The New New Normal

American Anxiety

The numbers say the stumbling U.S. economy is picking up steam. But there’s good reason to worry.

A few weeks ago, I asked a room full of students and their parents to raise their hands if they were anxious about America's economic future. It's a question I have asked on several occasions in recent months and once again, virtually every hand in the room shot up.

At first sight, this seems to contradict the scientific data. After all, the University of Michigan's widely followed measure of consumer sentiment improved again last month, and recent monthly employment numbers have also been pretty good -- both signaling that the economy continues to heal. Yet, Americans are hesitant to interpret recent improvements as a sign of long-term recovery, and understandably so.

In part, this is because the effects of the 2008 global financial crisis are still with us, reflected in the 5 million Americans who are long-term unemployed, the millions of other discouraged citizens who have exited the labor force in recent years, the 20 percent of homeowners who are upside down in their mortgages, and the 4 million houses facing a high probability of foreclosure.

There is also something else at play: Americans are rattled by the reckless and previously unthinkable political behavior they have seen in Washington. Be it politicians' repeated willingness to play Russian roulette with the economy (the fiscal cliff being this year's sad sequel to the debt ceiling debacle) or last year's loss of one of the country's AAA credit ratings, Americans are regularly confronted with destabilizing realities that are hard to comprehend. And the further citizens get pushed away of their comfort zones, the less they trust the institutions of government. Lack of trust, in turn, encourages people to pursue approaches that undermine rather that nurture the collective good.

Moreover, for the first time in over 100 years, our children's generation risks being worse off than that of their parents. This could mean not only relative deprivation, but also the fracturing of a society built on the notion of continuous improvements in living standards -- embedded not only in the popular narrative of the "American dream," but also in mundane constructs like retirement and health insurance plans. But if anxiety about the medium-term economic outlook is understandable, how best can we navigate this uncertain future?

There are several things that each of us can do to improve our outlook and that of our children. At a minimum, these efforts will help us weather a period of uncertainty. And if our politicians get their acts together and stop bickering, they could significantly amplify the country's economic recovery.

Education is at the foundation of a better outlook. Even with all the complaints about its current state, the data confirms that the more education individuals have, the greater the probability that they will find a job and remain employed. And the numbers are startling: The unemployment rate for dropouts is three times higher than that of college graduates.

But basic education is no longer a guarantee of economic wellbeing and financial stability. Acquiring forward-looking skills, particularly in specialized manufacturing and upper end technology, is a good way to enhance professional competitiveness. And while many schools and universities still lag behind in offering this kind of instruction -- and America has yet to revive meaningful vocational training -- there is an ever expanding array of online course offerings that can help fill the gap.

The impressive growth of the Internet, and its inspired use, has made this possible for practically anyone. And you don't have to sit through the increasing number of stuffy lectures available online from reputable universities. Just visit the website of the Khan Academy to see the amazing range of accessible content. To succeed in the world of today and tomorrow, the average citizen also needs to have a broader global perspective, a better understanding of different cultures, and deeper intellectual curiosity about how best to reconcile different perspectives. Again, the Internet is a great help here, and one that can provide a foundation for many that are currently excluded.

Higher productivity and better growth prospects are absolutely necessary for improving the economic outlook. But they are unlikely to be sufficient. Improved financial literacy will also be essential if the next generation is to manage the consequences of the enormous debt they are inheriting. School curriculums have a lot of catch up on here, starting with offering better asset-liability education and more emphasis on how to navigate the confusing financial landscape faced by consumers.

Finally, there is the issue of social awareness. It is depressing to see the extent to which popular narratives have been distorted and oversimplified. The rich and privileged need to stop hiding behind the façade of the American dream. A little bit of hard work is clearly not enough for every citizen to escape poverty. At the same time, however, less well-off segments of society should be careful about placing all the blame on "the system" for being rigged against them. Both views are harmful exaggerations, and both ignore the reality of how interconnected American society is.

But what of our collective future? Individual efforts to enhance human capital will pay big dividends if politicians pivot toward more collaborative behavior. Shared responsibility must become a defined norm, along with shared sacrifice, and fair burden sharing -- no small task for politicians motivated by short election cycles.

