INNOVATION
By Don Peck
Deep recessions aren’t without silver linings. One, typically, is a subsequent burst of entrepreneurial activity and new-product innovation. Laid-off employees start new ventures, based on ideas their former employers might have ignored; sclerotic companies fail, making room for nimbler enterprises.
Needless to say, the United States could use such a burst today. Breakthrough innovation is what propels an economy quickly forward, creating new jobs as old ones obsolesce and disappear. For a variety of reasons, the rate of innovation was slow throughout much of the past dozen years. We have a lot of catching up to do.
Breakthroughs of the sort that create new products or even new industries—and with them, large numbers of new, good jobs—are, to some extent, unpredictable. The government can do only so much to foster them, especially in the short term. But following are four steps we can take right now that, collectively, could make a real difference sooner rather than later.
Import entrepreneurs. In the wake of the presidential election, an overhaul of immigration laws looks newly possible, and a more flexible regime could be an economic boon. Almost axiomatically, immigrants tend to be more driven, adventuresome, and risk-tolerant than the neighbors they’ve left behind; they have always been a rich source of entrepreneurship in the United States, and we should welcome more of them, particularly newcomers who are well-educated and highly skilled.
But here’s a specific proposal that could create new products, new businesses, and new jobs almost immediately and need not await comprehensive immigration reform: The bipartisan Startup Visa Act, first introduced in the Senate in 2011, would essentially grant entry to anyone with a business idea that American venture capitalists are ready to finance. Venture capitalists came up with the plan themselves, having seen a queue of foreigners with fully formed business ideas ripe for funding, if only the entrepreneurs could move here. We should let them.
Fund more start-ups, more cheaply. Angel investors, venture capitalists, and other U.S. financiers are always looking for the next great entrepreneurial venture. Even so, there’s a case to be made that new-business financing is stingier than it should be. Columbia University professors Edmund Phelps and Leo Tilman have noted that innovation creates so many ambient benefits—from jobs to the experience gained even by failed entrepreneurs and the people around them—that as a society, we should be willing to fund new ventures more generously (and accept a higher failure rate) than individual financiers would be willing to do. They have proposed a National Innovation Bank that would lend to or invest in innovative start-ups. Such a bank could bring more money to bear than private investors could, and at a lower cost of capital, promoting more investment and enabling the funding of somewhat riskier ventures.
Make math and science majors cheaper. A highly skilled workforce is essential to innovation; if the U.S. is serious about keeping its place at the frontier of science, technology, and innovation of all sorts, it must improve schooling from pre-K through college and beyond. For the most part, school reform would take years to reap benefits. But some novel measures could pay off sooner. In particular, we could encourage college-bound students to major in math, computer science, and hard sciences—fields that are essential to innovation and carry important spillover benefits to the economy as a whole.
Florida’s public universities are already thinking of lowering tuition for students who major in fields that the state’s economy needs, as a way to eliminate bottlenecks to economic growth. Similar programs could focus on academic majors deemed critical to innovation and technological progress, to create faster advances in science and a more bountiful climate for tech start-ups of all kinds.
Ease regulation on new industries. As Wall Street proved in 2008, not every industry is overregulated. Still, recent years have seen an accretion of well-intentioned regulations (the Sarbanes-Oxley accounting rules, homeland-security regulations) that may have chilled the climate for investment. Regulatory balance—how much is too much?—is always difficult in practice. But economist Michael Mandel has suggested a rule of thumb: For fledgling industries that could bring explosions of economic growth, the government should apply a lighter regulatory touch to encourage experimentation and expansion. Think of the Internet, which flourished in the 1990s without government’s heavy hand. Green technologies, wireless platforms, and social-networking technologies might benefit from similar treatment today.
The writer is features editor at The Atlantic and the author of Pinched: How the Great Recession Has Narrowed Our Futures and What We Can Do About It.
