The Great Equalizer

by David M. Smick
"The next U.S. President should thank David Smick for The Great Equalizer. It offers a prescription for how an American leader can succeed in a time of divided government. Having lived the American Dream, Smick has a clear-sighted view of what is best about America. His optimistic attitude, his big heart and personal experience in finance and politics offer a unique window into what ails America and what can be done about it. Specifically, his legislative experience allows him to see how Congressional deals can actually happen—deals in which each side gets some of what it wants and the American people get what they want: action not stalemate; progress not paralysis."
—Bill Bradley,
former U.S. Senator (D-NJ)
"Agree or disagree and I do some of both, David Smick has written an important tract on restoring comity in Washington and a sense of economic hope across the country. Whoever advises the next president on economics will want to read this book."
—Lawrence Summers, former Clinton and Obama economic adviser
"Never one to aim low, David Smick is calling for America to reinvent herself through a new innovative era of "mass flourishing." And even more impressive, he's written a game plan on how to do it. The Great Equalizer is chock full of canny insights and bold ideas; it definitely deserves a close read."
—Paul Ryan, Speaker of the House
"David Smick was a key leader in the revolution which led to two decades of prosperity. Now, in The Great Equalizer, he courageously takes on the policies which are crippling our economy and shifting money from working Americans to Wall Street. This is an important book."
—Newt Gingrich, former Speaker of the U.S. House of Representatives
"Smick describes a bold vision with specific, actionable recommendations. His ideas—written in an easy-to-understand, engaging style—are light-years beyond anything advocated during the long election season. Smick offers a highly innovative policy framework. Every Washington policymaker must read this book."
—Jeffrey E. Garten, Yale School of Management
"David Smick's analytical insights are always worthwhile reading."
—Alan Greenspan, former Federal Reserve Chairman
"Dave Smick's probing insights on the economy stem from an extraordinary vantage point few observers can match."
—George Soros
"In a world of dysfunction, misunderstanding and partisan deafness, it's easy to give up hope. The Great Equalizer aims to be the economics version of picking us up, dusting us off and putting us back on the horse. It intends no less than a program to get the economy growing faster and with broad-based political support. You probably won't agree with everything in it but it's a vote for 'can do' over 'why bother?'"
—Austan Goolsbee, former Obama economic adviser

The Great Equalizer book coverThe experts say that America’s best days are behind us, that mediocre long-term economic growth is baked in the cake, and that politically, socially and racially, the United States will continue to tear itself apart. David W. Smick, the hedge fund strategist, author of the 2008 best seller The World Is Curved and now The Great Equalizer, argues that the experts are wrong.

True, the economy faces stiff headwinds. Macroeconomics has failed to achieve historic levels of economic performance. The central bankers have slashed interest rates and flooded the economy with liquidity. The economy has underperformed anyway. As a result, working- and middle-class families can feel the American Dream slipping away. For nearly two decades, their incomes have flatlined. Average folk are desperate. They yearn for a dynamic big jobs-producing economy that works for everyone. They know in their gut America needs a new economic approach.

Smick argues that Americans feel besieged precisely because in recent decades, a Corporate Capitalism of top-down mismanagement and backroom deal-making has smothered America’s innovative spirit. Government and central bank policy now favors the big, the corporate, and the status quo at the expense of the small, the young, the new, the inventive, and the entrepreneurial. It favors Wall Street, not Main Street. Because the economic system is compromised, people can feel it in their bones that their children’s future is being frittered away.

In response, David Smick envisions a vibrant Main Street Capitalism of mass small-business startups and bottom-up innovation, all unfolding on a level playing field. Main Street Capitalism, he contends, is the Great Equalizer. He describes a new climate of dynamism where every man and woman is a potential entrepreneur. Main Street Capitalism empowers especially those at the bottom rungs of the economic ladders.

Smick argues that the problem with today’s economy is not a lack of monetary liquidity but a lack of the liquidity of confidence. People are terrified of the future. Investors are holding back. Innovators are starting firms at half the rate they did two decades ago.

Smick delves into the reasons why America’s economic dreamers and discoverers have become risk averse. He argues that the economic system is rigged. In the fight between David and Goliath, Goliath always wins. And in Washington, D.C., a stifling partisanship has meant nothing ever gets done to fix things. He argues that the policies of two presidents, one a Republican and the other a Democrat, can offer a roadmap to Main Street Capitalism, the Great Equalizer.

Today, the world seems a terrifying place of massive debt, currency wars, and excess supply capacity, while ISIS rears its ugly head all too often. The new information economy is replacing the old, familiar brick-and-mortar one of manufacturing. Technological change is coming at people so fast they are overwhelmed. Can technological innovation be made to benefit everyone, and not just a select few in Silicon Valley and on Wall Street?

