FRIDAY, AUGUST 13, 2010
KLMNO Washington FORUM
State aid: The cream and the wax
by Matt Miller
chirps to spatting spouses Gilda Radner and Dan Aykroyd that “New Shimmer is a floor wax AND a dessert topping!”? Well, the $26 billion state relief pack-
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age Congress just passed on party-line votes — and signed by President Obama on Wednesday — is the same kind of zany paradox: a crucial step to ease today’s economic pain and a dastardly bailout. That’s right, kids — it’s indispensable and indefensible! Welcome to another truth too subtle for our political culture to process in- telligently. In Washington, and in the posing that passes for “debate” on cable television, the $26 billion is cast as either nirvana or apocalypse. But if you’re not blinded by partisan- ship, a few things are clear. As a matter of macroeconomics, the big (if imperfect) federal stimulus has been partly stymied by a huge “anti-stimulus” at the state lev- el. Big holes have been blown in state budgets, with revenue collapsing as the economy sank. Since states by law have to balance their budgets, they’re forced to slash spending and raise taxes, further crimping local economies at the worst possible time. These state cutbacks can- cel out the stimulative effect of deficits being run by the feds. With state budget gaps this year slated to soar as high as $140 billion, $26 billion is thin gruel. Even the $50 billion the president wanted would have made the vast anti-stimulus only a third smaller. It’s another tale of Democratic aspira- tions falling far short of the magnitude of the problem. In an ideal world, would we want Un- cle Sam to keep borrowing billions from China to ship to states to help them avoid hundreds of thousands of teacher, police and firefighter layoffs? Of course not. But we’re not in an ideal world. We’re in a jobs crisis, with a Federal Reserve that’s out of traditional ammunition, and we need to use fiscal policy on an emergency basis to keep the raft of the economy from sinking back under the waves. (Plainly it’s a metaphor crisis as well.) It’s the same logic of pragmatic crisis
management that produced the auto bailout — action that, with GM posting its biggest profits in six years, looks to have been a success, even as it spared the fragile Midwest economy from sudden, untold job losses if the carmakers and their suppliers had been left for dead. So much for the Democratic dessert
topping. But Republicans are right to see the floor wax. The auto emergency offers the right template — because the indus- try was forced to restructure as a condi- tion of its bailout. The states haven’t been. Borrowing from China to skirt dev- astating state layoffs is one thing. But borrowing from China to keep runaway Medicaid programs in New York and California free from fundamental over- haul, and gargantuan unfunded public pensions untouched, seems mad. In Cali- fornia, more money is spent each year on compensation and pensions for 70,000 prison employees than on the state’s en- tire higher education system! The conspiracy-minded might view China’s lending here as a shrewd Manchurian- candidate-style fiscal assault meant to slowly sap our strength. The tragedy is that it is not beyond the mind of man to structure a state bailout that does what we need. States would be eligible for far more near-term relief than Democrats just offered in direct propor- tion to the amount they reduce their long-term unfunded liabilities in pen- sions and health care. It’s just that our current byzantine tangle of interest groups, campaign funding and media habits, mixed with both political parties’ fears and ambitions, conspire to ban even the expression of this kind of idea, let alone its enactment. It’s another de- pressing example of how unequal our po- litical institutions have become to the substantive challenges we face. Nor would it be hard to design an am- bitious stimulus that goes beyond these state bailouts that could make a big dif- ference fast. As I’ve argued before, we could enact big payroll and corporate tax cuts now, offset (and then some) by new energy and consumption taxes passed to- day but taking effect only once un- employment is below, say, 6 percent. This tax swap, which could appeal to liberals and conservatives, would provide a much-needed jolt to business’s “animal spirits” while assuring bond markets we’re serious about getting our house in order in due course. Instead, we’ve got the $26 billion blues, the perfect emblem of American pseudo-solutions circa 2010. A scheme that, in the end, offers none of the magi- cal properties of New Shimmer, “the greatest shine you ever tasted.”
