Republican presidential candidate Mitt Romney has taken a beating over the past few weeks regarding his long tenure at the private equity firm, Bain Capital. After distinguishing himself from President Obama as someone who truly knows how to create jobs, Romney likely did not expect to have his business credentials challenged—let alone by his Republican rivals. Among other things, Bain has been accused of “looting” companies and destroying jobs and lives along the way.

Some have sprung to Romney’s defense, often relying on the idea “creative destruction,” a term coined by economist Joseph Schumpeter several decades ago to describe the persistent process by which entrepreneurs challenge existing companies, often leading to the latter’s demise. Such creative destruction reached new levels in the 1980s, precisely the period now under scrutiny in the Bain recriminations.

Not surprisingly, this controversial issue isn’t new: liberals and conservatives have been quarreling over the economic lessons of the 1980s for twenty years. Wall Street Journal columnist Daniel Henninger argues that, in contrast to the narrative presented in movies like Wall Street, firms such as Bain “saved” the U.S. economy: “This was a historic and necessary cleansing of the Augean stables of the American economy. … It led directly to the 1990s boom years.”

The debate, however, glosses over the long-term economic trends in America that should be of very real concern. Many people have pointed out that the decade from 2000 to 2009 was the weakest in terms of job creation since World War Two. Even leaving aside the recessionary years of 2008 and 2009, the expansion from 2002 to 2007 was the weakest in postwar history—a hedge fund manager interviewed in Michael Lewis’ recent book, Boomerang, describes it as a “false boom.”

What connects the argument over the 1980s with today’s economic challenges? See this chart:

Gross Job Flows

Economists at the Census Bureau and elsewhere have laboriously compiled a detailed breakdown of labor market “flows” over the past three decades. While the United States maintains a relatively high level of job churn, with millions of people changing jobs each quarter (for better or worse), overall job creation has slowed markedly.

There are many reasons for this. One is the falling job contribution of new and young companies, a trend that began prior to the Great Recession. My Kauffman Foundation colleagues, E.J. Reedy and Robert Litan, have documented what they call a trend of companies “starting smaller, staying smaller.”

The fact that new companies start with fewer employees today than they did several years ago probably won’t surprise too many people—technological advances likely account for some of this. Likewise, sectoral shifts in the types of new companies have probably also played a role: construction firms tend to be smaller than manufacturing companies, and many more of the former were started over the past decade. More worrisome is the second part of the research by Reedy and Litan: namely, that young companies are growing more slowly than their predecessors in the 1980s and 1990s.

How can we account for this phenomenon?

For one, demographic trends may be at work: labor force participation has fallen over the past several years and so slower job creation could reflect lower availability of workers, as strange as that sounds at a time when we have millions of unemployed workers. Second, the productivity revolution that began in the mid-1990s has meant lower levels of job creation. Finally, lower job churn doesn’t necessarily reflect poorer labor market outcomes. Some researchers have argued that job tenure among women remains higher than men because of women’s later large-scale entry into the workforce and, since women now account for a much larger share of the workforce, this could suppress turnover.

Whatever the reason, it is clear that an accusatory debate over Mitt Romney and private equity does little to advance our understanding of deeper economic trends and what might be done about them. Given the complex interaction of these larger trends above, we need a far broader dialogue that matches the scale of our economic challenges.

Photo by: Lachicaphoto

As the 2012 election gets underway, President Obama is still waiting to see who his opponent will be. Candidates and campaigns matter hugely, of course, but we should also pay attention to the field on which the match will be played—and at first glance, the lay of the political land doesn’t look so favorable to Obama and his party.

The lingering economic slump has demoralized voters and tilted the electorate rightward. With idle workers, underwater homeowners, exploding deficits and debts, growing inequality, and a bitter, broken political system, objective reality isn’t exactly working in incumbents’ favor. Upon closer inspection, however, the electoral landscape may not be as forbidding for progressives as it first appears.

For one thing, the recovery finally seems to be gaining momentum, complicating Republican attempts to cast Obama as a “failed president” who doesn’t have a clue about how the economy works. For another, Republicans are incumbents too, and their intransigence and obstructionism throughout 2011 will make many swing voters reluctant to entrust them with undivided control of the federal government. Finally, the fractious battle for the GOP nomination reveals a party at war with itself, while conservatives’ venomous attacks on Obama push Democrats toward unity.

But no matter whom the Republicans pick as their standard bearer, the tricky political terrain confronts Obama with three strategic imperatives: 1) roll up a big majority of moderate voters; 2) win back a good chunk of the in-dependents who deserted his party in 2010; and 3) fashion a stronger economic message that combines jobs and fiscal responsibility.

