Archive for 2009

The Storms on the Economy’s Horizon

By
Rob Shapiro
Published: November 19, 2009

The high economic anxieties that most Americans felt six months ago may have faded, but count me among economists who are still very concerned.  Sure, the last GDP report came in at 3.5 percent, and the next one should show comparable gains.  Virtually all of those gains, however, come from the temporary stimulus and unusual inventory corrections.  Once those factors run their course – mid-2010 for the stimulus and maybe earlier for inventories – a second dip down becomes very possible, and it could be even worse than the first.  And the main reason we remain so vulnerable is the series of political stumbles which have left largely unchanged many of the forces that drove us off the cliff.

Just today we learned that new residential construction fell again last month, while home foreclosures continue to rise.  It could hardly be otherwise: Washington has still done little to address the pressures from falling home prices colliding with rising mortgage payments, even though they were the largest single factor in the financial meltdown. We did warn that the government’s housing plan wouldn’t work:  A small government benefit to encourage banks to offer better terms to strapped homeowners couldn’t overcome the basic rule that anymore facing foreclosure becomes a poor credit risk, and banks don’t refinance mortgages for poor credit risks.  So, as jobs have continued to disappear and incomes fall, foreclosures continue to rise.  We could still declare a brief moratorium on foreclosures while putting in place some measures that might actually work – for example, directing Fannie Mae, which we taxpayers now own, to provide better terms to strapped homeowners whose mortgages are held there.

Washington also gave financial institutions hundreds of billions of tax dollars without ever requiring them to get rid of their toxic assets and reboot credit to businesses – and so, they largely didn’t.  Now, as foreclosures continue to rise, they face more losses from the mortgage-backed securities and their derivatives they still hold.  Those losses will continue to limit the credit flows needed to keep the economy going once the stimulus fades.  And that doesn’t factor in the increasing pressures on financial institutions from growing problems with commercial real estate.

And by the way, oil prices are up to $80 per-barrel again and headed higher if the dollar continues to weaken.  You may have forgotten, but it was the run-up in oil price in 2007 that actually triggered the recent recession, with the financial crisis coming a little later and making it so much worse.  If oil prices keep on rising now, on top of weak credit flows and anemic consumer spending, and the economy heads down again, its trajectory could well be even worse this time, since it will come in the context of already weak demand and high unemployment.

This possibility brings us to Washington’s largest failure of all – okay, the second largest after its astonishing incompetence dealing with the financial bubble and bust.  Throughout the last expansion, Washington sat on its hands as jobs continued to disappear for two years after the 2001 recession ended, and then finally began to grow but at less than half the rates seen in the 1990s and 1980s.  This political failure means that we now face double-digit unemployment for a long time, even if we manage to avoid returning to recession.

At least the administration and Congress finally are noticing the jobs problem.  What we don’t know is whether they’ll do anything effective to address it.  They have real options here.  For example, for the short-term, they can provide more money to states squeezed by falling revenues and balanced-budget requirements, so the states can keep their teachers, police and other employees working.  An even better idea would be to jumpstart new job creation by exempting the first few thousand dollars of wages from payroll taxes.  And they could pay for it with a small, Tobin-type tax on financial transactions.

What really scares me and some other economists, however, is the possibility of another large shock to the financial system.  For example, while it’s not likely, we could see a sudden collapse in the markets for securities backed by commercial mortgages.  The real nightmare on Wall Street, however, is an international crisis that suddenly drives up the dollar’s value.  That would present terrible problems, since much of the near-record profits being reported by Goldman “We’re doing God’s work” Sachs and others come from nearly a trillion dollars in complicated financial plays that depend on a weak dollar.

If this somehow should come to pass, Washington’s incapacity to deal effectively with the recent crisis will create very scary scenarios.  At a minimum, even President Obama’s legendary skills of persuasion won’t be enough to convince the public to bail out Wall Street a second time. It’s may not be too late, however, for the administration and the Fed to privately jawbone Wall Street to reduce this new risk exposure – and ours. Whether they’re willing to accept smaller bonuses, which usually come with less risk, could be a good test of whether they deserve to ever be rescued again.

