The Economic Café: Beutner, Caruso and Obama’s New Mojo

It’s been a busy, contentious couple of weeks on the economic front. As part of an ongoing series of conversations about the economy, politics and the future of Los Angeles, Frying Pan News asked USC Professor and economist Manuel Pastor to separate the good, the bad and the ugly.

Frying Pan News: Did President Obama’s State of the Union speech reclaim his status as a progressive populist?

Manuel Pastor: It certainly seems that he has his mojo back. This speech was one of the first times he was able to frame what he is doing in a way that makes sense. One element of the speech that was important was the concept that success come from teamwork, wrapping the idea of interdependency into the national narrative. The second thing is he was very clear that concerns about inequality do not stem from people begrudging others’ economic success; he rejected the claim of class warfare and instead argued that a progressive tax policy is simple common sense.

He was benefited, by the way, by the release of Mitt Romney’s tax returns, which revealed two things: the extraordinarily low tax rate he has been paying because of the privileged way his income is treated in the tax code, and the fact that there is no meaningful way you can claim that those tax breaks actually lead to job creation – it’s passive income from investments made a long time ago.

FPN: What struck you about his economic proposals?

MP: Obama lifted up the importance of manufacturing, and as we know manufacturing has been essential to the creation of the middle class and a unionized working class. There has been an assumption in the U.S. that manufacturing is going to disappear entirely to lower-wage countries, but that makes little sense when you look at a country like Germany, where about a fifth of the workforce is in manufacturing. The challenge is how do we encourage advanced manufacturing.  So he talked about how you should get a tax deduction if you create jobs here and get no deductions if you create jobs in other countries. He talked about rebuilding America’s infrastructure, and how there has never been a better time to build. And he talked about income tax policy that squares burdens with resources. It’s not a perfect set of proposals but the Obama that people were excited about in 2008 is back.

FPN: The day after Obama’s speech, local business writer Mark Lacter asserted that there isn’t much that local government — or government in general — can do to grow the economy. Is he right?

MP: Here where he’s wrong: Government, including local government, can create jobs – through spending, through promotion of industry, through land use and planning powers that can facilitate job creation. Government also has an indirect role in encouraging private sector investment  that can create quality jobs – or even creating more directly the conditions that can resuscitate private investment. No one who is working in Chrysler or GM would deny that government can create jobs – the government brought them through bankruptcy in record time, streamlined the companies to make them more competitive and helped save an entire industry and region of the U.S.

At the same time, here’s where progressives should be listening:  We sometimes think only about the public sector and what it can do and not so much about how to encourage the high-road private sector. We need to be thinking more about how to integrate public and private sector approaches to produce quality employment.

FPN: Last week L.A. mayoral candidate Austin Beutner rolled out some of his economic proposals, including elimination of the city’s business tax. Is that a good idea when the city is already struggling with budget deficits, service cuts, layoffs and wage and benefit reductions?

MP: It’s not necessary. There’s little evidence that taxes have any impact on companies’ decisions to locate here. More important is quality of life and the quality of the workforce, both of which require resources. And  one of the frustrating things about Beutner’s proposal is that  he didn’t explain how he would refill the city coffers if he eliminated the business tax. We’ve been there before at a national and state level– and it isn’t pretty. And already many people working for the city have taken big hits in terms of not getting raises and facing reduced pensions and more furloughs. And if you cut back on resources to the city, how will that affect safety, which does impact businesses‘ decisions to locate here?

I would acknowledge one criticism Beutner made of city policy: There is a need to further streamline  the regulatory process for small business. One thing progressives don’t always realize is that the labyrinth of regulations can make it more difficult to move rapidly, so anything we can do to make it possible for business to move forward by streamlining regulation is a good thing. That doesn’t mean more lax regulation, but making it easier to move through the process is a good thing.

But if this is the first salvo in a public relations campaign arguing that the real way to grow the economy is to shrink the government, this will not be helpful to a serious debate about the central issue of our time: coupling economic growth with a targeted strategy to reduce poverty and create more platforms to the middle class. Study after study now shows that targeting equitable opportunity is key to economic growth and we should be asking all the candidates how they plan to achieve that.

FPN: Is there anything in his plan to deal with the city’s huge number of working poor and the need to create good jobs?

MP: Beutner has some ideas I disagree with, others we should pay attention to. Electric bus manufacturing is intriguing, particularly given government mandates to reduce pollution and address climate change, upgrading the port is something people will agree with and there are definitely ways in which all that ties to the creation of quality jobs. Also, while some will rightly disagree with his conclusion, he’s raising key issues about the costs and benefits of high-speed rail versus other sorts of transit investments.

Here’s the rub: Beutner essentially believes that we need to generate economic growth and that this will indirectly deal with working poverty. My view and that of most progressives who have seen trickle down instead become trickle away is that you have to build dealing with working poverty into your economic model – you have to know what kind of jobs you will create, and how you will make sure that low-income communities benefit. But I’d rather see the other candidates be in a debate about the role of government in addressing prosperity and inclusion with Austin Beutner than with, say, Rick Caruso, who, if he runs, is likely to just complain about taxes and government regulation. Indeed, Beutner is a business-friendly candidate talking about using government resources and strategies to create jobs, which puts the lie to the statement by Lacter that government can‘t grow the economy.