The Great Equalizer

Preface

This is a unique moment in American history. Our president can shift people's expectations about the future to positive goals and actions. The choice is between being an ideological placeholder or becoming a truly transformational president. In a counterintuitive way, today's public anger and disillusionment over lack of economic opportunity have produced a rare chance to achieve positive change. The public's message to their Washington policymakers: We are tired of economic mediocrity at home and terrified of a dangerous world. We crave a healthier, more robust economy. We want constructive change. We don't care how you get there. Be creative. Be pragmatic. Try different things. Cut bipartisan deals. Just get there! We want an economic environment of bottom-up dynamism. When all is said and done, economic growth is everything.

The Great Equalizer describes the new mindset that can achieve a better economy for everyone. It is a call for a set of new paradigms that inspire and empower average Americans to reboot their economy. It is a manifesto that argues with a new kind of economic policy of Main Street Capitalism, America's best days are still to come.

To be sure, many experts have concluded that America's best days are behind us, that mediocre long-term economic growth is baked in the cake, and that politically, socially, and racially, the United States will continue to tear itself apart. These experts are wrong.

True, the economy faces stiff headwinds. The policy tools of macroeconomics have failed to achieve historic levels of economic performance. The central bankers have slashed interest rates and flooded the economy with liquidity. The economy has underperformed anyway. As a result, working- and middle-class families can feel the American Dream slipping away. For nearly two decades, their incomes have flatlined. Average folk are desperate. They yearn for a dynamic jobs-producing economy that works for everyone. They know in their gut America needs a new economic approach.

Americans feel besieged precisely because in recent decades, a Corporate Capitalism of top-down mismanagement and backroom deal-making has smothered their innovative spirit. Government and central bank policy now favors the big, the corporate, and the status quo at the expense of the small, the young, the new, the inventive, and the entrepreneurial. It favors Wall Street over Main Street. Because the economic system is compromised, people can feel it in their bones that their children's future is being frittered away.

In response, I envision a vibrant Main Street Capitalism of mass small business startups and bottom-up innovation, all unfolding on a level playing field. Main Street Capitalism is the Great Equalizer. It offers a climate of dynamism where every man or woman is a potential founder of a business startup. Women already start firms at twice the rate of men (based on 2014 data). Dramatic advancement by female entrepreneurs could become America's economic secret weapon. Just as important, Main Street Capitalism especially empowers those at the bottom rungs of the economic ladder.

As I'll show, the problem with today's economy is not a lack of monetary liquidity but a lack of the liquidity of confidence. People are terrified of the future. Investors are holding back. Innovators are starting firms at less than half the rate they did two decades ago.

There are reasons why America's economic dreamers and discoverers have become risk averse. The economic system is rigged. In the fight between David and Goliath, Goliath always wins. And in Washington, D.C., a stifling partisanship has meant nothing ever gets done to fix things. Meanwhile, our infrastructure is crumbling. I argue that the political and legislative tactics of two past presidents, Republican Ronald Reagan and Democrat Bill Clinton, can offer a useful guide to better policymaking.

Today, the world is a terrifying place of massive debt, currency wars, dubious asset prices, and excess supply capacity, while ISIS rears its ugly head all too often. The new information economy is replacing the old, familiar, brick-and-mortar one of manufacturing. Technological change is coming at people so fast they are overwhelmed. Can technological innovation be made to benefit everyone, and not just a select few in Silicon Valley and their investors on Wall Street?

I contend that despite such daunting challenges, people are not going to give up on the American Dream without a fight. Thankfully, innovative dreaming and discovering have always been in America's DNA. The United States has been a land of innovative daring. That is why the American economy has traditionally been a massive, high-growth, jobs-producing machine, a hothouse of commercially attractive creativity. The United States still has many advantages. The building blocks are still in place to achieve higher levels of economic success. Today technology is sometimes feared, but actually innovative advancements in information and other technologies can produce a powerful bottom-up growth phenomenon. Because people are more connected, great ideas are more easily found and shared. All human knowledge is at everyone's fingertips, and essentially is free. The cost of reaching customers has never been cheaper. So The Great Equalizer is ultimately an optimistic book about rebuilding an awesome economic growth engine that is beyond the economists' ability to model. To show the way, I offer Main Street Capitalism's 14-Point Plan of bipartisan reforms that can help unleash America's creativity and confidence.

