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.

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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.

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

PPI Senior Fellow, Roger Ballentine, explains in The Hill why the cost of gasoline matters far more than the price:

“Recently, it seems the debates on Capitol Hill make even less sense than usual.”

“Look closely and you will find that the same politicians who demand more domestic oil production to “relieve pain at the pump”, simultaneously and inconsistently, attack the Obama administration’s efforts to increase fuel economy standards.”

“Take Rep. Darrell Issa (R-Calif.), for example, the chairman of the powerful House Oversight Committee. He’s launched a needless investigation into the administration’s new mileage standards, even though they were negotiated with—not imposed upon—Detroit. Most importantly, Rep. Issa blindly ignores that boosting fuel efficiency is a sure-fire way to lower gas costs for American families. Republicans can chant “drill, baby, drill” all they want, but they can’t repeal the basic laws of economics.”

Read the full article at The Hill

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.

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“After a number of incremental but positive indicators that have come out in the past couple of months — the so-called “green shoots” — today’s fourth quarter GDP was a reminder that our economy is still very fragile. Like a green shoot of a plant or a tree, our economy needs a lot of nurturing to really grow.

“Mike Mandel is the chief economic strategist for the Progressive Policy Institute. He says lower-than-expected GDP in the final three months of last year reflect an economy that’s “on the road to recovery,” but it’s a “slow, uneven recovery.”

“Mandel says we still haven’t solved a key underlying problem: We’re investing too little in increasing our productivity and too much on consumption. According to Mandel, we went into this recession too focused on consuming and neither public or private investment has been enough of a priority.”

Read and listen to Mandel on Marketplace.

“President Obama emphasized fairness and pledge to raise taxes on wealthy Americans. If this be populism, we are all populists now, and the voters are solidly behind the president on this. But the prevailing tone in Obama’s speech wasn’t class warfare, as some political reporters have claimed. It was economic patriotism.

“Obama’s State of the Union Speech last night was Clintonian, in two senses. First it was stupendously long, as Clinton’s SOTU speeches tended to be. Second and more important, Obama repeatedly evoked consensual American values and common national interests, muting rather than inflaming ideological or partisan differences.”

Read the entire post.

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.

Despite the central focus on unemployment, however, another number deserves equal attention as a barometer of the nation’s overall economic health: housing values.

As catastrophic as it is to lose a job, the percentage of Americans who are unemployed is actually exceeded by the percentage of Americans who have either lost significant wealth from their homes or are currently “underwater”—owing more on their mortgages than their homes are worth. Since 2006, Americans have lost a total of $7 trillion in housing wealth—a figure that, according to the Federal Reserve, is more than half of the nation’s aggregate home equity.

In recent days, the Obama Administration has telegraphed its intention to devote more energy to housing—and with a focus on foreclosures and defaults. While this is laudable, the Administration should not neglect a second front: the tremendous loss of housing wealth.

In this report, we make our case by analyzing home values in the 16 battleground states that will serve as the proving ground for 2012. In 15 of these states, home values have fallen by an average of 16% since October 2008. We also offer up suggestions for tackling this issue.

No doubt, every contender for the White House will have a jobs plan. But no economic plan can be complete without an equally robust plan to rebuild housing—and in particular, to rebuild housing wealth. Policies that address this loss of wealth, even for those not at immediate risk of losing their homes, makes sense both politically and economically

Negative equity: A new crisis in middle-class wealth

In a reversal of the optimism that is typical of Americans, 41% of people in a January 2012 poll—including a majority of seniors—said they feel less financially secure than last year, while just 14% said they feel more secure.

The loss of wealth—and housing wealth in particular—might help explain why.

According to the Federal Reserve’s Survey of Consumer Finances, 62.5% of families suffered a loss of wealth from 2007 to 2009. Moreover, says the Fed, “declines in home equity were an important driver of decreases in wealth.”

• Homes made up 47.6% of the total non-financial assets held by Americans in 2009. Between 2007 and 2009, American homeowners saw their equity drop by a median of 11.8% (or $18,700).

• From its peak in 2006, the Case-Shiller housing index (the “Dow” of home values) has fallen 32.93%, including an 11.33% decline from October 2008. Median home prices have fallen from $196,600 to $164,100.

• As many as 12 million Americans are now “underwater” with mortgages that are more than their homes are worth.

The loss of home equity has broad implications for the nation’s economy beyond mere sentiments of economic confidence. For example, underwater homeowners can’t qualify to refinance their homes, which means they can’t take advantage of one of the Administration’s most successful monetary policies: low interest rates. A 1% lower interest rate on a $200,000 mortgage can mean $168 less in interest payments per month—money that could be spent in the broader economy on other things.

Underwater borrowers are also stuck in their homes, unable to trade up or move out (a problem that also limits job mobility). Negative equity also means no nest egg for homeowners nearing retirement, and fewer resources to draw on for households seeking to finance a new business, help a child through college or weather out a spell of unemployment or ill health.

Download the report.