leaving smaller fires simmering all over town: housing foreclosures, job losses, lower earnings, less economic security, soaring pay on Wall Street and in executive suites.  

Much the same has occurred with efforts to reform the financial system. The White House and Democratic leaders could have described the overarching goal as overhauling economic institutions that bestow outsize rewards on a relative few while imposing extraordinary costs and risks on almost everyone else. Instead, they have defined the goal narrowly: reducing risks to the financial system caused by particular practices on Wall Street. The solution has thereby shriveled to a set of technical fixes for how the Street should conduct its business. (more…)

Robert Reich

By Robert Reich
Former U.S. Secretary of Labor, Professor at Berkeley

The structural problem began in the late 1970s when a wave of new technologies (air cargo, container ships and terminals, satellite communications and, later, the Internet) radically reduced the costs of outsourcing jobs abroad. Other new technologies (automated machinery, computers and ever more sophisticated software applications) took over many other jobs (remember bank tellers? telephone operators? service station attendants?). By the ’80s, any job requiring that the same steps be performed repeatedly was disappearing–going over there or into software. Meanwhile, as the pay of most workers flattened or dropped, the pay of well-connected graduates of prestigious colleges and MBA programs–the so-called “talent” who reached the pinnacles of power in executive suites and on Wall Street–soared.

The puzzle is why so little was done to counteract these forces. Government could have given employees more bargaining power to get higher wages, especially in industries sheltered from global competition and requiring personal service: big-box retail stores, restaurants and hotel chains, and child- and eldercare, for instance. Safety nets could have been enlarged to compensate for increasing anxieties about job loss: unemployment insurance covering part-time work, wage insurance if pay drops, transition assistance to move to new jobs in new locations, insurance for communities that lose a major employer so they can lure other employers. With the gains from economic growth the nation could have provided Medicare for all, better schools, early childhood education, more affordable public universities, more extensive public transportation. And if more money was needed, taxes could have been raised on the rich.

Big, profitable companies could have been barred from laying off a large number of workers all at once, and could have been required to pay severance–say, a year of wages–to anyone they let go. Corporations whose research was subsidized by taxpayers could have been required to create jobs in the United States. The minimum wage could have been linked to inflation. And America’s trading partners could have been pushed to establish minimum wages pegged to half their countries’ median wages–thereby ensuring that all citizens shared in gains from trade and creating a new global middle class that would buy more of our exports. (more…)

Robert Reich

By Robert Reich
Former U.S. Secretary of Labor, Professor at Berkeley 

Missing from almost all discussion of America’s dizzying rate of unemployment is the brute fact that hourly wages of people with jobs have been dropping, adjusted for inflation. Average weekly earnings rose a bit this spring only because the typical worker put in more hours, but June’s decline in average hours pushed weekly paychecks down at an annualized rate of 4.5 percent. 

In other words, Americans are keeping their jobs or finding new ones only by accepting lower wages. 

Meanwhile, a much smaller group of Americans’ earnings are back in the stratosphere: Wall Street traders and executives, hedge-fund and private-equity fund managers, and top corporate executives. As hiring has picked up on the Street, fat salaries are reappearing. Richard Stein, president of Global Sage, an executive search firm, tells the New York Times corporate clients have offered compensation packages of more than $1 million annually to a dozen candidates in just the last few weeks. 

We’re back to the same ominous trend as before the Great Recession: a larger and larger share of total income going to the very top while the vast middle class continues to lose ground. 

And as long as this trend continues, we can’t get out of the shadow of the Great Recession. When most of the gains from economic growth go to a small sliver of Americans at the top, the rest don’t have enough purchasing power to buy what the economy is capable of producing. (more…)

Robert Kuttner

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

 President Obama seemingly has two entirely incompatible tasks. One is to move the economy on a path toward faster recovery with increased stimulus spending. The other is to address the problem of rising deficits and the escalating long term public debt.

He is holding a White House Jobs Summit next Thursday to signal concern for the high rate of unemployment while he is being lobbied by the deficit hawks. His economic team is parsing the tradeoff between these two goals. But a tradeoff is the wrong way to think about it. Recovery is a short term imperative, while the debt is a long term challenge. There are, however, important choices to be made.

Obama’s team underestimated the degree of stimulus that the economy would need, and prolonged the period of payout. Council of Economic Advisers Chair Christina Romer estimated that the unemployment rate would peak at 8.9 percent. Today, unemployment is 10.2 percent and rising — and over 17 percent if you include discouraged and involuntary part time workers.

On paper, the stimulus, at $787 billion, was about 2.7 percent of GDP over two years. But in fact, it is being paid out over three years, with about 30 percent of the money not being spent until 2011. Meanwhile, the loss of state and local revenues, now projected at more than $450 billion over three years, undermines about two-thirds of federal stimulus spending. So the real net stimulus is well under one percent of GDP per year.

We need about half a trillion dollars in new stimulus spending in 2010 alone, and more if that doesn’t do the trick. There is no shortage of worthy things deserving of public funds.

I look around my home town of Boston. I see crumbling bridges and subways, social programs being shut down for lack of funds. Our progressive Democratic governor, Deval Patrick, just increased the regressive sales tax — in a recession! Our pioneering near-universal health program is running in the red and cutting coverage. All of this is just nuts. Let’s get some emergency fiscal relief to the states.