JOBS
By Jim TankersleyThe United States is now in its third straight recovery from a recession in which economic growth has revived but job growth hasn’t followed at anywhere near the same pace. First 1991, then 2001, now the Great Recession—jobless recoveries appear to be the economy’s default setting, and a damaging one. Since mid-2009, gross domestic product has climbed by 3.6 percent in the United States (on a per capita basis) while employment has fallen by 1.8 percent, economists Nir Jaimovich of Duke University and Henry Siu of the University of British Columbia reported in a research paper in November. This is why more than half of Americans still believe the recession hasn’t ended.
Growth without jobs is deadly. To revive the economy, policymakers need to do more than just kick-start growth. They must target job-creation specifically. They can begin by following the emerging research that specifies which sorts of jobs don’t return after a recession—basically, anything that relies on a routine task that a machine or a low-wage foreign worker could do instead. The economy sheds bank tellers and assembly-line operators when demand falls and then, afterward, makes do without them for good. The decline in “middle-skill” work depresses wages, both for the workers competing for fewer jobs and for lower-skilled workers then forced to compete against the middle-skilled workers thrown out of work.
Many economists, across the ideological spectrum, say there’s only one answer to this erosion: more education for everyone. “Given the reduction in opportunities for middle-skill workers,” researchers at the Federal Reserve Bank of New York wrote this fall, “it is especially important to help people build the skills necessary” for high-skill work. But that’s a long-term proposition at best, and it assumes—incorrectly, no doubt—that every former steel-mill foreman can be re-invented as an engineer.
More immediately, policymakers need to find ways to push more people into middle-skill jobs and to find ways to create more of those jobs. This means a return to emphasizing vocational education. The United States still needs lots of new plumbers, electricians, and heating-system re-pair workers.
Government support for particular occupations or sectors—such as President Obama favors for manufacturing—is a version of so-called industrial policy. But governments at all levels have an even simpler place to start: Build stuff and employ more public workers. Construction foremen, cops, and firefighters, three of the largest middle-skill occupations left, have all suffered during the recovery because of reduced spending on infrastructure and public safety, especially by state governments. Liberal economists Lawrence Summers of Harvard, a former Obama adviser, and Brad DeLong of the University of California (Berkeley) argued in a recent paper that federal borrowing costs are so low that a massive stimulus program today would more than pay for itself in the long run by spurring growth and tax revenue.
“Stimulus,” of course, has become an epithet in Washington after years of Republican assaults on Obama’s 2009 legislation, especially now that austerity looms beyond the fiscal cliff. Still, there may be no better way to create middle-skill jobs—and end the jobless recovery cycle—than by spending federal billions.
The author is the economics correspondent for National Journal.
MEDICAL COSTS
By Margot Sanger-KatzThe relentless rise in medical costs has been a disaster for more than the federal budget deficit and state government balance sheets: It’s a leading cause of wage stagnation, too.
Private-insurance premiums have climbed steadily for decades. But in the past 10 years, as corporate budgets have tightened, health care has begun to crowd out other forms of employee compensation. Given growing premiums, increased out-of-pocket medical expenses, and higher taxes to support Medicaid and insurance for public-sector employees, private-sector employees’ health care costs alone have nearly erased all income gains since 2002, according to a recent Rand analysis.
The mounting health care costs also hurt the global competitiveness of American businesses. In most other Western countries, the government—not employers—shoulders the cost of health insurance. In the United States, health care has consumed an ever-larger share of employers’ compensation to employees, driving up costs and making labor pricier than many businesses want to pay.
“We’ve been battling increasing health care costs for three decades now, and costs continue to increase faster than wages and faster than inflation,” said Mike Thompson, a principal in the human-resources practice at PwC, the accounting giant. “It’s putting pressure on companies not just to compete domestically but to compete globally.”
The solution isn’t obvious, especially because our piecemeal system of medical care relies on a mix of private and public insurers. Typically, when the government cuts payments for public programs such as Medicare—which could happen as part of a budget deal next year—hospitals and other providers raise premiums in the private market to recoup those costs. Policymakers don’t exert much control over private-market spending.