David Smick contends that despite such daunting challenges, the American people are not going to give up on the American Dream without a fight. Thankfully, innovative dreaming and discovering have always been in America’s DNA. America is the land of dreamers and discoverers. That’s why the American economy has traditionally been a high-growth, big jobs-producing machine, a hothouse of commercially attractive invention. So The Great Equalizer is ultimately an optimistic book. And to show the way, the author offers a substantive 14-point plan of bipartisan reforms that can unleash America’s creativity and confidence.

Ultimately, Smick argues, economies are more than statistical measurements of supply and demand, economic output, balance-of-payments deficits, and rates of return on capital. Economies are people—their hopes, fears, dreams, and expectations. Economies entail what the English economist John Maynard Keynes in 1936 called the ebb and flow of “animal spirits.”

This is a unique moment. In The Great Equalizer, David Smick argues that America’s new president can shift people’s expectations about the future to positive actions and goals. Public anger and disillusionment over lack of economic opportunity have produced a rare opportunity for positive change. The public’s message to Washington: Protect us from economic mediocrity at home and from a dangerous world. We don’t care how you get there. Be creative. Be pragmatic. Try different things. Cut bipartisan deals. Just get there! We are tired of all the excuses. We want a high-growth economy. When all is said and done, growth is (almost) everything.

The Great Equalizer is a call for a set of new paradigms that inspire and empower average Americans to reboot their economy. It is a manifesto that argues that with a new kind of economic policy, of Main Street Capitalism, America’s best days are still to come.

Question-and-Answer Summary

1. HOW DOES THIS BOOK RELATE TO OUR NEW PRESIDENT? The election of Donald Trump should not have come as a complete surprise. American working families are angry. Their incomes have flatlined. They want protection from a dangerous world. They crave a new kind of economic policy. And why not? Half of American families are near insolvency. Half have no means of handling an unexpected $500 bill for a medical emergency or car repair. As I show in the book, Trump and Hillary Clinton's unexpectedly challenging primary opponent Bernie Sanders were opposite sides of the same coin.

President Trump faces a choice. He can either continue his campaign role as political provocateur or become a truly transformational president who shifts the American people's expectations about the future toward positive goals and actions. The author of the book The Art of the Deal, Donald Trump campaigned as the ultimate dealmaker. As president, he needs to artfully bring together the 75 percent of the country not beholden to the two political extremes and inspire a set of new paradigms that reboot the economy. He needs to be the unifier.

The American people have a message for Washington, D.C.: Stop the partisan bickering. Fix the economy to allow for higher rates of economic growth. Try different things. Cut bipartisan deals. Be bold. Bring the entire country together behind a new economic growth plan.

In economics, candidate Trump talked specifically about the economy's international side—the problems of poorly negotiated international trade deals and rampant currency manipulation. But trade represents only 13 percent of America's GDP. This book describes how to rejuvenate the other 87 percent of the economy.

But it is important to start with the correct understanding of how economies function. During the 2016 Democratic primary campaign, Bernie Sanders put today's capitalist system on the defensive. But capitalism comes in different varieties, and a return to a more equitable society does not mean embracing the socialist model. I believe the key to a better economy is not to reject capitalism; it is to rediscover the Main Street roots of capitalism. Donald Trump needs to quickly make clear what kind of capitalist he will be and how he will move America in that direction.

2. WHAT DO YOU MEAN BY DIFFERENT FORMS OF CAPITALISM? The terms "Main Street Capitalism" and "Corporate Capitalism" can be confusing. So let me explain things through the old parable, offered by some unnamed social-economic theorist, about farming.

Under COMMUNISM, you have two cows. The State takes both and gives you some milk.

Under SOCIALISM, you have two cows. You give one to your neighbor.

Under MAIN STREET CAPITALISM, you have two cows. You sell one and buy a bull. Your herd multiplies, and the economy grows. You sell them and retire on the income.

Under CORPORATE CAPITALISM, you have two cows and engage in financial engineering. You sell three of them to your publicly listed company, using letters of credit opened by your brother-in-law at the bank, then execute a debt/equity swap with an associated general offer so that you get all four cows back, with a tax exemption for five cows. The milk rights of the six cows are transferred via an intermediary to a Panamanian company secretly owned by the majority shareholder who sells the rights to all seven cows back to your listed company. The annual report says the company owns eight cows, with an option to buy one more.

And then, in your final act, you hire a lobbyist to try to pass laws and promulgate regulations that make the purchasing of milk from all other cows but yours either highly expensive or illegal.

