G4
Business gut check from G1
Macroeconomic Advisers and Moody’s
Economy.com all estimate it created around 2.5 million jobs. The problem is that it wasn’t alone. Unlike the federal government, 49 of 50 states must balance their budgets (the exception is Vermont). So when the economy crashed in 2007, they went down with it. First, tax revenue dried up because residents lost jobs. Second, expenses went up as more unemployed people needed help. The states with the most responsible budget practices had reserve funds and tricks to hold them over for a year, and maybe even two. Three years in, they’re all up against the wall. And because they cannot run deficits to hold them over until their economies improve, they’re cutting services and raising taxes. Using the data for 2009 and 2010, and then projecting for 2011 and 2012, the Center on Budget and Policy Priorities expects the total state shortfall will reach $610 billion.
Because some of the federal stimulus dollars were saved rather than spent, the effective stimulus we’ve had has been less than the $789 billion that’s often touted. It might even be less than $610 billion shortfall in the states. Which would mean the anti-stimulus overwhelmed the stimulus. Or, you could look at it in reverse: Nick Johnson, who directs the State Fiscal Project at CBPP, says that “the effect of the federal stimulus was to wipe out the negative effect of the state
Common goal helps attract opposites
opposites from G1
problem.’’ In a bid to promote more trust among members, Cote and Stern even invited the others to an in- formal dinner last Tuesday at Honeywell’s D.C. office. Erskine B. Bowles, the commission chair- man and onetime aide to former President Bill Clinton, said it was hard to exaggerate the impor- tance of such gestures. “When you spend time with people, they can no longer be cari- catures,” Bowles said. “You talk about your personal lives, family stuff, and you build trust. When you form a bond like that, you seem to find ways of bridging dif- ferences, and I think that’s what those two guys have done.” Cote and Stern describe them- selves as pragmatists who grap- pled with hard choices while run- ning large organizations. “Running a company, you learn
that the needs always exceed the resources,” said Cote, a former top executive at General Electric. “There’s only so much you can do, and you gotta pick the places you’re going to work on.” Stern was quick to sympathize.
“It’s a very practical set of ques- tions,” he said. “You have a certain amount of income, and you have a certain amount of expenses.” But the murmurings of agree- ment can be deceptive. Cote em- phasizes that economic growth is the key to fiscal stability, and Stern politely contends that it’s unrealistic to bank on economic growth alone as the solution. “There are some people who say, ‘Let’s grow our way out of it,’ ” Stern said. “Okay. Tell me how much growth we’re going to need? Has it ever happened before?” The subtext of their exchange is clearly about the broader clash. Republicans warn that higher tax- es will imperil economic growth and focus on the need for spend- ing cuts. Democrats argue that some of the biggest GOP targets — safety-net programs — need to be protected and that deficits are too big to be closed without at least some tax increases. A debate is raging in Congress and among economists about whether this is the right time to start reducing deficits. Many lib- eral groups worried about high unemployment argue that the economy is still so weak that the government should keep spend- ing and deficits high to prevent a double-dip recession. But law- makers in both parties are balking at new stimulus spending, and some economists argue that the deficit needs to be reined in soon- er rather than later. The panel itself was proposed by a bipartisan odd couple: Sen. Kent Conrad (D-N.D.) and Sen. Judd Gregg (R-N.H.). Both are members of the commission.
ed they would enroll in overdraft services. About 15 percent said they did not want to sign up, and the rest were either unsure or were not aware of the changes.
Read the fine print Banking experts and even in-
CHIP SOMODEVILLA/GETTY IMAGES
Sen. Judd Gregg (R-N.H.), left, and Sen. Kent Conrad (D-N.D.) proposed a bipartisan commission be created to come up with a solution to the nation’s budget deficit. Both are members of the panel.
Gregg recently teamed with a prominent Democrat, Sen. Ron Wyden (Ore.), on a proposal to overhaul the tax code. The panel’s co-chairmen, mean- while, are battle-scarred veterans of previous bipartisan budget deals. Alan K. Simpson, the for- mer Republican senator from Wy- oming, voted for the 1990 budget agreement between Democrats in Congress and President George H.W. Bush. Bowles, a former chief of staff under Clinton, was a key negotiator on the 1997 budget agreement with Newt Gingrich, then the Republican House Speaker.
Two of a kind, after all
In their first joint interview — Stern and Cote insisted on being interviewed together — it would have been easy to mix up the two. Both men wore blue, pin- striped suits and bantered about their common experience run- ning big organizations. Stern, with his coifed white hair and his pink silk tie, could have passed for a business mogul and often sounded like one as he talked of the need for “targets” and “reach- ing the numbers.” Cote was if any- thing the more rumpled of the two and spoke in plain terms about the sheer magnitude of a trillion-dollar deficit.
