Up Front

Web Chat: President Obama’s Economic Outlook and the State of the Union Address

Bruce Katz

As the economic recovery struggles to take hold, President Obama’s second State of the Union address focused in part on efforts to stimulate the economy, create more jobs, and build future prosperity. Bruce Katz took your questions on the broader economic aspects of the State of the Union speech in a live web chat moderated by POLITICO’s David Mark.

The transcript of this chat, held on January 26, 2011, follows.

12:30 David Mark: Welcome to the chat. Let’s get started.

12:30 [Comment From Peter Tracy: ] There has been much recent comment on the shrinking middle class in America. Economists and statisticians have observed that the richest 10 percent of Americans now enjoy 40% of all U.S. income — up from about 20% in the early 1970s. One author observes the middle class can no longer afford to purchase the goods we manufacture thereby assuring slow growth and slow job creation, and suggests the level of inequality has not been this dramatic since the Great Depression. Does the administration see this as a problem, and if so, what in the president’s speech addresses the issue?

12:30 Bruce Katz: I think the President’s economic vision is a direct response to the middle class squeeze you describe. The economy preceding the Great Recession was miserable for people in the bottom half of the skills and earnings distribution. Despite significant macroeconomic growth through much of the 2000s, median household income dropped, wages fell in the middle and bottom of the distribution, and poverty rose. And that was all before the Great Recession hit.

The Administration’s focus on growth driven by exports, clean energy, innovation and skilled workers could rectify this challenge. A focus on exports, for example, is potentially important for expanding opportunity in two ways. First, to the extent that expanded exports occur in industries in which the United States already has an export advantage, these are industries that, according to the Department of Labor, pay above-average wages and benefits, and where a mix of skills – particularly in manufactured goods – is needed. Second, research by colleagues in Brookings confirms that the wage advantage even accrues to workers without high school diplomas who work in export-intensive industries.

12:31 [Comment From Jennie: ] What do you think of the choice of Immelt for chairman of the jobs council? Isn’t it just a symbolic nod to big business?

12:31 Bruce Katz: I do not agree. I believe the appointment of Immelt is central to this shift in economic policy which is occurring. We are clearly moving from a phase of economic recovery to a phase of economic renewal and restructuring. Immelt, and CEOs of other global production firms, have been very clear that the US needs a different growth model going forward (less consumption, more sustainable production) and must commit to targeted transformative investments in a wide range of infrastructure (energy, transport, technology) to compete globally. This is more about alignment of thinking than political calculation – though politics never hurts.

12:32 [Comment From Emily: ] The new House majority is pretty skeptical of Obama’s plans – they see “investment” as a code word for spending, and they want to cut spending. What kind of investments can realistically make it through a divided government?

12:32 Bruce Katz: I think the devil is in the details. Over the past twenty years, three major infrastructure bills have been enacted under Republican Presidents and Republican Congresses. The current transportation law expires in March. I believe it is conceivable that this Congress could agree to a two-year reauthorization that puts more emphasis on public private partnerships and the efficient allocation of resources. That is good for American business and competitiveness and, frankly, consistent with a vision of limited, smart government.

12:32 [Comment From Fred: ] How did Obama’s speech measure up to the 2010 SOTU?

12:34 Bruce Katz: I think Obama’s 2011 speech was a marked improvement. I think the President laid out a coherent economic vision, provided audacious goals for the nation to meet and recommended a series of policy reforms and initiatives that, if implemented, could set the country on a productive path. This was linear and logical and represented a bridge between different ideological factions (low taxes/streamlined regulations on one hand, transformative investments on the other).

12:35 [Comment From Benjamin F. (DC): ] What are the biggest infrastructure needs we face? Where do we need to invest the most?

12:39 Bruce Katz: I believe the U.S. faces a range of infrastructure challenges, partly due to the fact that we have deferred public investment in transformative projects for so long and partly due to the disruptive nature of change (energy, economic, demographic, technological) that is sweeping the globe. I tend to look at infrastructure from the ground up and believe that every major metropolis (and networks of metro and rural areas) have distinctive infrastructure needs that new financing facilities (an Infrastructure Bank, a Green Bank) could meet through a mix of public and private financing. I think that compartmentalizing infrastructure into separate programs is actually a ticket for log rolling and political horse trading. So we need new institutions that respond to the infrastructure demands that are tailored to the market realities of different places. If the federal government cant get its act together, than states and metros will need to invent this. That’s a 5th-best world, given the competition we face from abroad.

