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U.S. Industrial Output & production

This graph shows a very sharp decline in industrial output, and industrial production is a key to the depth of the economic slowdown. Up until recently export growth had been strong, and the decline in industrial production had been mild. Now, with the global economy slowing sharply, industrial production and capacity utilization are falling off a cliff. Also the significant decline in capacity utilization suggests less investment in non-residential structures for some time.

US Industrial Production

Federal Government Grants

Government grants are sums of government money that the government hands out to an individual, group, business, or organization if they meet the requirements. Generally, you need to apply for government grants to get them, and this can be done by getting grant applications on the grants that you are interested in. Grants can help you in a number of different ways, no matter who you are. There are a huge number of government grants, and literally millions of dollars available every year to whomever applies and qualifies for them. Many businesses and organizations have profited greatly from government grants, as well as college students and other programs that can help people find a better place in society.

There are a ton of different kinds of grants. From women business grants to small business grants, there is really a grant out there for anybody who is trying to better themselves. Free government grants are more popular now than ever, especially considering the economic downturn that everything seems to be in. Government grants are a great way to start new businesses, to finish school, or to fund special projects or programs.

Free grants are not as hard to get as you might think. In fact, college grants are free grants that you can get to finish school. This might not seem like such a big deal… after all, there are student loans for that, right? Well, do you know how long it will take to pay off those student loans? Years and years! Actually, they will hang over your head for a very long time, making it seem like even a college education can’t get you ahead! But if you apply for free government grants for college, than you might be able to get your school bills taken care of right out of the gate!

Federal grants, like education grants, offer a lot of opportunity for those who want to start a new business. Imagine wanting to start a business that will help the community, but not having the money. This is a tale that way too often is really true. And there is literally no way someone like you or me could hope to borrow enough money to start a large business! That is just way too much money. But that is where government grants come in. They make it possible for people like you and me to get the opportunity to start a new business that would otherwise not get started if it weren’t for government money available in government grants.

U.S. Recovery & Reinvestment Stimulus

The package contains targeted efforts in:

• Clean, Efficient, American Energy

• Transforming our Economy with Science and Technology

• Modernizing Roads, Bridges, Transit and Waterways

• Education for the 21st Century

• Tax Cuts to Make Work Pay and Create Jobs

• Lowering Healthcare Costs

• Helping Workers Hurt by the Economy

• Saving Public Sector Jobs and Protecting Vital Services

The economy is in such trouble that, even with passage of this package, unemployment rates are expected to rise to between eight and nine percent this year. Without this package, we are warned that unemployment could explode to near eleven percent. With passage of this package, we will face a large deficit for years to come. Without it, those deficits will be devastating and we face the risk of economic chaos. Tough choices have been made in this legislation and fiscal discipline will demand more tough choices in years to come.

Since 2001, as worker productivity went up, nearly all of the income growth in this country went to the wealthiest 10% of society. While they were benefitting from record high worker productivity, the remaining 90% of Americans were struggling to sustain their standard of living. They sustained it by borrowing… and borrowing… and borrowing, and when they couldn’t borrow anymore, the bottom fell out. This plan will strengthen the middle class, not just Wall Street CEOs and special interests in Washington.

Our short term task is to try to prevent the loss of millions of jobs and get our economy moving. The long term task is to make the needed investments that restore the ability of average middle income families to increase their income and build a decent future for their children.

executive summary

Unprecedented Accountability

The American Recovery and Reinvestment Plan provides unprecedented oversight, accountability, and transparency to ensure that taxpayer dollars are invested effectively, efficiently, and as quickly as possible.

• Funds are distributed whenever possible through existing formulas and programs that have proven track records and accountability measures already in place.

• Numerous provisions in the bill provide for expedited but effective obligation of funds so that dollars are invested in the economy as quickly as possible.

• The Government Accountability Office and the Inspectors General are provided additional funding for auditing and investigating recovery spending.

• A new Recovery Act Accountability and Transparency Board will coordinate and conduct oversight of recovery spending and provide early warning of problems.

• A special website will provide transparency by posting information about recovery spending, including grants, contracts, and all oversight activities.

• State and local whistleblowers who report fraud and abuse are protected.

• There are no earmarks in this bill.

Key Investments

This plan targets investments to key areas that will create and preserve good jobs at the same time as it is strengthening the ability of this economy to become more efficient and produce more opportunities for employment.

Clean, Efficient, American Energy: To put people back to work today and reduce our dependence on foreign oil tomorrow, we will strengthen efforts directed at doubling renewable energy production and renovate public buildings to make them more energy efficient.

• Over $30 billion to transform the nation’s energy transmission, distribution, and production systems by allowing for a smarter and better grid and focusing investment in renewable technology.

• $5 billion to weatherize modest-income homes.

Transform our Economy with Science and Technology: We need to put scientists to work looking for the next great discovery, creating jobs in cutting-edge-technologies, and making smart investments that will help businesses in every community succeed in a global economy. For every dollar invested in broadband the economy sees a ten-fold return on that investment.

• $15 billion for science facilities, research, and instrumentation.

• $7.2 billion to expand broadband internet access so businesses in rural and other underserved areas can link up to the global economy.

Modernize Roads, Bridges, Transit and Waterways: To build a 21st century economy, we must engage contractors across the nation to create jobs rebuilding our crumbling roads, and bridges, modernize public buildings, and put people to work cleaning our air, water and land.

• $27.5 billion for highway construction;

• $16.5 billion to modernize federal and other public infrastructure with investments that lead to long term energy cost savings;

• $18.8 billion for clean water, flood control, and environmental restoration investments;

• $17.7 billion for transit and rail to reduce traffic congestion and gas consumption.

Education for the 21st Century: To enable more children to learn in 21st century classrooms, labs, and libraries to help our kids compete with any worker in the world, this package provides:

• $26 billion to local school districts through Title I ($13 billion), IDEA ($12.2 billion), and the Education Technology program ($650 million).

• $53.6 billion in state fiscal relief to prevent cutbacks to key services, including $39.5 billion to local school districts and public colleges and universities distributed through existing state and federal formulas, $5 billion to states as bonus grants as a reward for meeting key performance measures, and $8.8 billion to states for other high priority needs such as public safety and other critical services, which may include K-12 and higher education modernization.

• $15.6 billion to increase the Pell grant by $500.

Lower Healthcare Costs: To save not only jobs, but money and lives, we will update and computerize our healthcare system to cut red tape, prevent medical mistakes, and help reduce healthcare costs by billions of dollars each year.

• $19 billion for health information technology to prevent medical mistakes, provide better care to patients and introduce cost-saving efficiencies.

• $2 billion to provide for preventative care and to evaluate the most effective healthcare treatments.

