Can Obama Get It Right on the Economy?

By Fareed Zakaria

Barack Obama has moved to the center, and it is working – politically. Most Americans want a president who can deal with both parties and gets things done. President Obama should use the State of the Union to present a compelling agenda that can garner support from both sides of the aisles, one that is not just good politics but good policy. He has an opportunity to craft a genuinely bipartisan pro-growth strategy for America.

Republicans and Democrats differ fundamentally on how to tackle the U.S. economy’s short-term problems. Democrats want more direct government spending, either in jobs programs or unemployment insurance. Republicans want more tax cuts. The only possible compromise was achieved last month, when both sides got their wish, and the federal deficit went up $900 billion over 10 years. We can’t keep playing this game.

It would be far better for Obama to move beyond this debate, proposing a strategy for long-term growth. (As it happens, his team put out a white paper on innovation in December 2009 that contains many smart ideas.) The left and right disagree here as well, with the right focusing more on measures to spur the private sector and the left on government spending. In fact, the best policy would recognize that both sides are correct.

The right wants significant regulatory and tax reform. American businesses operate in a global landscape with many options. They can invest their vast cash reserves by building and expanding factories in China, India, Brazil or the United States. So far during this recovery, business has invested furiously in the emerging markets and meagerly in America. There are fundamental reasons – chiefly, lack of consumer demand at home – but it’s also clear that companies simply don’t need America as they once did.

Consider Facebook’s recent search for funds. When Goldman Sachs, which made the private offering, realized that it might run up against U.S. laws that would force Facebook to go public, it simply offered the opportunity exclusively to foreign investors. Twenty years ago, if you needed to raise billions of dollars in a hurry, the only place to go was the United States. Today, there are piles of cash all over the world. America’s unusually stringent laws on this matter simply drove the business outside America.

Similar patterns are emerging in other areas. The Obama administration, concerned about the dramatic slowdown in drug development, is proposing a new federal research center with a $1 billion budget. A good idea, but U.S. officials should look at the regulatory framework surrounding the process of discovery and development, since the private sector spends more than 50 times that sum every year on drug research. The Food and Drug Administration takes twice as long to approve a drug as its European counterparts. As a result, health-care research has been moving offshore, particularly as China and India innovate in every product and process.

If Republicans are correct in their worries about being competitive on regulations and taxes, Democrats are right about the need to increase federal spending on research and development. People are watching China’s aggressive investments in clean technology, high-speed rail and telecommunications and wondering if they will work. They should look at U.S. history: Without federal investment in R&D, America would not have become the world’s leader in information technology. The semiconductor industry was created because of Defense Department demand and later rescued by the Reagan administration in a series of measures that can only be called industrial policy. NASA was critical in the growth of the computer science industry. Al Gore may not have invented the Internet, but DARPA – the Pentagon’s venture capital arm – did.

During the Cold War, the United States spent 3 percent of its gross domestic product on research and development; the government and private sector each contributed about half. Today, the private sector spends a bit more but government spends less. Obama should propose doubling federal spending on research and innovation. Three percent might have been enough in the 1950s, when Americans could still get millions of jobs in basic manufacturing. Jobs of the future lie in knowledge industries, and that means doing better than we did in the 1950s at knowledge creation.

If Obama gets his State of the Union right, he will show Americans that bipartisanship is not simply an exercise in political theater but can produce better policies than ideologically driven agendas. It will remind Americans why they elected him in the first place.

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