Escape Velocity

President Barack Obama’s State of the Union address offers a unique opportunity to address the key economic issues of our time. And the American people deserve no less. It’s been too long since the country was given an explicit and realistic assessment of where the economy stands — identifying what needs to be done to enhance economic and financial outcomes and assigning responsibility where it belongs.

The U.S. economy continues to heal steadily after the trauma of the global financial crisis that landed it in the economic equivalent of a hospital’s intensive care unit. It is generating jobs, fiscal and external deficits are narrowing, inflation has been contained, and disruptive cases of extreme financial vulnerability (including housing and banks) have been addressed. The patient has been released.

Yet the economy exited the hospital with structural impairments. As such, it can walk but it cannot run.

The country’s growth dynamics remain overly tentative, with the latest estimate for the final quarter of 2012 suggesting a mild contraction (though the revised numbers should be a lot better). Annual growth rates are mired in the 1.5-2 percent range, well below the economy’s expansion potential. And this morning’s small business survey confirms that a powerful driver of growth — and one that is key to the wellbeing of the middle class (and politics) — is stuck in first gear.

Yes, jobs are being created, but not enough to bring unemployment down from its current 7.9 percent to the historically more acceptable level of around 5 percent. Too many people are what’s known as "long-term unemployed" — 39 percent of those officially out of work, to be exact. And a growing number of Americans are depending on, and in some cases falling through, the country’s overly stretched safety nets.

Simply put, as hard as it tries, the U.S. economy is yet to attain economic escape velocity. As long as it remains bound by this additional gravity, middle- and lower-income households will find it hard to prosper, income and wealth inequality will increase further, and the economy will continue to struggle with a combination of persistently sluggish growth, unusually high unemployment, and worrisome pockets of poverty and deprivation.

Four issues, and ones I hope the president will address this evening, would contribute to the U.S. economy reaching this escape velocity:

1. At the macro level, the economy needs to transition from "supported growth" (which requires ever-more experimental and untested Federal Reserve policies) to "endogenous growth" (powered by more sustainable and less distortive engines).

2. At the sector level, improving the functioning of the labor market, education, housing finance, credit intermediation, and infrastructure renewal.

3. At the micro level, engendering private sector confidence that would unlock the trillions of dollars in cash that — rather than invested in new plants, equipment, and hiring — continue to lie idle on balance sheets and in bank’s excess reserves.

4. At the financial level, replacing the blunt spending cuts associated with the sequester with a more thoughtful approach; and, agreeing on a medium-term framework that puts an end to merry-go-round budgetary negotiations that unnecessarily add to uncertainty and further political polarization.

By speaking directly to these issues, Obama can constructively reset the economic narrative at the very start of his second term. And in doing so, he would also help citizens reconcile three emotions that run high in America today: excitement, hope, and anxiety.

Many people are excited by how the impressive rally in financial markets has improved their 401Ks, their pension savings, and their investments. They are hopeful that, unlike the last few rounds of ups and downs, this rally will be validated by strengthening economic fundamentals. But they also remain anxious, worried not only about political dysfunction in Washington but also companies’ hesitancy to invest, hire, and expand.

Tonight, in addressing what needs to be done on the economic front, the president can reassure citizens that America remains in full control of its destiny. Unlike struggling countries in Europe and elsewhere, it does not depend on the goodwill of others; nor does it face any immediate financial vulnerability.

The president also has the opportunity to make the point that what holds back prosperity today has less to do with traditional economic engineering and more with congressional politics. Indeed, while economists may differ on the precise details of an optimal policy package, there is little disagreement on the ultimate policy objectives and the related need for simultaneous progress on growth-enhancing structural reforms, demand management, and medium-term fiscal sustainability.

Which takes us from the "what" to the "who."

In addition to setting out where the economy stands and what it needs to go forward, Obama should not hesitate to remind the nation how dysfunction in Washington has repeatedly derailed sensible economic initiatives. From jobs to housing, many helpful reforms have fallen victim to extreme political polarization and endless election posturing.

As a rule, substance has repeatedly given way to trifling tactical maneuvers. Even the most basic economic governance responsibility — that of passing an annual budget — has eluded Congress for four straight years now. More generally, the sense of common purpose and the anchor of national unity have been replaced by rancor and pettiness.

By setting out a clear vision of what the economy’s traditional vibrancy and innovative spirit is capable of, the president can place the required policy measures in a powerful context and assign implementation responsibility to those elected for that purpose. In the process, he would better align politicians’ incentives, as well as use popular opinion for stronger congressional accountability — a powerful tool in this digital era of social media.

The State of the Union address will hopefully be remembered as an important step in starting to overcome the gridlock that has undermined for too long the dynamism and entrepreneurship of the largest economy in the world — a logjam that has come at a considerable cost to society.

I come to this conclusion as an economist that follows closely data and policy discussions, and as one that is hopeful that good sense and national duty will ultimately prevail on Capitol Hill.

But I am also saying all this as a parent. The longer it takes to shock Congress into a more constructive operational mode, the higher the risk that our children’s generation will be worse off than that of their parents.