Help Workers Hurt by the Economy: High unemployment and rising costs have outpaced Americans’ paychecks. We will help workers train and find jobs, and help struggling families make ends meet.

• $20 billion to increase the food stamp benefit by over 13% in order to help defray rising food costs.

• $13.6 billion for programs to help families during the housing crisis.

• $ 4.8 billion to train workers in high growth areas and help the unemployed find jobs.

Save Public Sector Jobs and Protect Vital Services: We will provide relief to states, so they can continue to employ teachers, firefighters and police officers and provide vital services without having to unnecessarily raise middle class taxes.

• $4 billion for state and local law enforcement funding.

To put people back to work today and reduce our dependence on foreign oil tomorrow, we will make investments aimed at doubling renewable energy production and renovate public buildings to make them more energy efficient.

• Reliable, Efficient Electricity Grid: $11 billion for research and development, pilot projects, and federal matching funds for the Smart Grid Investment Program to modernize the electricity grid making it more efficient, secure, and reliable and build new power lines to transmit clean, renewable energy from sources throughout the nation.

• Renewable Energy Loan Guarantees: $6 billion for loans for renewable energy power generation and transmission projects.

• GSA Federal Buildings: $4.5 billion for renovations and repairs to federal buildings, focused on increasing energy efficiency and conservation.

• Local Government Energy Efficiency Grants: $6.3 billion to help state and local governments make investments that make them more energy efficient and reduce carbon emissions.

• Energy Efficiency Housing Retrofits: $250 million for a new program to upgrade HUD sponsored low-income housing to increase energy efficiency, including new insulation, windows, and furnaces. Funds will be competitively awarded.

• Energy Efficiency and Renewable Energy Research: $2.5 billion for energy efficiency and renewable energy research, development, demonstration, and deployment activities to foster energy independence, reduce carbon emissions, and cut utility bills. Funds are awarded on a competitive basis to universities, companies, and national laboratories.

• Advanced Battery Grants: $2 billion for the Advanced Battery Grants Program, to support U.S. manufacturers of advanced vehicle batteries and battery systems. America should lead the world in transforming the way automobiles are powered.

• Home Weatherization: $5 billion to help low-income families reduce their energy costs by weatherizing their homes and make our country more energy efficient.

• Smart Appliances: $300 million to provide consumers with rebates for buying energy efficient Energy Star products to replace old appliances, which will lower energy bills.

• GSA Federal Fleet: $300 million to replace older vehicles owned by the federal government with alternative fuel and plug-in automobiles that will save on fuel costs and reduce carbon emissions.

• Electric Transportation: $400 million for a new grant program to encourage electric vehicle technologies.

• Cleaning Fossil Energy: $3.4 billion for carbon capture and sequestration technology demonstration projects. This funding will provide valuable information necessary to reduce the amount of carbon dioxide emitted into the atmosphere from industrial facilities and fossil fuel power plants.

• Department of Defense Research: $300 million for research into using renewable energy to power weapons systems and military bases.

• Alternative Buses and Trucks: $300 million to help state and local governments purchase efficient alternative fuel vehicles to reduce fuel costs and carbon emissions.

• Diesel Emissions Reduction: $300 million for grants and loans to state and local governments for projects that reduce diesel emissions, benefiting public health and reducing global warming. This includes technologies to retrofit emission exhaust systems on school buses, replace engines and vehicles, and establish anti-idling programs. Last year EPA was able to fund only 27% of the applications received.

• Training for Green Jobs: $500 million to prepare workers for careers in energy efficiency and renewable energy fields.


We need to put scientists to work looking for the next great discovery, create jobs in cutting-edge technologies and making smart investments that will help businesses in every community succeed in a global economy.

Broadband to Give Every Community Access to the Global Economy

• Wireless and Broadband Grants: $7.2 billion for broadband and wireless services in underserved areas to strengthen the economy and provide business and job opportunities in every section of America with benefits to e-commerce, education, and healthcare. For every dollar invested in broadband the economy sees a ten-fold return on that investment.

Scientific Research

• National Science Foundation: $3 billion, including $2 billion for expanding employment opportunities in fundamental science and engineering to meet environmental challenges and to improve global economic competitiveness, $400 million to build major research facilities that perform cutting edge science, $300 million for major research equipment shared by institutions of higher education and other scientists, $200 million to repair and modernize science and engineering research facilities at the nation’s institutions of higher education and other science labs, and $100 million to improve instruction in science, math and engineering.

• National Institutes of Health Biomedical Research: $8.7 billion for expanding good jobs in biomedical research to study diseases such as Alzheimer’s, Parkinson’s, cancer, and heart disease – NIH is currently able to fund less than 20% of approved applications.

• University Research Facilities: $1.3 billion for NIH to renovate and equip university research facilities and help them compete for biomedical research grants. The National Science Foundation estimates a maintenance backlog of $3.9 billion in biological science research space. Funds are awarded competitively.

• Department of Energy: $2 billion for basic research into the physical sciences including high-energy physics, nuclear physics, and fusion energy sciences and improvements to DOE laboratories and scientific facilities. $400 million is for the Advanced Research Project Agency – Energy to support high-risk, high-payoff research into energy sources and energy efficiency.

• NASA: $1 billion, including $400 million to put more scientists to work doing climate change research, including Earth science research recommended by the National Academies; $400 million to further exploration activities; $150 million for research, development, and demonstration to improve aviation safety and Next Generation air traffic control (NextGen); and $50 million to repair NASA centers damaged by hurricanes and floods last year.

• National Oceanic and Atmospheric Administration: $600 million for construction and repair of facilities, ships and equipment, to improve weather forecasting, support satellite development and address critical gaps in climate modeling.

• National Institute of Standards and Technology: $360 million for renovation and construction of new facilities and laboratories, including $180 million for competitive construction grants for research science buildings at colleges, universities, and other research organizations; and $220 million for additional research fellowships, equipment, and competitive grants.

• NOAA Operations, Research and Facilities: $230 million to address a backlog of ready-to-go research, restoration, navigation, and conservation activities.

• U.S. Geological Survey: $140 million to repair and modernize USGS science facilities and equipment, including improvements to laboratories, earthquake monitoring systems, and computing capacity.

Creating Small Business Opportunity

• Small Business Administration: $720 million for SBA programs to support small businesses, including new loan guarantee authorities to make loans more attractive to borrowers and lenders and to free up capital. The number of loans guaranteed under the SBA’s 7(a) business loan program was down 57% in the first quarter of this year compared to last.

• Rural Business-Cooperative Service: $150 million for rural business grants and loans to guarantee $2.99 billion in loans for rural businesses at a time of unprecedented demand due to the credit crunch. Private sector lenders are increasingly turning to this program to help businesses get access to capital.