Download the memo.

As the recent events in Florida demonstrate, a week is still a lifetime in politics.

Coming out of the South Carolina primary, Mitt Romney’s campaign was in significant disarray; Newt Gingrich seemed to have emerged as the long-awaited “conservative alternative to Romney,” with a path to the nomination, a positive and negative message that seemed to be resonating with Tea Party activists, and the Super-PAC money to compete in an expensive state like Florida. “Establishment” Republicans, including some key conservative opinion-leaders, were beginning to panic.

Now, the day after Florida, Romney is back in charge of the race, and while Gingrich, Santorum and Paul are all still campaigning avidly, it’s difficult to see a clear path to victory for any of them.

Romney, who fell immediately and badly behind in Florida polls after the South Carolina results were in, recovered last week and won the state by a 46-32 margin over Gingrich (Santorum, who won 13 percent, and Paul, who took 7 percent, conceded the state and spent little time there).

There were four main factors in the Florida turn-around: money, debates, opinion-leaders, and demographics.

On the money front, Romney and his Super-PAC outspent Gingrich and his Super-PAC by nearly a 5-1 margin – precisely, $15.7 million to $3.3. million, contradicting initial reports that Newt’s Super-PAC would buy $6 million in Florida media. Additionally, Romney began running ads before South Carolina, which enabled him to “bank” a significant lead among early voters (about 30% of total votes). Romney’s ads were heavily negative, and focused particularly on Gingrich’s Freddie Mac consulting contract, a powerful issue in a state hit very hard by the collapse of the housing market.

The two candidate debates were Gingrich’s big opportunity to establish momentum and excite conservatives, as he did so effectively in South Carolina. Yet Newt basically bombed, particularly in the final 1/26 event, where he let Romney get to his right on immigration policy and seemed defensive and nervous.

Opinion-leaders, in Florida and nationally, took a major toll on Gingrich and undermined his ideological bona fides. In-state, he was sharply criticized by the state’s most popular Republican, Sen. Marco Rubio, for ads calling Romney “anti-immigrant.” Even more importantly, key leaders in Miami’s Cuban-American community, most notably the Diaz-Balart brothers and Rep. Ileana Ros-Lehtinen, endorsed Romney and worked hard for him. Meanwhile, national Republicans, including credible conservatives like the editors of National Review, labeled Gingrich erratic and unelectable, and flatly denied his claims of being an important contributor to the Reagan legacy.

And finally, Florida was a much better state for Romney demographically than South Carolina: less “southern” culturally, with more relative moderates, fewer evangelicals, and a sizable Hispanic population dominated by Cuban-Americans and Puerto Ricans, who were unmoved by Gingrich’s efforts to attack Romney as hostile to immigrants. In the end, Gingrich won several of the same demographic categories he won in South Carolina —evangelicals, “very” conservative voters, and strong Tea Party supporters—but they simply represented a much smaller percentage of the electorate.

By election eve, Gingrich was clearly flailing. He resorted  to very harsh attacks on Romney as a tool of the “Republican Establishment,” over-the-top appeals to Christian Right audiences, and such strange tactics as a robocall targeting Jews (only 1% of the Republican electorate in Florida) with claims that Romney had cut off funding for kosher food at Massachusetts nursing homes.

On primary day, Gingrich even pledged to keep the competition with Romney going for “six or eight months”. This was a rather interesting remark as it would extend his candidacy well past the Republican Convention. In the end, though, the main thrust of his concession speech was to demand that Rick Santorum get out of the race. Santorum, in turn, reciprocated by saying Gingrich had lost his “shot”.

The most important question for Gingrich now is whether he can convince his main Super-PAC donor, Las Vegas casino mogul Sheldon Adelson, to keep sending checks. The next contest is a caucus in Nevada which Romney has long been favored to win. Next Tuesday, Missouri also holds a non-binding primary in which Gingrich is not even on the ballot, along with caucuses, in Colorado, where Santorum is hoping to make a splash. After that comes  Minnesota, another state where Romney is favored.

To make matters worse for Gingrich, Romney will remain difficult to beat as February comes to a close. On February 28th, Romney is heavily favored in his native state of Michigan, and will also be able to count on a sizable Mormon vote in Arizona. The road ahead is thus difficult and expensive for Gingrich until Super Tuesday, March 6, when the Speaker will have the chance to compete in his home state of Georgia . That being said, however, Gingrich will surely lose Massachusetts to Romney. He is also unlikely to win Ohio, and once again is not even on the ballot in Virginia.