Matt Miller, a senior fellow at the Center for American Progress and co-host of public radio’s “Left, Right & Center,” writes a weekly online column for The Post. His e-mail address is
mattino2@gmail.com.
emember (if you’re a certain age) that great Saturday Night Live ad parody in which Chevy Chase
A road map for saving Medicare
by Paul Ryan
to claim that Medicare’s imminent bankrupt- cy has been delayed, thanks to the creation of their health entitlement program. Only in Washington could the government raid one entitlement program to finance a brand-new one and still claim that deficits have been re- duced and entitlements have been reformed. The trustees’ report compares the revenue
T MATT ROURKE/ASSOCIATED PRESS RUTH MARCUS A subsidy for loafing?
s Congress subsidizing slackers? Lawmakers acted last month, after a cruel delay, to renew the extension of un- employment benefits. Those who are unemployed through no fault of their own will be eligible to collect ben- efits for as long as 99 weeks. That is an awfully long time. So, to phrase my question in a slightly less provocative way, do the beefed-up benefits encourage people not to work? In theory, yes. In reality, in a recession this severe, probably
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not very much. Abit of background: During normal times, unemployment
insurance usually lasts for 26 weeks of joblessness. During downturns, Congress generally steps in to provide extra weeks of benefits beyond what states offer. During this par- ticularly painful recession, workers have been able to collect benefits for an unprecedented 99 weeks — nearly two years. It is fair to question whether these extended benefits con- tribute to unemployment. Here are the reasons for my an- swer that the supposed “moral hazard” is not a big problem in the current, dreary environment. First, unemployment benefits in the United States are not terribly generous. As the congressional Joint Economic Com- mittee recently noted, the average benefit — about $300 weekly — amounts to just three-quarters of the poverty threshold for a family of four. Second, the jobs simply aren’t there for people to take.
There are five job-seekers for every available opening. Those tempted to slack off on the employment search because ben- efits are available for longer might not have found a job in any event — and any job they spurned probably would have been snapped up by someone else. As Harvard economist Lawrence Katz told the Joint Eco- nomic Committee this year, the “most compelling research suggests only modest impacts of [unemployment insurance] extensions on the search effort and duration of unemploy- ment” of jobless workers. When layoffs tend to be permanent, as in the current re- cession, rather than temporary, as in the past, the risk of workers gaming the system is reduced: The unemployed can’t simply hang out and collect checks expecting they’ll eventually be called back. Arecent study from the Federal Reserve Bank of San Fran-
cisco examined unemployment duration during this reces- sion for three different groups: those who lost jobs, those who left jobs voluntarily and those who are new to the job search. Only the first of these are eligible to collect un- employment. The study found that the length of times unem- ployed grew slightly in the early part of the recession and then rose sharply just as the duration of unemployment ben- efits was extended. Is that proof that more generous benefits cause indolence?
Hardly. The involuntary job losers, those eligible for benefits, experienced a similar increase in time spent unemployed to that of job-leavers and new entrants. The differential be- tween the two groups was a scant 1.6 weeks. Without the ex- tended benefits, the study calculated, the unemployment rate at the end of 2009 would have been four-tenths of a per- centage point lower. Not a negligible impact, but not a huge one, either.
Economist Keith Hennessey, an adviser to President
George W. Bush, looked at the issue from a different perspec- tive. He assumed that the longer period for collecting ben- efits would result in increased unemployment — contribut- ing somewhere between 0.5 and 1 percentage points to the unemployment rate — and considered whether the trade-off was worthwhile. At the lower effect, with unemployment at 9.5 percent, he
calculated that “eight people who would like a job but cannot find one are getting more generous [unemployment] ben- efits for each person who is getting those same benefits and choosing not to take a new job.” At an 8-to-1 ratio, extending unemployment is good policy,
Hennessey said. And what if the more generous benefits con- tribute a full percentage point to the unemployment rate? Then the ratio of out-of-luck worker to loafer drops to 3.5 to 1. “That is a tougher call, but I would still say yes,” Hennessey concluded. Bottom line: With unemployment this high, and long-term unemployment at a record level, extending benefits is the sensible, humane thing to do. The risk of underwriting loaf- ing is far less than the necessity of offering a safety net to those who would otherwise be without one.