And let’s also remember the WPA writers project and theatre project. Here in greater Boston, where Equity actors qualify for food stamps, two regional theatre companies have closed for lack of funds. How about one percent of the next stimulus program for the arts? And how about an emergency direct federal jobs program?

The usual suspects are making the usual noises about the long term debt. President Obama recently met with North Dakota Senator Kent Conrad, who is planning to hold the next routine vote to increase the debt hostage for a deficit commission. The idea is that a commission would create a budget balance plan that would be subject to little debate and an up-or-down vote. The supporters of this idea are also big promoters of the idea that Social Security and Medicare need to be cut back.

The fact is that Social Security will be in surplus for at least another generation. It is not contributing to the deficit. Medicare is heading for earlier deficits, but the cure for that is to shift to a more efficient health system across the board, otherwise known as national health insurance. Obama’s health insurance plan, though far from ideal, actually reduces the net deficit.

It also misleading to blame the enlarged deficits mainly on the stimulus. The prime culprits are the recession itself (which reduces tax revenues), compounded by the legacy of Bush tax cuts and a war that was financed mostly off-budget. On the list of causes of the rising deficits, the spending of the American Recovery and Reinvestment Act (the stimulus) comes in fourth.

It’s reasonable to worry that this recession will increase the long term public debt, and that this could be a problem down the road. But a deficit commission is anti-democratic. We elect Congress to make the laws. And the sponsors of the commission and their outside supporters, such as the Peter G. Peterson Foundation and the Concord Coalition, begin with an animus against social insurance and use the current crisis as a pretext to take whacks at our already threadbare welfare state. For an antidote to the hysteria and social insurance bashing of the Peterson Foundation, have a look at fiscalhighroad.org.

We do need to reduce the ratio of debt to GDP. But we need to do it after the economy is back in recovery. And we need to do it using the normal legislative process. And above all we need to use progressive taxation rather than program cuts.

Two good candidates as revenue raisers are a tax on all financial transactions, and a serious program of tax enforcement aimed at wealthy investors and corporations who use offshore tax havens. Supposedly, we are helpless in the face of the ability of capital to move offshore. And we dare not tax financial transactions for fear of driving the business to Caribbean tax havens. But this is just self-serving rationalization.

Congress could easily pass a law requiring any financial transaction where the investor does business, lives, or holds assets in the United States to be subject to U.S. tax law. We could harmonize our tax enforcement with nations that currently cooperate in the exchange of tax data. Right now, other so called advanced nations in the G-20 are more willing to tax financial transactions than we are.

Congress could also prohibit financial institutions that do business in the U.S. from doing business with ones based in tax havens. Does this sound draconian? After 9/11, we got very creative about cracking down on cross-border money laundering for purposes of terrorism. Now, we need to get equally smart about financial terrorism.

The national debt will be a challenge in the years after about 2013, but that is no reason to give up on the recovery. On the contrary, it should force us to get more serious about the recovery to get economic growth back on track so that the debt is less onerous.

Why is a debt approaching 100 percent of GDP a problem at all? It was larger after World War II, on the eve of a 25-year economic boom. When I was studying economics, we were taught that the national debt was no big deal because “we owe it to ourselves.”

That was then, back when China was not a global financial power. Today, the debt is a lot more serious because we owe it to China and other nations that are not exactly democracies. You could feel the tectonic shift in President Obama’s recent trip to China. Our creditors had the upper hand. As our friend Jeff Faux writes, a large foreign debt is a problem because our friendly creditors could loose confidence in the dollar.

But the answer is not to sentence ourselves to debtors’ prison. We need, once again, to finance most of our own national debt. In the World War II years, my parents, who were barely middle class, put some of every paycheck into War Bonds. How about a surtax on windfall Wall Street profits, with the proceeds invested in U.S. Treasury Recovery Bonds? Normal people, who don’t have access to insider trades, are earning about two or three percent on their savings. Turnabout is fair play. It would be salutary if the high rollers who caused the crash were made to put some of their wealth into Recovery Bonds, at two percent.

When John McCain rather pitifully proposed to suspend his campaign and duck a presidential debate so that he could help persuade Congress to enact Hank Paulson’s Wall Street bailout legislation, candidate Barack Obama lethally quipped that a president needs to be able to do more than one thing at a time. Now, President Barack Obama needs to demonstrate that it’s possible to do economic stimulus in the short run and the right kind of deficit reduction over the long term.

***

Robert Kuttner is co-editor of The American Prospect and a senior fellow at Demos. He is author of Obama’s Challenge: America’s Economic Crisis and the Power of a Transformative Presidency.

Dean Baker

By Dean Baker
Co-Director, Center for Economic and Policy Research

The elites hate to acknowledge it, but when large numbers of ordinary people are moved to action, it changes the narrow political world where the elites call the shots. Inside accounts reveal the extent to which Johnson and Nixon’s conduct of the Vietnam War was constrained by the huge anti-war movement. It was the civil rights movement, not compelling arguments, that convinced members of Congress to end legal racial discrimination. More recently, the townhall meetings, dominated by people opposed to health care reform, have been a serious roadblock for those pushing reform.

Those disgusted by the bank bailouts, and the bankers who brought us this recession, will have a chance to make their views known when the American Bankers Association has its annual meeting in Chicago, October 25-27. A large coalition of labor, community, and consumer organizations are organizing a protest at this “Showdown in Chicago”

A big turnout at this event can make a real difference. Just to review the scorecard, most of the country is still suffering the fallout from the bankers’ irrational exuberance of the housing bubble era. The Congressional Budget Office (CBO) and other forecasters expect the suffering to endure for years to come.

