The Reconnection Agenda Reuniting Growth and Prosperity By Jared Bernstein On The Economy jaredbernsteinblog.com Copyright © 2015 by Jared Bernstein Cover by Anthony Martinez and Kate Bernstein All rights reserved. ISBN: 1511769386 ISBN-13: 978-1511769389 To Kate, Ellie, Sarah, and Kay, with whom the connection remains eternally strong. Table of Contents Chapter 1: Introduction ................................................................. 1 Chapter 2: Growth Without Prosperity ........................................ 24 Chapter 3: Full Employment, the Most Important Missing Piece of the Puzzle ................................................................................ 44 Chapter 4: Fiscal and Monetary Policies that Work for Working People .......................................................................................... 66 Chapter 5: Reducing the Persistent American Trade Deficit, a Steep Barrier to Full Employment ............................................. 116 Chapter 6: A Full Employment Agenda that Reaches Everyone ................................................................................................... 145 Chapter 7: Maintaining the Reconnection with Policies to Sustain the Booms and Bust the Busts ................................................... 172 Chapter 8: The Federal Government and the Reconnection Agenda ...................................................................................... 210 Chapter 9: The States of Things to Come—the Reconnection Agenda at the Subnational Level ............................................... 253 Chapter 10: Politics and the Reconnection Agenda................... 293 Appendix A: Growth Without Prosperity Figures and Tables ... 319 Appendix B: Figures from Explaining the Housing Bubble by Adam Levitin and Susan Wachter ............................................. 328 Appendix C: Summary of Policy Recommendations ................ 330 Acknowledgments First, I’d like to thank my family and especially my wife for helping me carve out the time to write the Reconnection Agenda. Next, deep thanks to Ben Spielberg, my colleague at the Center on Budget and Policy Priorities (CBPP), with whom some of this material was developed, especially the work in Chapter 2 and much of the analysis of the inequality of opportunity. Ben and Stephanie Landry were absolutely indispensable in editing the manuscript, the graphics, and the tables. I make mistakes; they catch mistakes. All of my colleagues at CBPP deserve mention as I’m constantly bugging them and they’re constantly educating me. In absolutely no order: Chuck Marr, Nick Johnson, Chad Stone, Chye-Ching Huang, Richard Kogan, Kathy Ruffing, Joel Friedman, Paul Van de Water, Bob Greenstein, Isaac Shapiro, Bryann DaSilva, Brandon DeBot, David Reich, Mike Leachman, Mike Mitchell, Sarah Lueck, Ed Bolen, Edwin Park, Judy Solomon, and Liz McNichol . to name a few. I truly appreciate your generosity and just because I put a lot of stuff we talk about in here doesn’t mean I’m finished bothering you about it. Thanks to CBPP’s Anthony Martinez and Carolyn Jones for help with “comms” and admin. And thanks to CBPP writ large for supporting my work on everything in here along with www.jaredbernsteinblog.com, where a lot of these ideas were developed. For literally decades, I’ve worked with and learned from Larry Mishel and Dean Baker. Their fingerprints are all over the book. Finally, I thank Alexander Berger and the Open Philanthropy Project for support of CBPP’s Full Employment Project, from which much of this work is drawn. Chapter 1 Introduction While there are many uniquely positive attributes about the US economy, something is fundamentally wrong and here’s what it is: economic growth can no longer be counted on to deliver broadly shared prosperity. Moreover, the policy agenda put forth by those with the power to do something about this fundamental problem has either proven to be inadequate to the task or has been blocked by gridlocked politics. I do not come to these observations lightly. Allow me to take you down the path by which I got there. Let’s start at the beginning, i.e., the beginning of the Obama administration. December 16, 2008, Chicago, Illinois: On a dark, snowy Chicago afternoon in mid-December, it was my immense privilege to have a seat at an historic table. A few seats away from me sat the president-elect of the United States, the first African American to hold that title, Barack Obama. Next to him sat my new boss, the vice-president elect: Joe Biden. Scattered around the rectangle Jared Bernstein | 1 were some of the top economic and financial policy thinkers in the land: Christy Romer, Larry Summers, Tim Geithner. Obama’s First Economics Team Yours truly, all the way to your right (of all places!). Source: The New Yorker, Oct. 12, 2009.1 If the privilege was immense, so was the anguish. We knew the economy was in deep trouble. But we could not have known precisely how deep. As we sat there in December planning our economic counterattack