The economy added 244,000 jobs in April. That should be good news for President Obama and the Democrats. But according to the Economic Policy Institute, at this rate of job growth it would take until the fall of 2016 for unemployment to come back down to where it was before the recession. The next election, unfortunately, is in 2012.

Among the not-so-great items in the Labor Department's report:

• Fourteen million people are still officially unemployed, and millions more have given up looking for work.
• Counting those out of the labor force or working part time but wanting full time jobs, the total number of unemployed or underemployed was just under 25 million — not significantly better than at the pit of the recession. The number of people with involuntary part time work actually rose by 167,000 in April.
• Among young workers, 24 or younger, the jobless rate was a sickening 17.6 percent. And among African Americans, 16.1 percent were out of work. These happen to be two groups who voted with great enthusiasm for the president in 2008.
• Despite the growth in employment, the overall percentage of Americans in the labor force did not increase. The workforce is still more than a million people smaller than it was a year ago — meaning that the economy will need to grow at a much faster rate to soak up the unemployed.
• There still 5.8 million workers who have been jobless for more than six months, still close to an economic record. The longer they stay unemployed, the less likely they are to ever find a job. Employers tend to give preference to job seekers who have jobs, or who have been out of work for short periods.
• While the private sector added more than a quarter million jobs, the public sector kept laying off workers. State and local government shrank by another 22,000 in April. This is a confession of a policy failure. In a severe economic downturn, government should be adding jobs to make up for the softness of the private sector. But with austerity fever sweeping both parties, the idea of a public jobs program is off the table.

President Obama had a good couple of weeks. He deftly surfaced his long-form birth certificate, a move whose timing baffled pundits until the other shoe dropped — and the public appreciated that he was grappling with very consequential matters while his opponents were mired in trivia. The mission to capture or kill Osama bin Laden displayed presidential nerve and leadership that has often seemed missing in this administration.

But despite the president's enhanced stature on national security issues and his success in showing up his critics, the 2012 election will be mainly about the economy. With so many Americans still out of work, a large number of voters have a co-worker, friend, or family member suffering from joblessness.

It is easy to construct a national scenario in which Obama is plainly a more formidable candidate than any likely Republican nominee. The trouble is that we elect presidents state by state. And it will be hard for an incumbent to win if the economy in the key swing states of the Midwest remains deeply depressed.

It might be easier if the president were pushing hard for a robust recovery program while the Republicans were promoting slash-and-burn austerity. Obama could then point to the sluggish recovery and clearly lay it at the Republicans' door.

But Obama himself, though he has admirably defended Social Security and Medicare, forcing Republicans to distance themselves from Rep. Paul Ryan's proposed plan to turn Medicare into a voucher, is nonetheless giving more attention to deficit reduction than to job creation.

Long after the skirmishes over this year's budget cease dominating the news, when the government stays open and the United States does not default on our national debt, the major issue before the voters in 2012 will still be the condition of the economy, not the deficit. Though Obama's version of fiscal austerity is kinder and gentler than that of the Republicans, cutting the deficit while the recovery is still fragile could well slow growth and blur political responsibility.

The ambiguous April jobs numbers are a signal not of green shoots but of the perils of premature belt-tightening.

There are now three parties of austerity dominating the economic debate, while the party of jobs and growth is scarcely heard from.

We have the Republicans demanding draconian cuts in the name of fiscal responsibility, even though their proposed tax reductions would leave the deficit almost where it was. Then there is the Wall Street austerity party, willing to entertain tax increases (on others) as well as program cuts. And finally, the White House, with a more moderate forced march to fiscal discipline, but still a misplaced emphasis on deficit reduction.

In November 2012, if unemployment is still high, Obama will get scant credit for a better fiscal picture. He owes it to his supporters, to America's millions of idled workers, and to his own re-election prospects to pay more attention to jobs.

Read the original article on The Huffington Post.

Robert Kuttner is the author of A Presidency in Peril.

The global economy may be a mess, but the world's central bankers like to congratulate themselves for one thing. Inflation has been tamed.

Sorry, bankers, but the low level of price inflation has little if anything to do with skilled central banking. In the short run, the absence of price pressure reflects the prolonged recession. And for the past decade or so, the low inflation is the result of China's low wages.

That's right. Consumer prices are flat in substantial part because China sends us so much stuff, dirt cheap. This puts downward pressure on prices. The real price is paid both by Chinese workers who are paid a pittance and by American workers who either restrain their own wages or watch jobs move to China.

But all that may be changing, and the change will be a mixed blessing.

China, long politely criticized by the US government for managing the value of its currency, is now allowing the renminbi gradually to rise in value.

Analysts say China wants a stronger currency to fight inflation.

China is both contributing to the inflation and suffering from it, by being such a large new buyer of raw materials that it drives up prices. A stronger Chinese currency means that the price impact is buffered — for the Chinese.

China has also been criticized for its low wages. But the Beijing regime has also begun allowing wages to rise, as part of its strategy of domestic development.

Bottom line, stuff from China won't be quite as cheap. That, along with the impact of higher worldwide commodities prices, means higher inflation on the horizon for the US. Unlike the Chinese, we are not letting our currency appreciate in value. We are watching it fall.

What does all this mean? Economics, infamously, is the science of on-the-one-hand-this, on-the-other-hand-that. On the one hand, it's about time that China let its currency behave more like others and began paying its workers more than a pittance. A more expensive Chinese currency and better Chinese wages will be marginally good for American exports, and also good for US wages.

On the other hand, the free ride on inflation may be ending. If so, we could face pressure to raise interest rates at a time when the economy is still suffering from very slow growth and very high unemployment. That means a worse recession.