Stern had reached out first, sending an e-mail and inviting Cote for a visit just before the pan- el’s first public meeting in late April. Cote said he had initially been nervous, given Stern’s repu- tation as a combative and power- ful labor leader, but he showed up at the union’s headquarters April 28 and immediately felt at ease with him. “Andy reached out,” Cote said. “I thought, ‘Okay, this guy’s got more guts than I do.’ ”
Although he has almost always voted Republican, Cote said he considers himself a pragmatist and supported Obama for presi- dent. Within days of Obama’s in- auguration, Cote led a team of top corporate executives to the White House and spoke out strongly in
support of the president’s eco- nomic stimulus plan. Stern, for his part, had a long
history of teaming up with un- likely bedfellows. In 2007, he and his union creat- ed a furor by partnering with Wal- Mart — a bitter enemy of orga- nized labor — in support of health-care reform. The collabo- ration, which followed secret ne- gotiations, sparked complaints from other unions that Stern was grandstanding. “Why is he so cozy with corporations?” asked the Na- tion, a liberal weekly magazine. Stern was also an architect of “Divided We Fail,” a collaboration between his union, the Business Roundtable, the National Feder- ation of Business and AARP, the senior citizens’ lobbying group. The four groups disagreed about the particulars of health- care reform, but they financed a heavy television and newspaper ad campaign about the urgent need to pass ambitious legisla- tion. “We were probably the most odd-fellows group you could put together,” said John Castellani, president of the Business Round- table, a highly influential advoca- cy group of the nation’s top chief executives. “The premise was, we may disagree on what health care should look like in its final form, but we all agree it needs to be ad- dressed.”
Past party lines
On the fiscal commission, Stern is already looking for ways to break through the ideological camps on deficit-reduction. He has met privately with all six Re- publican lawmakers on the panel, and he has publicly praised ideas from conservatives such as Sen. Tom Coburn (R-Okla.). He has yet to meet one-on-one with any of the commission’s Democrats, sug- gesting it would be like preaching to the choir. “This isn’t a question of wheth-
er Jan Schakowsky and I agree,’’ he says, referring to the liberal House Democrat from Illinois. Cote has quietly nudged the
panel, too. When Democrats and Republicans started to trade barbs last month over the presi- dent’s stimulus program, Cote warned that the group was getting bogged down in politics. The oth- er panel members backed down, earning a heartfelt thanks from Simpson, the Republican co-chair. Simpson and Bowles have la- bored mightily to squelch the par- ty feuding. But unless Republican and Democratic political leaders in Congress show more willing- ness to compromise, analysts doubt the commission members will agree on broad proposals by their Dec. 1 deadline. Recommendations will require the support of at least 14 of the 18 members, a high bar to clear. Sup- porters say that even if a su- permajority of the panel fails to reach agreement, the delibera- tions could help nurture a consen- sus in Congress next year, espe- cially if the members named by Obama — four Democrats and two Republicans — can agree on a set of recommendations. Unwilling to wait and see how the broader politics play out, Cote and Stern are hunting for unno- ticed areas of common ground. They recently arranged a private field trip to the Business Round- table, where they spent several hours talking about international corporate taxation. Why? The two suspect that deficit-reduction measures could include tax re- forms that reduce the competitive disadvantages of the U.S. tax sys- tem.
Similarly, Stern has begun probing top union officials about ways to bolster Social Security. One idea: to have state employees, who currently do not contribute to Social Security, join into the program. It’s anybody’s guess whether
those efforts will lead to a break- through on the commission, much less in Congress. “We’re still at the trust-building
stage,” Cote said, referring to the deficit panel as a whole. “Andy’s done the best of everyone in reaching out, including to me.”
dustry groups have warned that banks will need to replace the revenue they have long collected in overdraft fees. That means people might find that the fees have disappeared, only to resur- face elsewhere in the form of a maintenance fee on their check- ing accounts, for example. “The whole banking system is
in a state of flux,” said Brian Ri- ley, research director at Tower- Group, a market research firm. “Consumers have to really read the fine print on this stuff and not go into the banks for the re- ward programs and the free toaster.” The new overdraft rules comes as banks grapple with tighter regulations on credit card inter- est rates and penalty fees man- dated by Congress last year. The financial crisis ignited a populist movement to strengthen con- sumer protections from Wash- ington, and Congress continues to debate the creation of an agency devoted to the issue. The Fed began drafting its new over- draft regulations last fall as law- makers prepared bills with simi- lar restrictions in case the Fed did not act. Meanwhile, numerous banks
braced themselves for what many saw as inevitable. Accord- ing to a survey by research firm Moebs Services, nearly 14 per- cent of 2,000 bank and credit unions reported eliminating their overdraft programs alto- gether. Bank of America ended its program in March after ex- tensive interviews with its cus- tomers. “We heard time and time again, ‘Don’t let me spend money that I don’t have,’ ” said David Owen, head of the bank’s pay- ments business. District resident Charlie
Meisch said he didn’t even real- ize he had overdraft service on his account until his bank, Chevy Chase, informed him of changes in the federal regulations. He said he has never used overdraft programs and would not sign up for the service. But what would entice him are services or notices that help customers avoid over- drafts in the first place, such as text alerts when account balanc- es run low.