against what would become known as the Great Recession, employers were cutting 700,000 jobs from their payrolls. The next month, as the new president took office, that number would jump to 800,000—job losses of a magnitude that 1 http://www.newyorker.com/magazine/2009/10/12/inside-the-crisis 2 | The Reconnection Agenda: Reuniting Growth and Prosperity none of us had ever seen. Real gross domestic product (GDP), the broadest measure of the value of all the goods and services in the economy, was contracting at an 8 percent rate, which, if you follow these sorts of things, is technically termed a “nightmare.” I vividly recall the president-elect distinctly not emoting the attitude of the dog that caught the car it had been chasing (“OK . now what are you gonna do with it?”). Like the rest of us, he viewed this in no small part as a technical problem. That’s not meant to sound callous. He was well aware of the human costs as well as the political costs of the deep recession. And had he not reflected on the latter (political costs), David Axelrod, his top political advisor, was there to remind him and the rest of us of them. But economists view the economy as a system, not unlike the human body. Given the right environment, which in today’s advanced economies is some version of capitalism, and leavened with various degrees of intervention from the government sector, it will generally flourish. Like the human body, it needs a steady flow of nourishing inputs, including energy, credit, skilled workers, and so on. And as long those flows are robust and the job market is providing adequate, fairly compensated opportunities for people to help convert those inputs into outputs (the goods and service we need and want), then the various sectors (households, businesses, government) will work together to keep the system going and growing. Jared Bernstein | 3 At least, that’s the theory. Around that table, I’d say we were less focused on econ 101 dynamic flow charts and more on the insight of the renowned economist Mike Tyson: “everyone’s got a plan, until they get punched.” The US economy had been punched big time by an imploding housing bubble inflated by “innovative finance” and excessive leverage (borrowing), which is the subject of Chapter 7. During the 2000s housing boom, the sharp appreciation of housing values spun off a huge “wealth effect”—literally trillions of dollars of housing wealth—that financed home-equity withdrawals (borrowing against your ever more valuable home) and just a general sense of rising wealth among homeowners.2 When the bubble popped, the wealth effect shifted into reverse and demand collapsed, disabling the elegant system described above. Moreover, as Summers and Geithner explained to the newly- minted team, credit flows were shutting down as bank balance sheets were at least partially forced to recognize a bunch of very bad loans. (I say “partially” because I would soon learn a new phrase—“extend and pretend”—where bankers tell themselves non-performing loans will come back to life any day now!). If credit is the blood of the economic system, the veins of the US economy had suddenly become extremely sclerotic. 2 Technically, the wealth effect describes the empirical fact that as someone’s wealth appreciates by a dollar, they tend to spend about 3-5 cents of that dollar. Note that this holds even when the newfound wealth is just “on paper,” as is the case in an appreciating home value. 4 | The Reconnection Agenda: Reuniting Growth and Prosperity So the discussion was all about what it would take to get the system back up and running. Large injections of liquidity would get credit flowing again. But it’s one thing to get the blood flowing (to boost the credit supply) and quite another to get the heart beating strongly again (to stimulate demand). For that, we’d need a significant Keynesian stimulus package, and much of the conversation that day focused on the size and content of what would become the Recovery Act (and a big part of my life for the next few years, as VP Biden would be tagged to be its implementer-in-chief). Credit flows, supply, demand . the technical expertise in the room, including my own, believed that our job first and foremost was to get the economic system back to some sort of equilibrium. I personally was there in part because of a related but different expertise: not just the creation of growth, but the distribution of growth. Obama/Biden ran on a platform that focused not just on getting the economy growing again, but on implementing policies that would steer more of that growth to the middle class. This was an especially big deal to the new VP. Though I’d met him briefly before, our first of many long conversations had taken place a few weeks prior to the Chicago meeting in his Delaware home. I got there around 10 AM (on Amtrak—when you visit Biden, you travel by his favorite mode of transport), and as he walked me into the kitchen and we passed an impressive new latte/espresso maker, Biden asked me if I wanted a cup of coffee.