Professor Charles Kindleberger famously argued in his 1973 book, The World in Depression, that the world economy needs a hegemonic monetary power, to provide a reliable currency, and to be both a lender and a market of last resort. Britain played that role in the 19th century, and the US after World War II. According to Kindleberger, the interwar period was such an economic disaster because no country played that role.

China is fast becoming the monetary hegemon of the 21st century. It has done a benign job of buying our bonds at low interest rates. But it has done a terrible job of opening its markets or managing its currency in the world's interest. On the contrary, its behavior has been entirely mercantilist, in its own self interest.

But if China starts behaving more like a normal nation, we could end up paying more to sell our bonds, and having to deal with higher inflation as well. And, increasingly, China will be in the drivers seat.

No hegemonic power is entirely benign. But the US in the postwar period wasn't bad.
It's hard to imagine China bearing its new-found economic power entirely with altruism.

Yet it would be comforting, but misleading, to scapegoat the Chinese. Yes, they do poach American jobs by subsidizing industry and paying crappy wages. But for the most part, the current crisis was made in U.S.A.

If we had had an industrial policy, we'd have a stronger manufacturing sector. If we hadn't let banks go nuts, we wouldn't have a prolonged economic stagnation. And if we hadn't gutted our tax code to reward the rich, we wouldn't have a huge deficit that required the Chinese to buy so many bonds.

Like it or not, China is now the 800 pound gorilla of the world's economy. The thing about such beasts is that tend to do what they please.

Read the original article on The Huffington Post.

Robert Kuttner is the author of A Presidency in Peril.

It’s a great day for the world and for the presidency of Barack Obama that Osama bin Laden was captured and killed.

But people who think that this assures the president’s re-election are a little premature.

A few other things have to happen first. We need to avoid a double-dip recession, or a combination of inflation and recession, which is looking increasingly likely. How many dollars a gallon in the price of gas does Osama's killing offset? How much of an uptick of unemployment in the midwest? How much does it bulletproof Obama in a nasty budget fight where all of the momentum is on the side of austerity?

Let’s celebrate this achievement. It brings one of the world’s great killers to justice and adds to President Obama’s credibility on national security. But please, let’s hold the champagne on Obama’s re-election.

Read the original post at The American Prospect.

Robert Kuttner is the author of A Presidency in Peril.

Economists are painting a pretty bleak picture of the economic outlook between now and the November 2012 election. Will this hurt President Obama's re-election chances? Or will voters blame the Party of No?

That, of course, partly depends on what kind of campaign Obama runs and partly on the Republicans. But first, let's take stock (actually, maybe let's sell stock).

The Federal Reserve has been buying up lots of bonds to keep interest rates very low. The Fed disguises what it's doing with the antiseptic and mystifying term, "quantitative easing," or QE for short. This is the second time the central bank has tried this trick, hence the coy nickname, QE 2. The problem is that very low interest rates only take you so far in a depressed economy.

For the most part the Fed's policy has been good for large banks and good for the stock market. Ordinary borrowers, businesses and homebuyers have trouble getting credit.

But other factors are starting to limit the effectiveness of very low interest rates.

For one, the very low rates in the US are depressing confidence in the dollar. That means we start importing inflation. For another, rising commodity prices worldwide — partly the result of the Fed's policy, partly due to rising demand in India and China — means increasing prices of consumer goods at home.

Five-dollar-a-gallon gas is not good for President Obama. Nor is the practice of food processing companies shrinking the size of standard packages to disguise price increases. And in the one part of the economy that might benefit from a little inflation, low interest rates have not worked to levitate depressed housing values.

The time-tested remedy, when cheap money ceases working, is expansive fiscal policy — government deficits and public investment. Now there's an idea.

Oops. Forget it.

There is, of course, huge pressure from the nation's opinion elites to cut the deficit, long before the economy is out of the woods. It comes from four potent sources.

Wall Street deficit hawks have been banging these drums for three decades, even during the late 1990s when the budget was in surplus.

The elite media buys this story, hook, line, and sinker. Big deficits are seen as proof of partisan gridlock and government irresponsibility. The six bipartisan horsemen of budget apocalypse, Senators Warner, Chambliss et. al. are widely depicted as fiscal heroes. The pundits seem to forget where these deficits came from.

Republicans since Ronald Reagan have pursued a strategy of cutting taxes and then expressing shock at the ensuing deficit and demanding program cuts accordingly. We were already having historically high deficits when the recession began, because of the Bush tax cuts of 2001 and 2003. Today's even more extreme Republicans would cut taxes further, slash outlays to their lowest level since before FDR, invoking the gods of deficit reduction.

President Obama, for his part, has fanned these flames with his appointment of the Bowles-Simpson commission, and his premature shift, as early as the 2010 State of the Union Address, from the theme of economic recovery and job creation to that of deficit reduction. His recent address at George Washington University was terrific at holding the line on Medicare, Medicaid and Social Security, but bought into the premise that we need deficit reduction more than we need job creation.

Why is Obama pursuing this strategy? Partly because his conservative economic advisers buy it, and partly because his political advisers look at polls that tell them voters care about deficits, especially political independents. But that current of public opinion exists only because opinion leaders — including Obama himself — have made such a fetish of deficits.

There is a whole politics that just isn't on the table: massive public investment to create jobs and growth — which then increase revenues and bring down the deficit. The political scientist Walter Dean Burnham refers to this sort of dynamic as "a politics of excluded of alternatives."

