This speech was delivered at The New School on May 19, 2009.
Views on the U.S. economy
Let me start by offering five views of the U.S. economy that in combination
are much bleaker than the single “we’re
near the bottom” view being put forward by those who seemingly are more interested
in resuscitating the banks and Wall
Street and in resurrecting their
discredited trading practices, than in fundamentally reforming these institutions and providing long-term systemic fixes
to our very broken economy. And I should
warn you, this tension between the so-called “reformers”, of which I am definitely
one, and the laissez faire “resuscitators” is an issue I am going to come back
to a couple of times.
As for those five views:
First, and most concerning, when we more
accurately add to the 13.7 million officially unemployed workers at the end of
April, the 14.8 million workers who are either underemployed – which means part-time
of necessity [8.9mm]
or otherwise marginally attached [2.1mm] – or in the so-called “labor
force reserve” because they have abandoned their job searches [3.8mm],
then the current effective
unemployment rate is a staggering 17.8%, rather than the half lower official
rate of 8.9%. In all, there are now 28.5
million effectively unemployed Americans, and yet only around 3 million job
openings.
The U.S.
economy lost 540,000 more jobs in April, despite the government adding 72,000
temporary jobs as part of its preparation for the 2010 Census – and it’s a sad
commentary indeed when such a huge job loss is perceived by some pundits as a “good
sign” because we didn’t lose even more jobs.
All in all, 6.2 million jobs have tragically been lost since the start
of the recession in December 2007, when instead we should have been creating over
the last 16 months up to 2.4 million new jobs just to keep up with population
growth.
Second, right up until the U.S. economy went into
its tailspin, the spending habits of Americans accounted for about 71% of our
nation’s Gross Domestic Product [source: Bureau of Economic Analysis, Table 1.5.5],
which is at least 5 and up to 10 percentage points higher than the level in most other developed countries and a full
30 points higher than the current
level in China [source: Anne Krueger, SAIS, 4-22-09].
Now, however, because of dramatic changes in their purchasing
practices, American consumers’ percentage of GDP has begun to drop toward a
level more in line with that of the other major developed nations and one that
we ourselves haven’t seen in nearly thirty years. And while about half of this trillion
dollar-plus decline in our GDP is likely to be offset by the effects of reduced
imports, other import-substitution initiatives, and government stimulus, it still
represents a huge dislocation of the U.S. and global economies, which is going
to require a substantial “rebalancing” of our economy. [note: U.S.
GDP in 2008 was $14.3 trillion]
Third, the United States has a persistent
trade deficit that has aggregated an almost unbelievable $7.2
trillion since 1980. Just the trade
deficits accumulated during the Bush administration – $4.7 trillion worth – have
made our economy today about $1.5 trillion smaller than it would have been
otherwise [source: Peter Morici, Univ. of Maryland, 5-11-09], and such
deficits were a major cause of the loss overseas, during this same period, of more than 5 million
manufacturing and 2 million service jobs.
And of course, all of this completely contradicts the premise that a
nation’s trading would always be nearly in balance and that it would never lose
large numbers of both types of jobs at the same time.
Fourth, past
Administrations have let America’s manufacturing sector – and the exports and
import-substitute goods it produces
– be swamped by our services economy, to such a degree that durable goods now
represent less than 7% of U.S. GDP and the number of people working in
manufacturing now account for only 8.7% of the jobs in the country [source: Manuf. & Tech. News, 4-17-09]. These are
completely doomed-to-failure percentages for a nation as large and globally
important as ours, but they also represent the height of economic
irresponsibility, since service jobs in comparison pay below average wages, do
very little to improve America’s balance of trade, and mostly just move incomes
around the country.