Calling on Chinese Bloggers

By
Sam duPont
Published: November 13, 2009

The President is in Tokyo today, and will be in China for the first half of next week.  In advance of the trip, our State Department hosted simultaneous press conferences in Beijing, Shanghai, and Guangzhou for audiences composed primarily of bloggers– a first for the U.S. in China. The attendees– a mix of English- and Chinese-language bloggers– were able to openly ask questions and comment on China’s internet restrictions, and several bloggers live-Tweeted the proceedings.

Obama Air Force OneThis is yet another example of the very smart 21st Century Statecraft being plied by the Clinton Department of State. Rather than limiting ourselves to interacting strictly with the governments of foreign countries, we can engage directly with people around the world. By lending credence to China’s bloggers, we help them in their effort to become a respected and efficacious voice for change in their own country. Even in cases in which our own objectives don’t quite line up with the ideals of the bloggers themselves, empowering a multitude of voices is a big step in the right direction.

We do, naturally, seem to be getting a bit of pushback from Beijing. When he stops in Shanghai next week, President Obama is hoping to hold a town hall meeting with Chinese youth in his typical free-flowing, agenda-free format.  Rumors abound that the Chinese and U.S. officials are having some trouble agreeing on the terms for the event, and it may be scuttled as a result. Fine. I, for one, would rather see the town hall ditched than see a phony compromise event in which the attendees have no freedom to speak their mind.

9500 Liberty

By
Sam duPont
Published: November 12, 2009

Along with our affiliate NDN, the New Policy Institute has recently hosted a few screenings of a powerful new documentary film, 9500 Liberty. The film takes an in-depth look at how the debate over immigration has played out in Prince William County, Virginia. And while it is about immigration and how our nation’s people are changing, it is also an extraordinary look at how a community comes together – or sometimes doesn’t – to tackle common challenges.

A trailer for the film is below, and we’d encourage you to visit the film’s website to learn more about 9500 Liberty.

Health Care’s Raw Deal for Middle-Class Families

By
Rob Shapiro
Published: November 11, 2009

Health care reform advocates often point out that the costs of reform should be weighed against the costs of doing nothing.  Unfortunately, that’s very hard to do, since our health care and tax arrangements mask those costs so well.  I suspect that if middle-class Americans had a better grasp of what health care really costs them, and how those costs are shaping their economic futures, the public response might well recall the tax revolt of the 1970s.

These are my thoughts, at least, reading a new piece from Eugene Steuerle, a tax economist at the Urban Institute with a knack for collecting data that can help us see the world in fresh ways.  From the data Steuerle presents, we can calculate that within just five or six years, the average middle-class family will have to devote nearly one-third of its income to health care costs.  That’s right: one-third.  According to the CBO, the average family will earn $54,000 a year in 2016, when a moderate-priced family policy will cost $14,700.  Employers will pay much of that insurance bill for most middle-class families; but that’s just a mask, since those employer payments come out of people’s wages, not a company’s profits.   In real effect, a middle class family’s earnings in 2016 will come to $68,700 ($54,000 + $14,700), of which $14,700 or 21.4 percent will go for health insurance.  And that won’t be their only health-related costs.  Their co-payments and other uninsured expenses, on average, will come to another $5,100.  They’ll also be paying taxes to help cover other people’s health care – 2.9 percent of their cash wages for Medicare ($1,566), plus perhaps $750 more in federal and state income taxes for Medicaid and for Medicare costs not covered by the 2.9 percent payroll tax.  Add up all of that, and it comes to $22,116, or 32.2 percent of the middle-class family’s adjusted income of $68,700.

While Steuerle is concerned – rightly so – about provisions in health care reform that will treat people with the same incomes differently, depending on the rules the legislation applies to employers, I’m more incensed about the current, raw deal for middle-class Americans.  Why should an average family expect to pay one-third of its income in 2016 on a health care system which, in that same year, should claim only 16 percent of our GDP?   The biggest part of this puzzle lies in the fact that most of the costs are roughly the same for most people, regardless of their income.  The worker earning $68,700, a manager who makes $100,000, and the company’s CEO who earns $1 million all will pay the same $14,700 for their families’ health coverage. Their out-of-pocket expenses do rise with income but not by very much; and while the manager and CEO pay more Medicare taxes than our average worker, they all pay at the same 2.9 percent rate.  There also are other factors which reduce the burden on other groups – and so tacitly increase it for those middle-class families.  For example, people on Medicare and Medicaid bear much lower insurance costs, although they also pay relatively more for their out-of-pocket expenses; and families without children pay relatively less for both insurance and out-of-pocket expenses.