Many will tell you that the required course correction contravenes some basic notion of atomization that has served the country extremely well throughout its history. Others will add that it's simply too hard to modify the American selfish gene syndrome that, guided by Adam Smith's "invisible hand," has delivered superior outcomes.

I am not so sure. And there is reason for you to be equally skeptical.

Recent unthinkables like Congress's handling of the fiscal cliff should not be treated as noise with little information content. Rather, they should be thought of as a signal that the system is struggling to accommodate some pretty meaningful shifts in the underlying parameters of economic and financial interaction. By better understanding the forces in play -- through clear-headed and less dogmatic discussions of the pros and cons of alternative scenarios -- we can go a long way in taking better control of our destiny and overcoming what is a debilitating sense of anxiety and helplessness.

Call me naïve, but I believe that we can overcome this issue through better information sharing and clearer advocacy. And in saying this, I draw courage from what happened in my home state on November 6: Californians came together and voted for a higher tax rate in order to provide more funds for education.

As he starts his second term, President Barack Obama has an important opportunity to convert into positive energy the nation's high level of anxiety about its economic and financial outlook. Let us hope that the political parties can help him by overcoming their pettiness and, thus, enable the nation's broad-based aspiration for a much better future. If not, our collective anxiety will continue to rise and the payoffs from inspired individualism will fall far short of what is possible, desirable and, indeed, necessary.

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The New New Normal

The Arabian Horse

Can Egypt's economy deliver on the revolutionary promise of a better future for all?

As Egypt's first democratically elected president, Mohamed Morsy, and his newly appointed prime minister, Hisham Qandil, assume their new roles, there is broad-based recognition within the country of the critical importance of the economic situation. The economy speaks to more than the realization of the objectives of the popular uprising that erupted in Cairo's streets in January of last year -- a revolution that, in just 18 days, overthrew a president who had ruled with an iron fist for almost 30 years. Perhaps just as fundamental as political reform, Egypt's economic strength will determine whether the revolutionary process succeeds or, instead, falls victim to counterrevolutionary movements.

Egypt's current economic situation is far from reassuring. Growth is insufficient, factories are operating well below capacity, and investment in new industry and equipment upkeep is way too low. Meanwhile, too many foreigners, be they among the millions who each year visit Egypt's incredible attractions or those who channel foreign direct investment into the country, are understandably nervous and staying away. In the process, they withdraw oxygen from a struggling economy.

Unsurprisingly, unemployment and underemployment are worrisomely high, constituting a huge economic and social challenge. It is not just the 12.6 percent official unemployment rate that most believe understates the extent of the problem. Among the young, many of whom so bravely led last year's popular uprising, the jobless figure is above 25 percent. No wonder so many are frustrated at the slow progress being made in improving the livelihood for millions of Egyptians.

Meanwhile, too many of those who are employed find that the combination of years of frustration and low wages, together with new sky-high expectations, is undermining labor relations and triggering periodic strikes. The result is an economy that is producing well below potential and has an even greater shortfall relative to people's aspirations and expectations.

Unfortunately, Egypt does not have a meaningful pool of savings to help transition through these challenging times. Too many citizens already live near or below the poverty line. Social safety nets are stretched thin. The fiscal deficit is running above 10 percent of GDP, contributing to higher borrowing costs and a weakening of the once strong debt dynamics. And over two-thirds of the country's stock of foreign reserves has been used up in the last 18 months, reducing the stock to about $15 billion.

The longer this persists, the greater the risks to the revolution. And the implications will be felt well beyond Egypt. The country's well-being has a direct bearing on the stability of the Middle East. Additionally, with a population over 80 million, it is not surprising that some European officials worry in private about the possibility of waves of Egyptian migrants.

Those of us who know Egypt well and follow it closely are, of course, concerned. We sense the mounting frustration of many Egyptians. We fear the high human costs. We worry about the pessimism that is starting to spread. And we recognize that the longer all this persists, the harder it is for Egypt to complete the critical pivot that follows the overthrow of a government. For it is not the topping of a regime that determines the overall success of a revolution -- it's dismantling the past in favor of a better future.

Fortunately, these concerns are not yet overwhelming, nor need they be. What Egypt faces today is similar to what other countries have gone through in prior revolutionary processes. Recall all the questions that were raised about South Africa and its ability to transition peacefully away from an entrenched apartheid regime -- and about Central and Eastern Europe, where countries like Hungary and Poland faced massive revolutionary challenges. Then there are other countries, particularly among the former Soviet republics and in Africa, that have failed in, or are still struggling with, their revolutionary transformations.