But wait, isn't the deficit a real problem? Yes, and no. Eventually, deficits at the 2011 level are not sustainable. However, the current accumulated debt held by the public of about 60 percent of GDP is not dire.

We could have two or three years of bigger deficits, very major public investment, let the debt ratio peak at 100% of GDP; and then stronger recovery, lower unemployment, and higher taxes on the wealthy would bring the debt ratio slowly down, as occurred after WW II.

Japan's debt ratio, for comparative purposes, is over 200 % of GDP — and Japan is increasing government outlay to repair the damage of the earthquake and tsunami. Britain's, after World War II, was over 250 percent, and Britain went on to enjoy a postwar recovery.

Why can't we have massive public reparation with war or natural disaster? Because politicians lack the vision and nerve.

Austerity will only slow down the recovery. The idea that a steeper path to deficit reduction will somehow restore business confidence and thus more than offset the hit to purchasing power is just blarney. And with both parties committed to some version of austerity, we could easily have the worst of both worlds — increasing inflation coupled with persistent stagnation.

However much the Republicans are at fault–for creating the financial collapse, blocking a stronger stimulus in 2009, and looting the Treasury with tax cuts for the rich, causing much of the deficit problem in the first place — an incumbent president tends to take the blame for hard economic times. Obama's talk of having a kinder, gentler brand of deficit reduction is no match for rising fuel and food prices and persistent worries about basic economic security.

Can the president shift to a rhetoric and policy that emphasizes the need for more jobs and a stronger recovery, and soon? Let's hope so. There is nothing like an election hanging to concentrate a politician's mind.

Robert Kuttner is co-editor of The American Prospect and a senior fellow at Demos. His latest book is A Presidency in Peril.

Read the original post on Huffington Post.

Robert Kuttner is the author of A Presidency in Peril.

President Obama did two things in his Wednesday address at George Washington University that he has been loath to do throughout his presidency. He spoke like a progressive partisan. And he spoke of that great unmentionable in centrist Democratic policies — the injuries of class.

Among the inspired zingers:

"They [the Republicans] want to give people like me a $200,000 tax cut that's paid for by asking 33 seniors to each pay $6000 more in health costs? That's not right, and it's not going to happen as long as I'm president."

And this:

"I will not allow Medicare to become a voucher program that leaves seniors at the mercy of the insurance industry, with a shrinking benefit to pay for rising costs. I will not tell families with children who have disabilities that they have to fend for themselves. We will reform these programs, but we will not abandon the fundamental commitment this country has kept for generations. That includes, by the way, our commitment to Social Security."

President Obama also raised the issue of class when he insisted that taxes on the wealthy had to be part of any deficit reduction deal:

"[A]t a time when the tax burden on the wealthy is at its lowest level in half a century, the most fortunate among us can afford to pay a little more. I don't need another tax cut. Warren Buffett doesn't need another tax cut. Not if we have to pay for it by making seniors pay more for Medicare. Or by cutting kids from Head Start. Or by taking away college scholarships that I wouldn't be here without. That some of you wouldn't be here without."

Well done, and long overdue! This isn't about fiscal responsibility. It's about Republicans using needless tax cuts for the rich to justify massive cuts in the social compact for everyone else. And with some presidential leadership, the progressive framing of the issue is the overwhelming majority position. It could blow the Republicans back to the fringe, minority position they were in when the financial collapse occurred and Obama won election.

That's the good news. And given the immense gift of Paul Ryan's blundering assault on Medicare, it would have been a travesty to have done anything less.

(I few weeks ago, on Huffington Post, I challenged President Obama to give a speech along these lines. Among the words I put in my imaginary president's mouth were: "I am here to say tonight that we are not going to balance the budget on the backs of kids, or elderly Americans, or sick people, or working families." Note to speechwriter Jon Favreau: call anytime.)

Just kidding.

But there is also plenty of worrisome news. Four things in particular.

First, there is far more deficit-cutting in Obama's proposed budget than fiscal circumstances warrant. The president proposes roughly two dollars in cuts for every one dollar in taxes. Most of these cuts will have to come out of the very areas Obama proposes to defend — education, health, the environment, kids, and aid to the poor — since only about 15 percent of the budget is domestic discretionary spending and most of that is social outlay.

Though Obama was too polite to say so, virtually all of the increase in the ten year deficit that is now the object of fiscal fetishism was the result of three things — the Bush tax cuts, the military buildup, the recession itself with its effects on reduced revenues and increased payouts from automatic stabilizers. Fix these, and you fix the deficit.

Additional optional federal outlays via the February 2009 stimulus package contributed just three percent of the ten year increase in the cumulative deficit.

Second, and closely related, Obama's welcome change of tone had almost nothing to say about jobs and recovery. In that respect, he played into the hands of the fiscal right by reinforcing the mantra that the deficit rather than the economic recovery is the prime challenge.

As Nobel laureate Joe Stiglitz said on Friday, speaking at a conference at the AFL-CIO, the recession caused the deficit, not vice versa. Fix the economy and restore a normal tax code, and most of the deficit problem is solved. Fail to fix the economy, and austerity only produces more austerity as falling purchasing power keeps bumping the economy downward — as the British government is finding out.

In that regard, one particularly unhelpful passage in Obama's speech reinforced the "belt-tightening" frame: "To meet our fiscal challenge, we will need to make reforms. We will all need to make sacrifices."

No, Mr. President, that's dead wrong. About 90 percent of Americans have already sacrificed in advance. Median income is now below where it was in the late 1990s. Young people are burdened with college debts, or can't afford college at all, and see the dream of joining the middle class evaporating. Tens of millions of Americans have lost jobs. Why on earth declare that we "all" need to sacrifice?"

