How Obama Can Fix the US Economy

09/28/2010 10:03 am EST

Focus: MARKETS

Jim Jubak

Founder and Editor, JubakPicks.com

Some advice on filling that economic adviser job at the White House: Think big, get tough in the global economy, and invest in America's future. Oh, and call Jim Jubak.

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

Why doesn't my 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 US economy?

I've quickly worked up this draft of an answer. I don't know 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. My 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, he asked, by closing firehouses?

Now I'm looking at a $14 trillion US 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 been stagnant for the past 30 years—especially if you take out extra dollars that come from having more moms in the work force and having one or both parents work extra and/or temporary jobs. For some workers—blue-collar industrial workers and workers without high school degrees—the Great Recession began not in 2007 but in the 1980s and hasn't ever ended.

Even the great job-creation surge in the Clinton years doesn't look like the best of times when you consider the kinds of work created—lower-paying, predominantly service-industry jobs—to replace the higher-paying manufacturing jobs that had been lost.

Let's admit that the ideas now getting recycled in the midterm election campaigns from both parties haven't prevented or reversed that long income stagnation—and they aren't likely to. It's 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 because they're too narrowly focused to end a 30-year problem.

As Larry Summers would say—if we transplanted James Carville's brain into the Harvard economist's body (and that would sure be fun)—"It's the global economy, stupid." Fixes that ignore the global economy are going to be too small or completely misguided. And those of us who live in the United States will 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 concede that when it comes to exports, the US has become essentially a commodity economy. We export corn, coal, and scrap paper, and we import TVs, cars, and solar cells. Export our way out of this mess with an extra paragraph here or there in our trade treaties? Oh, puleez!

NEXT: It's Time to Play Hardball!

|pagebreak|

Play Hardball (or Insert Your own Sports Cliché here)

Let me give you an example ripped from the headlines, as we say here in New York. China has slapped quotas on its exports of rare-earth minerals essential for building hybrid cars, wind turbines, amplifiers for optical cable communications networks, and the newest fluorescent lights.

If companies want to build these products and are worried about their sources of these raw materials, they can make sure they have plenty to work with quite simply—by moving production to China.

And we're going to fight back against this sort of globalism by creating a $30 billion loan fund for small businesses or lowering mortgage rates (by having the Federal Reserve run up its balance sheet)?

It's war out there in the global economy, and the battle is to secure the world's scarcest commodity: Good jobs. That's way better than real war, let me remind you. But to stand a chance in this war, the US has got to at least match the firepower of the other countries.

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 makers of high-speed trains are going to fight it out to see who gets billions in US taxpayer money to build a high-speed line in California.

Where's General Electric (NYSE: GE) in that competition? And if we don't have the team that can play in the big leagues in high-speed trains, 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, cheap financing is the only thing they've got that we don't. (And it's hard to believe that it isn't cheaper to provide low-interest taxpayer financing to US companies than it is to spend taxpayer money saving an industrial shell from bankruptcy.)

If moving from a defensive crouch to offense means using government resources to create competitive industries from scratch, so be it. It's cheaper in the long run than paying for years of unemployment and the social havoc that would cause. It's insane that the US 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, Bigger!

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

Countries such as France and China have official national champions—companies the governments back to drive their domestic economies and the countries' exports overseas. The US has de facto national champions. They haven't been awarded that title by some bureaucrat, but have earned it in the actual marketplace. Intel (Nasdaq: INTC), for example, is one.

But our de facto national champions often don't get much actual support from Washington, although we do give hefty tax breaks to last-century industries such as oil. So Intel winds up building a chip plant in Vietnam because that country supplies cheap land and labor. With government incentives, the US could match that. And don't say that isn't our system. Alabama, South Carolina, and Tennessee are perfectly comfortable paying BMW (OTC: BAMXF) or Toyota Motor (NYSE: TM) to build plants in their states.

MORE: Time to Fix Washington, too

|pagebreak|

Get Over Our Bad Case of “Not Invented 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 Marie Curie fan club ring that it wasn't), it sure isn't now. We need to stop exporting technology and to start importing some, too.

I've got no problem with Boeing (NYSE: BA) subcontracting work to Chinese companies and giving a boost to China's aircraft industry through legal or extralegal technology transfer. But how about some of it flowing the other way? How about a US company getting its hands on the technology to build a high-speed train as part of any contract in California? How about getting ArcelorMittal (NYSE: MT) to transfer its best practices to US steel company partners when it builds a plant in the US?

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 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 many of the workers feeling the brunt of this 30-year stagnation are those without high school degrees, let's make sure that the next generation has more education and the next generation even more. And let's 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 the rest of the world will, too. We can't say we've got a shortage of engineers, 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 to 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.

Let's Fix Washington, too

Your response to this is likely to be, "We can never get anything like that through Washington." (And 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 problem 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 (ha!) in the age of social networks and online collaboration? Why not do away with the current budget system entirely and let Americans vote online for the programs they want to fund? Maybe within 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 five years to kill the kind of boondoggle that now lives on forever.) And I'd suggest a simple rule: Adjusted for the economic cycle, we couldn't spend more than we had. Of course, to do that we'd need to actually implement a capital budget in Washington.

Or how about something like "American Idol" in which Washington department heads competed on TV for our money? Or "Budget Survivor," in which the worst government programs could get voted off the island (or out of D.C.).

I'd watch, especially if they had tiki torches.

Looking at my plan, I can't understand why the White House hasn't called. Come on, phone, ring!

At time of publication, Jim Jubak did not own shares of any company mentioned in this column in his personal portfolio. He also does not watch "Mad Men."

Jim Jubak has been writing "Jubak's Journal" and tracking the performance of his market-beating Jubak's Picks portfolio since 1997 on MSN Money. He is the author of a new book, The Jubak Picks, and he writes the Jubak Picks blog. He is also the senior markets editor at MoneyShow.com.

Related Articles on MARKETS