And fifth, the current estimate of the total credit losses to be incurred on U.S.
assets now stands at an almost unbelievable $2.7 trillion, plus there is
another $1.3 trillion of expected losses on European assets [source: NY Times, 4-22-09]. The U.S. Treasury has already doled out $300 billion
of TARP funds to the top 18 commercial banks and non-bank miscreants like AIG
and Bear Stearns, and of course just last week we learned that even using
overly lenient premises, $75 billion of additional capital will be required in the
next few months to buffer the banks against their projected 2009 and 2010
losses [source: FT, 5-08-09]. These are
stupefying numbers.
The first thing we have to ask ourselves today is,
“What the heck happened?”
Well, the answers
are actually pretty simple.
Even though history
teaches us that no nation can simply borrow its way to sustained prosperity and
that prosperity never comes either from disconnecting workers’ wages from their
productivity or from a government’s refusal to protect the right of workers to
organize and receive a fair share of their productivity gains, successive U.S. Administrations,
for the past 25 to 30 years, have in fact:
-
Gutted
the progressive individual income tax in order to benefit high-income Americans,
to such a degree that an infinitesimal two-tenths of one percent of U.S.
taxpayers now earn about half of our
nation’s individual income; -
Let
most productivity gains go to those at the highest income levels, again through
preferential tax policies; and -
Ceased
in any meaningful way to protect workers’ rights.
As a result,
- Income inequality is now at its highest
level since 1928; -
Median
wages have stagnated for more than a decade; and -
Trade
unions now represent only 7.6% of private-sector employees, down from more than
20% as recently as the early ’80s.
And most damaging
to long-term prosperity, our economy has simply bounced from one bubble to
another, fueled in each case by the combination of manufacturing and
energy-related trade deficits, cheap credit generated through financial
engineering, and hyper-consumerism.
And greatly compounding our current predicament is the fact that
the Economic Stimulus Plan that was enacted is woefully short of what is needed
and does not come close to sufficiently rebalancing our economy. It is:
- Too
small by half; - Not
nearly timely enough in some of its spend-out rates; - Too
focused on small one-time individual tax cuts [$233b]; and, most
important, - Too
underperforming against the only
measure that really counts, which is job creation.
Nearly three
months after passage of the current $787 billion Stimulus Plan, less than 6% of
the money [$45.6b] has been paid out, and even this paltry amount
was just “social service payments” and small individual tax cuts and not for jobs creation [Michael Cooper, NY Times, 5-13-09]. And the 3.6 million jobs which the Plan
is forecasted to create and save – but mostly just save – over the next two
years barely exceed the 3 million
additional jobs likely to be lost over the next 12 to 18 months [source: Sara Murray, WSJ, 5-09-09]. And of course 3.6 million jobs pales when compared to those 28.5 million workers who are already unemployed and need to find
productive work.
America‘s Human Capital
In his first
inaugural address, when there were but 13 million unemployed Americans and not
28 million, President Franklin Roosevelt said that the nation’s greatest task
was (quote) “to put people to work” (unquote).
This “greatest task”
now falls on the shoulders of President Obama and this Congress, and the only way
they are going to be able to help us earn our way back to long-term, sustained prosperity
is with an all-encompassing strategy – on the same massive scale that America
had at Normandy and behind the Marshall Plan – that creates those millions of jobs
which are missing in order for American workers to again be nearly fully
employed.
I believe nine specific initiatives are needed right now,
and while this sounds like a lot, frankly we need them all. They are:
1. A genuine national
industrial & manufacturing policy plus trade policies that put American
workers first and are as mercantilist as the policies that exist in the major
emerging markets – especially in China, India and Brazil – and in some of the
other major developed countries such as Germany.
2. A ten-year (not a two-year) program of significant public investment to upgrade
and rebuild our nation’s infrastructure, which will immediately create 18,000
new jobs for each $1 billion we spend [source: Univ. of
Mass.-Amherst PERI]
and help American companies succeed in the global marketplace.
3. Policies that encourage private investments
in wind and solar PV energy, together with targeted [i.e., $50b] federal government spending
related to:
-
Improving energy efficiency in manufacturing
facilities, - Smart grids and smart meters,
-
Ready-to-go transportation projects and
clean-energy public transit vehicles, and - Building retrofits.
