Rebuilding America: How Obama Can Still Turn Things Around

Fred Block: Rebuilding America

WE FACE a perilous situation in the aftermath of the midterm elections. Economic recovery will continue to be extremely weak in the absence of initiatives by the government to stimulate new investment. But with the Republicans in the House determined to block any such efforts, Obama could face reelection in 2012 with unemployment rates still higher than 8 percent. Even if he ran against Sarah Palin or another equally polarizing Republican opponent, the chances of a Democratic victory would be poor. The minority and young voters who made the difference in 2008 cannot be expected to return to the voting booths to support an administration that has failed to create the jobs they need.

The pundits have offered Obama two strategies to deal with the situation. The first is to follow Bill Clinton’s post-1994 trajectory—move sharply to the center and differentiate yourself from the liberal wing of the party. But this strategy does nothing to address the economic situation. Clinton’s strategy worked for him because there was a vigorous economic recovery underway that made him look good to centrist voters. A centrist Obama will not have that going for him in 2012.

The second is to follow the model of Truman in 1948: wage a determined battle for your preferred programs against the House Republicans, while fully expecting them to block the initiatives. He would then campaign in 2012 blaming the “do-nothing Congress” for the economy’s continuing weakness. While this is slightly better than the Clinton approach, it is also likely to fail. The Democrats tried in 2010 to blame unemployment on the Bush Administration and Republican obstruction, and that strategy did not save sixty House Democrats from defeat. Why should using the same rhetoric again–even if it is acted out through a series of dramatic confrontations—work in 2012?

Another strategy becomes clear when we understand the reason that recovery from the recession has been so slow. Private fixed investment is the key driver of the economy, and as Figure 1 makes clear, it fell dramatically as a percentage of GDP at the start of the recession and has not even begun to recover. The biggest fall has been in residential construction, which has declined by 4 percent of GDP since 2006. While we can expect that residential construction will recover somewhat from the current depressed levels, there is no way that it will bounce back to its unsustainable pre-recession peak. Other types of investment will have to take up the slack if we are to have vigorous job growth.

Figure 1

But corporations are currently sitting on huge piles of cash that they are reluctant to invest because they do not see the kind of consumer demand that would support expansions in their capacity within the United States. It is unrealistic to expect business investment in plants and equipment to rise very much without significant inducements from the government. In short, only strong government action can drive non-residential investment levels high enough to spark a real recovery.

The good news is that the Obama administration has put in place a whole series of programs that are designed to increase productive investment in the economy. Some funds in the stimulus bill encouraged automobile companies, electrical utilities, and other sectors to make huge new investments in green technologies—electric cars, solar energy, wind energy, biofuels, and new types of energy-saving construction materials. There were also funds to finance weatherization programs for older homes and buildings, which would conserve energy and create lots of jobs. Some of these funds were direct grants, some were tax credits, and some were loan guarantees designed to protect private investors from what could be risky investments. The bill also earmarked funding for the government’s research and innovation programs and included a program called “Build America Bonds,” which encouraged state and local governments to engage in infrastructure spending by promising that the federal government would subsidize a third of the borrowing costs. As Figure 2 shows, these efforts have pushed up public investment spending as a share of GDP.

Figure 2

To these efforts, we can add the president’s September proposal to provide extensive financing for new spending on roads, railways, and runways, including the creation of a national infrastructure bank that would mobilize private capital to finance these projects over the longer term. There is also the FCC’s National Broadband Plan that would encourage hundreds of billions of investment to upgrade the national broadband network and make fast broadband service available to underserved parts of the country. In addition, the America Competes Act to fund research and innovation is waiting for congressional reauthorization.

Taken together, these programs could generate an additional $200 billion per year for each of the next five years, in both private and public investment—enough to help get the investment to GDP ratio back to its pre-recession level.

BUT THE funding needed for these programs does not exist. The stimulus funds will soon all be spent, the Build America Bonds program stops at the end of 2010, and the Broadband Plan, the America Competes Act, and the new transportation infrastructure plan have not yet been funded. And we can expect House Republicans to do everything they can to block any extension of funding. They claim a mandate from the electorate to shrink the size of government, and they are determined to do that—even if it means leaving the economy flat on its back.

But if the White House takes on the Republicans directly and shrewdly, they could actually win the battle. A bold plan to revive the economy could gain powerful support both in the public and in the business community. The first key step is to focus the public’s attention by putting together a plan simply called the “Rebuild America Act.” This would be a well-designed piece of legislation that would combine authorizations for all of these critical types of funding—infrastructure, transportation, clean energy, weatherization, broadband, and innovation.

The second step would be to get endorsements for the Act from as many constituencies as possible, with particular emphasis on forward-looking business people like Warren Buffett, Bill Gates, Steve Jobs, and those on Wall Street who want the U.S. economy to recover. This is essential to show that the Tea Partiers and the deficit hawks are relying on out-of-date economic ideas in their ceaseless calls for spending cuts.

Finally, when the president sends this plan to Congress in February of 2011, he would return to the rhetoric of the 2008 campaign. He would say: “Yes, we can rebuild the U.S. economy, but it is up to the public to persuade the Congress that this critical legislation must pass.” With this encouragement, grassroots groups and the labor movement could organize hundreds of thousands of people to visit the nation’s capital—in wave after peaceful wave—to demand that the legislation be passed. Like the Bonus Army in the 1930s, they could refuse to leave until Congress had acted.

Demonstrations could also be organized in the districts of those newly elected Republican congress people. Assuming solid Democratic support, the legislation could pass in the House with only thirty Republican votes. Maybe the struggle would take a month, maybe two months, maybe longer. But when it becomes apparent that the masses of people who support this measure far outnumber the famous Tea Party activists, some Republicans would be forced to abandon the strategy of obstruction.

It is obviously unrealistic to expect Obama to act like a community organizer in the White House. But if he is going to save his presidency, he needs to remember how mobilized citizens can make change happen.

Note: All data are from the National Income and Product Accounts except for the estimates of Federal R&D spending that come from the National Science Foundation. The estimates of Federal R&D are for the fiscal years while all other data are for calendar years.

Fred Block’s new book, edited with Matthew Keller, is called State of Innovation: The U.S. Government’s Role in Technology Development, by Paradigm Publishers. It documents the economic importance of federal innovation spending.