Blackstone Blog
12

Sep

2011

An Olive Branch to Obama: I will Share the Pain - By Steve Schwarzman

The following op-ed by Mr. Schwarzman ran in the Financial Times.

President Barack Obama’s unusual address on America‘s economic woes to a joint session of Congress is vivid evidence of the problems we face. Growth in the first half of 2011 has almost stalled and we could slip into another recession. If that happens, the pain could last far longer than in the prior downturn because many weapons used then are no longer available. The Federal Reserve has exhausted its conventional resources and another huge stimulus package is politically unachievable. For the first time in my 40-year career in finance, I am genuinely concerned by our long-term economic prospects.

My concern is compounded because our ability to make economic decisions has become paralysed by political and social divisions. This problem began when the administration sought to attribute blame for the financial and economic crisis and alienated large segments of the business and banking community. They cast them as villains regardless of their culpability. Predictably, business reacted with fear and limited economic expansion, hiring and new lending. A second response to this was the rise of the Tea Party, which in turn attacked the administration and the Democrats. Unless we end targeted class warfare in the US, we cannot solve our economic problems or stop a long period of potential decline.

The US economy resembles a business badly needing turnround. Its growth is anaemic. Like many a faltering business, it has too much debt. No one, least of all S&P, believes that the latest deficit reduction package will solve this. There is too little investment. Corporations and consumers are cautious about spending, while the recent sharp drop in equity prices shows that investors do not want to risk capital in the market.

My firm has invested in, and advised on, hundreds of businesses in the past 25 years and we’ve seen companies successfully overcome such challenges. In each case, management had to meet three preconditions: a clear-eyed assessment, a decisive action plan, and the ability to pull together a cohesive team. While our economy is larger and far more complex than any one business, these preconditions still apply.

We have still not agreed how serious our financial situation is, let alone agreed on a plan to create jobs and ignite economic growth. For a start, we need to explain that federal spending has climbed from 20 to 25 per cent of gross domestic product, while revenues have declined from 18 per cent to about 15 per cent. To restore fiscal balance, we need over time to return to these historical ratios, some of which will occur with economic growth. Every American also needs to appreciate the gravity of having the federal government borrow 40 cents of every dollar it spends. But it is the third precondition – forming a united front – that is the key. This united front needs to include everyone – from business leaders, to hardworking hourly wage earners, to retirees, to farmers, to small business owners.

A united front is difficult when our leaders cannot even agree within their own parties, much less between Republicans and Democrats – witness the embarrassing spectacle of the debt ceiling impasse that the world watched with astonishment, and in fear of the consequences of a US default. Positions are inflexible and the debate has taken on a bitter and personal tone.

There are many possible ways to restart the economy and achieve fiscal balance, but any solution, no matter how sensible, including what the president proposed on Thursday, will be mostly dead on arrival unless we can move forward together to avert another recession. Just raising taxes on the wealthiest two per cent, for example, will not reduce a $1,300bn annual deficit enough to restore fiscal balance. For any future budget adjustments to be effective, we cannot exempt any group or special interest, except for the poor and disadvantaged.

“Shared sacrifice” sounds like cheap political rhetoric. But if we are to reform taxes and cut spending sufficiently to make a difference, virtually everyone will be affected. Broad-based tax reform will put everything on the table, from the rates we pay at every bracket to serious thinking about a flat tax regime with few or no deductions. Entitlement reform of Medicare, Medicaid and Social Security will affect the benefits we receive and the amounts we all have to contribute. There will probably not be a single American untouched by the spending cuts needed in the rest of the federal budget.

I believe that most Americans will be willing to sacrifice for economic stability and a bright future for our children, if the deal falls equitably on all shoulders. I know I’d prefer the short-term pain while working together towards a shared solution to the long-term pain of another recession, social unrest, or worse.

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