The unemployment rate is about to cross 10 percent, with an additional 9 million workers only able to find part-time work. CBO projects that unemployment will not return to normal levels until 2014. Almost 200,000 people are losing their homes every month through foreclosure. Tens of millions of people who had expected a comfortable retirement just saw most of their wealth disappear with the collapse of the housing bubble. State and local governments are being forced to lay off school teachers and fire fighters under the pressure of enormous budget deficits.

But not everyone is suffering. Thanks to the bailout programs put in place last fall, most of the country’s major banks are back on their feet. In fact, in the most recent quarter, bank profits hit a new record high as a share of all corporate profits.

And the banks are sharing their wealth. Many of their top executives and high performers will be getting bonuses this year worth millions of dollars, in some cases the bonuses will be in the tens of millions.

In the meantime, in elite Washington circles people are busy making plans for a national sales tax so that the government can limit the fiscal damage caused by the bankers’ recession. A sales tax is of course very regressive since low and moderate-income people typically spend the vast majority of their income, while our banker friends will more likely to be able to save some of their income or spend it in other countries where they will not be paying this new sales tax.

To summarize: the bankers wrecked the economy with their greed, ran off with taxpayer dollars in a massive bailout, and now plan to raise taxes for the rest of us. If that picture doesn’t sound quite right, then go to Chicago.

This is a case where the divisions are not left-right, but of the elite against everyone else. When Congress was debating the TARP bank bailout last fall, members of Congress were hearing calls from people across the political spectrum who were outraged that their tax dollars were going to the banks that had wrecked the economy. A higher percentage of Republicans than Democrats ended up voting against this bankers’ piñata.

The policies that will rein in the banks: reform of the Federal Reserve Board to make it democratically accountable, a tax on financial speculation to pay for the bankers’ mess, and restrictions on the bank abuses of consumers that caused the carnage have support from people on both the left and right.

A bill that would require the Fed to disclose what it did with more than $2 trillion in loans to banks and other financial institutions was originally co-sponsored by Ron Paul and Alan Grayson, one of the most conservative and one of the most progressive members of Congress. Due to public pressure, it now has more than 270 co-sponsors.

This is exactly the sort of alliance that gets the elite worried. Reining in the power of the financial industry will be a long hard fought war, but it is one that must be fought. President and Nobel peace prize winner Barack Obama may not have been able to bring the Olympics to Chicago, but everyone who wants to retake our country from the banks can bring their backside there on October 25th.

***

 Dean Baker is the author of the new book, “Plunder and Blunder: The Rise and Fall of the Bubble Economy.” 

***

This piece was first published on Huffington Post.

By Eric Lotke
Research Director at Campaign for America’s Future

The G-20 Summit is in Pittsburgh later this week. Leaders from the 20 countries that collectively represent two-thirds of the world’s population, 80 percent of world trade and 90 percent of global gross national product, will meet to discuss the global economy and terms of trade.

It is fitting that they meet in Pittsburgh. Steel City is renowned for the slump in its dominant industry, followed by what President Obama called a “world-class” transition to a diversified economy, including higher education, bio-tech and clean energy. The good news is true enough — credit where due — but the praise misses half the story.

Yes, some manufacturing jobs in Pittsburgh were replaced by high-end jobs in education or medicine. But many were replaced by jobs in hotels and food services — jobs that never paid as well and proved even more vulnerable in the recent downturn. Some manufacturing jobs were never replaced at all. That helps explain why the city’s population is declining, especially among youth, who seek opportunity elsewhere.

Two lessons from Pittsburgh are important for the United States and the G-20 Summit. We discuss them in our new report, Pittsburgh, G-20, and the New Economy — Lessons to Learn, Choices to Make.

The first lesson is the importance of the real economy. America grew up as an industrial superpower, from mass-produced automobiles to the Arsenal of Democracy. But our once-robust system of economic production — the invention, design and manufacture of products — has been steadily eroded. In its place has come an economy based on asset bubbles and foreign borrowing. That economy was never sustainable and is no longer available.

We need to dispel the notion that America has moved beyond the production of goods. From cars to computers to refrigerators, a country needs things. If we don’t make those things here, then someone else gets our money.

Too many modern Americans associate manufacturing with horse carts and buggy whips. We think of dirty old industries that economic evolution will naturally replace with high-end services in America and low-wage workers in other countries. We don’t appreciate that manufacturing still constitutes 12 percent of U.S. gross domestic product, 60 percent of U.S. exports and 70 percent of private sector research and development. If we hope to move beyond the production of goods, we need to think what would replace it.

We tried over the past thirty years to replace goods-producing jobs (down 54 percent) with service-providing jobs (up 34 percent). It hasn’t worked so well. First, because our deficit in goods far exceeds our surplus in services — $840 billion versus $160 billion– so our accounts are out of balance. Second, service jobs don’t pay as well. Even in the broad category of “services” — which includes high-end professionals like doctors, lawyers and investment brokers — service-providing jobs have an average weekly wage of $610 compared with $810 in the goods-producing sector. Service jobs pay 75 cents for every dollar paid a production job. Retail jobs pay 50 cents. 

 
Source: BEA and Campaign for America’s Future.

The second lesson from Pittsburgh is the connection between the production of goods and their sale. Trade, that is.

Many countries find it appropriate to enact protectionist and mercantilist polices to their individual advantage. The U.S. generally does not, however, citing its ideological commitment to free trade.