Ultimately, economies are more than statistical measurements of supply and demand, economic output, balance-of-payments deficits, and rates of return on capital. As I'll show, economies are people—their hopes, fears, dreams, and expectations. Economies entail what the English economist John Maynard Keynes in 1936 called the ebb and flow of "animal spirits." Economies are flesh and blood. And that's the good news.

Our economic future is not baked in the cake. Nor is our economic destiny a matter of luck. Human creativity and initiative are not irrelevant in determining economic success or failure. The level of the people's innovative daring is not preset. Americans have a history of rising to the challenge.

The Great Equalizer shows that with a new, bottom-up economic approach, a more robust economy is within our grasp. Americans want their leaders to write a new economic narrative. They want to rediscover the thing that has always made them exceptional: their can-do attitude and audacious spirit—their willingness to dream big and to dare big. Average working families are desperate for higher rates of economic growth. But the time to write that new story of American economic dynamism is now. The clock is ticking.

—David M. Smick

Introduction

When I was thinking about writing a book about today's global tsunami of working- and middle-class economic anger, it dawned on me that I may be both the worst and the best person to take on such a task. On the one hand, after a decade working as a staffer on Capitol Hill (and briefly in the U.S. auto industry), I have spent the last 30 years as a macroeconomic policy adviser to a number of world-class investors. I help my highly affluent clients war-game the threats and opportunities to the global economy. I am an investor myself.

On the other hand, I have also experienced life at a different level. I grew up in a working-class neighborhood in the city of Baltimore. My next-door neighbor drove a cement truck. A close friend's father was a plumber. While I was living at home into the late 1960s before leaving for college, my father never earned more than $8,750 a year. Economic thinking for most families in our neighborhood related not to global stock, bond, and real estate prices, but to how weekly paychecks could be stretched to cover food and housing expenses. This was a life of frequent economic anxiety.

A public school kid, I attended, though I didn't know it at the time, a junior high school later ranked as one of the ten most violent in the United States. To attend one of the city's two best public high schools, I took three transit buses, transferring my way across town and back for a total of two and a half hours a day. I was familiar with the neighborhoods at the center of the 2015 Freddie Gray riots. Nothing that happened there surprised me.

I worked my way through college as a janitor, house painter, member of a catering crew, hard-hat construction laborer, and country club dining room waiter. Working at the country club, I dealt with a lot of highly affluent club members. I grew to dislike those folks for their sense of superiority toward the wait staff, which adds a sense of irony to my current employment dealing with the global financial elite.

As my college years ended, no commencement speakers were telling my generation to follow our passions and believe in our destiny. It was the anxiety-ridden 1970s. We were just trying to figure out what to do about Vietnam and to find work in the worst job market since the 1930s. If you had told me back then that I would spend the bulk of my career working with some of the world's most successful money managers, I would have said you were crazy.

But here's the thing. Having come of age in Baltimore, I saw firsthand the combined ugly results of hyper-partisanship and the slow death of economic confidence, imagination, and hope. Baltimore is one of the most Democratic cities in the nation. Almost everyone in my neighborhood voted Democratic. In 1948, my father voted for Democrat Harry Truman for president. After turning 18, it seemed natural for me to register as a Democrat, which I did. Republicans seemed to be those rich people who lived in the horse country to the northwest of the city, the local pastures that support the Preakness racehorse activities. Their world seemed unapproachable.

But I was conflicted. I distrusted the rich but craved their financial security and was concerned about the Soviet Union's territorial ambitions. Fairly quickly, my political views began to develop. In presidential politics, I ended up working for the campaigns of Republican Ronald Reagan in 1980 and Democrat Bill Bradley in 2000. I admired Bradley precisely because of his lack of partisan narrow-mindedness and for his willingness to reach across party lines on tax reform and international economic policy issues. It was clear that Reagan's approach to the economy, although not perfect, was appropriately targeted at the small business, innovative sector—the frustrated economic risk-takers in waiting who could revive the American economy.