Both on a stand-alone basis and relative to other countries, Egypt has many attributes that should make economic observers hopeful. These indigenous benefits suggest that, with a coherent set of policies that mobilize broad-based domestic buy-in, the economy can go from potentially undermining the revolution to not only thriving, but delivering on the revolution's important objectives of social justice and a better Egypt for the vast majority of the population.

There are least five reasons that warrant constructive analysis and cautious optimism.

First and foremost, there is widespread recognition of the importance of the economy among Egypt's political parties, its vibrant youth movements, its vocal media, and the Supreme Council of the Armed Forces (SCAF). They all know that, though the economy is not everything, it is key to meeting the legitimate aspirations of over 80 million citizens. Of course, this understanding does not guarantee action, but broad-based recognition is an important prerequisite that Egypt has often lacked.

Second, Egypt has the physical and human attributes to sustain high economic growth, fuel a dynamic labor market, and undertake a developmental breakout phase. Remember, this is an economy that achieved bouts of strong growth in the 1990s and 2000s, even though it was repressed and subject to resource misallocations due to corruption and the granting of monopoly powers to friends of the previous regime.

Third, the country offers investors a large domestic market, especially for consumer basics, and a pivotal foothold in a region that, especially when underpinned by stable democratic politics, will constitute an important driver of earning for multinational companies. As such, Egypt has the potential to attract sustained surges of foreign direct investment. This will bring more than capital: Technology transfers, new management approaches, and huge potential for co-investments with domestic firms will follow.

Fourth, the large Egyptian diaspora is extremely willing and able to support the country in its quest to achieve economic, financial, political, and social stability. For my part, I continuously come across successful Egyptians abroad who are looking to channel money back to Egypt. Some are even talking about returning to the new democracy, something that they admit would have been unthinkable for them just two years ago.

Finally and most importantly, average Egyptians feel that they finally "own" their country and that, now, they have a say in determining their future within it. With that, and after years of marginalization, comes a sense of responsibility that is already apparent in the surge in community service and other civic engagement. More generally, individual and collective incentive structures are changing to the better. This is no longer seen as an economy that is destined to serve only the ruling elites and their close circles. With that comes the possibility of a greater willingness to engage and, yes, perhaps even start to trust more in the rule of law.

Call me an optimist, but I believe it is not a question of whether these factors will ultimately prevail; they will. The critical challenge today is to shorten the transition period and the related human and financial costs. Here is where a more coherent policy framework can -- and must -- play a critical role in accelerating the benefits and maximizing the costs.

In the next few months, and as the SCAF fulfills its promise of returning to its role as the guardian of Egypt's borders against outside aggression, the country's newly elected leaders will need to deliver quick on four key issues: 1) design, communicate, and start implementing a coherent medium-term economic vision with transparent and understandable objectives and road markers; 2) combine this with an immediate stabilization effort to minimize the risk of Egypt slipping into a financial crisis; 3) engage foreign creditors on terms consistent with the country's developmental needs; and 4) reorient a costly subsidy program that sends too much money to the rich and does not do enough to help the most vulnerable segments of the population.

From how to use foreign loans and revamp hopelessly inefficient social safety nets to how to better tap into areas of dynamic growth in the global economy and translate this into job creation, all this will require Egyptian officials making difficult decisions and transparently conveying their rationale to the population.

Some existing monopolies will need to be dismantled quickly, as will a whole host of regulations that were meant to protect the elites rather than encourage inclusive growth. Budgetary reforms, involving both the tax system and government spending, can ensure that Egypt's scarce government resources are used more effectively and fairly. There are gaps in the financial system that can and should be filled to ensure better mobilization of domestic private savings and their improved allocation to productive investments.

By necessity, this is a complex and difficult endeavor. But it is also a feasible and desirable one. The gains for Egypt and the region would be substantive.

I have no doubt this is possible. The Egyptian economy resembles an Arabian horse. It struggles to gallop and can be outright skittish when the surface is uneven and the destination is uncertain. But with firm footing and a clear destination, it can run with speed, endurance, and elegance.

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