• Economic Development Assistance: $150 million to address long-term economic distress in urban industrial cores and rural areas distributed based on need and ability to create jobs and attract private investment. EDA leverages $10 in private investments for $1 in federal funds.

• Community Development Financial Institutions: $100 million to help spur economic development and low-cost financial services in underserved communities.

DTV Conversion Coupons: $650 million to continue the coupon program to enable American households to convert from analog television transmission to digital transmission.


To build a 21st century economy, we must engage contractors across the nation to create jobs – rebuilding our crumbling roads and bridges, modernizing public buildings, and putting people to work cleaning our air, water, and land.

Highway Infrastructure: $27.5 billion for highway and bridge construction projects and $1.5 billion for competitive grants to state and local governments for transportation investment. It is estimated that states have over 5,100 projects totaling over $64 billion that could be awarded within 180 days. These projects create jobs in the short term while saving commuters time and money in the long term. In 2006, the Department of Transportation estimated $8.5 billion was needed to maintain current systems and $61.4 billion was needed to improve highways and bridges.

Transit: Public transportation saves Americans time and money, saving as much as 4.2 billion gallons of gasoline and reducing carbon emissions by 37 million metric tons each year.

• New Construction: $750 million for Capital Investment Grants for new commuter rail or other light rail systems to increase public use of mass transit and to speed projects already in construction. The Federal Transit Administration has $2.4 billion in pre-approved projects.

• Upgrades and Repair: $750 million to modernize existing transit systems, including renovations to stations, security systems, computers, equipment, structures, signals, and communications. Funds will be distributed through the existing formula. The repair backlog is nearly $50 billion.

• Transit Capital Assistance: $6.9 billion to purchase buses and equipment needed to increase public transportation and improve intermodal and transit facilities. The Department of Transportation estimates a $3.2 billion maintenance backlog and $9.2 billion in needed improvements. The American Public Transportation Association identified 787 ready-to-go transit projects totaling $15.9 billion. Funds will be distributed through the existing formulas.

Amtrak: $1.3 billion to improve the speed and capacity of intercity passenger rail service. The Department of Transportation’s Inspector General estimates the North East Corridor alone has a backlog of over $10 billion.

High Speed Rail and Intercity Passenger Rail Grants: $8 billion to advance the development of high speed rail and to improve the intercity passenger rail service in corridors across the nation. The States for Passenger Rail Coalition estimates that there are over $1.5 billion in projects that are ready-to-go.

Airport Improvement Grants: $1.1 billion for airport improvement projects that will improve safety and reduce congestion. An estimated $49.7 billion in eligible airport infrastructure projects are needed between 2009-2013.

Transportation Security Administration Explosive Detection Systems: $1 billion to install Aviation Explosive Detection Systems and checkpoint screening systems in the nation’s airports, improving security, and making life easier on travelers by speeding security lines. Funds are competitively awarded based on security risk.

Border and Ports of Entry: $720 million to construct GSA and Customs and Border Protection land ports of entry to improve border security, make trade and travel easier and reduce wait times.

Coast Guard: $240 million to rehabilitate and repair Coast Guard infrastructure and obstacles to navigation. Technology Improvements for a More Efficient and Secure Government

• Social Security Administration Modernization: $500 million to replace the 30 year old Social Security Administration’s National Computer Center to meet growing needs for processing retirement and disability claims and records storage.

• Farm Service Agency: $50 million for critical IT improvements to systems.

• State Department Technology: $290 million to upgrade and modernize information technology platforms to meet security requirements post-9/11.

• Department of Agriculture: $24 million for repairs and security improvements at USDA’s headquarters.

Department of Defense Facilities

• Medical Facilities: $1.3 billion for new construction to provide state-of-the-art medical care to service members and their families.

• Facilities Renovations: $4.2 billion to invest in energy efficiency projects and to repair and modernize Department of Defense facilities of which $400 million will be used to improve military medical facilities and $153 million will be used to restore Army barracks.

• Housing for Troops and Their Families: $890 million to improve base housing for our troops and families, and to provide aid to restationing military homeowners.

• Child Development Center: $240 million for new child development centers.

• National Guard: $100 million for new construction to support Guard and Reserve units across the country with operations and training facilities and utilities infrastructure.

• State Extended Care Facilities: $150 million for Grants for Construction of State Extended Care Facilities.

• Claims Processing: $150 million for a temporary increase to claims processing staff.

Veterans Administration Facilities

• Veterans Medical Facilities: $1 billion for veterans’ medical facilities. The Department has identified a $5 billion backlog in needed repairs, including energy efficiency projects, at its 153 medical facilities.

• Veterans Cemeteries: $50 million to put people to work making monument and memorial repairs at cemeteries for American heroes.

Job Corps Facilities: $250 million to upgrade job training facilities serving at-risk youth while improving energy efficiency.

Clean Water

• Clean Water State Revolving Fund: $4 billion for loans to help communities upgrade wastewater treatment systems. EPA estimates a $388 billion funding gap. The Association of State and Interstate Water Pollution Control Administrators found that 26 states have $10 billion in approved water projects.

• Drinking Water State Revolving Fund: $2 billion for loans for drinking water infrastructure. EPA estimates there is a $274 billion funding gap. The National Governors Association reported that there are $6 billion in ready-to-go projects, which could quickly be obligated.

• Rural Water and Waste Disposal: $1.38 billion to support $3.8 billion in grants and loans to help communities fund drinking water and wastewater treatment systems. In 2008, there were $2.4 billion in requests for water and waste loans and $990 million for water and waste grants went unfunded.

Water Resources

• Corps of Engineers: $4.6 billion for environmental restoration, flood protection, hydropower, and navigation infrastructure critical to the economy. The Corps has a construction backlog of $61 billion.

• Bureau of Reclamation: $1 billion to provide clean, reliable drinking water to rural areas and to ensure adequate water supply to western localities impacted by drought.

• Watershed Infrastructure: $340 million for the Natural Resources Conservation Service watershed improvement programs to design and build flood protection and water quality projects, repair aging dams, and purchase and restore conservation easements in river flood zones.

• International Boundary and Water Commission: $220 million to repair flood control systems along the international segment of the Rio Grande damaged by hurricane Katrina and other serious storms.

Environmental Cleanup

• Superfund Hazardous Waste Cleanup: $600 million to clean up hazardous and toxic waste sites that threaten health and the environment. EPA has 1,255 sites on its National Priority List, selected based on a hazard ranking system. There are many Superfund sites ready for construction, but not funded due to budget shortfalls and over 600 sites with ongoing construction that could be accelerated.

