Your State of the Union Prep: Economic Outlook for 2011

The Commonwealth Club hosted a private, off-the-record panel discussion on the U.S. and California economies, prior to the member’s-only Bank of America/Walter E. Hoadley Annual Economic Forecast luncheon on Friday, January 21, 2011. Panelists included former U.S. Representative and California State Finance Director Tom Campbell, former Semiconductor Industry Association President George Scalise, Public Policy Institute of California economist Dr. Jed Kolko, and Brian Riley, managing director of Merrill Lynch.

In light of the expected focus by President Obama on jobs and economic growth in tonight’s State of the Union address, we thought some of the ideas and observations of the panelists last Friday might be of interest. Because the session was not for attribution, we have not identified the individual sources of the observations below.

• In California, increases in output are still outpacing employment growth. The latest statistics on California unemployment rates show a recent rise: the jobless rate in the state now stands at 12.5 percent.

• The semiconductor industry experienced 30-percent growth in the past year, and technology and electronics remains California’s largest export industry. There was 10-percent growth in both the film and tech industries overall. But with the manufacturing companies mainly investing in capacity overseas, the future picture is not so rosy. In the longer term, based on decisions that have already been made and are being made, the growth and the jobs will occur outside of California and much of that outside of the United States.

• The federal budget deficit is extremely worrisome. Currently 38 percent of our budget is borrowed. The national debt has escalated to $45,000 today for each person in the United States. This is about triple what it was in the mid-1990s. Investment by business, particularly by small businesses, is driven by future profit expectations; large federal budget deficits increase uncertainty about the future stability of the economy. The result — businesses invest less and thus hire fewer workers. This, in turn, impedes the economy's recovery.

• The budget deficit must be addressed through Social Security and Medicare means-testing, probably also through cuts in defense spending. Unfunded pension liabilities must also be addressed.

• One thing the federal government could do to encourage businesses to hire employees would be a moratorium on costs to hire new employees, for a year. The cost of a new hire now is $10,585 in addition to salary, with required benefits and other costs imposed by regulation.

• The government must create incentives for companies to build their facilities and base their business in the United States. A five-year tax holiday for companies would have a dramatic impact. The economic activity caused by the resulting job creation would compensate for the lost tax revenue three to four times over.

• There is $1.8 trillion of cash on hand in the private sector. Economic policy needs to take the appropriate steps to increase confidence and certainty, such as reducing the deficit and creating incentives for businesses to expand and do it here in the United States.

• The industries that have been hurt the most will be the sites of most growth in the future – e.g. housing construction.

• Expanding sectors will include professional business services. Health care and nursing will be important, due to the aging population.

• Agriculture is still the largest industry in California, but government policy is getting in the way. The limits of access to water (federal regulations) and labor (immigration) are limiting the growth of this industry.
• The underfunding of higher education in California is a serious threat to our long-term leadership in technology, medicine and the other fields in which the United States and California have been so successful.

Eliot Spitzer on Confronting the Financial Crisis

Former New York Governor Eliot Spitzer came to The Commonwealth Club of California in San Francisco this week to talk about "The Cataclysm of 2008-2009."

Spitzer, who served as New York State's attorney general before assuming the governorship, had a reputation as AG for going after corporate white collar crime and Wall Street figures. That history has earned him more than a few enemies in the business community, but it also gave him a point of view on the large-scale financial meltdowns, chicanery, and mistakes that have come to light in the economic crisis.

Listen to audio of his speech here.

Club Speaker Loses Magazine: Gourmet Closes

Condé Nast is one of the big powerhouse magazine publishers in the world, home to GQ, Vogue, Architectural Digest, Glamour, The New Yorker, and many others. As of today, Conde Nast publishes several fewer titles, having given the axe to Cookie, Modern Bride, Elegant Bride, and -- in a move that shocked the publishing and the foodie worlds -- Gourmet magazines. The move followed a review of the company by an outside consultant firm, McKinsey.