Third, Obama has made too many concessions to the right already. The previous deal of April 7 that cut the 2011 budget by some $38 billion now becomes the left pole of the new normal. Obama's new progressive rhetoric begins practically in his own end zone.

Fourth, there is more mischief ahead. While Obama pointedly said he'd defend Social Security, the "Gang of Six", the bastard bipartisan spawn of Obama's own Bowles-Simpson commission, is talking about a grand bargain that would include cuts in Social Security as well as increases in taxes. And of course, these are not "increases" in taxes at all, but merely a tax code closer to that of the Clinton era, a period when the economy boomed and slightly higher taxes on the rich did not prevent them from increasing their share of the national income and wealth.

And if the Gang of Six, three of whom are Senate Democrats, agrees on a deal that includes Social Security cuts, the pressure will be overwhelming for both houses to pass it and Obama to sign it. And it will definitely be worse than what Obama proposed Wednesday.

As Obama himself said, his new posture of ostensible toughness in defense of what's left of America's social compact, "I don't expect the details in any final agreement to look exactly like the approach I laid out today. I'm eager to hear other ideas from all ends of the political spectrum."

No, Mr. President, you are not eager to hear what the Republicans have to offer. You just called them out as a bunch of elitist stooges for the right. You can't very well have it both ways.

Why do Democrats like Obama, Kerry, Gore, and Clinton embrace class only as a last resort? In part because they fancy themselves unifiers, but more importantly because the financial elite that underwrites their campaigns detests talk of tax-the-rich, and discourages any kind of broader populist rhetoric that might remind ordinary voters who crashed the economy and who exports their jobs.

At various points going back to the 1984 candidacy of Walter Mondale, Democratic candidates who spoke of the injustices of class were warned by their money men to tone it done. In Mondale's case the message came from Robert Rubin personally. When John Kerry talked about "Benedict Arnold CEOs," he was warned by some of those CEOs to drop the phrase. And he did.

Three days after Obama demonstrated a touch of class in his address at GW, he spoke at a gala fundraiser in Chicago where the big donors were treated like the royalty that they are in American politics.

It was the White House political team, according to my sources, who injected the class themes into Obama's Wednesday speech, because they are such winning politics. This tension will continue between now and November 2012.

Let's hope, if only for reasons of survival, that Obama continues to identify with the aspirations and frustrations of ordinary Americans against the delusions of the far right rather than the elite conceits about fiscal discipline.

If he does, he will be the early front runner and both the deficit and the campaign finance will take care of themselves.

Read the original article on The Huffington Post.

Robert Kuttner is the author of A Presidency In Peril.

My fellow Americans,

I ran for president to do two things — to change the tone of bitter partisanship in Washington, and to accomplish constructive economic change so that more Americans can share the blessings of prosperity.

I need to speak candidly to you tonight. Despite my best efforts, I find that I cannot do both things. You see, it takes two to compromise.

I understand why many Americans voted against my party — the Democrats — last November. Recovery from the worst recession in 75 years was, and is, too slow.

It's understandable that many people who had high hopes in 2008 felt those hopes dashed in 2010. The president's party normally loses some seats in his first off-year election, especially in hard economic times, and these times have been more difficult than most.

Those of you who voted for the opposition had every right to do so. But the vast majority of Americans did not vote to slash public spending on children, university students, the elderly, the disabled, the sick, and people who are unemployed through no fault of their own. You did not vote to blame the recession on nurses, teachers, police and fire-fighters or to punish them for the sins of Wall Street.

The budget debate that has dominated the headlines has emphasized numbers — mind numbing numbers. Will Congress cut $70 billion dollars, or $50 billion dollars, or $100 billion dollars? But let me tell you, this budget debate is not just about numbers.

It's about whether kids who are eligible for Head Start are denied places in the classroom. Whether community health centers shut down. Whether students who want a chance to go to college are denied Pell Grants. Whether our families have safe drinking water and pure food. Whether Americans who are unemployed through no fault of their own lose their health insurance. And whether the most affluent Americans get still more tax cuts.

Although the Republican Party is increasingly captured by the Tea Party, I just don't believe most Americans voted for these slash and burn cuts that will only harm our economy.

We have done our best to find a middle ground. But the opposition party keeps moving the goal posts on us.

No sooner do we come to terms over a compromise to keep the government open than the price goes up. The price of keeping the government, it turns out, is to cripple the government and the services that it provides. Deep cuts in Social Security, Medicare, and Medicaid are next.

Well, not while I'm president. I am here to say tonight that we are not going to balance the budget on the backs of kids, or elderly Americans, or sick people, or working families.

Last December, we reluctantly compromised with the Republicans in order to extend unemployment insurance and help working Americans in other ways. Their price was two more years of tax cuts for the very wealthiest of Americans. The cost was over $125 billion — or more than the cost of spending cuts now being demanded.

Frankly, if anyone should be tightening their belts in these circumstances, it is the most fortunate among us. But the increase in the deficit caused by those tax cuts is now being use as the pretext to slash government help to everyone else.

That's not right. So don't make the mistake of thinking that this debate is about who has the sharpest knife for cutting deficits. It's about how we cut deficits, about whose belt is to be tightened, and how we get the economy back on track.

If the Republicans had been sincere about wanting to hold down deficits, they never would have demanded those tax giveaways as their price for aiding the unemployed.

Not only are the Tea Party Republicans demanding crippling cuts in public services. They have also larded up the budget bill with so called riders that have nothing do with the budget.

They would ban funding for the new bureau of consumer financial protection, and other regulatory agencies charged with keeping banks from repeating the abuses that got us into this mess.