Some evidence shows, however, that the health care system is, in fact, becoming more efficient. Cost growth has slowed during the past few years, and optimists say that doctors and hospitals have begun changing the way they practice medicine to reduce waste and unnecessary care. Maybe. It’s clear that private insurers and Medicare are experimenting with new payment incentives to encourage this type of reorganization. It may take years before we know whether they are working.
Employers have reacted to rising costs by adopting insurance plans that shift more of the financial burden onto workers. Some 72 percent of American employees who get insurance at work now have plans that include a deductible, up from 52 percent in 2006, according to a survey from the human-resources firm Mercer. (The average deductible exceeds $1,000.) Many large employers have also launched wellness programs, hoping to keep their workers healthier and out of hospitals.
These efforts may be starting to succeed: The rise in medical costs has decelerated. After double-digit growth in the 1990s, annual premium increases dropped to 4 percent in 2012—albeit, still growing faster than the overall economy—and averaged about 6 percent over the past few years. There’s some evidence that high-deductible plans, by shifting costs to individuals, reduce their health care spending. Research also shows, however, that making people shoulder more of the costs tempts them to skip necessary as well as unnecessary care.
Some employers have found an even blunter way to curb their costs: simply eliminate health insurance coverage. The penalties they’ll face in 2014 if they don’t change their minds will be cheaper than the cost of premiums. Paul Keckley, executive director at the Deloitte Center for Health Solutions, said that employers facing a financial squeeze are “looking to the statehouses and Washington and saying, ‘Fix this.’ ” But whether government will, or anyone else can, still looks questionable at best.
The author is the health care correspondent at National Journal.
ENTITLEMENTS
By Jim TankersleyThis country’s social safety net was designed to cushion its citizens against extreme poverty, particularly when they are most vulnerable, and to lift them toward the middle class. That was the goal when Congress created Social Security in the 1930s and Medicare in the ’60s. For decades, the system has worked pretty well.
Maybe not for much longer. Concern is growing among economists—on the right and on the center-left—that surging federal spending on entitlement programs threatens to displace an array of public- and private-sector investments that broaden middle-class prosperity.
As baby boomers begin to retire, medical costs are rising much faster than inflation. As a result, spending on health care programs such as Medicare and Medicaid and on Social Security will more than double, from 7.3 percent of gross domestic product—their average over the past 30 years—to about 16 percent in 2037, the Congressional Budget Office predicts. Either the federal deficit will soar or taxes will rise as a share of GDP, and non-entitlement federal spending will fall, CBO estimates, from its 30-year average of 11 percent of GDP to as little as 7 percent in 2037.
Unless lawmakers bend that curve, the centrist Democratic think tank Third Way warned in a paper this year, “entitlements will encroach upon an even greater portion of the federal dollars once reserved for building roads, educating kids, and paving the way for technological breakthroughs”—all pillars of middle-class prosperity that government has historically funded. The free-market Heritage Foundation cautions that these entitlement programs are crowding out spending on defense, which supports plenty of well paying high-tech manufacturing jobs. Other conservative economists warn that raising taxes to fund safety-net programs on their current trajectory would impinge on private investment and job creation.
There’s still time to avoid the worst of these ill effects. Doing so needn’t require a politically explosive overhaul of the safety-net programs along the lines that House Republicans have proposed. A series of smart tweaks could slow the growth in costs considerably.
Social Security is the easier fix. Lawmakers could prolong its solvency simply by adopting a long-discussed change in how to calculate future benefit growth, switching from a wage-based measure of inflation to one based on consumer prices, which rise more slowly. Or, eliminating the cap on income that’s subject to payroll taxes would close nearly all of the projected gap, according to the nonpartisan National Academy of Social Insurance. Medicare and Medicaid are bigger challenges, because their growth is linked so closely to the economy-wide surge in health care costs. But while policymakers search for ways to tackle that larger problem, they could try some program-specific efforts to reduce the growth of federal health spending.