Ruth Reichl, editor of Gourmet since 1999, spoke at The Commonwealth Club in Silicon Valley just last week, where she talked about some of the major trends in American cooking, such as healthier food and increased international influences.

But Reichl couldn't beat out a different trend in America, that of a precipitous drop in advertising revenue. Not all magazines are primarily supported by ads; some get more of their revenue from newsstand and subscription revenue. But advertising remains the lifeblood of most of the big glossies, and that's Condé Nast's field of play. It publishes magazines filled with high-priced ads from luxury goods and services companies around the world. And until recently, Condé Nast was famous (or infamous among its peers) for never deigning to discount ad space; if you wanted to advertise in its magazines, you paid full price. In return, the magazines were known for their high quality photography, printing, journalism -- and perks, such as limousines for editors. (If you have seen The September Issue, the new documentary about Vogue Editor Anna Wintour and her top staff, you get the idea.)

An informal survey by this writer suggests that advertising pages have begun to rebound from their lows of late spring and summer, but it will be some time before publishers are back in the black.

As for Ms. Reichl's future, it's not yet known, though it's still possible her fans will find her within the surviving Gourmet family. According to Advertising Age:

Conde Nast didn't have an answer Monday for the number of jobs that would be lost as a result of the moves, but the titles' mastheads suggest massive cuts are likely. Gourmet alone lists some 100 staffers, although the company will presumably keep some to help run Gourmet's books, TV and recipes activities, which will continue. It wasn't immediately clear whether Ms. Reichl or VP-publisher Nancy Berger Cardone will stay in some capacity or leave the company. Cookie's masthead numbers closer to 75.

-By John Zipperer
VP of Media & Editorial, Commonwealth Club of California

Christina Romer: Health Care Reform Is "Good Economic Policy"

Citing a series of benefits to the nation's businesses, public coffers and individual citizens, Christina Romer -- chair of President Obama's Council of Economic Advisors -- made the case for tackling health-care reform.

Romer, speaking Monday, June 8, 2009, at The Commonwealth Club of California in San Francisco, gave some backing to people who've been seeing some recovery from the nation's economic crisis, at least if one measures that by her workload. She said that in the first few months of her tenure in the Obama administration, she dealt with a number of crisis-related topics that were all in her professional comfort zone: banking, fiscal stimulus, recession. But after his first 100 days in office, Obama announced his intention to tackle health-care reform, which led Romer to come up to speed on health-care economics.

"I've gone from being a positive but somewhat passive advocate of health-care reform, to being a passionate advocate," she said of the experience.

She worked on a report that looked at the benefits and costs to the country of reforming -- or not reforming -- its health-care system. She said that by the year 2040, health-care expenditures could be as high as one-third of the nation's economy if the system isn't reformed. A failure to reform, she said, could result in stagnating take-home pay (as insurance premiums eat up an ever-larger share of income) and the number of uninsured could rise from an already-alarming 46 million to 72 million people.

But if the country can meet the president's goals of slowing the growth of health-care costs and expanding coverage to the uninsured, Romer said that significant amounts of money could be freed up for investment in other things, savings will increase (which could also result in lower interest rates), unemployment will drop, and and the inflation rate would be lower.

"Good health-care reform is good economic policy," she summarized.

You can read a copy of the report via a link on this post on the White House blog (yes, they have one, too). A critique of the report's approach from libertarian Michael Tanner of CATO Institute is here. Politico.com reports on the political give-and-take over the report.

What do you think? Leave a comment below and join the conversation!

Robert Heller: How to Heal the Financial Markets

The economy and financial system may look like messes today, but they can be fixed. Robert Heller, a former governor of the Federal Reserve Board and the former CEO of VISA U.S.A., told The Commonwealth Club on April 29 that there were several things that needed to be done to restore confidence in our financial markets.