These initiatives alone would very
quickly create 3 million new jobs, including nearly 1 million construction jobs
and 800,000 manufacturing jobs.
4. A very strong “Buy
American” requirement related to all federal procurement, which now
comprises about 19% of our economy, along with policies which encourage the
domestic manufacturing of green energy component parts.
5. Major tax incentives for
businesses of all size to invest in state-of-the-art laboratories, domestic
jobs-focused R&D, and follow-on manufacturing plants and equipment.
6. Programs similar to Roosevelt’s Civilian
Conservation Corps and later programs like VISTA
and CETA, in order to provide employment opportunities for this year’s 6.4
million high school and college graduates and the graduates who will follow. To appreciate the magnitude of just this one challenge,
the unemployment rate of workers with only high-school diplomas is already 19.6%, not even including the
high school classes of 2009.
7. Significant expansion of job
training and apprenticeship programs.
8. Public-sector employment
initiatives that target urban renewal and, especially, enhanced inner-city K-12
education.
9. Passage of the Employee Free
Choice Act so that the 60 million or so workers who would like to join unions can
do so without obstacles, since expanding union membership is one of the clearest
signposts on the road to growing the middle class from the bottom up and less income
inequality.
We need all nine of these initiatives – in fact, we should
have had them already – and what
will never work is for us to simply pour borrowed money into our economy on the
flawed and unfair premise that it will “trickle down” to where it is
needed. “Trickle down” is a completely
discredited theory, whether the money is given to high-income individuals, as
Presidents Reagan and George W. Bush did, or, as is happening now, it is
distributed in the form of massive bailouts to big banks and Wall Street firms
with only the hope (but not at all the requirement)
that the bailouts result in economy-enriching and jobs-creating loans.
On this latter
point, as I commented earlier, of great concern right now to many of us
is our perception that certain important people in the Obama Administration
would actually like to forestall any significant reform and regulation of the
proprietary financial trading system that led us into the worst financial
collapse since the Depression.
The basis of this concern is twofold: first, of
course, is that absence of any requirement at all that the banks receiving
bailout funds actually start lending; and second, is the use in the
recently completed stress tests calculations of the very same high
debt-to-net-capital ratio of 25 to 1 that the banks were using when they got us
into this mess in the first place – 25:1 is twice
the 12:1 ratio that the SEC required up until 2004, and it is obviously a ratio
designed mostly just to get the banks back trading securities using ridiculous and
dangerous amounts of leverage.
In 1999, the American political establishment, led by then
Treasury Secretary Robert Rubin, dismantled the 66-year old Glass-Steagall Act,
which almost immediately caused banks and investment banks alike to trade
mortgage-backed securities, make unwise loans, do deals purely for deals’ sake,
and use credit default swaps to lower regulatory capital requirements to absurd
levels [source: Joe Nocera, NY Times,
5-09-09].
It would be the height of irresponsibility if the U.S.
resurrected its failed financial institutions rather than reform them, and the
proof will be found in whether or not we materially rein in the credit default
swaps and other derivatives – and the too-big-to-fail firms that traded them –
which ten years ago we unleashed on the world.
We can’t afford any more “crony capitalism”, in financial services or
anywhere else for that matter, and the answer is not simply improved
transparency, which was proposed last week by the Administration [source: FT,
5-14-09], as important as that
is. The fundamental problem is that
these securities, which grew to be in the aggregate tens of trillions of
dollars, most often have no underlying economic rationale beyond pure
speculation – and of course it is this unbridled speculation which has
ill-served the U.S. and world’s economies like never before and brought them to
their knees.