A trio of conservative economists, led by John F. Cogan of Stanford University’s Hoover Institution, argue that changing patient incentives in Medicare would push down costs. They propose steering beneficiaries toward plans with lower premiums but “higher deductibles, more coinsurance, or more tightly managed networks of providers.” The liberal Center for American Progress proposes a smattering of money-saving measures, such as injecting competitive bidding into the Medicare-financed purchase of medical devices and forcing doctors and insurance companies to display the prices of care services more transparently.
The goal here is efficiency—to get the most from each dollar spent on entitlement programs and, in so doing, to help a budget-strapped government afford the other sorts of investments that will benefit the economy in the long run.
FINISHING COLLEGE
By Anya KamenetzEver have one of those nightmares where you’re back in school and you forget to take the final exam? It’s a reality for 37 million Americans who have some college experience but no degree. Although record numbers of high school graduates have enrolled in college over the past few years, their odds of finishing remain low. Only 56 percent of full-time students complete four-year bachelor’s degrees within six years. At community colleges, where half of all freshmen enroll, the track record is even worse: Just three of 10 full-time students earn their two-year associate’s degrees within three years.
Getting diplomas in the hands of more people would be a huge boost for the U.S. economy. During the past three decades, the United States has slipped from first among nations to 10th in the percentage of people holding a college degree, even as the job market has eroded for Americans without one. Increasingly, this failure has constrained household incomes and harmed the nation’s economic growth and competitiveness.
Within a decade, more than 60 percent of all new U.S. jobs are expected to require a college education. Raising the number of people with a bachelor’s degree by 1 percentage point in the 51 most populous metropolitan areas would add $143 billion to the nation’s annual income, according to CEOs for Cities, a Chicago-based nonprofit.
Small cash grants to help struggling students pay for transportation and child care have been shown to improve their chances of getting a degree. The government’s Pell Grants, possibly subject to budget cuts in a Washington debt deal, cover community-college tuition for the most hard-pressed students; if they can attend school while working and finish quickly, they need less money overall.
Nor do colleges need to spend more—just “differently and better,” says Tom Sugar, a senior vice president at Complete College America, a three-year-old “do tank” trying to help students earn degrees. The group has persuaded 31 states to work on improving graduation rates by pursuing a set of field-tested best practices. These focus on speeding the path to a degree—before “life gets in the way,” Sugar notes—by tracking students’ progress more carefully and removing bureaucratic barriers to getting through school.
The biggest hindrance to completing college isn’t really financial. It’s academic fitness. Notably, half of the students in community colleges and 20 to 30 percent of those in four-year schools need a remedial, high-school-level course when they enroll; having to spend time and money without accumulating credits toward a degree prompts most of them to quit. Complete College America prefers the idea of “corequisites” that combine remedial tutoring, sometimes using software, with college-credit work.
President Obama has called for raising the national college graduation rate from 34 percent to 60 percent by 2020, and his administration could do a lot to help.
To start, it could update the data about college completion and change the government’s definition of learning by pegging its rules for financial aid and accreditation directly to student achievement instead of using credit hours as a clumsy proxy for progress. The Education Department could funnel more student loans and grants to states that fare best in moving students to graduation.
You don’t need a Ph.D. to find solutions. But getting there will require a sea change in how public colleges do business, with a commitment to data, accountability, and productivity—hardly watchwords in the hallowed halls of academe. “There hasn’t been a reform movement like this in recent history,” Sugar says. “This is a relatively new era in higher ed.”
The author is a senior writer at Fast Company magazine.
INFRASTRUCTURE
By Fawn JohnsonWhen officials in Denver started drafting a strategic traffic plan a few years back, they concluded that the city no longer had the money to expand its roads to meet the surging demands. They would have to make do with what they had.
Denver’s planners created a board game, Right of Way, that was scaled to the city’s streets. It had cards that symbolized lanes for travel, parking, buses, bikes, mixed use, and medians. There were too many cards for the available space, so officials gathered community representatives to debate which sorts of lanes mattered most. To everyone’s surprise, the group worked out an agreement, one that the city council pretty much ratified. “In the absence of additional benefits, it’s all about trade-offs,” said Gideon Berger, who headed the Denver project.
