Last week the NBER announced the recession ended in June, 2009. The good news is we have been in a recovery for 15 months though we may not always have felt it. The bad news is not only that the jobs have been slow to return but that policy makers have used an unprecedented amount of powder. On the monetary side, the fed cut rates to zero and also added to its formerly pristine balance sheet over a trillion of distressed securities. On the fiscal front, the US deficit as a percent of GDP, at 10%, is far above what most economists consider sustainable. Over time we need to return to historic norms but withdrawing stimulus too quickly could trigger another recession. If only there was another source of capital to drive the recovery forward! Fortunately there is: trillions of private capital sitting on the sidelines. If we can coax it out of hiding, not only can we support the current economy but we can begin to build the next one.
Fifteen months into the current recovery one of its most notable features is how much it resembles the old one. The two pillars of the Bush economy, banking and housing (with some help from the government) are still at the core of our economy and policy focus Social networking has emerged as a new growth avenue for the Internet but technology stalwarts like Microsoft and Google have watched their growth slow. Despite much talk about a clean economic revolution by me, President Obama and many others, clean jobs have been slow to materialize and regulated utilities and traditional energy companies still dominate the energy landscape. While we have seen glimpses here and there of the next economy in IPOs from Tesla Motors and A123 Batteries, their products have yet to go mainstream. In short, we are waiting for the Next Economy.
This endurance of the old and tardiness of the new is noteworthy given the depth and breadth of the Great Recession. The 1982 recession dramatically deindustrialized the US economy, leveling steel companies and manufacturers alike, but paved the way for the services heavy, technology driven economy that took its place. The 2001-2002 recession leveled a huge swath of the telecom and dot com sectors but paved the way for healthy growth once the industry consolidated. Reforms of the banking system combined with financial engineering paved the way for the housing boom of the 2000s even if that boom proved unsustainable. Yet the far deeper 2008-2009 recession while triggering numerous foreclusures and some closure of banks has not yet ushered in a successor.
Enter private capital. For the next economy to really take shape, we need not government but private capital and companies to begin investing. Private companies and investors have the money. The top three banks are currently sitting on a half trillion in unused cash according to banking analyst Richard X. Bove. And the Fortune 500, having survived the recesssion in most cases (in contrast to earlier recessions) are sitting pretty with non cash firms holding about one trillion in cash in their treasuries. Institutional investors have even greater sums stashed in cash that they could be using to buy corporate bonds or equities to fund investment in new plant and equipment. And trillions more in money lie offshore where it could be tempted by the right economic opportunities in the United States. This combined powder is much greater than anything Congress or even the Fed could deploy. The question is, what is holding it back?
A number of things:
First, tight banking supervision. Banks, Bove explains, are currently constrained by regulators and stringent standards from making loans. The recent downturn took its toll on credit scores, length of employment, assets and other credit indicators. Supervisors and banks must agree on a middle ground that is tighter than in 2007 but realistic given today's different economic reality.
Second, excessive energy regulation. The major sectors and regions to boom over the last half century have unifomrly been those that benefited from thoughtful liberalization. Liberalization can be carried too far as it was in banking in the last decade. However, the examples of Eastern Europe, China, Japan, Latin America as well as sectors in the west from banking in the 1980s in Lond to telecom in the 1990s in the United States are conclusive. The highly regulated electricity sector is a bar to innovation today and only by creating a modern 21st century architecture can we usher in a clean economy (the focus of NDN's Electricity 2.0 initiative.)
Third, legal uncertainty. The Obama Administration needs to commit itself to stable regulatory policies. The extralegal nature of measures taking during the crisis for example, necessary as they may have been, are a long term deterrent to investment of capital. More broadly, the Administration and Congress should lay out a long term agenda to provide regulatory certainty and visibility to investors.
Fourth, risk. The government can help manage risk in a way the private sector cannot. The Administration is correct in seeking to use comparatively limited quantities of public funding to leverage far greater quantities of private funds. Its infrastructure bank proposal, for example, far from being a vehicle for government spending, as portrayed by oppontents, is in fact a way to leverage private funds. Similarly, a green bank structured to provide a government guarantee to money advanced by the private sector, would give a huge boost to capital intensive clean economy investments
Finally, fear. The Administration as it enters its third year needs to reassure the public that normalcy is returning to the economy. Congress should do the same. Policymakers will have more opportunities to advance good ideas with a healthy economy than they will ever have in the midst of crisis. Accordingly, the Administration and Congress need to put the crisis behind it in their rhetoric and articulate an economic plan and message that is both forward looking and above all positive.
The US faces longer term challenges that require a variety of long term measures but in the short term the challenge is clear.
The private capital is out there and the Next Economy is waiting. It is only a matter of connecting the two.