Our nation’s Founders often spoke of a “city upon the hill”,
a place where people are judged on their individual abilities and where all of
us have a fair chance to make a good life and leave our children and
grandchildren a better world. How well President
Obama, Congress, and business and labor leaders respond to the jobs and financial
regulatory challenges now confronting the American economy will substantially
determine whether our nation continues to be the preeminent economic power in
the world and whether we ever again get the chance to live in that “city”.
Health and Retirement Security
I am going to close
my prepared remarks in a minute or so by talking about an issue near and dear
to my and Professor Madrick’s hearts, which is CEO and corporate responsibility,
but before I do, let me talk about a “city upon the hill” issue that I know is
near and dear to Professor Ghilarducci’s, which is the on-going theft of many
Americans’ health and retirement security.
Eighty years ago,
retirement security was stolen from two generations of Americans by the Wall
Street greed which brought on the Great Depression – and now, with the
complicity of big business, it is being stolen from this generation and maybe
the next by the kind of greed that would, on the one hand, privatize
Social Security at the drop of a hat and, on the other hand, bring back the
very same proprietary trading and compensation practices that just brought the
world’s economies to their knees.
If this nation is ever going to get back to being that “city
upon the hill”, there needs to be immediate health care reform, as there is no
greater ethical failure and no greater impetus to offshoring jobs than our
nation’s wheezing health care system.
And there also need to be pension and Social Security reforms that fix
the current systems while preserving safety-net obligations as well as the pensions
already owing to workers as fairly-earned deferred compensation.
How twisted is it that the CEOs of our nation’s most
important companies, the S&P 500, are, even in this crisis, retiring with
an average of $10.1 million in their retirement plans while only 36% of
American households have any type of retirement account?
President Obama and Congress need to put forward a new
“corporate responsibility contract” between American business and the American
middle class, which, among other things, requires corporations to keep their pension
promises to workers, prohibits the raiding of employees’ pension funds, and restricts
any unfair dissolving of collective bargaining agreements and their pension
plans.
Importantly, Congress also needs to encourage tax-benefitted
government-managed accounts that function like defined-benefit plans of old,
which means getting rid of the tax breaks for 401(k)s. An adverse unintended consequence of the
advent of 401(k) plans is that so many workers have been driven out of their
defined-benefit plans that now 82% of them now have either no private plan or
are perilously at risk of market vagaries in high-fee commercial 401(k) accounts.
Corporate
Irresponsibility and Excessive Compensation
Now, let me close by talking about the two items that I
believe are at the very root of the financial crisis of 2008, which are
corporate irresponsibility and excessive executive and management
compensation.
In 1972, Reginald Jones, Jack Welch’s predecessor at General
Electric, which was then as well America’s preeminent company, said in his
maiden speech as CEO that while his job was to keep GE successful into the long
term on behalf of the shareholders, he nonetheless had, at all times, equal and concurrent responsibility to employees,
customers, communities and the nation. He
then went on to say that a large fully-employed middle class growing from the
bottom up would be the very best thing for his company, its shareholders, and
the United States.
Because of Jones’s sense of concurrent obligations and his overriding
sensitivity to the American middle class, he was a “CEO statesman” in the best
meaning of the phrase.
However, only a few years later, beginning in the early
1980s, corporate responsibility started to materially break down because of
irresponsible changes in executive compensation and shareholder
governance. At the same time, Congress,
at the urging of big business, began to alter the progressive nature of the
income tax for the substantial benefit of high-income Americans, and the
federal government largely stopped protecting workers’ right to organize and
collectively bargain.
And by the end of the ‘80s, many U.S.-based global
corporations went another step further and began to see their non-U.S.
operations not just as sources of raw materials but as cheap production and
service sites, which triggered the most massive decline in trade numbers in the
history of any nation and the most instant and substantial offshoring of jobs
ever.
For the 35 years following the end of the Second World War,
the critical component of making the pursuit of the American Dream fair for all
Americans was how honorably government and business behaved and interacted, and
for the most part they did pretty well. Now,
however, Corporate America often uses the excuse of needing to “stay
competitive” in the global economy to justify breaking its social contract with
workers.