As a result, steel manufactured in Pittsburgh is competing against steel manufactured in China with devalued currency, government subsidies, deeply suppressed labor rights, and lower (cheaper) environmental and safety standards. Many products imported into America violate safety standards that U.S. manufacturers are required to obey, like lead-based paint in toys and pesticides in foods. American producers bear the cost of higher standards for the benefit of American citizens. Other countries avoid these costs with minimal consequences in the U.S. market.

The G-20 Summit in Pittsburgh provides an opportunity for Americans to look at what’s happening, and ask hard questions. It provides opportunity to move beyond shibboleths of free trade and protectionism, and to question the true functioning of the market. Obama’s decision to apply tariffs to remedy the “market disruption” of tires from China is a first step in this new direction.

The Summit also provides an opportunity to examine American patterns of production and consumption. Even when the economy was growing, America ran a current account deficit in excess of $700 billion every year. We borrowed $2 billion every day to cover the difference. That might have worked well for the countries we bought and borrowed from — but it worked less well for America. It was never sustainable, anyway.

As the G-20 leaders plan a recovery from the global downturn, they should not assume that the United States will remain the world’s consumer — spending more than we earn, and paying for it with personal and national debt. The G-20 must chart the process by which the global economy that emerges from the crisis is more balanced, and less dependent on U.S. consumption. Growth must be sustainable in Pittsburgh as well as Beijing.

***

Eric Lotke also is author of the book “2044”

This piece originally appeared at the Campaign for America’s Future.  

By Leo W. Gerard
International President

The economic structure of Jim Henson’s cartoon realm called Fraggle Rock reflects our own. In one HBO episode, the industrious, hard-hatted Doozers prepare to leave the rock, which would have quickly left the Fraggles starving. Somehow, politicians and powerbrokers in this country don’t see the simple parallel. If the U.S. continues to send its manufacturing overseas — with the latest proposal General Motors plants — the result will be hungry U.S. families.

I saw this up close and personal as I toured the U.S. last week on the 11-state, 32-city “Keep it Made in America” bus tour. I talked to unemployed manufacturing workers who are desperate. Through no fault of their own, they’ve lost their jobs, their homes, their health care. These are the people who are the strength of America, who in better times volunteered in New York City after 9-11 and in New Orleans after Katrina. Now, they’re forced to get groceries at their union hall’s food bank. They’re humiliated.

This economic crisis was inflicted on them by recklessness on Wall Street and in Washington. Over the past 40 years, politicians have eroded regulations that could have helped prevent the sub-prime mortgage bubble and bust. And Wall Street banks and investors took full advantages of that rule-free environment to behave capriciously in the market, causing stocks to tank, driving unemployment up to the current 8.9 percent, and contributing to the loss of 5.2 million manufacturing jobs since 2000.

Let me introduce you to four Steelworkers, four hard-hats struck down by the decisions so disastrous to the economy made in Washington and on Wall Street. They are Diana Arends, an aluminum can maker; Matt Dossett, a rubber worker; Andy Nirschl, a papermaker, and Kevin Vest, a copper miner.

Diana Arends’ employer, Ball Corp., shuttered its Kansas City aluminum beer can manufacturing plant March 27. Ball blamed the economy when it announced the closure that cost 150 Steelworkers their jobs. Beer sales are down. As the economy contracted, Americans had fewer coins in their pockets for every little pleasure, including throwing a few back.

Diana Arends

The plant closure was both an economic and emotional shock to Arends. She’s divorced, and supports a daughter and granddaughter. Before the plant mothballing, she routinely worked 12-hour days, with the overtime paying her mortgage and bills. Now she’s only getting unemployment.

Her house in Lees Summit, Mo., on which she has paid for 10 years, already is going to foreclosure. She doesn’t have any credit cards, but she does owe on a used car she bought a couple of years ago.

When she heard the plant was to shut, she immediately dropped her internet and cable TV services, ended trash collection and stopped eating out. She buys food in bulk at a wholesale store. But it’s just not enough.

She’s thinking about taking the remnants of her stock market-ravaged 401K and using it to support herself, her daughter and granddaughter because she has been unable to find another job. No one has called her back for a second interview, although she also has 28 years experience manufacturing grain bins for CTB, Inc. Let’s face it, she points out, who’s going to hire a 59-year-old?

She recollects, a few years ago, “I got to feeling set. I had a 401K and just a few more years to retire.” But now she’s jobless, and soon she may be homeless. “I did nothing to deserve that,” protests Arends, who went the extra mile, serving as president of USW Local 13, a position she loves, but one she’ll be forced to relinquish May 14 because she no longer is employed as a Steelworker.

Diana Arends is concerned about running up federal debt to pay for the bank bailouts and stimulus package, so she doesn’t understand anyone proposing to use one dollar of that money overseas. The stimulus is American tax dollars designated to create American jobs – not Chinese jobs or Korean jobs or Mexican jobs. So when General Motors submitted a bail out plan in which it would get American tax dollars, then use them to build fewer cars here and more cars overseas that would be sent back here to be sold, Arends just couldn’t believe it. “These are middle class jobs lost, the people who go to the grocery store and support food banks and the Little League,” she noted.

And they’re not just GM assembly line jobs. The more jobs GM sends overseas, the more support and supply jobs go overseas too. And that threatens the economic lives of millions more Americans — workers like Matt Dossett.