• Leaking Underground Storage Tanks: $200 million for enforcement and cleanup of petroleum leaks from underground storage tanks at approximately 1,600 additional sites. There are an estimated 116,000 sites with the potential to contaminate important water supplies.

• Nuclear Waste Cleanup: $6 billion for nuclear waste cleanup at sites contaminated by the nation’s past nuclear activities. Accelerating the completion of projects creates jobs and reduces long-term costs.

• NOAA Operations, Research and Facilities: $230 million for ready-to-go habitat restoration, research and maintenance activities.

• Brownfields: $100 million for competitive grants for evaluation and cleanup of former industrial and commercial sites – turning them from problem properties to productive community use. Last year EPA was only able to fund 37% of Brownfields applications.

Construction on Public Lands: $2.5 billion for infrastructure projects on federal lands including improvements to visitor facilities, road and trail restoration, preservation of buildings of cultural and historic importance, rehabilitation of abandoned mines and oil fields, and environmental cleanup projects. This includes $750 million for the National Park Service, $320 million for the Bureau of Land Management, $280 million for the National Wildlife Refuges and National Fish Hatcheries, and $650 million for the Forest Service.

Reducing Wildfires Threats: $515 million for hazardous fuels removal and other efforts to prevent wildfires on America’s wildlands. Making these investments today will create jobs in the short run, but also save long term costs of fighting fires in the future.

Bureau of Indian Affairs: $500 million to address maintenance backlogs at schools, dams, detention and law enforcement facilities, and over 24,000 miles of roads. BIA schools alone have an over $1 billion construction and maintenance backlog including shamefully unsafe conditions.

National Endowment for the Arts: $50 million to support workers in the arts.


We will provide our kids with a 21st Century education and help families send their kids to college so that American students can compete with any worker in the world.

Higher Education: Tuition is up, unemployment is up, and as a result more people are choosing to go to school to upgrade their skills and more of these students need student aid. This investment addresses those short term needs while investing in our nation’s future economic strength.

• Pell Grants: $15.6 billion to increase the maximum Pell Grant by $500, from $4,850 to $5,350.

• College Work-Study: $200 million to support undergraduate and graduate students who work.

K-12 Education and Early Childhood Development: As states begin tackling a projected $350 billion in budget shortfalls these investments will prevent cuts to critical education programs and services.

• IDEA Special Education: $12.2 billion for formula grants to increase the federal share of special education costs and prevent these mandatory costs from forcing states to cut other areas of education.

• Title I Help for Disadvantaged Kids: $13 billion for grants to help disadvantaged kids in nearly every school district and more than half of all public schools reach high academic standards.

• Education Technology: $650 million for 21st century classrooms, including computer and science labs and teacher technology training.

• Statewide Data Systems: $250 million for competitive grants to states to design and develop data systems that analyze individual student data to find ways to improve student achievement, providing teachers and administrators with effective tools.

• Education for Homeless Children and Youth: $70 million for formula grants to states to provide services to homeless children including meals and transportation when high unemployment and home foreclosures have created an influx of homeless kids.

• Improving Teacher Quality: $300 million, including $200 million for competitive grants to school districts and states to provide financial incentives for teachers and principals who raise student achievement and close the achievement gaps in high-need schools and $100 million for competitive grants to states to address teacher shortages and modernize the teaching workforce.

• Child Care Development Block Grant: $2 billion to provide child care services for an additional 300,000 children in low-income families while their parents go to work. Today only one out of seven eligible children receives care.

• Head Start and Early Head Start: $2.1 billion to provide comprehensive development services to help children succeed in school. Funds are distributed based on need. Only about half of all eligible preschoolers and less than 3 percent of eligible infants and toddlers participate in Head Start.


To save not only jobs, but money and lives, we will update and computerize our healthcare system to cut red tape, prevent medical mistakes, and help reduce healthcare costs by billions of dollars each year.

• Health Information Technology: $19 billion to jumpstart efforts to computerize health records to cut costs and reduce medical errors.

• Prevention and Wellness Fund: $1 billion to fight preventable chronic diseases, the leading cause of deaths in the U.S., and infectious diseases. Preventing disease rather than treating illnesses is the most effective way to reduce healthcare costs. This includes hospital infection prevention, immunization programs, and evidence-based disease prevention.

• Healthcare Effectiveness Research: $1.1 billion for Healthcare Research and Quality programs to compare the effectiveness of different medical treatments. Finding out what works best and educating patients and doctors will improve treatment.

• Community Health Centers: $2 billion to increase the number of uninsured Americans who receive quality healthcare and renovate clinics and make health information technology improvements. More than 400 applications submitted earlier this year for new or expanded CHC sites remain unfunded.

• Training Primary Care Providers: $500 million to address shortages and prepare our country for universal healthcare by training primary healthcare providers including doctors, dentists, and nurses as well as helping pay medical school expenses for students who agree to practice in underserved communities through the National Health Service Corps.

• Indian Health Service: $500 million to modernize aging hospitals and health clinics and make healthcare technology upgrades to improve healthcare for underserved rural populations.


High unemployment and rising costs have outpaced Americans’ paychecks. We will help workers train and find jobs, and help struggling families make ends meet.

Helping Workers Find Jobs

• Training and Employment Services: $3.95 billion for job training including formula grants for adult, dislocated worker, and youth services, and increased funds for the YouthBuild program, and competitive grants for training in health care and green jobs.

• Vocational Rehabilitation State Grants: $500 million for state formula grants to help persons with disabilities prepare for gainful employment.

• Employment Services Grants: $400 million to match unemployed individuals to job openings through state employment service agencies and allow states to provide customized services.

• Community Service Employment for Older Americans: $120 million to provide subsidized community service jobs for low-income older Americans.

Attacking the Housing Crisis

• Public Housing Capital Fund: $4 billion for building repair and modernization, including critical safety repairs. Every dollar of Capital Fund expenditures produces $2.12 in economic return.

• HOME: Low Income Housing Tax Credits: $2.25 billion for gap financing to restart low-income housing construction stalled during the credit crisis.

• Rental Assistance: $2 billion for full-year payments to owners receiving Section 8 project-based rental assistance.

• Native American Housing Block Grants: $510 million to rehabilitate and improve energy efficiency at some of the over 42,000 housing units maintained by Native American housing programs. Half of the funding will be distributed by formula and half will be competitively awarded to projects that can be started quickly.

• Neighborhood Stabilization: $2 billion to help communities purchase and rehabilitate foreclosed, vacant properties in order to create more affordable housing and reduce neighborhood blight.

• Homeless Assistance Grants: $1.5 billion for the Emergency Shelter Grant program to provide short term rental assistance, housing relocation, and stabilization services for families during the economic crisis. Funds are distributed by formula.