“Banks will set themselves
apart the more they can work with you to avoid this stuff,” he said.
Some banks that do not charge
overdraft fees are promoting their stance as proof they are
contraction.” Either way, the assumption
that total government spending has leapt up to counter the recession might be wrong. Worse, the federal stimulus money is going to thin dramatically this year, but the state budget problems could grow. And with unemployment sitting stubbornly at 9.7 percent, we’re not in any shape to let the federal stimulus peter out and leave the state anti-stimulus to drag us down. That means that the federal
government has to step in with aid for the states. The Obama administration has asked for about $50 billion for 2011, but experts say states really need about twice that. The trick, however, is that you don’t want to reward bad budget practices under the cover of mitigating an economic disaster. And helping states solely on the size of their budget holes would do exactly that. All things being equal, a fiscally responsible state would get less than a fiscally irresponsible state. The best idea I heard for
getting around this was to apportion the aid based on labor conditions. In general, whether unemployment is 4 percent (as in North Dakota) or 14 percent (as in Michigan) has less to do with state government than broader economic factors. If you tied the aid to, say, payroll data, you could help the states hit hardest by the economic storm while at least partially rewarding the states who didn’t save for a rainy day. Finally, state and local aid
KLMNO
SUNDAY, JUNE 20, 2010 The state of the stimulus depends on the anti-stimulus
RICK WILKING/REUTERS President Obama signs the American Recovery and Reinvestment Plan — the federal government’s $789 billion stimulus package.
happens to be an uncommonly effective form of stimulus. The difficulty with most stimulus spending is that not all of it gets spent. Tax breaks, for instance, often get saved. Mark Zandi, the
chief economist for Moody’s
Economy.com, estimates that cutting the corporate tax rate gets you only 32 cents in stimulus for every dollar you spend on it. That’s not the case with state and
local aid. When you’re plugging state budget gaps, you know that money will be spent, because it was being spent before, and usually on something that the state’s residents actually wanted.
Zandi estimates that every dollar spent on it actually gets you $1.41 in stimulus. It’s the best anti-anti-stimulus you could ask for.
kleine@washpost.com
Fewer overdraft fees could lead to end of free checking services
overdraft from G1
more customer-friendly. ING Di- rect, which hasn’t charged over- draft fees since launching its checking accounts in 2006, cre- ated an overdraft calculator for consumers to see how much they can save with the online bank. “The checking account should work for you, not against you,” said Todd Sandler, head of prod- uct strategy for ING Direct. “We feel like we’ve taken a much smarter approach in this catego- ry.”
‘Lots of choices’ People can still elect an over-
draft line of credit, however. In those cases, ING essentially lends customers the money they are missing at what Sandler said is a competitive rate, rather than charge a flat penalty fee. Other banks have been touting the abil- ity to tap into savings accounts or credit cards when a checking account is overdrawn. But the Moebs survey also showed that about 11 percent of banks and credit unions actually created overdraft programs, an acknowledgment that the serv- ice is important for some cus- tomers. The Fed’s rules also attempt to recognize that the overdraft service can be a useful tool: The rules do not apply to checks or recurring automatic payments. Officials said such payments are often applied to bills, such as rent or car insurance, and con- sumers indicated that they would rather pay an overdraft charge than have them denied. Several banks also said they will continue to allow overdrafts at ATMs but will notify customers that their balances are insuffi- cient. “What we wanted to do was to
give customers lots of choices,” said Pete Jones, Mid-Atlantic re- gional president for Wachovia, which has kept its overdraft service. “I don’t think we want to do away with any opportunity.” Still, Wachovia’s parent com-
pany, Wells Fargo, expects that revenue from overdraft fees will fall by $500 million this fiscal year. Bank of America has esti- mated its losses at $160 million a quarter. Moebs estimates that to- tal bank revenue from overdrafts will drop about $2 billion this year to $35.2 billion, the first de- cline in at least a decade. Industry groups have said banks will hunt for ways to re- coup those losses. Banks could decide to charge customers a fee unless they sign up for multiple accounts, rather than just a checking account, or fail to maintain a certain balance. They might also charge for certain ser- vices, such as writing multiple checks. “We expect that free checking
will go very far away,” Riley said.
muiy@washpost.com
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