Matt Dossett

He’s a rubber worker from Fancy Farm, Ky., furloughed with 50 other Steelworkers from the Goodyear Tire plant in Union City on Feb. 28. Dossett, 27, who tried to get a job at the plant since he graduated from high school, had worked there just a year before the lay off. He knew it was a good job because his father and uncles had all worked there. “They had their whole careers there,” he said, “They worked 40 years and retired there. They had good lives from working there. It is one of the best paying jobs in this area.”

He worked on a balance crew in the curing department – cooking tread onto the tires, a place where it could get well over 100 degrees in the summer. Still, he longs for that call back, “I really enjoyed it down there. I enjoyed the people I worked with and the job I was doing,” he said.

But that’s all jeopardized by the sagging economy, unfair trade practices by China in supporting its tire makers which export to the U.S. and GM’s plan to move production offshore – including to China.

When he was working, Dossett paid off his car loans and saved money just in case he got furloughed. But making the mortgage payments is starting to get tough. His wife works, so that’s helping them pay the bills. And they’ve cut out all frills. They don’t visit her family in Chicago anymore. They don’t go out to eat. They don’t visit Nashville for weekends. Dossett has a credit card, but no debt because he only uses it in emergencies. “I worked hard for everything I’ve got,” he explained, “I’m trying not to lose it all now.”

He sees a clear connection between GM building cars here and his job.  Because billions of American tax dollars have already gone into bailing out GM, they shouldn’t be talking about moving jobs overseas, he says. “We gave them money to build here, to create jobs here. Let the Chinese pay if they want a plant in China,” he said.

Like Dossett, Andy Nirschl worked for an industry damaged by unfair trade. He was a process operator, controlling pulp, for the NewPage Corp. Kimberly mill in Wisconsin. It made the kind of glossy paper used in magazines and new car catalogues. The mill had operated in the town of 5,000 since 1889 and was the largest employer. Kimberly was NewPage’s largest producer, but the Ohio corporation closed it after a defeat in a trade case with China under the Bush administration.

Andy Nirschl

That was Sept. 30, 2008. Nirschl, president of USW Local 2-9, knows all the gory details: 475 Steelworkers lost their jobs, and 125 salaried guys got thrown out of theirs. When NewPage refused to sell or re-open the plant, the town considered renaming its high school teams. They are called the papermakers.

Nirschl’s wife, who had worked at home, had to switch jobs so the family could get health insurance. He’d married late in life, so he had a good start paying off his mortgage. He isn’t behind yet but knows lots of fellow Steelworkers who are. He has only one credit card and no debt on it or on his cars, so he’s in better shape than many of his friends. Still, his family has cut out vacations and eating at restaurants.

Nirschl got a new job earlier this month, a good union job with the state helping the unemployed find work. It doesn’t pay as much as the mill did but has good benefits. The pay comes from the $700 billion stimulus package, and he’s hoping the position is renewed in the state’s next budget year in June.

He says he hopes Congress gets on board to save the American auto industry. He says his friends understand that to have a strong, solid economy, America must manufacture. It’s not clear to them why politicians are willing to back struggling banks with billions but balk at supporting industry.

Like Nirschl, Kevin Vest talks about a cycle of industrial life. It’s obvious to him. The haul truck driver furloughed with 600 fellow Steelworkers Feb. 13 from Freeport McMoRan’s Chino mine in New Mexico, where they extracted copper and molybdenum, a steel hardener, offers this story:

He read in a newspaper about a $100 million wind farm to be built near his daughter’s house in Arizona. The 30 wind turbines are to be manufactured by a company from India and the huge towers are to be constructed in Mexico. Vest wants to know why GE can’t make those turbines. If the American company did the work, they’d probably buy the copper wire for the turbines from an American company. And that company might buy the ore to make the wire from his mine – or some other downed U.S. copper mine, putting some Steelworker back to work. If there’s one cent of tax breaks or stimulus money in this wind farm, then it’s doubly outrageous to employ Indian and Mexican workers.

For the same reason, Vest always buys American cars. There’s copper wire in engines and molybdenum (molly) in other steel car parts. Buying that car keeps him employed, but also fellow Americans who make the glass and axles and all the other parts.

And he’s got news for people who deride the quality of American cars. He’s owned a series of them and driven them more than 150,000 miles with no problems. Now he has a 1997 Chevy Silverado with 160,000 miles on it that he’s planning to drive 1,400 miles to Iowa to visit relatives. His father has owned nothing but American cars, and when his brother bought a Nissan, told him to park it down the street. “When I got out of the service,” Vest said, “my dad tried a Toyota Celica GT. . . He looked at me and said he felt bad to have even test driven it. He bought a Ford Ranger pick up.”

At 54, Vest is without health insurance and behind on his credit card payments. He owes $2,000, and the collector is hounding him. He is hoping to get a job at a mine in Arizona, close to where his daughter lives. But that may not be possible until copper prices rise.

Workers like Vest, Nirschl, Dossett, Arends and me are taking the message to Washington D.C. this week for a teach-in to explain how crucial manufacturing is to the economy of this country and how essential manufacturing is to construction of automobiles in this country, not just the final product, but also all those products leading up to the final car — from glass for windshields to glossy paper for brochures. We are going to try to explain that 7.2 million paychecks are dependent on U.S. autos, including health care, education, service and other jobs, so that the politicians and policy makers understand clearly that the very idea that General Motors would ask for taxpayer dollars to ship more car manufacturing overseas – and then import the cars – is an insult and an affront to American workers – as well as an economic threat to the country. We are not going to allow American manufacturing to starve for support. But that support cannot go to pay for manufacturing overseas, or ever more American families will end up stretched like Arends, Dossett, Nirschl and Vest.