But the global economy doesn’t have to mean more job
insecurity, stagnant wages, and little or no health care or pension
benefits. And it also doesn’t have to
mean threatening workers with moving their jobs overseas and slashing their
benefits, just because multinational corporations have almost complete mobility
of capital and technology and American workers have almost no mobility.
Every day in America,
we tolerate the needless offshoring of millions of jobs, when CEOs could
instead be demanding immediate tax cuts for manufacturers, tax credits for
U.S.-based R&D expenditures, and trade agreements that incorporate
anti-subsidy and anti-currency manipulation provisions and strong labor and
environmental standards.
Every day in America,
we are foreclosed from the benefits that would come from a meaningful carbon
cap-and-trade system, because just one member of the 160-member Business Roundtable
– Exxon Mobil – opposes this system, despite the fact that nearly every other
developed nation in the world is in the process of implementing one.
Every day in America,
a handful of insurance companies keep universal health care from the 100
million or so citizens who are either uninsured or chronically underinsured.
In my opinion the reason these things are happening is
because also every day in America,
the average public company CEO earns
about 400 times what his average employee makes, while thousands of other managers
in both business and financial services drink heartily from the same frothy
trough.
For most of the last century, CEOs in the U.S. earned roughly 20 times as
much as the average employee [source:
EPI per NY Times, 12-18-05 and 1-01-06], and even
today the ratio of CEO pay to that of the average employee has remained around
22-times in Britain, 20-times in Canada, and 11-times in Japan. But in just ten years time or so, we in America
abandoned this fair and equitable relationship, both in business and in
financial services.
And in the process, we not only shot our own economic foot off, but that of
nearly every other economy in the world.
For not only is our current extreme disparity in compensation an ethical
embarrassment and an affront to workers and shareholders, but it also sadly
underpins, in my opinion, almost every major corporate misbehavior of the last
decade, especially including this great “financial crisis of 2008”. As the infamous bank robber Willie Sutton
said when asked why he robbed banks, “It’s where the money is.”
President Obama
and Congress need to take a very proactive role in fixing our capitalist system
and reestablishing its fairness:
First, Congress
should immediately grant public shareholders the rights, on their own, to call shareholders’
meetings, to vote out the current board, and to render advisory votes on
executive compensation. Much better than any other measures contemplated or
previously adopted, these three rights, which are already in place and working
well in Britain, would align shareholder and management interests as to both
governance and executive compensation.
Second, Congress
should establish a ceiling for individual executive compensation as a
reasonable multiple of average employee compensation, and penalize through the
corporate income tax code those companies that elect to pay in excess of this
multiple.
Third, Congress
should close the loopholes that currently allow the wealthiest Americans to use
offshore tax schemes that cost our Treasury $70 billion in taxes each year, and
it should aggressively step up tax enforcement to capture the 30% or so of
earnings from selling investments that currently goes unreported each year.
And fourth, Congress
should empower the Department of Treasury to oversee the compensation practices
of any entity that has or relies on federal government guarantees.
If Congress enacts these four measures, then we will have mitigated many of
the current breakdowns in our economy. And
the fairer and more balanced sense of corporate responsibility which so
honorably distinguished our country for most of the 20th century will have been
restored.
Thank you for allowing me to join you today.
Leo Hindery Jr. chairs the
Smart Globalization Initiative at the New America Foundation and is formerly
CEO of AT&T Broadband and its predecessors, Tele-Communications, Inc. (TCI)
and Liberty Media. He is now an investor in media companies as Managing Partner
of InterMedia Partners, LP in New York
City. He is the author of “It Takes a CEO: It’s Time to Lead With Integrity” (Free Press,
2005). During 2007-2008, he was Senior
Economic Policy Advisor for U.S.
Presidential candidate John Edwards, and later unofficial economic advisor to
now President Barack Obama.
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