First, we need to "sharply limit or even eliminate" the ability of certain financial institutions to take speculative positions. Second, let corporations choose a set of rules under which their securities are traded (to, for example, require buyers to hold their securities for a week before reselling them). Third, establish a safe pension system.

Find out how he thinks these things will have an impact. Watch the video:

Are Positive Economic Signs Helping Ordinary Americans?

While some people point to Wells Fargo's surprisingly healthy first quarter last week (Noriel Roubini said in Time magazine last month that Wells Fargo was one of the weaker banks; what happened?) as proof the recession has bottomed out, unemployment is still 8.5 percent and likely rising. A chipper AP story reports that the first week of April had the lowest amount of new jobless claims in months. One good week in the middle of 40 may not be a great indicator, and its impact on the unemployed remains to be seen. This New York Times piece speculates that the strong Dow could be covering up significant problems in the overall economy.

This blog has quoted economist and frequent Commonwealth Club speaker Robert Reich on numerous occasions, but he, along with Paul Krugman, have consistently spoken with clarity and caution regarding the state of the economy. In a Salon article Monday, Reich again tempered the media's newfound bullishness and believes the economic perkiness is due to the massive cash infusion issued by the Treasury.

But we're not at the beginning of the end. I'm not even sure we're at the end of the beginning. All of these pieces of upbeat news are connected by one fact: the flood of money the Fed has been releasing into the economy. Of course mortgage rates are declining, mortgage originations are surging, and people and companies are borrowing more. So much money is sloshing around the economy that its price is bound to drop. And cheap money is bound to induce some borrowing. The real question is whether this means an economic turnaround. The answer is it doesn't.

The inclusion of the theory that the recent bump in the Dow is due to the printing of new money was non-existent in most news coverage. Instead, the message in nearly every major story last week, save for a very cautiously optimistic article in the Boston Globe Friday, is that the financial sector is doing well and could indirectly help the pocketbooks of struggling Americans. It's true that short- and long-term interest rates are unbelievably low, but will it translate into more construction of homes? The inventory of already built new homes is high, and recently foreclosed homes are even higher. This could be where Wells Fargo's announced $190 billion in new loan applications are emanating. Once the glut of inventory begins to deplete in relation to low interest rates, where will this segment of the economy look like?

The attitude of much of Wall Street is to keep things positive; to keep the wheels of finance rolling. But it's likely that more than a half million additional workers will get a pink slip this month. Add to this the previous 5 million, and you have quite a segment of the population scrimping and saving and not purchasing goods and services. Until Americans see their own personal economies picking up, the overall mental health of the economy will not be viewed as looking as rosy as recent news reports might be leading people to believe.

--Steven Tavares

The Media and the Recession: Dr. Duffy Sparks HuffPo Debate

Commonwealth Club President and CEO Dr. Gloria Duffy touched off a spirited debate among Huffington Post readers with her recent article on that site, "Bad News Bears: Economic Fear Mongering by the Media." As of this morning, 60 responses had been posted to the article's comments section. In true Internet fashion, the comments range from hearty agreement to vociferous disagreement.

Read the post yourself and join the discussion!

Obama Ousts Wagoner from GM

President Barack Obama has reportedly requested and received GM CEO Rick Wagoner's immediate exit from the company he's headed for nine years (and where he's been employed for three decades).



The move comes one day before Monday's announcement by the White House of its plans for the auto industry, which has received billions of dollars in aid from taxpayers but has not yet satisfied the Obama administration's criteria for submitting a workable recovery plan. Chrysler and GM have between them taken $17.4 billion in government money, and they're seeking more than $21 billion more.

When Wagoner made a high-profile speech to The Commonwealth Club less than a year ago, on May 1, 2008, the executive touted the company's efforts at adopting green technology and responded to audience questions about GM's commitment to delivering on those promises. (See video, above.) At the time, the big question was the price of oil, which had spiked at more than $140 a barrel; that would, of course, fall, but only as the economy went into a tailspin. (Read a PDF of Club President and CEO Dr. Gloria Duffy's column about her ill-fated GM electric car, the EV-1, a column that Wagoner referenced in his address to The Club.)