Looking back, particularly in the wake of the ugly race riots of 2015, I can see how much my hometown's working-class families suffered living in a city captured by a status quo mentality. With its beautiful harbor, Camden Yards baseball stadium, and downtown luxury hotels, the center of Baltimore was allowed to become a glamorous donut hole surrounded by the rotting dough of inner-city poverty, local political and police corruption, and hopelessness. The middle class moved to the suburbs seeking better schools and greater safety. The rate of small business startups collapsed. While a few large corporations propped up the municipal tax base and some tech hot spots appeared, any type of an empowering economy for average folk for the most part shriveled up and died.

Yet nobody rang the alarm. For decades, a complacent Baltimore leadership lived an illusion, convinced that the status quo of sub-par economic achievement was tolerable. Baltimore got by until one thing happened: The U.S. economy itself entered its current era of mediocre long-term economic growth. Then the wheels of the city came flying off. Racial tensions exploded. Just as Baltimore needs a new economic narrative for success, America today must also write a new economic and political narrative that raises the level of prosperity for all.

The American people are angry—and with good reason. Their country has fallen into a slime pit of mean-spirited partisanship that will be difficult to reverse. This new era of hatred has contributed to broad-based policy shutdown. Stalemate and division are two reasons for America's "new normal" of mediocre economic growth rates. So is Washington's blind devotion to bigness—that is, to large institutions. America's leaders have lost their way. The country has become risk averse. People are no longer starting new firms at the rate they once did. Existing businesses are not investing at a high enough rate to really expand the economy for everybody. Uncertainty toward the future reigns supreme. As former White House national security official Norman Bailey neatly summed up the ultimate reason for the public's deep anger and frustration: "Large segments of the population are nearly insolvent." More than half lack the liquid savings to cover even a month's worth of income if they lost their job, according to a survey by the Pew Charitable Trusts. No wonder people are terrified of the future.

Indeed, something important is underway in American society and throughout large parts of the world. A new economic nationalism and rejection of free-market capitalism is rising in popularity. A silent, and at times not-so-silent, public anger over slow growth and lack of opportunity has appeared. How our new president responds to this emerging public attitude could affect the country for decades.

Brexit, the decision on June 24, 2016, by the British people to leave the European Union despite the extraordinary economic risk of doing so, could for the rest of the world in coming years be remembered as the canary in the coal mine. For Washington, D.C., Brexit was a warning that Americans are desperate for a new politics and a more effective approach to economic prosperity. They want reforms that produce a dynamic economy that works not just for the privileged few in Silicon Valley and on Wall Street, but for all. They also want protection from a dangerous world.

The global economy has, indeed, become a horror show that could take us all down. Confidence worldwide has plummeted. Financial and geopolitical risk has soared. In some cases, global risk resembles the dangers that plagued the depression-ridden 1930s. As the world's central banks continue to pump out financial liquidity, something strange is going on: Total global liquidity continues to shrink.

Meanwhile, some of the world's biggest central banks have been forced to resort to negative interest rates. That's when the banks ask you to pay them to hold your money. In the 1930s, average folk just stuffed their cash in mattresses. Everyone talks about the problem of global liquidity. But the problem is not with liquidity itself; it again is with the liquidity of confidence.

The world looks terrifying. Since 2010, official global GDP and trade growth rates have dropped by more than half. Commodity prices have become highly unstable. Emerging markets led by China are bogged down with massive amounts of excess supply capacity. They blindly produce regardless of the demand for their products, spreading dangerous disinflationary pressure worldwide as price levels soften.

Meanwhile, emerging-market corporate debt has more than doubled. China's dangerous credit binge has been unprecedented in terms of the speed with which the debt has been accumulated. Europe is in long-term economic stagnation, with an ugly populist political threat lurking at the door. Japan is at risk of falling back into deflation. Its financial market, with the central bank the biggest net buyer of stocks and bonds, is no longer a real market. Brazil is in severe economic crisis that could risk a scenario of default. Collapsing Venezuela is on the verge of entering the Stone Age. And the world's total debt has skyrocketed to a level unimaginable even a decade ago—$180 trillion as of 2015 and now even higher.