Robert Kuttner

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

Dear David,

President Obama faces two huge challenges in the next few months. One is dealing with the reality of an impending depression. It will take much stronger medicine to avert a depression than the measures taken to date, and the president needs to rally public opinion if he is to persuade Congress to act at the necessary scale.

The related challenge is about appearances — about whether middle America feels that the federal outlays are trickling down to regular people. So far, bankers seem to be getting too much and Main Street too little.

The two challenges are related. If the solutions are not bolder, they won’t cure the crisis. If the public isn’t persuaded of the need, Congress won’t act. If the economy keeps sinking, the people will lose confidence in the president’s leadership.

And if President Obama doesn’t boldly address both challenges, his presidency is in trouble. I take heart from some of the subtle shifts in the president’s positioning in recent weeks, but he needs to go farther, and move faster.

At the core of both problems is the sinking economy and the fact that he hired a team of orthodox economic advisers to fix it. A radical crisis requires radical solutions, but the economic team has been far behind the curve in the remedies it has put forward, both in the reality and the optics.

The Reality:

To prevent a slide into depression, you will need to spend roughly another three trillion dollars of public money in order to pay for a second stimulus package (at least a trillion) and to recapitalize the banking system (as much as two trillion.) Neither Congress nor public opinion is remotely prepared for that action yet. No one but the president is capable of the kind leadership necessary to move public opinion in this direction, and Barack Obama is a better teacher than most presidents. But that money needs to be understood as practical help for ordinary American families, not as more bailout for the culprits who created the mess.

Faced with three trillion dollars in additional needs, the administration has only $350 billion at its disposal — the as yet unspent TARP funds. Right now, the administration seems to be trying to spend that money several times over — first as an equity guarantee to anchor more borrowing from the Federal Reserve as the core of Tim Geithner’s latest bank rescue; then as a source of public funds for the auto restructuring; and again as part of the plan to refinance mortgages and prevent foreclosures. This string is more than played out. There are limits, financially and politically, to the use of the Fed as all-purpose piggy-bank. At some point very soon, Congress needs to be brought back in, because your efforts require both Congressional support and a lot more real money. And Congress will only act if the people understand the stakes.

The political reality is that the economy needs to be on the mend by mid-2010, or the Democrats will lose seats in the mid-term election. But most informed observers think that if present trends continue, the economy will not be in recovery by Election Day 2010. If the Republicans eat into what is now a bare working Congressional majority, you will face legislative gridlock. And the perception of a weakened presidency will become a reality — portending even worse political news for the president’s re-election in 2012.

Right now, the president has enlisted some Republican governors like Charlie Crist urging diehard GOP legislators to back his program. That’s a trifecta. It splits the opposition party, reinforces the perception of Republican obstructionism in Congress, and vindicates the president’s bipartisan overtures. Well done! But this will last only as long as President Obama’s program seems to be working.

As you must know, President Obama is at grave risk of getting on the wrong side of a populist backlash, which the Republicans — however improbably — will exploit. Regular Americans are losing savings, incomes and jobs, and see vast sums from bank rescues going mainly to bankers. A USA Today/Gallup poll published Monday shows that 83% of Americans favor federal aid to create jobs, 67% favor aid to states in financial trouble, and 64% favor relief to homeowners facing foreclosure. But only 39% favor aid to banks. I recently gave a speech to a blue collar audience, and one questioner asked why they didn’t just mail a check for $100,000 to every American family instead. Far fetched as that sounds, the seven trillion dollar cost about equals the direct and indirect costs of the serial bank bailouts (counting advances and guarantees from the Fed.) In days ahead, you will be hearing more of this on talk radio and cable TV.

You already grasp the need for better symbolism on this front. The limit on executive pay for top bankers getting federal relief is a good start. But the public expects a lot more. In the public mind, the bank bailout is conflated with the stimulus package; and what gets the publicity is the fact that the relief is going mostly to bankers, bank shareholders, and bondholders.

It did not help that Tim Geithner went on stage before his plan was ready for prime time. The plan laid an egg on Wall Street, but the financial market is not the only audience that matters. Geithner’s approach is also increasingly unpopular with ordinary people and with commentators. The fact that Geithner’s latest housing rescue also channels the relief through banks and bondholders, and solves only a fraction of the foreclosure crisis, does not help either.

The week that the 2008 election campaign locked in your favor, was, in retrospect, a very close call. That was the week of September 29, after candidate Obama had announced that even though the bank bailout bill was not perfect, he would support it. A large majority of House Republicans, meanwhile, refused to support the bill. Their mail and phone calls were running a hundred to one against the measure.

As you will recall, John McCain clumsily announced the suspension of his campaign and dramatically returned to the Senate, where he played no useful role whatever. When the dust settled, the White House rounded up just enough Republican votes over rank and file GOP opposition, and Barack Obama looked like a statesman while McCain looked like an inept opportunist. But had McCain behaved as a more adroit demagogue and played to the latent populism in the backlash against the bill, he could have been the net beneficiary while painting Obama as the “elite” agent of the banks. Given the close Republican alliance with Wall Street and McCain’s own prior record, the claim would have been preposterous, but politically it might have worked.