Whatever the causes, the data show clearly that health care costs have become a core economic issue for middle-class Americans.  Unless we can contain them, and over time even reduce them, realistic prospects of upward mobility for most middle-class families will simply slip away.   Health care, in short, has to be an essential part of a new economic strategy.

The last political upheaval over the economic prospects of the middle class began with Proposition 13 in California and went on to fuel a conservative realignment that held sway for a quarter century.   The next one may well have begun already with these unsustainable health care costs.  President Obama, whose talent for reading the American mood equals Ronald Reagan’s, has tried to respond quickly with several reasonable ideas for cost containment.  His proposals went nowhere when healthcare providers and insurers countered by, in effect, threatening to withhold people’s care.  The next time, this issue will be recast in terms that everyone understands – people’s real incomes – and the results could be very different.

India Bans Pre-Paid Mobiles in Kashmir – Security or Suppression?

By
Sam duPont
Published: November 10, 2009

For eight years, the Indian government dragged its feet until, in 2003, it finally permitted mobile phones in conflict-torn Kashmir. Intelligence officials had feared that Kashmiri and Pakistani militants would use the phones to plan attacks on Indian army outposts throughout the region, but in ‘03 they relaxed the ban, and the past six years have been the most peaceful since the conflict began in 1989. Causation? Probably not. But correlation, anyway.

Srinagar Cell PhoneLast week, the Indian government walked back on technological freedoms in Kashmir, banning pre-paid mobile connections. In Kashmir, as in much of the developing world, pre-paid is a popular option thanks to its known costs, and low commitment; the new ban will take phones out of the hands of 3.8 million Kashmiris. Unsurprisingly, hundreds of Kashmiris have taken to the streets of Srinagar, the capital city, to protest the law in recent days.

The stated reasons for the prohibition are that mobile vendors are not conducting proper background checks on new subscribers, and that militants are using mobile phones to detonate bombs– a practice observed in Iraq and Afghanistan in recent years. I suspect the actual reasons are considerably more Machiavellian.

Srinagar is one of the most heavily-militarized cities in the world, and the dense presence of Indian troops has led to frequent clashes between Kashmiri civilians and the military. As the BBC documented earlier this year, young Kashmiris have been using their cell phones to bear witness to the disproportionate, often unprovoked violence of the Indian army. With a camera phone in every hand, every citizen is a journalist, and the explosion of photos, videos and other first-hand accounts of the violence in Kashmir has brought images of the violence to the world.

What’s more, the Indian intelligence services have met with some success finding and killing militants by monitoring the cell phone conversations of Kashmiris. The consistency and higher background-check requirements for post-paid cell phone plans makes it much easier to monitor those subscribers.

It’s my strong suspicion that the pre-paid ban in Kashmir has more to do with suppressing critical citizen media and monitoring civilian phone conversations than it does with preventing phone-bomb attacks. The ban consists of a suppression of basic freedoms and a violation of privacy in an already repressed state. Further, the government is denying citizens a valuable tool for economic development and access to the global ICT network– increasingly a fundamental right in itself.

FD: I spent some time reporting in Kashmir. My views are certainly informed by that experience. My reporting is published here.

A New Economic Strategy for Hard Times and Good Times

By
Rob Shapiro
Published: November 4, 2009

You might not know it from what passes for economic commentary on cable TV, but the U.S. economy remains pretty sick.   Last week’s report of 3.5 percent GDP growth in the third quarter seemed like cause to celebrate – until you looked more carefully at the data and saw that virtually all of the upside came from temporary government stimulus.  As the head of a revered British firm told a crowd of fellow CEOs in Washington the same day, “if we gave that many drugs to a dead man, he’d dance too.”    The next day, the report on personal incomes showed consumption continuing to slump, along with incomes.  In coming months, the media and the administration will trumpet more reports of “good news” which actually will provide little comfort to most American businesses and households.   GDP may grow even faster in the fourth quarter as the stimulus continues to run its course and businesses stop cutting inventories that already are down to the bone.   After that, we could yet face a second dip down, a possibility raised last week by Harvard economist Martin Feldstein.

