How to fix the U.S. economy? First, no more baby steps

09/28/2010 9:13 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

I haven’t been able to sleep ever since I read that Larry Summers is leaving his post as President Barack Obama’s top economic advisor.

Why doesn’t the phone ring? I’m eating with it at my elbow. I’ve changed the way I walk to work to avoid cell phone dead zones. I’m even sleeping with the phone. And still no one has called to offer me the post.

I know the phone’s going to ring though and I want to be prepared for the BIG QUESTION: What would you do to turn around the U.S. economy?

I’ve quickly worked up this draft of an answer. I don’t now how much more time I have before the President calls.

Change the way we define the problem.

No more baby steps. You don’t fix a crisis this big by tinkering around the edges. I had this drummed into me in a business school class in 1984. The assignment was to come up with a budget to fix the New York City economy. The professor read my carefully prepared solution and laughed. Well, actually he guffawed. You think you can fix this budget by closing firehouses? he said. Now I’m looking at a $14 trillion U.S. economy with an unemployment rate pushing 10%. Tinkering with the tax code or offering a FICA tax holiday isn’t going to fix this crisis.

Admit that as bad as things are now they weren’t exactly swell before the crisis. Incomes for the average family have stagnated for the last 30 years—especially if you take out extra dollars that come from having more moms in the workforce and having one or both parents work an extra temporary job. For some workers—blue-collar industrial workers and workers without high school degrees, the Great Recession that officially ended in June 2009 began not in 2007 but in the 1980s. Even the great job creation surge in the Clinton years doesn’t look like the best of times when you look at the kinds of jobs being created—lower paying, predominately service jobs--to replace the kinds of jobs—higher paying manufacturing jobs--the economy was losing.

Let’s admit that the ideas now getting recycled in the mid-term elections from both parties haven’t prevented, turned around, or reversed that long crisis—and they aren’t likely to. Not because tax cuts, tax increases, education credits, No Child Left Behind, spending cuts, spending increases and the other patent medicines peddled by politicians don’t have any effect, but because they’re too narrowly focused to fix the 30-year long crisis.

As Larry Summers would say—if we transplanted James Carville’s brain into the Harvard economist’s body (well, that would sure be fun)—It’s the global economy, stupid. Fixes that ignore the global economy are just going to be too small or completely misguided. And those of us who live in the United States are going to have to give up some of our economic illusions. (Come on, you can do it—it’s not nearly as painful as giving up Mad Men.) For example, it’s time to admit that when it comes to exports the U.S. has become essentially a commodity economy. We export corn, and coal, and scrap paper, and we import TVs., and cars, and solar cells. Export our way out of this crisis with an extra paragraph here or there in our trade treaties? Oh, puleez!

Decide to play hardball with the big dogs. (Or fill in your own favorite tough guy sports cliché here.)

Let me give you an example ripped from the headlines, as we say here in New York. China slapped quotas on its export of rare earth minerals essential for building hybrid cars, wind turbines, amplifiers for optical cable communications networks, and the newest fluorescent lights. Companies that want to build these products and who are worried about their source of raw materials can always make sure they have plenty of rare earth minerals to work with my moving production to China. And we’re going to fight back by lowering mortgage rates (by having the Federal Reserve run up its balance sheet) or creating a $30 billion loan fund for small businesses?

It’s war out there in the global economy (which is way better than real war, let me remind you) and the battle is to secure the world’s scarcest commodity—good jobs. To stand a chance in this war, the U.S. has got to at least match the firepower of the other countries.

And in this competitive economic war, we can’t afford to have all the battles fought on our turf and we can’t always be on the defensive.  European and Chinese high-speed train makers are going to fight it out to see who gets billions in U.S. taxpayer money to build a high-speed line in California. Where’s General Electric in the competition? And if we don’t have the team that can play in the big leagues in high-speed trains in California, how about we go after China’s market for freight cars or freight locomotives. It’s not like our stuff can’t compete with their stuff—in many cases all they’ve got that we haven’t got is cheap financing. (And I find it hard to believe that it isn’t cheaper to provide cheap taxpayer financing to U.S. companies than it is to spend taxpayer money saving an industrial shell from bankruptcy.)

If moving from a defensive crouch to offense means creating competitive industries from scratch so be it. It’s cheaper in the long run than paying for years of unemployment and the social havoc it causes. It’s insane that the U.S. doesn’t have a domestic source of rare earth minerals and that we’re willing to give anybody in the world control of something essential to 21st century technology.