All in all, while the wild gyrations of this nomination contest so far make it difficult to say it’s over, Romney has the money, momentum, and the strategy to win fairly easily if he does not make mistakes. If Adelson cuts off Gingrich’s money, it could happen sooner rather than later. The longer it goes on, of course, the more permanent damage Romney could sustain to his favorability among the non-Republicans, those who are watching him bob and weave and try to outflank his opponents to the right.

Photo credit: boris.rasin

Nobody likes excise taxes—those annoying extra costs people notice only because of how narrow and random they are. They show up on hotel bills and cell phone bills. They are added on to the cost of alcohol, gasoline, and cigarettes. And the list keeps growing. For example, in 2010, Newark, New Jersey, imposed a 5% tax on rental cars  while Baltimore imposed a 2-cent per bottle tax on soda.

New data from the Census Bureau shows just how much local governments relied on in-creases in excise taxes to fill budget holes during the recession. PPI calculates that excise tax revenues collected by local governments—not including gas or tobacco—increased 5.2% from 2007 to 2009, compared to a decline of 8.1% in national retail spending by consumers, including restaurants. Even when you add in gas and tobacco, excise tax revenues rose by 4.5% during the recession, while local government general sales tax revenues went up 1.6% and national output (GDP) declined by 0.6%.

The large growth in excise taxes relative to the drop in retail sales shows that during a time when incomes were down, local government turned to these narrow, selective taxes imposed on consumers to make up the balance. For example, two tourist meccas, Las Vegas and New York City, raised hotel room taxes in 2009.

While the data reported in the chart applies only to local governments, state govern-ments also looked to excise taxes to solve their financial woes. In fact, 22 states raised excise taxes on tobacco, alcohol, or motor fuel in 2008 and 2009, with 24 states enacting other types of excise tax increases during the same period.

Download the report.

Last Saturday’s South Carolina primary sent the Republican presidential nominating contest into strange and possibly uncharted territory. Front-runner and “Establishment” favorite, Mitt Romney, turned in a dismal performance, while twice-left-for-dead Newt Gingrich not only swept the state but quickly seized the lead in both national GOP polls and in Florida, where voters go to the polls on January 31.

Newt’s Florida “bump” was especially impressive, since the Sunshine State was supposedly Romney’s “firewall” that would maintain his momentum even if disaster struck in South Carolina. Moreover, Gingrich took the lead there even though Romney had enjoyed virtually uncontested control of the airwaves, having spent (via his own campaign and his Super-PAC) over $5 million in ads, mostly attacking the former Speaker on his Freddie Mac “historian” gig. Thanks to another $5 million check from Sheldon Adelson’s family, Newt’s fighting back with his Super-PAC recently buying $6 million in Florida air time.

Gingrich’s ace-in-the-hole throughout the campaign, namely his ability to rally conservatives to his side by attacking the news media, didn’t work as well for him in the first of two pre-primary debates in Tampa on January 23. Instead, Newt was largely on the defensive against attacks from Romney. The debate, however, ended more or less as a draw, with Mitt once again struggling over questions about his tax returns. For this reason, the final debate in Jacksonville tomorrow could prove decisive.

In terms of the second-tier candidates, Ron Paul is not seriously contesting Florida, preferring to focus on upcoming caucus states. But one real imponderable here is the trajectory of the struggling campaign of Rick Santorum; his collapse or withdrawal could give a crucial boost to Gingrich, given the strong evidence that Newt is his supporters’ overwhelming second choice. That being said, it remains unclear how much Gingrich’s South Carolina win was attributable to the late withdrawal of and endorsement from Rick Perry, since the Texan’s support-levels there were low and vanishing. Regardless, there are generally strong signs in national polling that Gingrich has now become the Tea Party’s adopted candidate, with Romney depending to a dangerous degree on self-identified moderates.

One fascinating aspect of the contest at present is the vast gulf between elite and rank-and-file views about the two leading candidates’ “electability.” The prevailing elite view is that Gingrich would likely be a disastrous general-election candidate, as is already suggested in general election polls, particularly given the low odds that he could continue to avoid scrutiny of his marital and financial background in the long slog to November. Contrary to such skepticism, however, exit polls in South Carolina showed Newt soundly defeating Mitt among voters most concerned about “electability”. It seems Gingrich’s claim that he can end-run media “protection” for the incumbent in debates clearly sounds compelling to a lot of conservatives who don’t spend much time perusing polls and probably don’t trust them anyway.

