How Obama Can Fix the Economy
I’m mystified by all the hand-wringing about what a terrible time it is to be a new U.S. president.
Think of the presidents who have been judged by history to be truly great — Abraham Lincoln, Franklin Roosevelt, George Washington — and they’ve all served in times of crisis. But imagine what it would be like to be president when the crisis first unfolds, such as Herbert Hoover or now George Bush.
After all, the electorate wouldn’t be clamoring for change if everything were great, if easy credit remained there for the asking, stocks were hitting new all-time highs and speculators were still flipping Las Vegas condos. Crisis provides the political cover for undertakings that would otherwise be unthinkable.
Among other boons, for the time being we can forget about the deficit, because one thing we know from the Great Depression and Keynesian economics is that in crises like this the government has to get out there and spend. World War II produced the biggest deficits as a percentage of gross domestic product in U.S. history — and an end to the Depression. There will be time to balance the budget later.
With that in mind, here are my prescriptions for the economic crisis, were I stepping into the White House.
- Shoring up the banking and financial system must take first priority. Confidence, which eroded steadily after the demise of Bear Stearns, must be restored. We learned from the disaster at AIG that you can’t build a moat around the big banks and call it a day.
The non-bank participants in the global financial system are just as important, since the chain is only as strong as its weakest link. This means providing capital and liquidity to insurance companies and industrial finance arms like GMAC and GE Capital in return for preferred stock and ownership stakes where appropriate. These should be good investments, since so much of the crisis is psychological, and values will rebound when confidence is restored.
- The U.S. needs a comprehensive policy for faltering industrial concerns, probably starting with the auto industry.
This can’t be another case-by-case, ad hoc approach that arbitrarily favors some companies deemed too big to fail while consigning others to bankruptcy court. I favor the Warren Buffett approach: preferred shares that pay interest and warrants to acquire an equity stake at an attractive price. In fact, I might even ask Mr. Buffett to step up to this task. This can’t be a bailout of private-equity firms or existing shareholders. Someone in the Treasury will have to start thinking like a distressed-asset manager, since he or she will be managing the taxpayers’ money to earn a profit and will have to make tough-minded decisions about which investments are likely to pay off and which aren’t.
Will this be branded “socialism?” Not if the U.S. consistently manages its stakes as though it had a fiduciary duty to taxpayers, as opposed to management, labor, and other interests. The U.S. should be as tough on these companies as any private-equity firm, do what it takes to turn them around for the long term, and then get out, hopefully at a profit.
- Another lesson from the Depression is that spending on infrastructure helps, and can also be an excellent long-term investment. China just unveiled a $586 billion program that includes spending for airports, rail lines and highways, housing and other programs. These should raise quality of life, enhance productivity, and provide an economic boost. There’s no shortage of similar needs in the U.S.
If I’d just been elected on a promise to reduce dependence on foreign oil, I’d pour money into public transportation, including links between airports and central city transportation hubs. (I’d like to make a personal plea for an efficient rail line between New York’s Kennedy airport and Midtown.) And I’d invest in education and the arts, which will be starving for new facilities given soaring state and municipal deficits. I would certainly not be investing in bridges to nowhere, which is why this program has to be run from the White House, not Congress.
- I’d end compensation for failure. I’d legislatively ban employment contracts that call for huge severance payments without regard to performance. And I’d make prosecuting those guilty of fraud a top priority. When the government injects capital and takes a stake, I’d oust incumbent management unless there was a compelling reason not to. But I wouldn’t cap pay for success, including at big banks. This country needs incentives for the ingenuity, hard work, good judgment and experience that have made it great, now more than ever. I don’t begrudge Obama adviser Eric Schmidt at Google his billions; I wish we had more Googles, creating jobs and wealth and a product that benefits everyone.
- As president, I’d be the spokesman-in-chief. Transparency is essential. People have to understand what steps are being taken and why. They have to understand how the U.S. can afford all this, and how their tax money is being invested in our future rather than spent on useless pork. I’d be out talking and listening in the offices, the factories, the farms of America, not huddled in the White House.
I realize all this is easy for me to say. I’m not a politician, and I don’t envy anyone the rigors of a national campaign or the prospect of negotiating with Congress. But I think this is a great time to be president of the U.S., and if I were Barack Obama, I’d be seizing the historic opportunity that has just been handed me.
James B. Stewart, a columnist for SmartMoney magazine and SmartMoney.com, writes weekly about his personal investing strategy. Unlike Dow Jones reporters, he may have positions in the stocks he writes about. For his past columns, see: www.smartmoney.com/commonsense.