There will continue to be this sort of risk going forward. Republicans will posture as pseudo-populists. The administration’s emergency measures both need to cure the economic collapse — and to do so by symbolically and palpably siding with regular people.

With all of these alarms, there is still a lot that I find encouraging about the president’s actions in recent weeks.

President Obama’s event January 31 launching the task force on middle class working families chaired by Vice President Biden was superb, and the president’s remarks were spot on. Among other things, he declared:

We know that you cannot have a strong middle class without a strong labor movement. We know that strong, vibrant, growing unions can exist side by side with strong, vibrant and growing businesses. This isn’t a either/or proposition between the interests of workers and the interests of shareholders. That’s the old argument. The new argument is that the American economy is not and has never been a zero-sum game. When workers are prospering, they buy products that make businesses prosper. We can be competitive and lean and mean and still create a situation where workers are thriving in this country.

We have not heard language like that in the Oval Office since Franklin Roosevelt. And the Employee Free Choice Act, if enacted, would not just create a stronger labor movement but a stronger constituency for the Obama administration and future progressive electoral majorities. It puts the president on the side of working Americans.

I noted with great interest a most unusual front-page piece in the New York Times February 10, headlined, “Geithner Said to Have Prevailed on the Bailout.” In this piece, you and unnamed officials were quoted to the effect that Geithner had won the argument inside the administration against more severe executive pay limits and other tough conditions on banks receiving additional government aid.

What made this piece so interesting is that it deliberately publicized a split in a team famous for self-discipline and for never leaking anything about internal disputes. A blunter translation of the leak might be “You won that one and good luck, Tim, this baby is all yours.” I certainly hope that’s what you meant, because the baby is something of an orphan that nobody wants to claim. And if Geithner is not doing the job in a way that protects the public interest and the president, he certainly deserves to be isolated. Unless he improves on his performance to date, I would not be surprised if in six months, Geithner “decided” to resign to spend more time with his family.

It will be interesting to see whether the center-right economic team who took senior posts in the campaign and then got the top jobs in the administration learns how to get with a bolder program. If they don’t, it is up to the political team to re-educate them or to find people who get it right. I certainly hope you and the president are also talking to people who have a more radical view of how to fix the banking system, like Joe Stiglitz, Nouriel Roubini, Dean Baker, James Galbraith and Paul Krugman. The fact that people like Alan Greenspan and Sen. Lindsey Graham have said that bank nationalization might be necessary certainly gives the president some cover.

In early February, the president’s economic advisers came up with the idea of a White House summit on fiscal responsibility, which was held this Monday, February 23. The idea was to reassure fiscally conservative Blue Dogs and lay the groundwork for a “grand bargain” long promoted by Robert Rubin, Pete Peterson, and some in Congress to pay for the sins of emergency deficit spending this year and next by cutting back on Social Security and Medicare down the road. The preferred vehicle to bring this about was a bipartisan commission modeled on the base-closing commission. It would come up with a plan for automatic triggers for cutbacks in social insurance, and would be subject only to an up or down Congressional vote.

But someone failed to run the political traps. There was plenty of consultation with the Blue Dog Democrats and with some senior Republicans, but nobody thought to tell Nancy Pelosi or Harry Reid. Senior Congressional Democrats, among them Senate Finance Committee Chairman Max Baucus, who is nobody’s idea of a fiscal wastrel, warned the president that this was no time to be cutting back on Social Security and Medicare or putting government on bipartisan automatic pilot.

To his credit, the president changed the character of the White House summit, and preempted it with a budget briefing for reporters on the administration’s commitment to being the deficit back below three percent of GDP by 2013 — by letting the Bush tax cuts expire and by finding other revenue — not by gutting social insurance. Despite a lot of rhetoric about bipartisanship, the idea of a commission is off the table. Congratulations on preventing what might have been a political debacle and seizing the fiscal high ground.

It has been a real pleasure to see President Obama get out of the Washington bubble and get back on the road. His speech in Springfield, where the campaign began, marking the two-hundredth anniversary of President Lincoln’s birth, was one of his finest. And he articulated the themes that must be persuasive to Americans if he is to save the economy and his presidency.

In that speech, he challenged “the philosophy that says every problem can be solved if only government would step out of the way; that if government were just dismantled, divvied up into tax breaks, and handed out to the wealthiest among us, it would somehow benefit us all.”

And he added:

“Such knee-jerk disdain for government – this constant rejection of any common endeavor — cannot rebuild our levees or our roads or our bridges. It cannot refurbish our schools or modernize our health care system; lead to the next medical discovery or yield the research and technology that will spark a clean energy economy.

“Only a nation can do these things. Only by coming together, all of us, and expressing that sense of shared sacrifice and responsibility — for ourselves and one another — can we do the work that must be done in this country. That is the very definition of being American.”

I hope we hear a lot more of this.

Before the economy moves toward recovery, we will need a very different strategy for reviving a functioning banking sector — one rebuilds a simplified financial system to serve the real economy. The current approach is more about saving existing zombie banks, and the people notice. You can call it receivership or nationalization, but sooner or later the president will have to embrace it, and it is better done sooner.

We also need a plan to prevent foreclosures that goes directly to help homeowners, rather than hoping that by giving more incentives to banks and bondholders we can somehow induce them into passing along some relief — a plan that helps homeowners directly. I think the political team gets that. Either the economic team needs to get it, or you need to get a different economic team.