They would ban funding for the Affordable Care Act, meaning insurance companies once again could deny coverage to people with pre-existing conditions.

They would prohibit the Environmental Protection Agency from regulating toxic substances like mercury, Dioxin, and arsenic in certain industries.

They would block the Department of Education from cracking down on well documented abuses on the part of for-profit colleges that deceive hard working students and their parents.

They would get rid of federally-funded family planning services, which also includes screening for breast and cervical cancer.

Most Americans do not support these policies. And as much as I want compromise and civility in Washington, I am not a damned fool.

Americans deserve to know just how extreme these ideas are. And if the far right wants to threaten to shut down the government if we don't accept these radical ideas, that's a fight I'm prepared to have.

So I will continue my efforts to change the tone in Washington. But sometimes that requires firmness in the face of reckless destruction.

I want you to know, this is not about the "partisan bickering" that the press loves to decry. The far right is trying to show its supporters that it can be tough enough to shut down the government. But I can be just as tough on behalf of working American families, who have already suffered enough.

This is the leader I thought I was voting for. Judging by his performance so far, I was wrong.

Obama's tactics could be one way for him to win re-election. He puts himself above party, hangs progressive Democrats out to dry, and lets Republican recalcitrance move the political center further and further to the right. When he eventually gets a budget deal, it doesn't matter to him that it is mostly on Republican terms. He wins points for keeping the government open.

This seems to be the preferred strategy of top White House political strategist David Plouffe and chief of staff Bill Daley. The bounce in the polls that Obama enjoyed in the aftermath of a craven tax cut deal is used as the object lesson in the value of the president as compromiser in chief.

But that bounce has pretty well evaporated. Obama's approval-disapproval ratings are now about dead even again. However, if you want to identify a set of policies that are opposed by margins of three or four to one, try the Tea Party package.

There is another way for Obama to win, by showing some toughness, standing up for principle, and exposing the sheer extremism of the Tea Party capture of the Republicans.

Can he work up the nerve? It would certainly change the tone in Washington.

Read the original article on The Huffington Post.

Robert Kuttner is the author of A Presidency In Peril.

In the sorting out of the wreckage after Japan's earthquake and tsunami, many Americans have begun paying more attention to a phrase they had barely known — "supply chains."

American manufacturing companies no longer make most of the parts that they use in production. Rather, both U.S. companies and foreign ones that produce for the U.S. market have long and complex chains of suppliers the world over, many of them in Japan. Now, a lot of that production is temporarily idle, while Japan digs out.

The outsourcing of so much production through extensive foreign supply chains, combined with lean and supposedly more efficient "just in time" inventories, leaves companies ranging from Apple to GM vulnerable to supply disruptions half a world away. A few writers such as Barry Lynn and Eamonn Fingleton have been warning about risks of supply-chain fragility for more than a decade, but were paid little attention.

Now, however, we not only have the wake-up call in the form of Japan's earthquake. Economists such as David Levy of the Jerome Levy Forecasting Center, and some dissenting corporate executives such as John Surna of US Steel, point out that it makes less and less economic sense to keep outsourcing production because labor represents a dwindling share of manufacturing costs.

As industry becomes more automated, it takes fewer human workers to manufacture a product. So even if a Chinese worker is paid just one-twentieth the wage of his or her US counterpart, there is only so much that can be saved by moving production abroad.

Almost four decades ago, the Nobel laureate in economics Vassily Leontieff famously imagined a time when machines would be so productive that there would be only one production worker, and her job would be to flip the switch. We are not there yet, but labor cost savings no longer justify the epidemic of outsourcing, given all of the vulnerabilities that it entails.

Meanwhile, as labor costs become less important in manufacturing, energy costs keep increasing. In short, does it really make sense for China to import coal and iron ore from Australia, so that it can fabricate giant wind turbines and send them by ship to the United States? Wouldn't it make more sense for the US to build more of what we consume?

Even in the case of miniature electronics which are less costly to ship, Apple, which designs mostly in the US but out-sources most component production to Asia, could be encouraging more production at home.

As energy and the cost of shipping become expensive, and production becomes more automated, the logic of production shifts back in favor of more domestic manufacturing. However, absent some kind of industrial policy, that will not be sufficient to bring back manufacturing jobs.

Why? Because labor and transportation costs are not the only factors weighing in the decisions of executives of multinational corporations to move production offshore.

Higher environmental and labor standards in the US also make it attractive for multinational companies to outsource production to nations where workers not only have lower wages but no rights, and companies are freer to pollute.

US companies also locate production offshore to take advantage of foreign government subsidies. These subsidies are illegal, in principle, under the World Trade Organization. But China's entire industrial system depends on subsidies intended to attract western companies to shift production to China.

In addition, producing worldwide makes it easier to book profits in such a way that avoids national tax liability. It was recently reported that GE, with worldwide profits of $14.2 billion in 2010, paid no US taxes. In fact, the US ended up owing GE $3.2 billion.

In January, President Obama named GE Chief Executive Jeff Immelt to chair a new presidential council on jobs and competitiveness. But based on GE's record of outsourcing and creative tax avoidance, Immelt should be the poster child for how corporate America ought not to behave.

There is a whole other approach to bringing back manufacturing to the US. Events in Japan and shifting relative prices of labor and energy costs give that approach new compelling logic.

Manufacturing is increasingly hollowed out in the US, but still accounts for upwards of 14 million jobs. It's hard to keep innovating in the US if we lose what's left of our manufacturing industry.

Manufacturing and energy together account for most of our trade deficit, now upwards of $46 billion a month.