Here's what is really scary. Throughout the world, the return on capital, the rate of income received from an investment, is often so low there are serious questions about how long borrowers will be able to service that massive debt, particularly when their debt is denominated in strengthening U.S. dollars. Worldwide there is now a dangerous shortage of dollars, which is why it has been difficult for the Federal Reserve to tighten credit as much as some policymakers there would like. One wrong move could be the tipping point unleashing a global tidal wave of defaults—and a worldwide banking crisis.

The global financial system, therefore, has become a dangerous paradox wrapped in a riddle. The matrix of inflation, deflation, slow income growth, excess productive capacity, dubious real estate and stock market asset prices, unprecedented public and private debt, and eye-popping geopolitical surprises is as confusing as ever. The vast majority of people worldwide believe their children's future is at risk. They can see that the global economic engine is sputtering in a world with no one in control. Around the world, things we thought could never happen are happening.

The American people are desperate to decouple from this global madness. It won't be easy, but doing so is not impossible. The experts argue that a long-term U.S. economic growth rate of only between 1 and 2 percent is all we can hope for. They call it the "new normal" of economic mediocrity. There's nothing we can do, even though slow growth makes us highly vulnerable to these nasty global risks.

The growth-is-limited theory is called "secular stagnation." It holds that lower population growth and a slowdown in the kind of transformative technological breakthroughs that lead to greater productivity performance (doing more with less) could hold the American economy back for decades. A dismal economic future for America, some experts say, is baked in the cake.

Because the rate of a nation's long-term growth has extraordinary implications, this book will outline the dangers that secular stagnation represents. The difference between the U.S. economy's historic average annual growth rate of 3.2 percent versus the disappointing 1.4 percent average annual GDP growth achieved during the period 2007–2016 is not more than a mere 100 percent jump in economic activity. It is more like a 500 percent spike in economic dynamism. It is the difference between a nation in deep economic anxiety, at war with itself, versus a nation where the American Dream is still a possibility for all. It is likely the difference between a successful two-term presidency or a one-term disappointment.

For America, however, all is not lost. Throughout history, the economic experts have almost always been too pessimistic. Their forecasting track record has been abysmal. With policy reforms and better leadership, there could be better times ahead. One extraordinary bright spot: Women in America are moving to the forefront of the process of starting new businesses. Economics has always entailed a high degree of unpredictability. The health of an economy depends on behavioral elements that don't always fit on an Excel spreadsheet or follow the confines of a predictable theory. A scenario of mediocre or no economic growth doesn't have to be baked in the cake. There could be more prosperous times ahead. Indeed, in a curious way the public's anger, as difficult as it is to imagine, may present our new president with a rare opportunity for bipartisan problem solving, particularly in the areas of debt reduction, infrastructure modernization, and the encouragement of more business startups. For a brief window with the election of a new president, the destructive partisan forces of stalemate may be held at bay.

The experts are pessimistic on growth precisely because the economics profession itself is in crisis. Since the 2008 financial collapse, economists have conducted a giant global monetary experiment. They have relied on massive supplies of central bank liquidity to try to spur higher economic growth. The experiment failed. What the experts found is that the role of central bank liquidity—of money—is a lot more complicated than they thought. Economies are a lot more than "money."

Economies involve a complex ecosystem and are linked to psychology, which cannot be understood via standard econometric models that try to reduce human behavior to mathematical equations.

Economies, again, are a mixture of the hopes, dreams, and fears of people. And that's the good news. Little about our economic future is necessarily preset. The success of an economy is heavily influenced by the behavior of people, by their level of confidence. And people are not just consumers; they are also investors, entrepreneurs, and, in some cases, dreamers of the kind of breathtaking innovation that can transform the lives and livelihoods of average working families.

Despite a dangerous, chaotic world, the ingredients are still there for Americans to achieve higher levels of economic success. The United States has many advantages. Unlike most parts of the world, it is for all practical purposes independent of the politically unstable Middle East for its supplies of energy. But what the United States desperately lacks is a new economic narrative told by a compelling leader.