marcusr@washpost.com
that supports Medicare’s trust funds with the program’s planned expenditures. Last year’s report revealed a $38 trillion shortfall over the next 75 years. This year the shortfall ap- pears to have decreased, but only after the Democrats’ health bill cut $529 billion from Medicare. This apparent improvement was the basis for Democratic celebration — even though the program remains tens of trillions of dollars in the hole. With the same legislation that cut more than half a trillion dollars in Medicare spend- ing, the Democrats created a nearly $1 tril- lion health-care entitlement. The Obama ad- ministration’s own chief actuary has ex- plained that in addition to the dubious assumptions on provider cuts and other claims of savings, the health-care law’s Medi- care cuts cannot be used to both reduce Medicare’s unfunded obligations and pay for a new entitlement. And the Congressional Budget Office said in March that the health- care overhaul’s Medicare savings “would be used to pay for other spending and therefore would not enhance the ability of the govern- ment to pay for future Medicare benefits.” Put simply, Medicare is on course to col- lapse. Medicare and interest on the national debt alone will soon overwhelm the federal budget, crowding out all other national pri- orities. The CBO estimates that Medicare will consume 12 percent of gross domestic prod- uct by 2080 (up from 3.6 percent of GDP to- day), bringing total health entitlement spending to 17 percent of GDP. Exacerbating our unsustainable trajectory, health spend- ing explodes under the Democrats’ health plan — raiding Medicare, expanding Medic- aid and creating two entitlements without any clue of how to finance the ones we have now. The economy simply cannot handle such crushing levels of taxation and the bor- rowing required to finance this spending; the CBO warned last month of a devastating debt crisis within two decades. We do not have a choice as to whether
How to jump-start U.S. manufacturing P
by Robert M. Kimmitt and Matthew J. Slaughter
resident Obama observed last week that the U.S. manufacturing sector has “been hit hard for as long as folks can remember.” In fact, the last time so few Americans worked in manufactur- ing was April 1941. Since the Great Reces- sion began in December 2007, America has lost 16 percent of its manufacturing payroll jobs. While there has been a slight uptick in manufacturing jobs in the last seven months, only 11.7 million Americans work in this sector, down from 17.3 million 10 years ago. That’s barely 9 percent of total U.S. nonfarm payroll jobs. More Americans now work in the leisure and hospitality industry. Yet manufacturing remains impor-
tant. Manufacturing firms have long ac- counted for an outsize share of U.S. cap- ital investment, research and develop- ment, and exporting. Productivity growth — the only source of sustainable increases in standards of living — has long been faster in manufacturing than in services. As we recover from the global financial crisis, America’s economy needs to be rebalanced away from consump- tion demand and toward capital in- vestment and exports. Manufacturing can play a key role in this process. Fundamental to the revival of Amer- ican manufacturing is international in- vestment, both outward and inward. Such investment has long fostered the sector’s dynamism and growth. The U.S. operations of multinational companies based here and abroad strengthen our manufacturing industry in several ways. Start with U.S. multinationals operat- ing in manufacturing. In 2007, the most recent year for which data are available, the U.S.-parent operations of these man- ufacturing firms made $173.5 billion in capital investments and conducted $157.2 billion in research and devel- opment. That was 58.4 percent of all pri-
vate-sector research and development in America. They employed nearly 7.3 mil- lion Americans, at an average annual compensation of $78,164 — more than 50 percent above the economy-wide average compensation.