As events in Japan remind us, doing more production at home is only prudent. It also makes increasing economic sense. What's missing is more political leadership to put the pieces together.

Read the original article on The Huffington Post.

Robert Kuttner is the author of A Presidency In Peril.

One of the most startling exit-poll results to emerge from the 2010 midterm elections was the finding that the 35 percent of voters who (correctly) blamed the economic collapse on Wall Street actually voted Republican by a margin of 56-42 percent. As Ruy Teixeira and John Halpin wrote in a sifting of the exit polls, "The Obama administration's association with bailing out Wall Street bankers, who are heavily blamed for the bad economy, apparently had a negative effect on Democratic performance in this election."

To put it mildly.

But since the election, Republicans keep on demonstrating that they are even better friends of the banks than the ambivalent Democrats. Tea Party populism at the grass roots coexists with close alliance with the financial industry where it counts. Under the guise of reducing the budget deficit, the Republican House and Senate budget would dramatically reduce funding for the agencies that regulate Wall Street.

Richard Shelby, the ranking Republican on the Senate Banking Committee, keeps inserting himself into a law-enforcement proceeding, trying to block the proposed legal settlement of abuses in mortgage foreclosures and documentation that has been put forward by the 50 state attorneys general.

Shelby last week called the plan:

"Nothing less than a regulatory shakedown by the new Bureau for Consumer Financial Protection, the FDIC, the Fed, certain Attorneys General, and the Administration, led by Elizabeth Warren. This proposed settlement appears to be an attempt to advance the Administration's political agenda, rather than an effort to help homeowners who were harmed by a servicer's actual conduct."

It's worth reviewing the back story. State attorneys general, led by Iowa's Tom Miller, but with the vigorous support of Republican as well as Democrat AGs, have documented a wide range of illegal abuses by mortgage companies and banks dealing with homeowners who were victimized by corrupt lenders.

So called "robo-signers" falsely signed affidavits that the bank or other mortgage service company had the right to foreclose when in fact it had no such legal right.

Timely payments that were sent in to pay principal and interest were improperly applied to late fees and other penalties, causing homeowners to fall behind in their payments and then fall into technical default, leaving them vulnerable to foreclosure.

While many homeowners who were working in good faith with the lender to secure refinancing or loan modifications, the loan servicer was proceeding on a separate track to foreclose and take away their house.

Cases are legion of frantic homeowners not getting phone calls returned and being unable to get a straight story of how much money they owe, and to whom.

Some military families lost their homes while a breadwinner was serving in Iraq, in flat violation of law.

The proposed agreement with the five largest banks that control 59 percent of the mortgage market, drafted by the state AGs, would prohibit such abusive practices, define permissible procedures, and collect a one-time penalty fee from the banks in the range of $20 billion as an alternative to the criminal prosecution that the mortgage industry so thoroughly deserves.

As the tireless Bill Black, a former senior financial regulator, keeps pointing out, in the savings and loan scandals of the 1980s, there were more than a thousand felony convictions. S&L executives went to jail. There was an interagency task force coordinating criminal prosecution, and this under the Reagan administration. And unlike the subprime disaster and its continuing fallout, the S&L collapse was largely contained to that industry, did not end up punishing homeowners, and caused little damage to the wider economy.

Instead of using their political influence to resist the proposed global settlement of mortgage abuses, banking executives should consider themselves lucky. The proposed settlement would be a two-fer. It would prohibit illegal and deceptive practices, define proper ones, and would produce some of the money needed for the principal reductions to keep some ten million Americans from losing their homes.

The Administration's Home Affordable Modification Program (HAMP) is a widely acknowledged failure. About 600,000 loans — fewer than one at-risk mortgage in ten — have gotten relief. The program, which includes a modest incentive payment to banks, is entirely voluntary to bankers.

The administration's reluctance to push for stronger medicine is rooted in the banking industry's reluctance to book losses on their balance sheets. By pretending that under-water mortgages are worth 100 cents on the dollar (until they are foreclosed) banks can pump up the stated value of their assets. But it would be far better for all concerned if banks reduced the principal amount of at-risk mortgages to roughly the actual market value of the home. That would compel honest accounting, and allow millions of homeowners to keep their homes.

The present policy, by contrast, continues the epidemic of foreclosures and the resulting drag on housing prices. The downdraft in the real estate sector, in turn, functions as a deadweight drag on the economy.

Leaks and counter-leaks suggest that the Obama administration is split on whether to strongly push for the AG's proposed global settlement. The Treasury Department, both Secretary Tim Geithner, and the Office of Comptroller of the Currency, basically are siding with the banks. Elizabeth Warren, assistant to the president and acting director of the Consumer Financial Protection Bureau, favors the plan, as does the FDIC, and the Department of Housing and Urban Development.

The banks and their Republican allies are, not surprisingly, dead set against it. But it is one thing for Republican politicians like Shelby to weigh in against policies they oppose. It is utterly shameful for them to try to block law-enforcement proceedings. Republicans like Shelby are all for states rights when it's convenient, but not when state AGs go after their banker pals.

As more and more abuses come to light, and more homeowners are fighting back against illegal foreclosures, the average foreclosure proceeding now drags on for almost two years. Just this month, the banking giant, HSBC had to suspend foreclosure actions because of questions about documentation and dubious practices.

With Republicans so explicitly in bed with bankers, and after the drubbing that the Democrats took last November, you would think that it might occur to the White House that it makes good political as well as economic sense to be more clearly aligned with the interests of consumers. But that is still contested terrain.

