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Big Business should stop ignoring Washington

March 15, 2012, 6:19 PM UTC

By Glenn Hutchins and William Galston, contributors

At a recent conference about U.S. economic growth and job creation convened by the Brookings Institution, one business leader after another expressed deep frustration with our dysfunctional federal government. It became clear that the U.S. business community is confronted with a fundamental choice: Ignore Washington or work with it to fix the problems plaguing our economy.

There is strong sentiment, particularly among technology entrepreneurs, that the government is ineffective at best, irrelevant at worst — and therefore it should be ignored. While these sentiments are understandable, this attitude is self-defeating. Even if the private sector and local governments do everything right, it won’t be enough. Only Washington can provide key drivers of our competitiveness — from a sustainable macro-economic policy, pro-growth tax code, prudent spending, sensible regulation, and market-opening trade treaties to smart public investments in education, infrastructure, and research.

There’s really no alternative: business leaders must set aside their disappointment with our national political institutions and instead work to fix them.

Our economic problems are multiple and urgent. Three important studies released since the beginning of the year illuminate the mounting challenges the American economy faces in the global marketplace. First, the Competitiveness and Innovative Capacity of the United States, prepared by the Department of Commerce and the National Economic Council, raises six economic “alarms” — inadequate job creation, declining wages and household incomes, pressure on manufacturing, stagnant innovation, a sub-par K-12 education system, and obsolescent infrastructure. Other measures showing negative trends include growth in government and corporate R&D, the number of advanced degrees in science and technology, and the creation of new firms.

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In its annual report on Science and Engineering Indicators, the National Science Board paints a similarly bleak picture. Over the past decade, U.S.-based high-tech manufacturing employment has fallen by 28%, from 2.5 jobs to 1.8 million. During the same period, the number of research and development employees of U.S.-based multinationals who are based abroad more than doubled, from 123,000 to 267,000, while U.S.-based employees in this category increased by only 15% (92,000).

Completing this disturbing trifecta is Prosperity at Risk, which reports the findings from a survey of nearly 10,000 Harvard Business School graduates, many of whom are in senior business leadership positions. Nearly half — 45% — say that they expect U.S. firms to be less able to compete in the global economy three years from now, versus 20% who believe they’ll be able to better compete; 64% believe they’ll be less able to pay higher wages and benefits. Over the longer term, 66% of respondents see the U.S. falling behind emerging economies, versus just 8% who saw it pulling ahead; 21% expect the U.S. to fall behind other advanced economies, compared to only 9% who saw the U.S. staying in the lead. When asked why they thought the U.S. was falling behind, fully 60% cited the ineffectiveness of our political system compared to other advanced economies.

Of the respondents, more than 1,000 had confronted a choice at their company between remaining in the United States and moving overseas. By a margin of more than five to one, their firms had chosen the foreign option. When asked to name the principal impediments to investing and creating jobs in the United States, respondents cited regulations, labor force quality, taxes, macroeconomic policy, and the political system as the top five. Uncertainty about government action figured prominently in their decision-making.

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Notably, national-level decisions shape each of these issues. The business leaders who came to Brookings deplored the absence of action at the national level and expressed interest in filling the vacuum. While the business community doesn’t have the levers of power available to government, it is skilled in moving swiftly to solve knotty problems and ought to mobilize in the national interest.

Here are two examples:

We all lament the deterioration of our roads, ports, and airports as well as the under-investment in broadband. What about a public-private partnership to deploy sidelined capital for growth-promoting infrastructure investments? Many experts and groups have called for the creation of an infrastructure bank — seeded with a modest amount of public capital and run by an independent board — that attracts private capital for infrastructure projects that can pass a rigorous market test. The U.S. Chamber of Commerce and the AFL-CIO both support the idea, as does the Obama administration. It’s time for a broader business coalition to get behind it—and to help design the most robust possible institutional architecture.

There’s a key role for business in governance reform as well. With partisan polarization at its highest level in more than a century, electoral rules that mute the voices of cooperation, and congressional rules that foster gridlock, it’s no wonder that the policy results are so unsatisfactory. That’s why we desperately need institutional reforms that would reduce partisanship, break logjams, and improve decision-making.

We need a Congress that produces budgets on time, confirms or rejects presidential nominees promptly and openly, and allows crucial issues to reach the House and Senate floor for open debate. We need a budget process that can deal with everything the government does — not just appropriations (a shrinking share of the total) but tax expenditures and entitlements as well. And we need an electoral system that empowers the tens of millions of voters who belong to neither party’s base and whose voices have been muted for decades.

The business community should throw its weight on the side of these vital reforms—and support the civic groups that promote them. For example, the Senate Homeland Security and Government Affairs Committee recently held a hearing on a bill that would cut off pay for members of Congress if they fail to produce a budget resolution and appropriations bills prior to the beginning of the next fiscal year. Although the Congressional Budget Act of 1974 mandates this timetable, Congress has not finished its work on time since 1996, demonstrating the need for stronger incentives. Speaking with a united voice, business leaders should let their senators know that they want the committee, followed by the full Senate, to complete work on this bill without delay.

U.S. business has an alternative, of course — to accept the slow decline of the American economy as irreversible and do what it can to hedge its bets. Out of an understandable frustration with our political system, some business leaders may be tempted by this course. But choosing it would be short-sighted and dangerous in the long-run. Not only would the current public backlash intensify in the United States, but foreign governments aren’t guaranteed to be so friendly in the future when they have the upper hand.

Even in this age of globalization, nation-states still matter. And so too does the messy but unavoidable process of politics.

Glenn Hutchins, a co-founder of Silver Lake, is Vice-Chairman of the Board of the Brookings Institution. William A. Galston is Ezra Zilkha Chair in Governance Studies at Brookings.