We could even face more upheaval in financial markets already growing giddy again.  In fact, Nouriel Roubini, the NYU economist who warned us in 2006 and 2007 that the end of the housing bubble could wreck the financial markets, now sees a new bubble forming from trillions in new investments by financial institutions playing the declining dollar off of other currencies.  Moreover, he also sees an inevitable bust coming, with devastating new costs.  He’s certainly correct that currency plays are very risky, since exchange rates can turn unexpectedly on a dime.   That’s actually a variant of what happened to the Long Term Credit Management fund in the late-1990s.  The big bets placed by that single fund, and the liabilities of its Wall Street investors, nearly brought down the financial system.  What’s happening now is on a much bigger scale, and the underlying system is a lot more vulnerable.

If we do dodge Roubini’s latest bullet, the bad news eventually will run its course – though it probably will take at least another year, and longer than that for employment to recover.  By that time, it will be more obvious that we don’t have a national strategy to avoid another boom-and-bust cycle and produce sustained gains for most people.   It’s hard to face, but the Treasury and Congress have to give up their comforting assumption that the handful of financial institutions which dominate our capital markets are driven to behave in ways that ultimately produce good times for everyone.  In some periods, markets do work nearly as well as that – from the latter 1950s and through the 1960s, for example, and again in the latter 1980s and through the 1990s.  At other times, distorting new conditions bound the system, and markets go a little haywire.  That’s what unfolded in the latter 1920s and through the 1930s, again in the 1970s, and now it’s happening again.  So it’s time to retire the economic strategies of the last 25 years or so, which relied on efficient markets to drive those who run its largest institutions to work their will for everyone else’s benefit.

What we need now is a new debate over the terms of a new economic strategy.  One place to begin is by limiting some of the risks taken by institutions that dominate critical markets, which the rest of us also depend on.  It’s hard to do, because it’s very difficult to even measure and monitor those risks.  It also means effectively limiting the profits available to the society’s richest companies, and how often does that happen?

A greater challenge will involve facing up to the way that the fast-evolving global economy has undermined our capacity to create jobs and deliver rising incomes for most people.   It’s not about sending jobs to China.  Rather, it’s about how hard it’s become for many companies, facing intense competition from tens of thousands of new foreign and domestic businesses created in globalization, to raise their prices when their cost go up.  So as their health care and energy costs have marched up, they’ve cut other costs – starting with jobs and wages.  And whenever this crisis and downturn truly end, the intense competitive pressures that indirectly eat into the American incomes will be as strong as ever.

The debate has to begin with the recognition that in this period at least, markets won’t cure these problems.  If we truly want to restore steady wage gains, there will be no way to avoid serious government steps to slow future cost increases in health care and energy. A new strategy also has to acknowledge our only certain competitive edge in a global economy.  In the country where the idea-based economy took hold first, our companies and workers still do better than most of their counterparts elsewhere in developing powerful new innovations, adopting them across the economy, and adapting them to their own particular circumstances.   We have to generously fund both the seeds and the infrastructure of innovation.  And we should help everyone develop the flexibility demanded to operate effectively in innovation-dense workplaces, by funding universal opportunities for people to upgrade their skills and education every year.

Life Tools & Cheap Phones Come to Indonesia

By
Sam duPont
Published: November 4, 2009

Nokia PhonesNokia sells more handsets than any other manufacturer in the world, but they have never really caught on in the United States.  Rather, they make their bones selling simple, cheap, virtually indestructible phones in Europe and in much of the developing world. 

To avoid getting pigeonholed in this less-lucrative corner of the market, Nokia has increasingly been moving into offering services built into their handsets. A year ago, they launched Nokia Life Tools in India– a suite of applications meant particularly for phone users in rural, disconnected areas, to give them access to agricultural information, educational services, and entertainment media. 

The services were evidently a hit, as Nokia is now rolling out the same Life Tools in Indonesia, starting later this year. The tools, which run off a graphically rich, multilingual interface, help users by enabling access to weather forecasts and market prices for their produce, test preparation and English-language training, and music, jokes, and movie reviews.