• Rural Housing Insurance Fund: $200 million to support $11 billion in direct loans and loan guarantees to help rural families and individuals buy homes during the credit crunch. Last year these programs received a record number of applications.

• Rural Community Facilities: $130 million to support grants and loans to rural areas for critical community facilities, such as for healthcare, education, fire and rescue, day care, community centers, and libraries. There are over $1.2 billion in applications pending.

• Lead Paint: $100 million for competitive grants to local governments and nonprofit organizations to remove lead-based paint hazards in low-income housing.

Alleviating Hunger

• Supplemental Nutrition Assistance: $19.9 billion to provide a 13% increase in nutrition assistance to modest-income families and to lift restrictions that limit the amount of time individuals can receive food stamps.

• Senior Nutrition Programs: $100 million for formula grants to states for elderly nutrition services including Meals on Wheels and Congregate Meals.

• School Lunch Program: $100 million to provide schools with assistance in purchasing equipment with priority for low-income schools.

• Emergency Food Assistance Program: $150 million to purchase commodities for food banks to refill emptying shelves.

Payments to Disabled and Elderly: $4.2 billion to help 7.5 million low-income disabled and elderly individuals with rising costs by providing an additional SSI payment in 2009 equal to the average monthly federal payment under the program (approximately $450 for an individual and $630 for a couple). This one­time payment will serve as an immediate economic stimulus as half of SSI recipients have no other form of income and the other half average outside income of less than $450 per month.

Community Services Block Grant: $1 billion for grants to local communities to support employment, food, housing, and healthcare efforts serving those hardest hit by the recession. Community action agencies have seen dramatic increases in requests for their assistance due to rising unemployment, housing foreclosures, and high food and fuel prices.

Community Development Block Grants: $1 billion for community and economic development projects including housing and services for those hit hard by tough economic times.

Emergency Food and Shelter: $100 million to help local community organizations provide food, shelter, and support services to the nation’s hungry, homeless, and people in economic crisis including one-month utility payments to prevent service cut-off and one-month rent or mortgage assistance to prevent evictions or help people leave shelters. Funds are distributed by formula based on unemployment and poverty rates.

Social Security Administration Disability Backlog and Claims Processing: $500 million to help the Social Security Administration process a steep rise in disability and retirement claims, getting people their benefits faster, and preventing existing backlogs from getting worse.

Centers for Independent Living: $140 million for state formula grants to help individuals with disabilities continue to live in their communities.

AmeriCorps Programs: $200 million to put approximately 16,000 additional AmeriCorps members to work doing national service, meeting needs of vulnerable populations and communities during the recession.

Nonprofit Fund: $50 million for grants to community-based organizations to provide critical safety net services to needy individuals and families.

Department of Labor Worker Protection and Oversight: $80 million to ensure that worker protection laws are enforced as recovery infrastructure investments are carried out.


We will provide relief to states, so they can continue to employ teachers, firefighters, and police officers and provide vital services without having to unnecessarily raise middle class taxes.

State and Local Law Enforcement: $4 billion to support state and local law enforcement including $2 billion for Byrne Justice Assistance formula grants to support local law enforcement efforts with equipment and operating costs, and $1 billion for the COPS hiring grant program.

Periodic Census and Programs, Communications: $1 billion for work necessary to ensure a successful 2010 census, including additional personnel and up to $250 million for expanded communications and outreach programs to minimize undercounting.

Firefighter Assistance Grants: $210 million for grants to modify, upgrade, and construct fire stations to ensure that vital emergency response infrastructure remains intact during this economic crisis. Funds will be competitively awarded.

Transit Security Grants: $150 million for grants to protect critical transit infrastructure, including freight rail, Amtrak and ferry systems in high-threat areas. Funds are competitively awarded based on security risk.

Port Security Grants: $150 million for grants to protect critical port facilities and infrastructure. Funds are competitively awarded based on security risk.


Where Is the Economy Going?

Fifteen key economists, policymakers and strategists weigh in on a week of volatility and economic turmoil.

‘A Meltdown’
Nouriel Roubini

We know booms and busts are aspects of capitalism, and have been so historically. Many of them have been driven by a technological innovation–whether it was the railroad or the Internet–and they may create bubbles, fraud and eventual losses. But they are also driven by real innovation. This latest crisis we see today differs from such historical examples in two important elements. First, with housing there was no technological revolution of any sort. We still build homes basically the same way we did 50 years ago. The innovation in this instance was financial. We went from a system where banks held mortgages on their books to one in which banks originate mortgages, and then securitize and distribute them. The idea was to reduce systemic risk by getting the risk of holding mortgages out of the banks and into the capital markets, and out of the United States and into the global economy. Of course, as we see now with subprime, that has brought a massive contagion in financial markets that is now affecting the real economy.

Comparing with some recent financial crises, I think it’s worse than 1987, when we just had a stock-market crash. It’s worse than the savings and loan crisis of the late 1980s, because the contagion then was generally limited to the savings and loan thrifts and commercial real-estate sectors. It is much worse than the Long Term Capital Management crisis of 1998. That was a liquidity problem. Today we have insolvency problems. It is much worse than the tech bust of 2000 and 2001, when most of the problems were confined to the tech sector and we had a mild recession. You have to go back to the Great Depression for something comparable. We are, of course, far short of a Great Depression now, but in terms of systemic risk and the risks of a financial meltdown, you almost have to go back that far to find a good analogy.

Roubini is a professor of economics and international business at New York University’s Stern School of Business.

‘Financial Folly’
Kenneth Rogoff

What’s happening now is not at all special, but follows the well-trodden paths of past financial folly. As my work with Carmen Reinhart of the University of Maryland shows, the most important determinant for the depth of a financial crisis is the size of the initial hit to the system. Unfortunately, we don’t know that yet. If it’s just the money lost on subprime—losses of perhaps $300 billion to $400 billion—it will be a medium-size crisis, not an epic one. It would be comparable to the S&L; crisis in the late 1980s. But if the slowdown deepens and losses spread to credit cards, high-yield corporates and other mortgages, it could be much worse.

It is early days still. The U.S. economy is probably experiencing mildly negative growth right now. If we have no bad news like a slowdown in China or geopolitical problems in the Middle East, we’ll just have a mild recession in the United States and recovery setting in by the year-end. The rest of the world will feel some pain, but the global economy itself will not go into recession. Does that mean not to worry? I am afraid not. The problem is, the U.S. economy is very vulnerable—think of someone with a bad cold who has not slept much for a week. The resiliency of the U.S. economy is down, and a year is a long time for nothing else to happen. Unfortunately, given the underlying problems of a deflation in the housing bubble and an apparent slowdown in productivity growth, there is not a lot policymakers can do. The U.S. fiscal package, besides tying the hands of the next president by making the budget problem worse, is not likely to help.