Doomsayers’ warnings that China will overtake the United States in economic strength because of its snazzier airports and trains are surely overblown. But we shouldn’t minimize the task that our elderly infrastructure presents. Highways and bridges will need $2.5 trillion in upgrades if they are to survive for another 50 years—a must-do to keep commerce thriving. And that figure doesn’t even take into account the airports, railroads, subways, sewage-treatment plants, waterworks, levees, electric grids, pipelines, and all of those other expensive systems that people ignore until they break down.
So, who’s gonna pay? Don’t count on Washington, where cut, cut, cut is the order of the day. The 41,000-mile interstate highway system, which bound the nation into a single market with an investment of $130 billion, will cost twice that much in upkeep over the next five years. After two years of wrangling, Congress cobbled together only half a highway bill, authorizing just $104 billion—less per year than a longer version and insufficient to cover modern improvements. The era of the massive federal public works project is over.
If Washington is broke, then what? State governments, which kick in one-tenth of the costs (to the feds’ one-fourth) for roads, have also suffered from the sagging economy. The private sector could step in—and to a minor extent, already has—but that requires an intimate but complicated cooperation between municipalities, investors, and federal overseers.
More and more, the burden is devolving onto the level of government closest to the potholes. Roads, railways, gas pipelines, water pipes, electric grids, and even Internet access will increasingly rely on individual communities’ choices and resources. In Lower Manhattan or along the Brooklyn waterfront, it’ll be up to New York City to protect against another disastrous hit to the city’s economy like that wrought by superstorm Sandy. Absent federal money to build the levees, Mayor Michael Bloomberg will need to find the funding elsewhere. Fuhgettaboutit.
More likely, the story of infra-structure for the foreseeable future can be found in Denver. As metropolises become ever-bigger economic hubs, city planners will look for better options for moving people from place to place or risk losing critical investment from local businesses. No longer will officials talk only about adding infrastructure but will also broaden the discussion to include other options—mass transit or bike lanes, say. The idea is to get people out of their cars, without resorting to the dictatorial, London-style option of charging drivers to enter the city—which Bloomberg once proposed, to Bronx cheers.
Let’s not forget another source of funds: user fees, more palatable than direct taxes. The Capitol Beltway in Northern Virginia recently introduced toll lanes—privately funded, mostly—that, for a guaranteed 45 mph speed, electronically charge drivers a levy that varies with traffic volume. If governments are strapped, who’s the last patsy standing? You are.
The author is a staff correspondent at National Journal.
HOUSING
By Jordan WeissmannEarly in 2012, the U.S. housing market quietly woke up from its postcrash coma and began the recovery we’d all been waiting for. Today, home prices are rising, foreclosures are falling, and construction crews are back in business.
So what’s left for President Obama to do, now that he has been reelected despite a checkered record on helping homeowners? Plenty. The administration could take a number of steps that might ease the debt burden on millions of families and jump-start our all-but-frozen private lending markets. And, even better, Obama might be able to take many of these actions without waiting for Congress.
Housing’s comeback has been steady but fragile. According to CoreLogic, a data-crunching consultancy, nearly 11 million homeowners are still underwater, owing more on their mortgages than their homes are worth. New lending has slowed to a crawl. With banks skittish about credit risks, the Federal Housing Administration or the government-sponsored entities Fannie Mae and Freddie Mac now back about 90 percent of new mortgages. Without Washington, in short, there would be no market to speak of.
All of this is crimping our chances for a robust recovery. In past economic revivals, housing has arguably been the single most important source of momentum. This time around, the Federal Reserve Board has kept interest rates at historic lows, in part to goose homebuyers and to return money to consumers’ pockets by letting them refinance debt at cheaper rates. But making mortgages inexpensive means bubkes if the banks won’t lend. And refinancing without government help is all but impossible for underwater families, who are at greater risk of foreclosure should the economy sink back into recession.
