The New New Normal

Getting Down to Business

The bad news is Washington hasn't seen the last of its bickering, dithering, and gridlock. The good news is Obama can change that in his first 100 days. 

Dennis M. Sabangan/EPA
Dennis M. Sabangan/EPA

For most of 2012, it was fashionable to characterize the U.S. presidential election as one of the most defining events in recent times. Certainly, if you happened to live in Florida, Ohio, or another battleground state, you were barraged with advertisements announcing that choosing one or the other candidate would result in the end of days. Amid a hotly contested and often bitter campaign, the presidential candidates went out of their way to highlight their differences, by exaggerating not just the good that each would deliver if elected but also the bad that the other would impose.

Now it’s time for a reelected President Barack Obama to govern. First, though, a hard truth: As he thinks about his new presidential term, Obama will soon realize that, even if the spirit is willing, he will be unable to meet many of his election commitments. There is no rapid way to reverse the multiyear decline of America’s middle class and no immediate way to pull up the poor who have fallen through the country’s stretched social safety net. This inconvenient reality needs to be internalized quickly.

The United States’ economic and financial situation provides Obama a limited degree of freedom, and a less-than-accommodating global environment adds to these constraints. Combine this with the reality of a divided Congress — where too many elected officials have made personal pledges to oppose any and all taxes, a vow inconsistent with the country’s current circumstances — and what transpires is an uncomfortably high probability of continued bickering, dithering, and gridlock.

So rather than surging ahead with promised new initiatives, the incoming Obama administration risks ending up in the same political paralysis that dominated Washington the last few years. Think a world in which the U.S. economy’s expansion stays sluggish, joblessness remains high (especially among the young and the long-term unemployed), income and wealth inequality continue to worsen, and deficits and debt continue to rise. Further political polarization and fragmentation in Obama’s second term would reduce the likelihood of getting any good policy out of Washington, accentuating what has become a depressingly familiar and increasingly vicious cycle.

That’s the bad news. The good news is that it need not be like this. In his second first 100 days, Obama has an unprecedented opportunity to right a fragile global economy and change the way Americans — and the world — think about Washington.

The steps fall into two broad categories: first, to limit and, if possible, remove the headwinds undermining economic success (in other words, do no harm); and second, increase the tailwinds (do outright good).

As for the headwinds, Obama’s first challenge — on full display this week during the flurry of deal-making on Capitol Hill — has been to remove the "fiscal cliff" threat of automatic tax increases and spending cuts. The economy cannot absorb a disorderly fiscal contraction of some 4 percent of GDP without falling into another recession. Going over the cliff would increase unemployment and erase some of the hard-earned balance sheet cleanups of recent years. By exploiting common political ground with his Republican opponents, however, the president can limit the fiscal contraction to some 1.5 percent of GDP, which could also help set up longer-term fiscal reforms.

Second, the official narrative on China needs to pivot away from election-season bashing to constructive dialogue. The basic challenge is to enable discussions that minimize the tensions inherent between an established power and a rising one — and in a way that underpins regional stability. To this end, Obama will need to reach out to the new Chinese leadership, walking back the dialogue from a single-issue focus (the exchange rate) to broader economic governance issues.

Third, the new administration needs to do more to help solve Europe’s debt crisis. Another few rounds of public lecturing will only irritate European policymakers more. What’s needed is meaningful progress in better harmonizing differences in regulation. In this effort, Obama needs to work with Europe above all else on giving emerging markets a meaningfully bigger say in the actions of the IMF and the World Bank.

Fourth, and most importantly, the new administration must be brutally honest with the American people about the multiyear, multidimensional nature of the United States’ economic and financial challenges. After all the promises of the election cycle, Americans need to better understand the scale and scope of the problem. Obama needs to speak directly to the people and then appoint a specialized spokesperson to ensure that citizens and markets understand the president’s economic vision and its implementation.

Once a better system of communication is in place, it’s time to work up some tailwinds. Obama needs to initiate a reform effort that touches on four key areas — and do so in way that 1+1+1+1 equals much more than 4. And it can.

He should begin by appointing a "jobs czar." If ever a national economic challenge required a person empowered by the president to break intra-agency blockages, America’s unemployment crisis is it. Dealing with the malfunctioning labor market is one of the absolute top priorities. A stubbornly high joblessness rate — and one that has disproportionately hit the young and long-term unemployed — has turned a demand-deficiency problem into an increasingly structural one. America also needs aggressive labor retooling and retraining programs while making education more relevant to today’s rapidly changing world.

Second, Obama needs to restart quickly the dialogue on medium-term fiscal reform. The election narratives suggested that a partial approach is possible by focusing primarily on just one side of the budget or the other. Don’t believe it. The math indicates that there is no sustainable reform — one that combines long-term debt sustainability, growth-enhancing realignments, and fairer burden-sharing — without addressing both revenues and spending. And that begins with resurrecting the Simpson-Bowles debt-reduction plan to provide the initial analytic framework for a political compromise.

Third, there is no escaping the reality that lending will continue to be constrained as regulatory and market pressures force the banking system to deleverage further. Yet the financing of small business that Obama championed on the campaign trail should not be held hostage to banks’ risk-averse behavior. Instead, Obama needs to initiate and lead a process of building alternative credit streams, some financed by the private sector for, say, working capital, while other things like infrastructure can be funded with public-private partnerships.

Finally, Obama needs to address the persistent problems in housing, a sector critical to the well-being of citizens, labor mobility, and stable wealth accumulation. The good news is that this market is stabilizing; the bad news is that a full recovery will not occur without principal forgiveness and difficult decisions about allocating losses.

This may seem an ambitious to-do list. But there’s an ambitious amount of work to be done to correct years of excessive leverage, poor investment, an entitlement mentality gone crazy, and a risk culture gone haywire. Obama might not be able to claim an overwhelming electoral mandate, but a proactive administration with a clear agenda can lead a fragmented, discredited Congress toward greater collaboration. Anything short of this will condemn our children’s generation to being worse off than our own.

Mohamed A. El-Erian is chief economic advisor at Allianz and the designated president of the University of Cambridge’s Queens’ College. Twitter: @elerianm

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