Rogoff is a professor of economics at Harvard University.

‘U.S. Recession’
Stephen Roach

It’s pretty simple–you either believe in globalization through increased border-trade linkages, or you believe in decoupling. But it’s intellectually dishonest to believe in both. There’s no region of the world that is more externally driven than developing Asia, which is where I live now. Exports represent 42 to 43 percent of pan-regional GDP, a record high. Private consumption represents 48 percent, a record low. So how is this region going to decouple? Advocates of decoupling would point to all the young consumers in China and India. But consider that the U.S. consumer last year spent $9.5 trillion. Chinese consumers spent about $1 trillion, and Indians about $650 billion. The power of the American consumer is still six times that of this new “Chindian” consumer. It’s mathematically impossible to see a major decrease in U.S. consumption being made up by the Chinese and Indians. And there will be a meaningful decrease in U.S. consumer spending.

I believe the United States is in recession. The consumption share of GDP in the U.S. is 72 percent (a record) versus 48 percent in developing Asia. The housing market has driven U.S. consumption, as well as the credit bubble. Both have now burst. Consumers will now have to save the old-fashioned way–out of income–and the consumption share of GDP will likely drop to the 25-year trend level of about 67 percent. That’s a big shift, and we need it to correct our current account deficit. But it will mean a full-blown U.S. recession that will be longer and deeper than most think, and will have repercussions throughout the world. Japan could fall into recession. Europe will narrowly avoid it, and there will be meaningful shortfalls in growth in much of Asia.

Roach is chairman of Morgan Stanley Asia.

‘Innocent Victims’
Robert J. Shiller

It’s no surprise that the subprime debacle is continuing to fuel last week’s market turmoil. The world is currently emerging from the biggest real-estate bubble in more than 100 years. Perhaps the best historical analogy to today’s situation is the bubble that developed and deflated throughout the 1920s and ’30s. In the four years leading up to 1925, there was a 19 percent increase in real home prices, and then prices fell 13 percent from 1925 to 1932. In comparison, from 1997 to 2006 there was an 85 percent increase in real home prices, followed by a fall of less than 10 percent so far. The 1920s bubble was due in part to a euphoria driven by a technology boom, including the advent of radio and the mass production of the automobile. As people began to drive, there was a sense that the world would run out of land. Resort areas like Florida, now accessible by car, boomed. Then, as now, there was also an explosion of easy credit. In fact, mortgage defaults were a substantial part of the Great Depression. One crucial difference: the government back then did a lot more to cushion the fallout, instituting major public programs to bail out homeowners. By comparison, the Bush administration has done very little. To me, that’s a problem. The idea that we should simply let average citizens take the pain seems unjust–there are a lot of innocent victims of the subprime debacle. I think we need more substantive public-policy responses to the crisis. In the future, there should also be safeguards against mass defaults. People need more protection.

Shiller is a professor of economics at Yale University and a cofounder of MacroMarkets LLC.

‘Losing Momentum’
Jim O’Neill

I’ve spent most of this decade writing about the strengths of the major developing countries, but this year I’m not so sure. Sure, the big picture is still bright for Brazil, Russia, India and China, the emerging-market powerhouses known as BRICs. Look a bit closer, though. The key word is “valuations.” There’s been just a persistent, fantastic increase in emerging-market assets, driving expectations of even more-incredible gains. But assets in China and India aren’t cheap anymore. That means these countries are vulnerable to any kind of disappointing news.

But what about decoupling–the notion that thanks to booming demand from China, the emerging markets can get by and perhaps even flourish in the teeth of a downturn in the United States? Not quite yet. It’s one thing to talk about China and the world decoupling when the United States was growing just below the trend, as in 2007. But that’s almost impossible in a recession. The United States is 30 percent of the global economy, and China is only 7 percent. For now, I’m betting on recoupling. The world cannot ignore a U.S. recession. What’s more, the latest data make it pretty clear that China is losing some momentum. China and the United States represent 55 to 60 percent of global growth. You don’t need to do much math to know that the emerging markets are not the place to be this year. On a selective basis, perhaps. But for a while, at least, I’d say maybe it’s time to give BRICs a bit of a rest.

O’Neill, a senior economist at Goldman Sachs, specializes in emerging markets.

‘A Return to Growth’
Holger Schmieding

First the seizing up of money and credit markets, now the mini-crash in stock prices. The twin shocks will hurt economies around the world. But Europe is relatively well placed to deal with the fallout and rebound afterward. The credit upheaval makes it more difficult to borrow. Fortunately, many European companies are well capitalized and do not depend on easy credit for much of their growth. Most households in the 15 euro countries rely less on loans to finance purchases than consumers in the United States and the United Kingdom.

The same goes for the stock-market gyrations. Major European markets have fallen by roughly 14 percent this year. In unsettled markets, companies may find it more difficult to raise capital, and may shy away from building plants or hiring workers, but this is not yet happening in Europe. Last week, with markets plunging, business confidence improved slightly in Germany and held steady in France. Lower stock prices can also discourage consumer spending, but this effect is smaller in Europe than in the United States. For every dollar lost on the markets, Americans reduce their consumption by 2 cents, Germans and French only by 1 cent.

Bottom line: euro-zone growth will probably fall far below its 2 percent trend rate in early 2008. Stagnation is a serious risk. But the setback should be temporary. Most European domestic fundamentals are sound. The chance that the external shocks will fade later this year also supports our view that the euro zone can return to substantial growth in late 2008.

Schmieding is head of European economics at the Bank of America.

‘Tug of War’
Mohamed A. El-Erian
Bond and equity markets swung widely last week as concerns about a U.S.-led global downturn gave way to excitement that policymakers were finally responding. What are global investors to make of all this volatility? First, it speaks to the tug of war between worrisome economic and financial trends and corrective policy moves. Second, it highlights differences in the reaction speed of market participants and policymakers, both of which are navigating an extremely fluid situation. Finally, and most important for the longer term, it illustrates the extent to which market and policy infrastructures have failed to keep up with the range of activities enabled by global economic transformations and financial innovations.

The world is now engaged in a massive process of catch-up. Through the combination of a fiscal response and an emergency interest-rate cut, the United States has signaled an understanding of the severity of the situation facing its economy. At the same time, we are starting to see evidence of more-decisive actions on the part of new CEOs at major Wall Street firms that declared large losses in the past few weeks (such as Citigroup and Merrill Lynch). On both counts, there should be little doubt as to the willingness to react. But this does not necessarily signal the end of the phase of high volatility. There remains a legitimate question as to the impact. Accordingly, investors would be well advised to keep their seat belts tightly fastened.