The Obama administration’s early attempts to fix the housing market smacked of a bored kid toying with a Rubik’s Cube—halfhearted, prone to trial and error, and ultimately futile. But the White House seems to have learned its lessons. Officials have quietly suggested that the president plans to sack Edward DeMarco, the intransigent acting director of the Federal Housing Finance Agency, Fannie and Freddie’s overseer. He refused to let the two mortgage giants forgive portions of their severely underwater loans, despite evidence that doing so would save the companies—and possibly the taxpayers who basically own them—money by staving off defaults.
Appointing a new director would clear the way for those reductions in principal, which would avert future foreclosures and act as a form of economic stimulus. It would also free up Fannie and Freddie to expand a mortgage-refinancing program that counts as one of the Obama administration’s more successful efforts to bring the housing market back to life.
Regulatory changes could help, too. A swarm of rules covering everything from underwriting standards to securitization are pending at a slew of federal agencies. Many economists believe that banks, fearful of being sued, will be slow to lend until these regulations are final. That may be simply a bankers’ excuse, but we won’t know until the rules are in place.
Housing brought us the recession. It’s the key to the recovery. And it’s largely in Obama’s hands.
The writer is an associate editor at The Atlantic.
RETIREMENT SECURITY
By Mark MillerOnce upon a time, more than a third of elderly Americans were poor. No longer. Helped by pensions and Social Security, the poverty rate among Americans age 65 and over fell to 8.7 percent by 2011. They survived the Great Recession in better shape than younger folks did.
But many younger Americans won’t fare as well when they’re seniors. For the coming generations of retirees—baby boomers, Generation X-ers, and millennials—the value of Social Security benefits keeps eroding due to the gradual increases in retirement ages enacted in 1983. In the private sector, traditional pensions have all but evaporated, and 401(k) retirement accounts haven’t come close to replacing their value. Typically, people ages 55 to 64 held no more than $120,000 in household retirement accounts in 2010, according to the Federal Reserve Board—a pittance, compared with what they’ll need. Only a seventh of Americans, in a recent Employee Benefit Research Institute survey, report being “very confident” they’ll have enough money for a comfortable retirement.
So, why should economists care? Social Security and pension payments, it’s true, boost consumer spending. Still, fixing this crisis-to-come is less a matter of economic strength than of social justice—a test of the kind of society we are. The question: Can we avoid a new crisis of elderly poverty?
At the center of things is Social Security, which many retirees will have to count on as their sole—if meager—lifeline in years ahead. The program plays no direct role in the federal deficit. But it does face a challenge long term: Its vast $2.7 trillion trust fund is projected to be exhausted in 2033 as baby boomers’ retirements accelerate; from then on, payroll taxes would fund only 75 percent of promised benefits.
Acting early would mean an easier solution, but of course that’s not how Washington works—unless, in this case, President Obama agrees to a reduction in Social Security benefits to lure House Republicans into a “grand bargain” on reducing the deficit. That’s a possibility.
For future retirees, bold action on pensions would be nicer still. Barely two-fifths of private-sector workers ages 25 to 64 have a retirement plan of any sort in their job, Boston College’s Center for Retirement Research has reported—“shockingly low and showing no sign of improving on its own.” Only a third of private-sector workers hold a traditional pension, down from 88 percent in 1975, according to the National Institute on Retirement Security. The use of 401(k) accounts has soared, but the average worker’s contribution of just 3 percent is too small to grow much of a nest egg.
Fixing the problems with pensions isn’t at the top of anyone’s list in Washington. But lawmakers could encourage a revival of traditional pensions by making them less costly for employers—for example, by letting private-sector workers contribute to their accounts, like public-sector workers do.
State governments are a likelier source of ideas. California recently enacted legislation to lay the groundwork for state government to sponsor a retirement-savings plan for employees of companies that don’t offer their own. Money deducted from a worker’s paychecks would, upon retirement, be converted to a dependable, pension-style payout. Policymakers in 10 other states are pondering similar plans.
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