After midterms, Obama needs to move to the center - of the country

By Steven Pearlstein
Washington Post Staff Writer
Tuesday, November 9, 2010; 9:44 PM

Looking at those red-and-blue electoral maps following last week's voting, you couldn't help but notice the dramatic swing of the industrial Midwest from Democrat to Republican.

The industrial heartland has been contested territory ever since Richard Nixon's reelection campaign of 1972. And its no coincidence that for the last 40 years this region has come out on the losing end of globalization and rapid technological change, even as other areas have prospered.

People who have seen their incomes stagnate and their jobs sent overseas, who have watched their communities decay, who never experienced the real estate bubble but now live surrounded by foreclosures and who have seen their children move away to find economic opportunity - these are not people who are likely to be swayed by vague promises of "green jobs" or the latest study showing that outsourcing creates two jobs at home for one in Bangalore. At this point they are beaten down, demoralized and desperate for someone with a credible plan for regaining what they have lost.

In Barack Obama they saw somebody who they sensed could be that kind of transformational leader. What they got was somebody who turned out more transactional, a leader who bailed out Wall Street and pushed through health-care reform but could never show how these moves were part of a larger strategy for restoring America to economic greatness. It is a measure of their disappointment that they have now pulled the lever for a party and a platform whose essential economic message is, "You're all on your own, buddy."

"These are people who understand that the world is not friendly and that they've been dealt a lousy hand," said one administration official who knows the region well. "They never expected much in the way of immediate results, but what they needed to see was that we were on their side."

For reasons I still don't fully understand, even the rescues of General Motors and Chrysler did little to boost the president's popularity in the industrial heartland. The follow-on "manufacturing intiative" never really gained traction in the face of catcalls about rampant socialism from an ungrateful and disingenuous business community. By the time the White House was finally ready to get tough with China and get behind a serious investment agenda, it was too little, too late.

For the president and his party, regaining the confidence of the industrial Midwest is now a political imperative. For the U.S. economy, its no less an imperative to find a way to revive the Rust Belt. Unlike many other challenges, this one doesn't require much in the way of controversial new legislation, although it will require hundreds of billions of dollars in carefully targeted public and private investment. And unlike so many other issues, it provides an opportunity for business, labor and government to work together toward common goals. The challenge will be to put aside old grudges and ideological blinders and take practical steps to demonstrate to ourselves and the world that we can still compete and win.

Start with the basics: world-class airports and cargo ports, state-of-the-art rail lines, free-flowing highways. More public universities with engineering programs and business schools to rival those of MIT and Stanford. Community colleges that pioneer in the use of technology to lower cost and improve educational outcomes. Clean and efficient new electric plants fueled by plentiful supplies of nearby natural gas.

Financing could come from federal block grants that replace the hodgepodge of existing programs, plus new tax-free Invest in America Bonds sold with a patriotic fervor at post offices and workplaces.

One problem with the Midwest economy is that its fortunes rely too heavily on those of large corporations. The energy for the new economy must come from local entrepreneurs who can take advantage of cheap land and large numbers of unemployed skilled workers. In the early years they could be helped by property tax breaks, payroll tax breaks and lower capital gains taxes.

Surely this is a great time for the Midwest to divorce itself from Wall Street and once again turn to a new crop of homegrown banks. Then add venture capital from newly created public-private partnerships and private-equity firms supported by local foundations and public pension funds.

The model here is not China but Germany, an export powerhouse that somehow manages to combine high wages and strong unions in a manufacturing sector organized around closely held, mid-size companies known for quality and innovation. Study their model, copy it and import it through direct foreign investment.

While many of these initiatives will be local and regional, they will need much more supportive federal policies, including aggressive enforcement of trade rules and targeted subsidies and tax breaks. These are the same tools used to great advantage by all of our major trading partners. Purists will call it industrial policy. Others call it survival.

A new approach to economic policy requires a new team in Washington, one less centralized at the White House and less allergic to anything that smacks of populism or industrial policy.

I'm sure Commerce Secretary Gary Locke, Labor Secretary Hilda Solis and Trade Representative Ron Kirk are honest and hard-working, but in two years they have cast no shadow on the economy and economic policy. Ron Bloom, one of the architects of the successful auto bailout, combines an MBA with working-class sensibilities and would be perfect to lead a reinvigorated Department of Labor. Carl Schramm has spent the last decade studying and nurturing entrepreneurship from his perch as president of the the Kauffman Foundation in Kansas City; as Commerce Secretary, Schramm could rebuild bridges to business executives and hammer out deals with state governments and foreign countries. And Laura Tyson, a former business school dean and Clinton economic adviser, would bring toughness, determination and economic savvy to the task of restoring a level playing field to international trade.

A good choice to coordinate their work would be Bruce Reed, the current staff director of the bipartisan budget deficit commission, which finishes its work later this month. Reed would bring an open mind, an unassuming Idaho manner and a "third way" political sensibility to the top job at the National Economic Council.

Given the prospect of political gridlock in Congress, the focus of economic policy will now shift from Washington to places such as Detroit and Indianapolis, where people are still willing to roll up their sleeves and work together. If Barack Obama wants a second term, that's where he and his team will be as well.

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