El-Erian is co-CEO and co-CIO of PIMCO. He was previously president and CEO of Harvard Management Co.

Ruchir Sharma

When sorrows come for markets, they come–to borrow a line from Hamlet–not in “single spies but in battalions.” The news flow out of the U.S. economy had been deteriorating for many months, but global investors were hoping emerging markets led by China would save the day. But they will not be the havens of growth they had been in years past. Policymakers in these markets are more concerned about containing inflation than the U.S. slowdown–and for good reason: it is rising in four out of five developing countries and has accelerated, on average, by nearly 2 percentage points over the past six months. In many countries, inflation is now beyond the tolerance limit, often defined as a headline rate of 5 percent. The latest data out of China for December show consumer price index inflation running at 6.5 percent–close to a 10-year high. Rising food prices have accounted for 80 percent of the increase. The price leaps in China have triggered growing discontent. So for the first time in 15 years, Chinese policymakers are resorting to price controls. The good news is that inflationary pressure remains modest outside the food sector, and there is little reason to believe it will spread. Productivity growth remains high and wages are rising slower than the rise in output. But bull markets thrive on high growth and benign inflation–the two conditions that defined the global economic environment over the past five years. With the United States teetering on the brink of a recession, the world needs emerging markets–the growth leaders of this decade–to pick up the slack, just as the United States did in the late ’90s following the Asian economic crisis. Back then, the U.S. Federal Reserve was able to cut interest rates and cushion the blow from emerging markets. But with China and other developing economies more preoccupied with fighting inflation than offering any stimulus, the bull market in emerging-market equities will remain suspended until the food inflation scare passes away.

Sharma is head of global emerging markets at Morgan Stanley Investment Management.

‘Averting the Abyss’
Barton Biggs

The world is in an old-style financial panic out of the late 19th or early 20th century. Investors today, just as then, are human beings subject to extremes of greed and fear. Accountants and auditors are human also, and they are being pilloried for past sins of negligence and misconduct. I strongly suspect they are overreacting by compelling huge markdowns of the subprime paper held by their bank clients. Everyone is scared to death of being sued in a litigious world. These write-downs are crushing earnings, reducing book values and causing steep falls in the share prices of financial institutions.

This has happened before in banking crises. Sometimes the result was write-ups later of the value of the paper. It happened most recently in Asia in the late 1990s. This time, though, the scope of the crisis is far larger, and both the write-downs and the write-ups may be even greater. A lot depends on whether the financial contagion spreads and the United States and world economy slip into a prolonged period of stagnation and deflation like Japan. If so, the current conservative valuations will prove to be correct. On the other hand, the “authorities” in the United States (the Fed and the government) are now providing liquidity and spending stimulus. Unfortunately the European Central Bank still doesn’t get it even though the European banking system is in just as much trouble as America’s. The other factor in averting the abyss will be whether this year the United States and then the world economy falls into recession. The consensus believes it will, and in fact many loud voices say it already has. A U.S. recession could drag the world into recession and would set off a new round of contagion in leveraged debt. However, the data from the United States and the world at this moment do not support the recession conclusion. Meanwhile, stocks in the United States, Europe and Japan are cheap on all the valuation measures we use. Emerging-market equities are volatile but, considering their much faster growth prospects, they are intriguing. When the abyss is on the front page, as it is now, I am inclined to bet against the doomsayers.

Biggs is a managing partner of the Traxis Partners hedge fund in New York.

‘Much Uncertainty’
Heizo Takenaka

Is the American credit crisis like the Japanese banking crisis of the 1990s? No. The key difference is between a liquidity crisis and a capital crisis. I don’t see the systemic risk of a capital shortage like we had in Japan. That’s the most important point. There are also similarities—for instance, the fact that the problem wasn’t the bursting of the bubble, but mismanagement by the banks. Central banks can deal with a liquidity shortage, as we saw with the Federal Reserve’s action last week. The Fed might have acted a little earlier, but by and large its reaction has been correct. The question is, will this create a capital shortage? I don’t think so. Consider Citigroup. Last week its newest capital issue drew $25 billion in investor demand. The volume of recapitalization in the banking sector is massive. But it indicates there is still capital, and that we’re not moving from a liquidity shortage to a capital shortage. The bigger danger is a second problem, the effect on household consumption and the macroeconomic slowdown we’ll see in the second half of the year. This macro effect is more serious than the banking crisis. I don’t believe in decoupling, and the slowdown in the United States will hit Asia hard.

The biggest risk factor is mismanagement and overreaction. Investors are reacting too negatively to the banking issue. The disclosure system is much better than it was in Japan, where banks hid their bad loans for 10 years and CEOs weren’t fired. But it could still be better. There is a real risk of protectionism, as we’re seeing in the reaction to sovereign wealth funds. With so much uncertainty, people will act on the worst assumptions. Everything is based on people’s expectations. Finally, let’s not blame the United States for everything. Japan and China have their own domestic economic problems that feed into this.

Takenaka is the director of the Global Security Research Institute at Keio University and former Economics minister of Japan.

‘We Need Greater Transparency’
Lawrence Summers
On industry regulation: I think we are going to need more regulation in certain areas of the finance industry. For several years, you’ve had a Republican Congress and a Republican executive branch that have given freer reign to market forces, and have been less interested in the role of government in these issues. I think now we’re going to see more insistence on better disclosure of risk, and more pressure on [banks] to maintain some kind of relationship with those to whom they lend.

On sovereign wealth funds: There’s no question that we’re better off in the United States because sovereign wealth funds have infused new capital into our financial institutions. One of the main threats to the economy at the moment would be a turn toward protectionism. That said, in the United States, we don’t allow our government to invest the Social Security trust fund in companies because of the potential for politicization of investment. It seems appropriate to ask other governments making commercial investments to give commitments that those investments are being made on a commercial rather than a political basis. We haven’t had problems yet, but the more the markets are politicized, the less well they perform. It’s not an issue of transparency—it is up to the individual governments to decide how often they report on the progress of the funds to their citizens. But we should seek commitments that investments are being made on a commercial basis.

On a recession: There’s a good chance that we are in a recession, and I think it’s possible, though not probable, that it will be prolonged, and that it will have implications for the rest of the world. The effect could be quite serious for Europe, Japan and Latin America. There will also be some fallout in developing Asia.

On the correct response: The United States is at the root of the current market problems, and it should be at the center of the solution. I would like to see U.S. officials engaged in efforts to strengthen and enhance fiscal confidence and stability in the short and medium term. For starters, we could use more accurate pricing of assets. You’ve got bonds that are priced one way in one American bank, and another way in another American bank, and a third way in a European bank, and a fourth way in a hedge fund. We need greater transparency. There should also be further steps to avoid excess mortgage foreclosures in the United States. Mainly, that would include more provisions for writing down the value of mortgages—not just the interest, but the total value. This would help the innocent victims.