By the time many of you have read this blog posting, the Obama recovery plan for the carmakers will have been announced. Will it help drag Chrysler and GM out of the murk and back into profitability? Will it be a money-pit for taxpayers? What would you suggest the government do? Leave a comment and join the discussion.

Helicopter Ben: Printing Money

"Helicopter Ben is still throwing money out there," said conservative businessman and Forbes editor Steve Forbes in his August 7, 2008, speech to The Commonwealth Club.

Forbes was referring to Ben Bernanke, the chairman of the Federal Reserve and one of the two key figures in the government's response to the credit crisis and the please-don't-call-it-a-depression recession (the other figure is the Treasury secretary). Forbes (see video below) also said, "Ben Bernanke once wrote academic papers saying the way you deal with a crisis is you print more money, throw money at it. He even made the analogy that Milton Friedman did to throwing money out of helicopters, which is why his name inside the Fed is Helicopter Ben."

Forbes was speaking back in August, when the full extent of our economic troubles was not yet known. Now comes news that Bernanke announced plans for increasing Fed Treasury purchases and mortgage-backed-securities purchases to the tune of more than $1.2 trillion. The Fed basically makes its own money, so it's printing the money and pumping it into the economy to try to unfreeze credit markets and improve the health of the financial system (which Bernanke told "60 Minutes" this past Sunday was key to recovery this year).


Forbes isn't the only person who raises an eyebrow at efforts to vastly increase the money supply. The same concern is behind the growing criticisms from the governments of Germany (a country that has strong memories of the disaster wrought by runaway inflation during the Weimar Republic) and France.

Put simply, the fear is that printing lots of money right now might bring an earlier end to the recession, but it will be nearly impossible to shrink the supply at just the right amount at just the right time at just the right speed during the recovery to prevent runaway inflation.

Is it a case of the lesser of two evils? Can Bernanke -- an expert on the Great Depression -- successfully manage the transition to recovery? Will the $1.2 trillion be enough to make a difference? Leave a comment and join the discussion.

How to Win a New Job

When the country is in a severe recession, it's a good time to have a job. The trick sometimes is holding onto it.

Johnson Publishing, the Chicago-based home to such long-standing magazines Jet and Ebony, recently announced that it was reorganizing its operations and that current staffers would be allowed to reapply for their jobs. The company says it is part of a process of repositioning the company "to service the changing media environment."

Johnson's changes are not unique, of course, either in the media industry or in business of any industry. Every week and almost every day brings news of more layoffs, store closings, and cutbacks in hours worked. The country has gone through downturns before, and layoffs are not unusual. But in past recessions, the downturn was often in specific sectors, hitting hardest some whil leaving others only lightly or not at all damaged. One could leave a job and expect to find employment elsewhere. This time, the carnage is widespread.

Consider one young scientist we know who moved to the Bay Area in 2001 after getting his degree from an Ivy League school. After two months on the job, and while still paying off moving expenses, he was laid off when his company was purchased and went through a round of "servicing the changing [science] environment," so to speak. But within two weeks, he had landed a new job -- and a better-paying one, at that.

But just this week, his company laid off about a quarter of its work force, and those employees will have to compete with every other laid-off scientist if they search within the science markets for a new job, and if they start looking in other industries, they'll have to do jobforce-battle with out-of-work real estate agents, store clerks, sales people, and, perhaps, postal carriers. There's no schadenfreude when everyone's in the same boat.

The Bay Area is still filled with enough people who remember the layoffs following the collapse of the dot-com bubble. And once again, people are looking for information and leads on new careers, new jobs, new industries. The Commonwealth Club's Inforum division held a green-jobs fair on January 26, drawing an overflow crowd (literally out the door, down the stairs and onto the sidewalk). See ABC7's report, video and photos here.

