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. 

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.

Dennis M. Sabangan/EPA

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.

Scott Olson/Getty Images