Of course, if Romney manages to win in Florida, the road ahead will likely become much easier for him. With a slew of caucuses that will reward his financial and Establishment advantages, followed by a February 28 primary in his native state of Michigan, Mitt would likely enter Super Tuesday (March 6) poised for victory. Gingrich’s failure to get on the ballot in Virginia would merely be icing on the cake.

But a Romney loss in Florida could cause a real crisis of confidence in him in the very Establishment circles he is counting on. There are already some signs of panic, with renewed talk (not terribly realistic, given the rapid passage of filing deadlines for primaries) of last-minute candidacies by an assortment of pols who chose not to run earlier in the cycle. Indeed, last night’s credible SOTU response by Gov. Mitch Daniels is certain to encourage some Republican pundits to cast goo-goo eyes in his direction.

Meanwhile, Democrats have been greatly encouraged by the rude interruption of Romney’s cakewalk to the nomination; by the weaknesses in his background Gingrich has exposed; and of course, by the tantalizing prospect that Republicans might actually nominate the man who became a useful punching bag for Bill Clinton when they shared power in the 1990s. Obama’s combative SOTU address indicated the incumbent has fully shifted into re-election mode. And his slowly improving approval ratings, along with fragile but encouraging economic news, provide a decent foundation for a strong campaign against an opposition party that continues to surprise virtually everyone including itself, however unpleasantly.

Photo credit: skooksie

IDEA #1: Scraping regulatory barnacles off the economy—A Regulatory Improvement Commission

In our policy brief,  “Reviving Jobs and Innovation: A Progressive approach to Improving Regulation,” we describe how such a Commission could work. Neither Congress nor the executive branch currently has an efficient, streamlined process for eliminating outdated regulations that stifle innovation and growth. The Regulatory Improvement Commission could fill that void.

IDEA #2: Starting up start-ups–Improving access to credit and access to capital for smaller businesses

Our policy memos, “The Credit Gap: Easing the Squeeze on the Smallest Businesses” and “501 Shareholders: Redefining ‘Public’ Companies to Help Emerging Firms” explain how these changes can promote innovation where it first begins–with start-ups and small businesses.

IDEA #3: Rescue underwater homeowners; restore homeownership wealth

In “Underwater: Home Values in 2012 Battleground States,” we looked at home values in 16 potential battleground states from 2008 to 2011. We find both an enormous loss of middle-class wealth and a potentially potent political issue. We also offer up some practical first steps toward restoring home values.

IDEA #4: An Off-Year Fundraising Time-Out

In our memo, “It’s About (the) Time: Ending the Nonstop Campaign,” we propose changing congressional ethics rules to ban members from directly accepting campaign contributions except during election years. This proposal would free up members to spend more time making policy instead of raising money.

IDEA #5: A Post-Cold War Benchmark for Defense Spending

In our memo “Defense and Deficits: How to Trim the Pentagon’s Budget–Carefully,” we propose a floor of 3 percent of GDP beneath which defense spending should not be allowed to fall. Such a level would ensure that investments in R&D and procurement are sufficiently robust to maintain America’s superior industrial base and high-tech weaponry.

With the South Carolina primary on tap this Saturday, Mitt Romney is breathtakingly close to a victory that would likely all but clinch the presidential nomination. He’s been ahead in every public poll taken in South Carolina since his win in New Hampshire. His conservative opposition remains divided. And the one candidate who did drop out after New Hampshire, Jon Huntsman, promptly endorsed Romney after months of badmouthing him.

But a strong debate performance by Newt Gingrich on Monday, and the $3.4 million his Super-PAC invested in attack ads on Romney that have generated a lot of even more powerful “earned media,” have placed the outcome in South Carolina in some doubt. A final debate on Thursday, along with the decision—or indecision—of conservative opinion-leaders to consolidate support behind a single candidate, could make a difference.

Romney and his own Super-PAC have clearly concluded Gingrich is the main, and perhaps the only, real threat, and have resumed the intense fire on the former Speaker (heavily utilizing former House colleagues) that cut him down to size in the run-up to the Iowa Caucuses.