The massive turnout demonstrated both the thirst for help with job-seeking and the eagerness to find the next big thing that wil power a career and an economy. In this case, it's the new technologies driving the green business future that many people, including President Barack Obama, have been touting. People who missed that event will be heartened to know that Inforum will produce another jobs fair in the near future, and will remain focused on how the economy is impacting people's lives and what they can do about it.

Activist and self-appointed "green jobs guru" Van Jones made a repeat appearance at The Commonwealth Club on February 2. See the video embedded above for his previous appearance at The Club, when he and California legislator Darrell Steinberg discussed their vision for helping the economy by helping industry to help the environment.

So there is help out there. But people in the Bay Area may be finding that the best results will come via the region's famous networking opportunities, such as Inforum job fairs and meeting the people who are building the new economy.

Economic Forecast: An Interesting Year Ahead

Former Clinton administration Labor Secretary Robert Reich gave the annual Bank of America-Walter E. Hoadley Economic Forecast speech last month to a sold-out crowd of people curious about what's going to happen in 2009. Reich tried to allay the audience's worst fears, but he did not sugar-coat the basic message, that he believes we are in for a rough recession -- he mostly avoided the "d-word" -- but that effective action by Washington could shorten the pain.
Watch the excerpt above to see his message. And Commonwealth Club members should keep an eye out for their March magazine in a few weeks, which will feature a Reich forecast cover story, as well as some valuable looks-back at previous economic times of trials in 1980 and 1933.

Rich Lose Billions While the Poor Get Poorer

THOSE ALREADY ON THE BOTTOM ARE TAKING A GREATER HIT

Staggering amounts such as $700 billion for the financial service industry and the relatively paltry $15 billion proposed for the auto industry pale in comparison to the estimated $1.7 trillion the recession will exact in future losses by the continuing plight of America's poor.

A study released today by a bipartisan child advocacy group takes into account that children born in poverty tend to become lower wage earnings and suffer from poor health without the help of consistent health-care coverage.

The Center on Budget and Policy Priorities said last month that more than 10 million adults and 3 million children could dip into poverty during the current economic downturn and may further hamper those still reeling from the previous recession of 2001.

A story from earlier this year when the state of the economy was bad, but not yet in the free fall that is seemingly occurring today, explained that while the economy expanded after 2001, the number of those in poverty increased by over a million.

This unfortunate phenomenon was touched upon last year by Nobel-winning economist and New York Times columnist Paul Krugman during a speech at The Commonwealth Club where he said, "There have been huge gains at the top of the income distribution. A few people got much more richer, and that took all or almost all of the gains."

Krugman also explained a notion that, a year later, seems quite prescient: "We are fully back to the levels of inequality not seen since the 1920s. It's an extraordinary thing."

As many media types struggle to pin a moniker on this "financial crisis" (this one has nearly runs its course), some are now calling it the "Great Recession." Either way, it is the poor who are shoulder the biggest burden.

The Department of Labor said last week that more than 573,000 Americans applied for unemployment insurance. Indiana's fund is insolvent and California, New York, Ohio and Rhode Island may not be far behind. If government aid is struggling to keep up with demand, it is likely non-profits that fill in the cracks are having trouble keeping their doors open.

Nearly half of the non-profits in the Twin Cities area of Minnesota are resorting to staff cuts because of higher costs and dwindling donations.

A feature story from the Rocky Mountain News illustrates in detail the problems the poor and local non-profits have keeping people warm and nourished. Similar problems are surfacing in the San Francisco Bay Area.

Just last September, an Alameda County non-profit that administered health care to about 1,000 East Bay children closed its doors – and this is in one of the country's wealthier counties.

Gaudy figures on the pages and web sites of the newspapers' business sections may titillate headline makers across the nation, but it seems during a recession, the poor are the canary in the coalmine.