There is the further challenge of branding the practical help that the Obama administration is already providing. Franklin Roosevelt had the blue eagle of the NRA plastered in every store window. And when jobs came via the CCC or the WPA, nobody doubted who was the author of that help. For now, even though $780 billion is a lot of money, it passes through so many hands before it finally reaches local communities that it isn’t branded as help from President Obama. You are probably better equipped to figure out that one than I am, but it is another challenge.

In closing, let me say that during the campaign I wrote a lot of commentary, sometimes back-seat-driving what you were doing. Nine times out of ten when I second guessed your tactics, you were already several steps ahead of me. You’re a stellar political strategist. However, you now have the added challenge of governing, and of governing on the edge of a depression with a team of economic advisers that is sometimes more of an echo of the past than an asset. You don’t have much margin of error, and you need to get the politics right in order to get the economics right. We all need you and President Obama to succeed.

Robert Borosage

By Robert L. Borosage

Co-Director Campaign for America’s Future

The Obama administration has made its first serious misstep. No, it wasn’t the wooing of ingrate Republicans, or the dining with clueless reactionary pundits. It is much more significant. Faced with the failure of the Paulson-Bernanke banking bailout, the Obama administration has decided to double down. The new plan, described in broad outline by Treasury Secretary Tim Geithner on Tuesday, antes up another $1.5 trillion or more to keep the banks afloat. But it won’t convince many that they are seaworthy.

The plan isn’t likely to get the administration where it needs to go for two simple reasons. It is wrong about where we are starting from. And it is wrong about where we’re going to. If you don’t know where you are and don’t know where you are going, it is very hard to get there.

The plan won’t admit where we are: the major banks in the US are insolvent. They aren’t addled by a temporary fever. They are broke. If they actually marked their toxic paper to the market price – where there is one – their losses would wipe out their capital, even including the billions kicked in by the government in the first round. Clearly, the Obama administration – like the Bush administration before it – hasn’t accepted that reality.

The plan won’t get us where we need to go: we need to restructure – and downsize – our financial sector. Its baroque excesses – billions in bonuses, golden parachutes, million dollar office renovations, $35,000 “commodes on legs,” $50 million private jets, legions of employees – were constructed atop a housing bubble that finally burst. Now the banks and financial houses must be downsized, chastened, and regulated. As President Obama stated, “the party is over.” But the administration’s plan envisions a restoration, not a restructuring. We don’t want to go there even if we could afford it.

Martin Wolf, the lead economics writer for the establishment Financial Times, notes that the plan was constrained by three assumptions: no nationalization, no losses for bondholders, no new money from the Congress.

No nationalization rules out the way the US normally deals with insolvent banks. The FDIC takes them over, replaces the management; the depositors are reassured, the shareholders take their losses to write off the bad debts. Then the FDIC restructures the bank, merges it or sells it back to private investors. It arranges an orderly and seemly burial. Without doing this with banks that are “too big to fail,” the administration is left paying tribute to zombie banks that consume taxpayers’ money while doing little if any productive banking.

No losses for bondholders means that taxpayers pick up the bill. With an insolvent bank, shareholders lose their investment. That’s how the market works. If that isn’t enough to cover the losses, then creditors take what is called “a haircut.” A portion of the loan they made to the bank is written off or turned into equity (stock). But with neither the shareholders nor the creditors taking the hit, only taxpayers are left.

No new money from the Congress – surely a political reality with the rising popular fury at bailing out millionaire bankers – means that the plan is immensely complicated, combining guarantees from the Federal Reserve, small capital injections, inducements to lure private investors. But the whole point of the exercise is to restore confidence in the soundness of the banks. A jerry-built complicated package only makes everyone nervous that the whole contraption won’t hold up.

How can Obama get back on track? The plan does have one potentially redeeming feature. It pledges that any bank requesting federal assistance will have to undergo what it calls “a stress test,” a detailed assessment of the value of its holdings and liabilities. This is the first thing the FDIC does when it takes over a bank verging on collapse. An honest assessment allows the government to decide whether the bank is salvageable or not. (It is aided in this process by getting rid of the old managers who have a direct interest in covering up the depth of the hole they are in.)

The Treasury could use this clause to “discover” that the banks applying for assistance aren’t solvent – and then proceed to restructure them (never using the N word). Congress might sensibly instruct the administration to do just that. Otherwise, another trillion or so will be devoted to keeping the zombies alive, while the economy — and the Obama presidency — suffer.

But for this to happen, Obama will have to put grit in his policy, not just his rhetoric. As Steve Fraser recounts, in the last great depression, Franklin Roosevelt railed against the “money changers” from his first inaugural on, scouring them for squandering “other people’s money, and promising to chase “these unscrupulous money changers” from their “high seats in the temples of American civilization.”

But FDR combined bite with his bark. Again Fraser summarizes:

After 1929…new financial regulation was at the top of, and made up a hefty part of, Roosevelt’s New Deal agenda during its first year. That included the Bank Holiday, the creation of the Federal Deposit Insurance Corporation, the passing of the Glass-Steagall Act, which separated commercial from investment banking (their prior cohabitation had been a prime incubator of financial hanky-panky during the Jazz Age of the previous decade), and the first Securities Act to monitor the stock exchange.

Over the past weeks, it is apparent that Obama has begun to educate Americans about the scope of the economic devastation that he must deal with. Now it is vital that his policies get as bold and radical as the crisis demands. The new banking plan isn’t there.