12:39 [Comment From Ed L. @ SoosGlobalCapital: ] “Obama offers a level of specificity and detail to his economic vision”…you said this in you “Jobs is the Word” piece on Brookings, and then you suggest that the DC crowd will present obstacles to the President’s plans while what was said will resonate around the country. While i agree with you, the question is “how will those investments laid out by the president be funded? Where will spending cuts begin in earnest to fund the necessary investments? And when? After 2012?” Unless there are clearly defined funding plans, then the SOTU will turn out to be yet another example of ‘talking the talk” but not being able to “walk the walk”.

12:42 Bruce Katz: Again, I think the devil is in the details. The president and, frankly, the deficit commissions, have put forward a theory of “cut and invest”. This may ultimately be the way that new transformative investments are made without increasing the deficit. Last night, the President suggested cutting subsidies to oil companies to fund advanced energy research and development. I have long supported scaling back the mortgage interest deduction (a main driver of our consumption economy) and investing a portion of the savings in modern infrastructure or even manufacturing innovation. I am not saying any of this is going to be easy. But a major tax reform bill could, as in 1986, allow for the federal government to invest in new things while being fiscally responsible.

12:43 [Comment From Don: ] How does the United States make itself a more competitive environment for businesses to take root? Right now, Asia is growing by leaps and bounds. How do we spark the same type of growth here at home?

Author

12:46 Bruce Katz: The U.S. has so many competitive assets and advantages — advanced research institutions, world class universities, entrepreneurial dynamism, tolerance (generally) for immigration, rule of law, attractive cities and metro areas. We need to strengthen our strengths and build on our assets and enhance the quality of the products and services we offer to the world. I think there is too much concern about “what others are doing” and not enough focus on what we can do. That was my favorite part of the president’s speech last night: the notion that America can compete and innovate given our incredible, enviable strengths.

12:46 [Comment From Jessica K.: ] The president hit on a lot of key issues last night, but do you think he lacked specifics?

12:49 Bruce Katz: I believe paradigm and vision drives policy. The most important thing is to lay out a vision for the kind of economy we want to build … and then provide a general road map for getting there. I think the vision last night — export more, waste less, innovate in what matters (clean energy rather than financial engineering), produce and deploy more of what we invent (“Make Things Again”) — is precisely the vision we need if we are going to have an economy that is productive, sustainable and inclusive.

If people buy the vision (and, again, I think major business leaders DO buy the vision), then policy will follow … whether at the federal level or in states and metros.

The time for policy wonkery can come later.

12:50 [Comment From Jason: ] The president had a strong emphasis on green technology and green energy last night – what’s your take on his goals?

12:53 Bruce Katz: The shift to low carbon is as profound a market transformation as the information revolution of the past 30 years and I thought the emphasis on clean energy and clean technology was appropriate. The goals are, as they say, big, hairy and audacious. The federal role is to set a platform for this transformation through, ideally, three pillars: carbon pricing, investments in advanced research and development and new public/private financing tools (a Green Bank) for transformative interventions. Obviously, pricing doesn’t appear realistic any time soon. So we are going to need to build the low carbon economy the hard way, through invention, financing, commercialization and deployment. We are not alone in the world … so we need to be realistic about which segments of the low carbon market we are best suited to lead.

12:55 [Comment From Jennifer S.: ] I was intrigued about the “Sputnik” comment. In a post-Cold War world, does that have any relevance? And if it does, what should the new competition be, and with whom? Back then, it was the space race. What should it be now?

12:59 Bruce Katz: I am not sure most Americans know what Sputnik was! Or the Marshall Plan for that matter! But I think the public does understand the need to have a vision, set some targets, and be disciplined about meeting those targets over time, beyond the political cycle. In many respects, the key word last night was “compete,” which generally aligns with the American zeitgeist. My sense is a large number of Americans feel insecure about the future and worried about the disruptive change underway across the globe. Competitiveness may not be the right phrase to capture what we need to do as a nation, but it could be a galvanizing force for change much as Sputnik was in the late 1950’s.

1:00 David Mark: Thanks for joining us today.

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