In writing a new game plan, the first step is to examine recent history. What worked and what didn't? During the period from 1980 to the present, those presidents who, when they had no other choice, engaged in reasonable bipartisan compromise (and were wise to the growth-inhibiting effect of excessive regulation on the private sector) enjoyed economies twice as robust, with more than twice as many jobs created, as those presidents unwilling, or unable, to accept bipartisan compromise.

In other words, during the high growth, big jobs–producing presidencies of Ronald Reagan (1981–1989) and Bill Clinton (1993–2001), both political parties, when forced to, worked together for the benefit of the nation's economic welfare. Both benefited from the lagged effect of the previous deregulation of the trucking, airline, railroad, and other industries achieved under President Jimmy Carter (1977–1981). Both had economies helped by a period of stable prices while the global economy was enlarging and nationalism was at bay. But both sent the reassuring message to economic decision makers in the private economy that, if need be, Washington, D.C., could embrace the process of reaching bipartisan consensus. Policymaking represented a broad consensus of public opinion.

Since the turn of the century, however, America has undergone a disappointing transition. During the deeply partisan years of George W. Bush (2001–2009) and Barack Obama (2009–2017), policy stalemate reigned. Regulation of the private sector ratcheted up under Bush and zoomed to unprecedented highs under Obama, according to the American Enterprise Institute. The global economy kept shrinking, and nationalism returned in full force. The U.S. economy underperformed, and for most the American Dream began to slip away.

As a personal aside, I feel that in recent years Bill Clinton has gotten a bum rap. Although hardly flawless, his economic accomplishments have been smeared by unfair characterizations from both the right and the left. Facts are facts, and the Clinton economy was impressive. Bill Clinton's ability to achieve bipartisan compromise was not some flaw as many progressive commentators suggest. That willingness to compromise, along with a middle-of-the-road policy mix that encouraged an expansion in investment, were part of the secrets to the success of the 1990s. So, too, of course, were the end of the Cold War and the earlier elimination of hyperinflation.

During the 2016 Democratic primary, Bernie Sanders, the self-described Democratic socialist, argued that America's only choice was to travel down the road of overwhelming governmental control of the economy. He argued that capitalism itself was not only "rigged" but bankrupt. Such thinking has captured the ultra-progressive side of the Democratic Party. Bill Clinton's approach of working within the capitalist system is no longer popular with some Democrats, and others absolutely despise it. Yet the lesson here is that to be successful when it comes to the economy, a president would be wise to be a lot more like Bill than Bernie.

Capitalism comes in different varieties. In recent decades, a Corporate Capitalism of inside deal–making, elite special privilege, and dominance by large institutions has, indeed, exerted a stranglehold over the U.S. economy. The system has been "rigged." As a result, America's traditional can-do attitude and spirit of optimism have been shattered by a sense that there is no longer a level playing field. The corporate capitalists, of course, have always been around. But in the last decade their power has intensified to a mind-boggling level.

But is rejecting capitalism really the answer to insulating America from a dangerous world? Could we trust, say, the managers at the Department of Veterans Affairs to run something as complex as the U.S. economy? Or how about the experts who designed and implemented the Obama Administration's healthcare website? Maybe the solution is not to abandon capitalism but to reboot capitalism. Instead of Corporate Capitalism, I call for a return to Main Street Capitalism.

Main Street Capitalism is the Great Equalizer in this time of inequality. It is the high-growth capitalism of bottom-up innovation, with a flood of business startups, all happening on a level playing field. The empowering force of Main Street Capitalism, where every man or woman is a potential entrepreneur, is what has historically made the U.S. economy the envy of the world.

I will never forget a conversation I had in the mid-1990s with Jean-Claude Trichet, then head of the French central bank, who later became president of the European Central Bank. Over lunch at the central bank in Paris, Trichet surprised me by uttering this: "The American economy is nothing short of a miracle. Your people's sense of daring, of a willingness to explore avenues of innovation, to take on risks is nothing short of breath-taking." He was applauding Main Street Capitalism, the Great Equalizer. He was congratulating America's global distinction as a land of dreamers and discoverers. At the time, unlike today, America's productivity rates were soaring. American innovators were on the move.