The Foundations of Economic Recovery and Growth: State of the Union 2010

[LEESUN]

By Michael Ettlinger, Heather Boushey | January 28, 2010

The president laid out his vision last night for a more thriving,
competitive U.S. economy. He reminded us in his State of the Union
address that we have already lived through a lost decade—the 2000s saw
no income gains for the typical American family—and we cannot afford
another. He offered economic plans to address both the immediate
crisis and our long-term needs. Job one, of course, is recovering the
jobs lost in the recession through intensive interventions. But even
if the economy is back on stable footing, there’s more to be to done
to get the country on the long-term growth path from which we so
greatly departed in the last “lost” decade.

In describing the elements of his plan for the long term, he held to
the elements of the five pillars that form the foundation of economic
growth, which he articulated in a speech he gave at Georgetown
University on April 14, 2009: reforming regulation of the financial
sector, new investments in education, new investments in renewable
energy and technology, new investments in health care, and achieving
all this with a fiscally responsible federal budget. The focus
throughout the speech was the impact on the middle class, in
particular, including the announcement of several policies developed
by the Middle Class Task Force led by Vice President Joe Biden.

Regulation

The descent into the Great Recession established without a doubt the
necessity of establishing a set of rules and regulations to guide our
nation’s financial structure. It was a disdain for regulation by those
tasked with enforcing the rules—and an incoherent regulatory structure
that allowed them to get away with it—that caused the financial crisis
and precipitated the Great Recession that has left more than 15
million Americans unemployed and searching for work. We cannot move
forward on a path of sustained economic growth until we have addressed
the lapses in financial regulation. Delaying on this policy agenda is
only hampering economic growth, and President Barack Obama recognized
this in his speech last night. Financial firms need to know the new
rules on leverage requirements, their consumers, and what kinds of
businesses can be combined under one roof, so that they can adapt
their business models and get back to the important role they play in
the economy of providing credit and markets.

Energy and climate

Addressing the twin issues of energy and climate is absolutely
necessary for our economic competitiveness. As the president pointed
out last night, the nation that invests in innovation will have the
competitive advantage. He laid out both a long-term and a short-term
plan. He laid out a long-term vision for investing across the value
chain—not just in innovation in alternative energies, but also in
production and improving efficiency. And in the short term, we could
be doing more to lay the foundations for long-term economic growth by
doing more on the issue of efficiency. The HOME STAR program that
provides consumers with rebates for investments in energy efficiency
not only begins to address our long-term issues, but spurs demand in
the short term, which boosts much-needed job creation.

Health care

The lack of affordable health care for all is also hampering our
economic growth, primarily through rising costs, which push up
government spending and add to our long-term deficits. Employers and
employees also suffer from negative effects of the broken system, and
these add to our economic woes. Uninsured Americans cost our health
care system much more than providing preventative care. Rising health
insurance costs burden employers and employees. But health care reform
can help improve health care and create jobs in the long run. Passing
health insurance reform must not fall from our agenda—our nation’s
families as well as the economy depend on it.

Education

The president also expanded on the importance of education. The
importance of education to our nation’s economic success isn’t
controversial. Resources and reform are the key. His speech addressed
the entire gamut of education, but the president’s particular focus on
community colleges is welcome attention to an oft-neglected area. The
large cadre of working learners that need skills enhancement are vital
to our economy.

The deficit

The president also spoke about the deficit. He described the
lamentable fall from a surplus of $200 billion in 2000 to the over $1
trillion deficit that his administration inherited. This degeneration
of our fiscal situation was caused primarily by irresponsible tax
cuts, going to war without paying for it, and other expansions of
unpaid-for spending under the last administration—all compounded by
the recession. The president rightly did not call for any moves to
address the deficit in 2010—when economic recovery is so fragile. The
most laudable proposal was his re-affirmation of his intention to let
the Bush tax cuts on those making more than $250,000 expire. His call
for freezing a piece of discretionary spending was, however,
disappointing. There is no reason to target this area, and the savings
are likely to be quite modest. We’ll have a fuller picture of how this
proposal fits in with the broader budget when that is released on
February 1, but at this point it seems ill-conceived. The commitment
to a budget commission may help in reaching an agreement on the very
tough decisions needed to address our budget challenges, but it
doesn’t make those challenges any less substantial. Ultimately,
Congress and the president will have to act.