In addition, Nokia just announced five new low-cost phones intended for rural environments, including their cheapest model to date. The $30 Nokia 1280 has a slightly shorter battery life than its predecessor– 8.5 instead of 9 hours– but it has other built-in features that make it a useful tool for a typical villager, including a flashlight and an FM radio. My favorite aspect is that the new phone enables five separate phone books; in many poorer areas, phone-sharing is an increasingly common way for people to stay connected, and the separation of phone books is a feature that– irrelevant in the US– makes the phone more valuable, and more functional for a user in rural Indonesia. Another great insight from Jan Chipchase and his colleagues at Nokia.

Secretary Clinton Announces “Civil Society 2.0″

By
Sam duPont
Published: November 3, 2009

Speaking today in Marrakesh, Secretary Hillary Clinton announced a new initiative of the State Department, “Civil Society 2.0.” Under this program, State will provide funding and expertise to allow grassroots civil society organizations around the world use technology to grow and work more effectively.  From the press release:

“Civil Society 2.0” includes the following components:

  1. Deploying a team of experienced technologists to work with civil society organizations around the globe to provide training and support to build their digital capacity. The competencies developed in the trainings will include:
    • How to build a website
    • How to blog
    • How to launch a text messaging campaign
    • How to build an online community
    • How to leverage social networks for a cause
  2. Partnering these technologists with local civil society organizations and governments to develop and implement technology-based solutions to local problems.
  3. Publishing interactive “how to” programs and curriculum online to help organizations that do not have access to in-person assistance.
  4. Creating a curated open platform that allows any citizen or company to develop, share or suggest content for the curriculum.
  5. Allocating $5 million in grant funds for pilot programs in the Middle East and North Africa that will bolster the new media and networking capabilities of civil society organizations and promote online learning in the region.

In the past, this kind of capacity building would have been undertaken by Western governments and NGOs. By letting foreign peoples and governments tackle their own problems, it’s much more likely that those problems will be addressed and solved in effective, locally-relevant ways. What’s more, this spread of technology will help promote American ideas, and make the U.S. a more sympathetic actor in the eyes of those around the world.

This is yet another element of the very savvy “21st Century Statecraft” that Secretary Clinton and her advisor Alec Ross are applying around the globe, and a part of the “Smart Power” approach to global leadership that the Obama Administration has embraced.

How Do You Say “Dot Com” in Urdu?

By
Sam duPont
Published: November 2, 2009

Sometime next year, for the first time, an internet domain name without any Latin characters will go live.

WangZhanICANN, the organization in charge of domain name and IP address registration, among other tasks, voted on Friday to permit domain names composed of nearly 100,000 different characters, beyond the 37 currently-permitted characters you see on your keyboard. Hindi and Chinese, Greek and Hebrew, Russian and Arabic characters will all be allowed in top-level domains.

The hope is that this change in policy will bring the internet within the reach of yet more people. It will certainly make the internet a more viable tool for children learning to read in languages that don’t use the Latin alphabet. It’s not an earth-moving event, perhaps, but it’s a small step that recognizes the global, boundary-free nature of the internet.

If you’re into this kind of thing, here’s a hopelessly sappy video from ICANN celebrating the change:

State Department Supporting Social Tech in Pakistan

By
Sam duPont
Published: October 30, 2009

Secretary of State Hillary Clinton is in Islamabad, and yesterday she announced American support for a new mobile-phone based social network in Pakistan.  The network is called “Humari Awaz,” which means “our voice,” and it is accessible through a free SMS shortcode on all five mobile networks. Pakistanis will be able to use these networks for purely social ends, or to enhance business, media, agricultural, and other purposes. The US government will pay for the first 24 million text messages sent through Humari Awaz.

As in much of the developing world, Pakistan’s 95 million mobile subscriptions vastly outnumber landline or internet connections, so it makes a lot of sense to leverage SMS technology to tie people together.  I’d be curious to hear more about who State is partnering with on this– particularly who will be operating the back-end– and how the network will function for users.

But on a less tech-y and more geopolitical note, I’m a big fan of the State Department’s continued embrace of “21st Century Statecraft,” to advance American interests by using modern technology and encouraging its adoption around the world. Pakistan is the “most dangerous place on earth,” and also one of the places most central to American security. Leveraging social technology to help build civil society, improve the economy, and empower Pakistani citizens is a smart, focused use of our power, and initiatives like this may do more to promote American security than any direct US action against al Qaeda’s strongholds in Waziristan ever could.

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