On central banks: In general, the independence of central banks is a very good thing. But it can be counterproductive if it inhibits international cooperation or domestic collaboration. Central banks probably should become more cooperative institutions in the years ahead. In terms of where we go from here—now that we’ve got strong fiscal and monetary measures in place, we should turn our attention back to the financial sphere. We need more pressure for greater capital requirements in financial institutions. And we need more thorough and accurate marking of financial assets to markets.

Summers is a professor of economics at Harvard University and a managing director at D.E. Shaw & Co.

‘The Prospect of Stagflation’
Sri Mulyani Indrawati

On lessons from history: The lesson from the Asian financial crisis is that when [corrective] decisions are made fast and the [policy] prescriptions are potent, a severe or prolonged crisis can be prevented. What happened in South Korea shows that economies can pick up again very fast. Their severe adjustments lasted just one year. Yet the Indonesian economy remained sluggish for five to seven years because [corrective policies were] too long in the making and too weak. The United States is the world’s biggest economy, and one that’s more complex than Thailand, South Korea or Indonesia. But the lessons are the same. We do hope that decisive action will not be delayed so the damage to the global economy is minimized. Whether we are talking about one financial institution or the U.S. economy as a whole, policymakers need to get things moving quickly again.

On the theory that Asia’s economies have decoupled from the American consumer:From a trade point of view, I don’t think decoupling is really there yet. If we look at capital flows, the regions are not decoupling at all but becoming more linked to each other. When we issued [government] bonds in early January, buyers from the U.S. were quite dominant. I don’t think there has been any diversification in the way the United States finances its deficit with funds from Asia, or any increased ability by Asia to invest our reserves [elsewhere] that would constitute decoupling. I think the financial links are very close and very strong.

On fears about the economy: In this case, it is certainly the prospect of stagflation in the United States. A recession combined with high inflation would create a very difficult policy challenge, especially when the U.S. budget is not in very good shape. A mild recession can be corrected but if this is stagflation, the room to maneuver will be very limited.

Mulyani is the Finance minister of Indonesia.

‘Now We Have a Mess on Our Hands’
Robert Reich

On investor sentiment: The Fed is clearly becoming aware of the serious potential of an economic meltdown. The size of the cut is larger than anyone expected because the Fed usually moves in [increments of] .25 or .50 percentage points. But the danger of a cut this size is that it may panic the investors. Credit markets are still uncomfortably frozen and the housing slump continues to worsen. [But] the fact is that no one knows anything. Even experienced Wall Street hands have no idea whether we’re near the bottom. We can expect even more violent swings in the stock market. The reason for all the uncertainty is that the big banks and lenders simply have no idea how many bad loans they’re holding. I wouldn’t be surprised if the Fed cut another quarter point this week, or within the next month or so. It is clearly worried. [And while lowering rates may cause] inflation, it is far less threatening now than a recession or perhaps—and I cringe at using the word—a depression. Several managing directors on the Street, whose opinions I trust, have said to me that the chances for a depression are 20 percent. That matches my sense. Even absent a depression, it seems likely that the coming recession will be deeper than the last several.

On Finding a Solution: The scale of the problems is so much larger than any stimulus package or Fed rate cut can readily deal with. The stimulus package now being considered on the Hill is in the range of $140 billion to $150 billion. But at the rate housing prices are dropping, consumer purchases are likely to be hit by $360 billion to $400 billion. Similarly the Fed rate cuts, under normal circumstances, would free up money, but lenders are afraid of lending because they don’t know how much risk of default they face, even at lower interest rates. It’s a little like offering a lobster dinner to someone who is so constipated he can’t take in another mouthful.

On oversight: The housing bubble and the Wild West credit markets of the last few years came about not because the Fed kept interest rates too low, but because the Treasury, the comptroller of the currency, and the Fed, in its regulatory capacity, failed miserably to use their authority to oversee credit markets and assure that they were not unduly exploiting those low interest rates with irresponsible lending practices. Now we have a mess on our hands. Bernanke has the only pooper-scooper in town, but it is too small for the job.

Reich, secretary of Labor in the Clinton administration, is the author of “Supercapitalism: The Transformation of Business, Democracy and Everyday Life”

‘Now the Illusions Are All Gone’
Masaaki Kanno
On the market’s steep decline: Japan’s stock prices moved in line with other developed economies until July of last year. Since then the subprime has become one of the major issues. The irony is that Japanese banks didn’t suffer from exposure, but Japanese share prices fell more sharply than average stock markets. There are a couple of reasons. First, global investors sold shares on all the stock markets, including Japan, the United States and Europe. In Tokyo, if my memory is correct, two thirds of the turnover is by the foreign investors. Second, the July election was a very big turning point, when Shinzo Abe became a lame duck and was later succeeded by Yasuo Fukuda. Since then there has been no strong message on reform.

On leadership: Japan has had no [perspective], not only from politicians but from firms, senior management and foreigners. Overseas stockholders who proposed a different management style in firms were unfortunately rejected. Japan disappointed the rest of the world in terms of governance.

On the market’s prospects: Japan’s stock prices have been overvalued, with a P/E ratio higher than the United States and other developed countries. That was justified until the 1980s, but then Japan’s economic growth got much worse. We saw a normalizing of stock prices, until Junichiro Koizumi became prime minister [in 2001]. People started to get back to the old theme—”Well, Japan’s potential growth rate might have changed.” But now the illusions are all gone. We are in a correction phase, but the P/E ratio is still almost equivalent to America’s and Europe’s, and if people believe Japan’s growth rate will remain far below the United States’ and Europe’s, then Japan’s stock price needs to come down. That is the basic market sentiment. I think the rationale is very strong.

Kanno is chief economist at JPMorgan in Tokyo.

Rupert Stadler
My personal view is optimistic. There have been market adjustments before. Our incoming order numbers are strong, and we haven’t seen any signs of a slowdown. German industry has worked very hard in recent years to gain technology leadership, hold down costs and raise productivity. We’ve worked on diversifying our export markets away from being dependent on just one major region. German companies are more robust and better prepared than ever. We have a lot more room to breathe today than just a few years ago. Like many German companies that concentrate on the premium segment, our business is by nature not as volatile as the mass-market end of production. Our export markets are much more diversified today, and that holds not just for Audi but for all of German industry. We’re no longer dependent on one or two major markets. For us, growth in the emerging markets is going to compensate for slower regions elsewhere. If there is a U.S. recession, American companies will be in a more difficult position, since they’re more dependent than we are on the domestic market.

Stadler is chief executive officer of Audi.