Meanwhile, the candidate who came out of Iowa with a strong claim to have finally become the “true conservative alternative” to Romney, Rick Santorum, is struggling a bit, though still, along with Ron Paul, showing up in the mid-teens in South Carolina polls. Santorum appeared to have obtained a real breakthrough last Saturday, when a sizable group of conservative religious leaders convened in Texas by Christian Right warhorse Tony Perkins announced it had reached a “consensus” to back the Pennsylvanian. But almost immediately, backers of Newt Gingrich who attended Perkins’ conclave contested this interpretation of events, and suggested the group was evenly divided between Gingrich and Santorum, with the vote to endorse Santorum only occurring after a big percentage of attendees had already left. In Monday’s debate, Santorum didn’t exactly shine, and found himself on the defensive for voting against a national “right-to-work” bill in the Senate (not a popular position among union-hating South Carolina Republicans).

Lost in the shuffle has been Texas governor Rick Perry, who hasn’t registered double-digit support in Palmetto State in any poll since October. Though he’s campaigning heavily around the state, the main publicity coming out of his campaign this week was the request made by one of his earliest and most prominent South Carolina supporters, state senator Larry Grooms, that he withdraw from the race and enable someone else to beat Romney. South Carolina looks to be Perry’s last stand, and it isn’t going well.

If Gingrich does somehow catch up with Romney, or perhaps even if Romney narrowly wins but Perry and Santorum do poorly enough that they are forced to drop out (no one expects Ron Paul to withdraw until the Convention itself), the next question will be whether Gingrich’s latest rise from the political grave will inspire a national renaissance of his campaign, or at least make him competitive in Florida, which votes on January 31. Until today, polls in Florida and nationally were showing Romney building huge leads over the field. But a Rasmussen survey released today, the first taken since Monday’s debate, shows Gingrich suddenly within three points of Romney nationally.

One note of encouragement for Gingrich might have gained a lot more attention earlier in the year: Sarah Palin told Fox viewers that were she voting in South Carolina, she’d vote for Newt. This was, however, the most indirect endorsement yet from Palin, famous for sometimes phoning in endorsements: she said she wishes Newt well so that the campaign can continue, and the winner can receive a more thorough vetting. Well, there’s no question she is an expert on the need for candidate vetting.

Assuming Romney survives South Carolina and other early tests to become the nominee, it’s worth wondering how much general-election damage he’s suffered from attacks on him by Gingrich and others. Aside from the Bain Capital issues raised so visibly by Gingrich’s Super-PAC (complicated most recently by allegations that one Bain beneficiary was a company that disposed of “biomedical wastes” from abortion clinics), his reluctance to release his tax records is turning heads, and each day he has to spend precious general election capital reassuring conservatives that he’ll be sufficiently loyal to their priorities in office. And in general, the nomination campaign continues to shine light on the gap between GOP “base” preoccupations and more mainstream sentiments, as illustrated by Monday’s debate. Democrats couldn’t have been happier with the spectacle of wealthy Republican candidates spending the Martin Luther King holiday lecturing poor and unemployed people on how to develop a work ethic while the audience howled for blood like Romans.

Photo credit: DonkeyHotey

Yesterday’s meeting of the Council on Jobs and Competitiveness saw a long list of expensive and long-term recommendations, but one important idea was missing that could help generate new jobs cheaply and quickly: A Competitiveness Audit.       A Competitiveness Audit will help identify which industries are competitive, near-competitive, or not competitive, so we can target future public and private investments in a way that will stimulate the economy and create jobs that are competitive internationally.

Right now we have no concrete data on U.S. competitiveness – in other words, we are flying blind. It’s incredible that for all of the data swirling around the internet, for all the information being pumped out of statistical agencies and for all of the numbers people worldwide have immediate access to, we do not have basic information on how U.S. prices compare to foreign-made prices for comparable items.  We can find out Celine Dion owns about 3,000 pairs of shoes but have no clue how much a piece of furniture made in North Carolina compares to a similar piece being imported from China.

President Obama’s new “insourcing” initiative, launched last week, gets right to the heart why we need a Competitiveness Audit. Tackling the issue of restoring competitiveness head-on is a welcome commitment from the Administration, but we need more data to tackle it successfully. Finding ways to insource production (recapture imports) in a way that expands U.S. exports and restores U.S. competitiveness will be extremely challenging, if not impossible, if we don’t know where to look. After all, what good is investment if it goes toward an industry that has little chance of being recaptured, like clothing? The last thing America needs is to spend valuable investment dollars that get us to the same place as that Alaskan bridge: nowhere.

If the Administration is serious about encouraging insourcing and restoring competitiveness, something PPI’s Chief Economic Strategist Michael Mandel noted in a recent blog could create many U.S. jobs, then it’s important to get it right. Effectively targeting investment to encourage innovation and revitalize manufacturing is the right way to move forward. Conducting a Competitiveness Audit is the first step.

Photo Credit: Dave Reid