Think big. NO BIG! BIGGER!

The world’s companies want our metallurgical coal? Fine. Have then build steel mills in Pennsylvania and West Virginia and even more car plants in Alabama. The world’s companies want our corn? Fine. Make their home countries tear down the trade barriers that keep U.S. chickens out of Russia and other nations. (Granted, it might help if we guaranteed not to dip them in bleach.)

Countries such as France and China have official national champions, companies that the government backs to drive the domestic economy and the country’s exports overseas. The U.S. has de facto national champions. They haven’t been awarded that title by some bureaucrat but have earned it in the actual market place. Intel (INTC), for example. Of course, our de facto national champions often don’t get much actual support (although we do provide last century industries like oil with hefty tax breaks) from Washington so that Intel winds up building a chip plant in Vietnam because that country supplies cheap land. The U.S. could match that. And don’t say that isn’t our system. Alabama and South Carolina and Tennessee are perfectly comfortable paying BMW or Toyota to build a plant in their state.

Get over our bad case of Not invested here. Maybe once upon a time we were justified in looking down at other countries' technology or to make jokes about their claims to have invented the telephone. But if that superiority was ever justified (and I’ll bet my Madam Curie fan club ring that it wasn’t), it sure isn’t now. We need to stop exporting technology and start importing some of it too. I’ve got no problem with Boeing (BA) subcontracting work to Chinese companies and giving a boost to China’s aircraft industry through legal or extra-legal technology transfer. But how about some of it flowing the other way. How about a U.S. company getting its hands on the technology to build a high speed train as part of any contract in California? How about getting ArcelorMittal (MT) to transfer its best practices back to U.S. steel company partners when it builds a plant in the U.S.?

We need to recognize that you don’t win in this global economy playing with out of date infrastructure. Our airports, highways, ports, and railroads aren’t up to the standards of the toughest of our competitors. And then there’s our electronic technology where our wireless and Internet network increasingly lags. Countries, especially countries such as Singapore that don’t have huge natural advantages, spend to create infrastructure advantages. We let ours decay because it costs too much money. In the short run the expense is certainly considerable although it could be spread over years or decades by a mechanism such as a government-seeded infrastructure bank. (One of the great ironies of the moment is that to find good infrastructure investments I have to send my money overseas.) In the long term it is again cheaper than running a country in permanent recession.
And let’s upgrade our human capital too. If the workers who are feeling the brunt of the pain in this 30-year crisis are those without a high school degree, let’s make sure that the next generation has more education and the next generation even more. And make sure that it’s education that’s appropriate to the new global economy. Raising standards so that every kid getting out of high school can do 12th grade math and write good (or is it "gooder"?) is a decent goal, but it won’t get the job done in the long run. We can’t learn only English and expect that the rest of the world will too. We can’t say, We’ve got a shortage of engineers and then turn out kids who can’t do trigonometry. It will take a long tough battle but again it’s cheaper to fight the battle than pay the long-term cost of losing it.

We should recognize that there’s a potentially nasty strain of xenophobia built into this idea of global economic competition and we should fight it actively by expanding all existing programs that get Americans acquainted—or better yet immersed—in other cultures. If you play any competitive sport, you know it’s possible to play to defeat your opponent with all your strength and still go out for a beer afterwards. And it’s fun.

Your response to this is likely to be “We can never get anything like that through Washington.” (Although I do recognize that another possible response is, Thank goodness, nothing like that would ever get through Washington.)

I refuse to accept that. If the current politicians won’t act, dump ‘em. It may take years to create a responsive government. But if it took 30 years to get the crisis to this stage, what’s another 30 years fixing it?

And as long as we’re thinking BIG, doesn’t it strike you as hopelessly antiquated that we elect representatives to vote our will (HAH!) in the age of social networks and online collaboration? Why not do away with the current budget system entirely and let voters actually vote on line for what programs they want to fund? Maybe with a limit of no more than a 20% change from one year to the next to ensure some kind of continuity? (So it would take 5 years to kill the kind of boondoggle that now lives on forever.) And with a simple rule that—adjusted for the economic cycle—we couldn’t spend more than we have. Of course, to do that we’d need to actually implement a capital budget in Washington.

Or how about something like American Idol where Washington department heads compete on TV for our money. Or “Budget Survivor” where the worst government programs could get voted off the island (or out of the District.) I’d watch, especially if they had tiki torches.

Looking at that program I can’t understand why the White House hasn’t called. Come on, phone, ring!

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