Obama's 4 Biggest Economic Challenges

Getting past the "fiscal cliff" is the easy part.

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President Barack Obama speaks to the media in the Roosevelt Room of the White House, Nov. 16, 2012.
President Barack Obama speaks to the media in the Roosevelt Room of the White House, Nov. 16, 2012.

Forget the "fiscal cliff."

The year-end deadline for addressing a slew of federal budget decisions is obviously a big concern right now. Congress will torpedo economic growth if it allows more than $600 billion worth of tax hikes and spending cuts to take place all at once, as scheduled.

But at best, a compromise solution that averts the cliff will merely remove an impediment to growth. Washington is unlikely to do anything innovative or revolutionary to transform a stagnant economy over the next few weeks or months.

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President Barack Obama faces much bigger challenges over the next few years. He'll kick off his second term with some advantages he didn't have during his first. For one thing, much of the healing form a brutal recession is already underway. Forecasting firm IHS Global Insight predicts the economy will create nearly 10 million jobs during the next four years, regardless of White House policies. An American energy boom — which has materialized with virtually no help from Washington — will give the U.S. economy another natural advantage. And the Federal Reserve remains on call to prop up the economy with whatever tools it still has left in its kit.

President Barack Obama speaks to the media in the Roosevelt Room of the White House, Nov. 16, 2012.
President Barack Obama speaks to the media in the Roosevelt Room of the White House, Nov. 16, 2012.

But all of that may not be enough to invigorate a stalled economy that used to be the world's most productive. Here are four of the toughest economic challenges Obama faces:

Reviving confidence in Washington. The U.S. economy doesn't necessarily need a major assist from the government. But it does need an environment in which policymakers set the stage for success, and do the least amount of harm. And many business leaders feel Washington has become one of their biggest problems.

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In the World Economic Forum's latest annual survey of global economies, the United States ranked 54th in the trustworthiness of its politicians, 66th in macroeconomic stability, and 76th in efficient use of resources by the government. Those are appalling numbers that reveal business leaders disgusted with the American political climate. Some of it may have to do with increased regulation under Obama, which CEOs don't like. But mostly it reflects a dysfunctional government that can't get its spending under control, stick with a consistent set of policies or even tell businesses and consumers what their tax rates will be next year.

Obama spent much of his first term dealing with economic emergencies, but he now has a chance to broker some lasting deals on economic policy that could help revive American prosperity. It's true he must contend with restive Congressional Republicans who oppose many of his ideas. But they have a few respectable ideas of their own, and one essential component of leadership is finding common ground with rivals. If Obama can generate a sense of stability in Washington over the next four years, it may do more good for the economy than any stimulus plan.

Helping American businesses regain a global edge. Big businesses can operate just about anywhere, and many U.S.-based multinationals do much of their hiring, manufacturing, and money processing overseas these days. A recent survey of Harvard Business School graduates found 58 percent expect U.S. competitiveness to worsen over the next three years. This would be a good time for Obama to prove them wrong.

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There are many reforms that generally have broad support and could make American firms more competitive, with little or no overall cost to the economy. Some of those recommended by the Harvard respondents and other business leaders: Lower corporate tax rates while closing myriad loopholes (which Obama has already said he supports, in general); easing restrictions on highly skilled immigrants; streamlining regulations, especially old and outdated ones; aggressively pursuing new free-trade agreements; and continuing policies that encourage investment in research and development. Many such ideas could be part of a bigger compromise deal with Republicans.

Getting healthcare costs under control. The main thrust of Obama's healthcare reform law is to extend coverage to millions of people who aren't currently covered. But it doesn't directly tackle an equally large problem, which is the rapidly rising cost of healthcare in America. "The level and pace of growth of U.S. per capita health care costs make the United States an outlier among advanced nations," says the Economic Policy Institute. And shifting those costs from the private sector to the government (or vice versa) won't solve anything.

Runaway healthcare costs are the biggest threat to Medicare, the one federal program most likely to overwhelm the government's finances in the future. They also hurt family finances, depressing living standards, and force companies to divert money away from investments that could generate economic growth. There are a lot of ideas for how to rein in healthcare costs, including "accountable care organizations" that focus on outcomes rather than the number of procedures, digitized medical records, and incentives for doctors and patients alike to pursue more cost-effective care. True healthcare reform still requires proven ways to make healthcare more affordable.

Improving education. Most education is funded and managed locally, which makes it hard for anybody in Washington to make much of a difference. Yet with American students underperforming their peers in many other countries, business leaders insist that better education should be a top economic priority.

Obama's Race to the Top program, which offers financial rewards to states with the most-improved education systems, has won a modicum of praise. But continued weak test scores — paired with volumes of anecdotal information from hiring managers about the poor preparedness of many young adults — indicates a lot more work is needed. Some critics want to see tough national standards for student performance. Others would rather see reforms that lower dropout rates, enhance accountability for parents and teachers, and create more competition among schools. Anything Obama can do to make kids smarter will help the economy, and burnish the legacy that he's surely starting to think about.

Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.