If the proposed global settlement does fail, bankers will face a continued legal morass, and some may yet face criminal proceedings for abuses. It would be tempting to wish that fate on an industry that is responsible for so much wider suffering. But it would be far better to get the mortgage mess behind us and get on with the economic recovery. Rather than political brickbats, the state AGs and Professor Warren deserve Shelby's thanks and Obama's strong support.

Read the original article on The Huffington Post.

Robert Kuttner is the author of A Presidency In Peril.

How lunatic-fringe do the House Republicans have to be on budget cuts before President Obama starts calling them out on their plans? Evidently, they still have a ways to go, because the administration has been mostly silent on the sheer perversity of the Republican cuts.

The cuts proposed in the House budget would devastate spending on everything from Headstart (157,000 eligible kids denied services) to Pell grants (a 25 percent cut) and dozens of other programs including job training, energy assistance, safe food and clean water.

On paper, the Republicans would cut discretionary spending by "only" 14.3 percent, but since the fiscal year will be more than half over by the time the cuts become official, the actual cuts would be fully one-fourth — a staggering cut for any program to bear and an insane economic idea during a severe downturn. These cuts have nothing to do with reasonable fiscal policy; they are pure ideological retribution against government.

You would think that at some point, President Obama would be pointing to the recklessness of these proposals in a still soft economy. But instead, the president has doubled down on his bipartisanship.
Last Friday, in Miami, President Obama could found be sharing the spotlight with former Florida governor Jeb Bush, crowing about their shared views on educational reform.

Obama declared in his weekly address:

I'm talking with you from Miami, Florida, where I'm visiting Miami Central High School, a school that's turning itself around on behalf of its kids. And I came here with Jeb Bush, former governor of this state, because he and I share the view that education isn't a partisan issue — it's an American issue.

In other words, with Republicans slashing everything from Pell Grants to Headstart, there are no partisan differences on education. So why bother to have an election? Why bother to have two parties? Why not just give up and embrace the Republican budget?

What White House political geniuses dreamed up the idea of a joint presidential appearance with Jeb Bush? Evidently the same strategists who still think that voters care about bridging partisan differences more than they care about substantive progress to end the economic slump and to restore economic opportunity.

On Sunday, speaking on NBC's Meet the Press, White House Chief of Staff Bill Daley all but invited the Republicans to define the necessary goals of budget cutting:

DAVID GREGORY: The White House says a lot about how it's meeting Republicans halfway… The reality is you are far apart on cutting spending for this particular year. How do you bridge this and avoid a shutdown in two weeks?

WILLIAM DALEY: …We aren't that far apart. We're at over $50 billion in cuts. The House passed the HR1, which was $100 billion… So we're over halfway there.

Translation: The Republicans have set the goals. The Administration will meet them halfway, and more if necessary. Never mind the content of the budget cuts, or whether deep budget cuts are sensible at all while unemployment is still at 8.9 percent.

Daley added this:

The president's had conversations with Speaker Boehner, Leader Cantor, Congresswoman Pelosi, McConnell and Reid, Senators McConnell and Reid, and his — he is not going to play the Washington games. We've had enough in the last two years. I think the American people are sick and tired of it. They're tired of the partisanship. And if anyone thinks that, out of this last election, the American people were voting for more partisanship, more saying no, I think they're, they're going to have a rude awakening in the next election.

Translation: The Democrats lost 63 House seats in the 2010 midterm election, but this was not a victory for partisanship or for Republican hardball.

Well, you could have fooled me.

The president was more candid than his new chief of staff, when Obama admitted that the Democrats had taken a shellacking. And that will continue if the Republicans stand for something and Democrats just stand for making nice. The rude awakening in the next election will be that making nice doesn't impress the voters.

On a second crucial front last week — Wall Street versus Main Street — the administration was sending mixed signals on its long awaited plan to settle legal claims against banks for fraudulent mortgage practices, in exchange for a $20 billion bank contribution towards mortgage refinancing that would allow more people to keep their homes.

The plan was the result of discussions between the administration and state attorneys general. Banks and other loan servicers seeking to foreclose on homeowners are often finding that they lack the legal right because of their own slipshod documentation and collection practices.

But the Obama administration is divided, with Elizabeth Warren's new Consumer Financial Protection Bureau pushing for at least $20 billion in penalties, which would go to fund mortgage refinancings and loan modifications. This plan, which was circulated last Thursday, has the support of many of the attorneys general and the Federal Deposit Insurance Corporation. The Treasury Department, however, is lukewarm to the plan, and the Office of Comptroller of the Currency, based at the Treasury, has put out leaks disparaging the plan as anti-bank. Industry leaders have been quoted as calling the plan a "shakedown."

In fact, the plan would help financial markets surmount a legal tangle of the banks' own making. Just last week, another of the largest lenders, HSBC, admitted major "deficiencies" in its handling of mortgages, and became the latest bank to suspend foreclosures. To date, according to the Mortgage Bankers Association, more than four million homes are in foreclosure, and another 8 million are 90 days or more delinquent and headed for foreclosure. This state of affairs drags down the balance sheets of banks and homeowners alike, and sandbags wider economic recovery. The existing voluntary plan for mortgage refinancings, HAMP, is widely considered a failure.

Here is a case where a strong regulatory presence is necessary both to stem a lingering economic catastrophe and to normalize loan documentation practices. But any regulation worthy of the name is now considered radioactive. With Obama's strategy of extending an olive branch to both the Republicans and to corporate elites, evidently all that executives have to do is to disparage necessary regulatory policies as "anti-business," and many in the administration are inclined to back off.