Despite the common assertion that
U.S. multinationals simply “export jobs” out of the United States, these firms’ ex- pansion abroad has tended to comple- ment their U.S. operations. More interna- tional investment and employment in their foreign affiliates has tended to cre- ate more U.S. parent company invest- ment and jobs as well. Our calculations from U.S. Bureau of Economic Analysis data show that from 1988 to 2007, em- ployment in foreign affiliates rose by 5.3 million jobs — while U.S. parent compa- nies added nearly as many positions, 4.3 million. A 2009 study published in the American Economic Journal: Economic Policy analyzed all U.S. multinationals in manufacturing from 1982 to 2004 and found that each additional dollar in an affiliate’s employee compensation gener- ated, on average, an increase of about $1.11 in employee compensation at its parent company. Each additional dollar in an affiliate’s capital investment gener- ated an average increase of about 67 cents in its parent’s capital investment. In many U.S. multinationals, foreign and U.S. operations support and strengthen each other. A major reason for this is faster economic growth outside the United States. Rapidly growing coun- tries present vast revenue opportunities for U.S. multinationals, opportunities that tend to boost affiliate and parent activity. The benefits of international invest- ment are also clear when it comes to multinationals based abroad that oper- ate in America. In 2007, their U.S. manu- facturing operations conducted $30.6 billion in research and development, made $63.7 billion in capital investments and exported $125.7 billion in goods. They employed nearly 2 million Amer-
icans — 36.2 percent of total U.S. employ- ment of all foreign-headquartered multi- nationals — at an average annual com- pensation of $79,869. Notably, and contrary to common claims, the U.S. op- erations of these companies have long had unionization rates about 50 percent higher than coverage in the rest of the U.S. private sector. As economic growth has broadened and quickened in recent decades, world- class manufacturing companies have emerged from many countries. The Unit- ed States continues to offer these compa- nies several advantages for investments: a talented workforce, a culture of in- novation and risk-taking, and by far the world’s largest single-country market. The good news is that some are mov- ing in this direction. Consider Compact Power Inc., a subsidiary of South Korea’s LG Chem. With more than 14,000 em- ployees worldwide, LG Chem is one of the world’s leading designers and pro- ducers of lithium-ion batteries. Last month President Obama attended the groundbreaking ceremony for its subsid- iary’s factory in Michigan, which will eventually employ 300 people making lithium-ion car batteries. “These are jobs in the industries of the future,” Obama said. “You are leading the way in showing how manufacturing jobs are coming right back here to the United States of America.”
At this time of continuing high un- employment and sluggish job growth, policymakers and business leaders alike should encourage investment into and out of the United States. It would help re- vive American manufacturing and con- tribute to the nation’s economic recovery.
Robert M. Kimmitt, deputy secretary of the Treasury from 2005 to 2009, is chairman of the Deloitte Center for Cross-Border Investment. Matthew J. Slaughter, a member of the White House Council of Economic Advisers from 2005 to 2007, is an adviser to the center.
Medicare will change from its current struc- ture. It is being driven to insolvency. An hon- est debate requires a serious discussion of how Medicare will avert its collapse and be made sustainable. Unfortunately, but not surprisingly, the Democrats’ political ma- chine has attacked my contribution to this debate, making the false claim that the only solution put forward to save Medicare would “end Medicare as we know it.” The CBO has said that my reform plan, “A Roadmap for America’s Future,” would put Medicare on a sustainable path. The plan protects and preserves Medicare for those enrolled now and for those who will become eligible in the next 10 years, while reforming the program to ensure it will be there for younger generations. Future seniors would have access to the same coverage I enjoy as a congressman. Far from the claims of “radicalism,” this proposal is based on a key reform from the National Bipartisan Commission on the Fu- ture of Medicare, chaired by then-Sen. John Breaux (D-La.). That commission in 1999 rec- ommended “modeling a system on the one Members of Congress use to obtain health care coverage for themselves and their families.” Future Medicare beneficiaries would re- ceive a payment to apply to a list of Medicare- certified coverage options. The Medicare payment would grow every year, with addi- tional support for those who have low in- comes and higher health costs, and less gov- ernment support for high-income beneficia- ries. The most vulnerable seniors would also receive supplemental Medicaid coverage and continue to be eligible for Medicaid’s long- term care benefit. If we act now, we can avoid disruptions for
current seniors while advancing patient- centered reforms so Medicare will be strengthened for future beneficiaries. The al- ternative is the European-style death spiral of the welfare state: kick the can down the road as our debt explodes. Under an ever-expan- sive, all-consuming central government, costs will be contained with Washington’s heavy hand imposing price controls, slashing ben- efits and arbitrarily rationing seniors’ care. The Democratic leadership will seek to
brand every Republican running for office with my road map. Ironically, if Democrats succeed in demagoguing to death efforts to saveMedicare, that political victory will has- ten the program’s end. While I am proud to have 13 House Republicans co-sponsor the legislation, and have been overwhelmed by the support outside the Beltway, my plan is not the Republican Party’s platform and was never intended to be. This proposal is my sin- cere attempt to break the political paralysis on entitlement reform, to show that this challenge can be met — mathematically and politically — and to challenge those who dis- agree with my proposal to offer their own.
The writer, a Republican from Wisconsin, is the ranking minority member of the House Budget Committee.
he annual analysis of Medicare’s finan- cial health released by the program’s trustees on Aug. 5 led some Democrats
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