As members of Congress sat listening to President Barack Obama’s State of the Union address – many from a new vantage point across the aisle – they applauded the president’s inspiring themes centered on rebuilding the nation’s economy. Surely a concerted effort to address our economy is critically needed and long overdue. That said, very little of what Obama said would have material impacts on creating jobs in the current decade. To accomplish that, the focus should not be creating new government programs, but rather repairing what the government can fix through regulation and supporting what the private sector can do in developing new industries.
In the regulatory arena, the half-hearted financial reform implemented last year left the big banks intact and still too big to fail. More importantly, it neglected to address the most fundamental element of the financial crisis: the enormous overhang of bad debt on consumer balance sheets (which inhibits borrowing) and on corresponding bank balance sheets (which inhibits lending).
Numerous international studies have shown that after major debt crises, those countries which immediately nationalize all of the bad debt and sell it off to the private sector return quickly to growth. Countries which allow bad debt to linger may never return to growth. The country’s experience after the commercial real estate crisis in the 1980s produced an institution -the Resolution Trust Corp. (RTC) – which nationalized and liquidated the debt overhang from the S&L crisis. The RTC concept could be recreated today to liquidate the subprime mortgage debt clogging our banking system and restore normal borrowing, lending and growth.
The other major gap in government conceptions of economic development is a blind spot to building on what works. Achieving significant job growth in less than a decade must be based on an honest assessment of what industries are competitively capable of globally on a large scale. The role of government should be to facilitate the expansion of these sectors through trade initiatives, planning of education and regulation management. In this context, the government should concentrate on enhancing areas of the nation’s existing economic competency such as information technology, advanced machinery, aircraft and health care products, as well as resource based export growth areas of agriculture and the nation’s recently discovered bonanza of shale gas. High-speed rail and most "green energy" are still economically marginal and will produce significant jobs by mid-century, if then.
This perspective is probably too market-based for most Democrats and too interventionist for most Republicans. Perhaps, however, if members of Congress continue to venture across the aisle between now and the next State of the Union address, they will find the political center on an economic recovery plan focused not on creating new programs, but on purging our system of our weaknesses and capitalizing on our strengths.
Steven C. Carhart is president and chief investment officer of Trust & Fiduciary Management Services Inc. in Boston.
