Can Obama spend US back into prosperity?
Presidents, particularly Democrats it seems, love to try and attach catchy titles to their agendas. FDRâ€™s New Deal and JFKâ€™s New Frontier made for powerful branding. Bill Clintonâ€™s New Covenant, not so much.
Barack Obama seems to be going with â€śNew Foundation,â€ť the title of a big-think economy speech from last spring. As the President said back then with biblical flair: â€śWe cannot rebuild this economy on the same pile of sand. We must build our house upon a rock. We must lay a new foundation for growth and prosperity.â€ť
As a follow up, the White Houseâ€™s National Economic Council, headed by Lawrence Summers, just released a new white paper that fleshes out how the administration plans to create that â€śnew foundation.â€ť In a post on the official White House blog, Summers says the government needs to take an active role in strengthening Americaâ€™s â€śeconomic ecology.â€ť
But letâ€™s examine the diagnosis before we turn to the prescribed treatment. The most important statistic for analyzing a nationâ€™s economic strength is worker productivity. And since 1995, U.S. worker productivity has increased at a terrific annual rate of about 2.6 percent.
But is that somehow a phony number, a mere derivative of the equity and housing bubbles? The White House doesnâ€™t seem to think so. As economic adviser Jared Bernstein told me recently, â€śThere is nothing thatâ€™s changed in the basic underlying productivity and strength of the American workforce and the American economy. [Productivity] remains in that kind of post â€“â€™95, elevated, 2 Â˝ percent range.â€ť
In other words, Obama actually inherited an economy with a pretty solid foundation, though clearly one with some cracks. And donâ€™t forget that despite the financial crisis, the World Economic Forum still recently ranked the American economy as the second-most competitive in the world, far in front of major competitors such as Germany and France.
The key, then, is to build on Americaâ€™s existing strong foundation of innovation-driven productivity. Summerâ€™s NEC makes a variety of recommendation such as increased government investment in education, infrastructure and basic research. And as long as that spending is limited to the â€śbuilding blocksâ€ť of economic growth as opposed to picking winners, Uncle Sam might actually do some good here.
Unfortunately, the White House has been picking winners in a sort of an ad hoc industrial policy. Maybe the banks were too big too fail, but GM and Chrysler?
And why should the tax code continue to favor the housing sector? Is building bigger homes and vacation getaways the best use of American capital? Yet there is little evidence the White House plans on changing that sectorâ€™s privileged position.
And the President continue to favor the idea of high-speed rail, a favorite of unions and green activists, despite numerous studies questioning the economic benefit of such a system in the vast, spread-out United States.
The administration also seems to be making a bet that higher taxes on small businesses, investment and higher incomes will have limited or no negative effect on the nationâ€™s entrepreneurial climate.
Finally, any productivity guru will tell you that perhaps the most important thing a country can do to boost innovation and economic efficiency is keeping markets open. Or to use the favorite phrase of Diana Farrell, former director of the McKinsey Global Institute and now a Summerâ€™s deputy at the NEC, “creating maximum competitive intensity.” Obamaâ€™s tire tariff doesnâ€™t seem to qualify as a pro-innovation measure by that standard.
So by all means, repair some bridges and spend more bucks at federal labs. But innovation and productivity involve a whole lot more.