Congress has made significant progress this year on much of this
agenda. Both the House and the Senate have passed health insurance
reform and the House has passed financial regulation and an energy and
climate bill. Education has also been addressed. The challenge now is
working through the details to get bills to the president that he will
sign.

As the president laid out last night, each of these issues are
critical to our economic future and must be addressed for the United
States to remain an economic powerhouse. But the president also
acknowledged that our primary goal must be to create jobs in the short
term.

Job creation

The president laid out his ideas for promoting immediate job growth:
$30 billion from TARP for community banks, a jobs tax credit for small
businesses who hire workers or raise wages, eliminating the capital
gains tax credit on all small business investment, putting Americans
back to work building infrastructure, and rebates for home efficiency.
Funneling TARP funds toward immediate job creation makes sense; those
funds were intended to restore our nation’s financial health, and
without jobs, consumers will continue to face challenges, which is
hampering our nascent recovery.

What our economy needs now is another boost in spending. It is
unlikely that tax breaks aimed at investment will make a significant
contribution to boosting jobs in the short term. Businesses are not
hiring because they do not see sufficient demand for their goods and
services. Creating tax breaks on the investment side does not solve
this problem; what we need is to take actions to boost demand. A basic
step to boosting demand is to get the unemployed back to work.
Employing more people doesn’t just get those workers back on the job;
it affects the momentum of the economy, which ultimately creates the
cycle of private-sector job creation that we need. Unemployed workers
have few dollars with which to purchase goods and services, and giving
them a job injects an immediate boost to their family budget and our
national economy. We need to build on the successes of the American
Recovery and Reinvestment Act and use scarce federal dollars in the
most efficient way to boost demand and get the unemployed back to
work.

As the president mentioned, the House has already passed a jobs bill
that would redirect $75 billion of TARP funds toward infrastructure
investment and aid to states, which would immediately boost demand in
the economy. This is important legislation, and the Senate should match
—and increase—that investment. A record number of Americans are out of
work and experiencing excruciatingly long job searches—4 in 10
unemployed workers have been pounding the pavement searching for a new
job for at least six months—and we need to do more to get people
quickly back to work. Infrastructure investment and aid to the states
must be a top priority, along with direct investments in job creation
through initiatives such as expanding our national service programs.

The president and vice president laid out a list of key investments
for the middle class earlier this week, which signaled a recognition
of the profound transformations that the American workforce and
American family have undergone over the past 40 years. As the Center
for American Progress first highlighted in "The Shriver Report: A
Woman's Nation Changes Everything," two-thirds of families with
children are headed by two working parents or a single working parent.
Our economic policies must be responsive to this reality. The
president's announcement of a major new investment in childcare for
America's working families and a down payment in helping families
support aging relatives is a critical first step toward job stability
for the millions of American workers who are one step away from losing
their job due to breakdowns in family care arrangements.

But this is only a first step. Workers need access to a variety of
labor protections and on-the-job benefits in order to fully address
the very real middle-class anxieties around the day-to-day challenges
of managing the dual responsibilities of work and family. Individual
workers and families have been bearing the full responsibility of
managing work-family conflict, which cannot continue. The government
is doing the right thing by addressing care issues, but employers
should also recognize that these policies are good for their employees
as well as good for business and should be a part of the solution.
Workplace flexibility, paid family leave, and paid sick days are the
next key steps that we look to this administration to move forward.

The State of the Union address significantly offered a re-affirmation
of the president’s commitment to the plan for achieving long-term
economic growth that he developed during his run for office and
articulated in his April 14 speech. It is a vision for the economy
that the Center for American Progress has long favored. Regulatory
reform, health care reform, a clean energy economy, and education—all
achieved in a fiscally responsible way—are the keys to a future
American prosperity. But to get there, we need to start by creating
jobs now.

* Source: http://www.americanprogress.org/issues/2010/01/sotu_economy.html

Michael Ettlinger is the Vice President for Economic Policy at
American Progress, and Heather Boushey is senior economist at the
Center for American Progress.