Daley, formerly a lobbyist for JP Morgan Chase, epitomizes the Administration strategy of not uttering a critical word about the Republicans and getting even cozier with the very banks that caused the financial collapse. This approach does not solve real economic problems. It lets both Republicans and bankers off the hook for practices and policies that are justifiably unpopular, and is the opposite of presidential leadership.

The Administration's new slogan is "Winning the Future." A good place to start would be to win the present.

Read the original article on The Huffington Post.

Robert Kuttner is the author of A Presidency In Peril.

My friend, the late Mike Harrington, used to describe his politics as "on the left wing of the possible." It's a fine aspiration. But if anything, economic problems have become more politically intractable since Mike died in 1989.

Scanning the various economic ills afflicting our Republic and its citizens, it's evident that nearly all of the solutions lie beyond what is currently deemed thinkable in mainstream politics — beyond the left edge of the possible.

It's not that my own views and values have become more radical in two decades. What has changed is that the American political center has shifted further to the right, while the twin assault on the good society by the private financial system and the organized right has become more intense.

There are only two possibilities: either we act to expand the boundaries of the possible, or we suffer the consequences.

Consider these five prime economic challenges:

Economic Recovery and the Budget. We are told by Beltway solons of both parties that the prime malady harming the economy is the budget deficit. But nobody can explain how fiscal austerity will promote economic recovery. On the contrary, the more we cut, the more we retard economic recovery and the more we remove the cushions that make the recession slightly more bearable for regular people.

Out here in the real world, the problem isn't the deficit; it's the recession, the high rate of joblessness and the stagnant earnings.

The solution? Significantly more public investment to get the economy on a faster road to recovery and to generate more and better jobs. In the short run, the deficit increases. But over time the economy grows faster and the debt burden recedes.

Unfortunately, both parties are mainly jousting over budget cutting. We have the party of cuts versus the party of deeper cuts. Neither is putting forth a serious recovery plan. The win-win solution that benefits Main Street is beyond the left edge of the possible.

The Health System. Once recovery comes and tax receipts return to something like normal (assuming that the right doesn't further gut the tax code), America doesn't have a deficit problem; we have a health system problem.

President Obama's Affordable Care Act insures more people, but does so through the private insurance system, and doesn't reduce overall health care costs. The Republicans would cut costs by cutting care.

Every other wealthy nation insures everyone for about 10 percent of GDP. Our system leaves out some 50 million people, and costs 17 percent of GDP. That's a difference of seven percent of GDP, far more than the structural budget deficit.

The solution? National health insurance, of course; or if you'd like to sound more like motherhood and apple pie, Medicare for All. Polls show that large majorities of Americans support it. But in mainstream politics, national health insurance is considered beyond the left edge of the possible (makes you wonder who controls mainstream politics.)

The Banking/Housing Mess. Seven million Americans are on a path to foreclosure, one home in three has more mortgage debt than the value of the home, and housing values declined last year in 18 of the top 20 metro areas. Home ownership as a ticket of lifetime asset accumulation is being denied to the next generation.

The Administration's relief program, the Home Affordable Modification Program or HAMP, is voluntary to the banks. It is helping less than one out of ten homeowners in trouble. Stronger medicine to keep people in their homes is rejected because it would force banks to recognize losses. So foreclosures continue and housing prices continue to sag.

The solution: give bankruptcy judges the power to order reductions in mortgage principal owed. Use leverage on banks rescued by government to insist on deep refinancings, so that distressed homeowners are not forced onto the street. In the long run, banks would incur less loss, neighborhoods would be less blighted.

Are you kidding? The banks would never sit still for this, and they own too many legislators of both parties. The common-sense solution is in the usual place — beyond the left edge of the possible.

American Economic Competitiveness in the World. We are getting our clock cleaned by Chinese state capitalism. "We," in this case, is the American economy. American-owned business is doing just fine.

The rules of the trading system, as indulged by U.S. presidents of both parties, allow China and other mercantilist nations to subsidize their industry, and to make American business an offer it can't refuse — locate in China on our terms, and you get state subsidies and docile workers. All you have to do is give sensitive trade secrets to your new Chinese partners, who will soon displace you.

The U.S., uniquely among western nations with the exception of Britain, doesn't mind if domestic industry gets hollowed out. Industrial policy is considered a sin, but it's okay for our fate to be an artifact of China's industrial policy.

The solution: one set of rules for all nations that benefit from the trading system, and strategic investments to rebuild U.S. industry.

Sorry, neither party will touch that one with a rake — beyond the left edge of the possible. Business may complain a bit about intellectual property theft, but basically the business elite likes the present deal just fine.

Petroleum and Global Climate Change. Rising oil prices, reflecting revolutionary events in the Middle East, have dealt another setback to the shaky U.S. economy. Imported oil adds hundreds of billions of dollars to our trade deficit, and contributes to escalating global climate change.

You would think that investment in clean, domestic, job-creating, revolution-proof renewable energy, would be a no-brainer.

But that sensible policy is in the usual place, beyond the left edge of the possible.

Every one of these areas has in common this reality: the longer we delay the sensible solution, the more we suffer. Only bankers, corporate elites and oil companies gain. Tea parties benefit from the citizen confusion and frustration.

None of these alternative policies is extreme. They are simply impossible given the present constellation of American politics. Rather, it is the politics that pass for mainstream conventional wisdom that are extreme — in the sense of extremely unhelpful.

I draw one simple conclusion. We need to take back our politics, so that what is sensible is also possible. Maybe, just maybe, events in Madison and elsewhere are the beginning of that process.

Read the original article on The Huffington Post.

Robert Kuttner is the author of A Presidency In Peril.