3. WHAT IS THE GREAT EQUALIZER? Today the U.S. economy is suffering from a disease that is fueling a growing inequality. Productivity growth (doing more with less) has been abysmal. Innovators are starting firms at half the rate they did fifteen years ago. Existing firms are not investing in new opportunities at the same rate as in the past. Young firms are finding it much tougher to go public (and the bulk of new job opportunities comes when firms go public). Today's innovation itself appears to be less than transformational to the lives of average working families.

Meanwhile, America's large corporations (the ones that haven't moved offshore) have used the Federal Reserve's low interest rates not to invest in America's economic future but to buy back their own stock (creating an unprecedented mountain of corporate debt). Even today's leaders in high technology, Google and Facebook, now spend more on patent lawyers and lobbyists to stifle competition than they do on research and development of new technological breakthroughs. As a result, GDP growth rates have been subpar and inequality has expanded.

Main Street Capitalism is the great equalizing force—the great change in mindset—that can restore a dynamic climate of economic mobility. In this climate, every man or woman is a potential founder of a business startup (women are now starting firms at twice the rate of men—they are one of the economy's new secret weapons). With Main Street Capitalism, people are not just consumers; they are also investors, entrepreneurs, and, in some cases, dreamers of breathtaking innovation. For the majority of Americans who don't start new firms, Main Street Capitalism offers a new grassroots climate of more dynamic growth and more lucrative job opportunities.

As you can see, I have a strong bias toward business startups. The reason? Startups take place in America. More than 75 percent of the new job creation by multinationals happens overseas.

4. BUT WHAT ABOUT THE THEORY OF SECULAR STAGNATION? Some experts have concluded America's best days are over. Mediocre economic growth is baked in the cake. The demographic and technological headwinds holding back the economy will prevail for a generation. We're trapped. There's nothing we can do but muddle through.

Yet the experts are often wrong. They failed to predict the 2008 financial crisis, the Arab Spring, and Brexit. Nobel Prize-winner Joseph Stiglitz estimates economists' forecasts are off the mark 60–70 percent of the time.

Maybe the problem is not secular stagnation but policy stagnation, and a stagnation in American attitudes. Today's Corporate Capitalism of top-down mismanagement and backroom deal-making has smothered the American people's innovative spirit. Even central bank policy now favors the big, the corporate, and the status quo at the expense of the small, the young, the new, the inventive, and the entrepreneurial. It favors Wall Street over Main Street.

Under Corporate Capitalism, Washington policymakers have an almost slavish devotion to large institutions, both public and private. They have also allowed a poisonous hyper-partisanship to make effective policymaking impossible. They have squandered the chance for an effective immigration policy that confronts the demographic challenge. They have imagined away America's entitlement nightmare. As a result, average folk can feel in their bones that the American Dream is slipping away.

5. WHAT ROLE DOES INNOVATION PLAY? Innovative breakthroughs are the key to long-term prosperity. They are particularly essential to an economy bogged down with massive amounts of debt. But here's the problem: Broad-based prosperity requires more than a handful of glitzy technological breakthroughs, such as the smart phone, coming from rarified places such as Silicon Valley. History shows that significant increases in per capita income arise from what economist Edmund Phelps calls "mass flourishing" at the grassroots level. In this process, average folk become "idea machines" in a Main Street Capitalism where ordinary people reinvent ordinary products and services from the bottom up.

Our policymakers have got it all wrong. Our economic destiny is not a matter of luck. Human initiative and creativity are not irrelevant in determining economic success or failure. Attitude is everything. The health of an economy depends on behavioral elements that don't always fit on an Excel spreadsheet or follow the confines of a predictable theory. Economies involve a complex ecosystem and are linked to psychology.

How else do we explain the phenomenon of so many Americans who historically have quit their jobs, mortgaged their homes, maxed out their credit cards, and borrowed from family and friends—all to pursue the commercialization of some new idea or vision in an environment where 90 percent of such pursuits fail?

People may be the problem, but they are ultimately also the solution. Main Street Capitalism begins with a new mindset about the role of human drive, courage, and ingenuity in the process of economic growth and job creation.

6. WHAT ARE THE IMPLICATIONS OF THIS MINDSET FOR THE FUTURE? The implications are that it is impossible to capture via an econometric model a scenario in which 325 million Americans all collectively become inspired to re-engage and reinvent their economy behind a bipartisan leadership that removes obstacles to growth and changes today's negative expectations toward the future?

It is difficult to forecast the effect of a new paradigm that results from daring leadership brushing aside the ideological extremes and charting a new course backed by achievable common-sense policy reforms.

No algorithm can factor in the effect of Americans returning to the dynamic that has always made them exceptional—their boundless joy and can-do optimism toward future possibilities, sometimes in spite of mind-boggling obstacles. Successful deployment of the central bank's liquidity depends on understanding the hopes, dreams, and fears of average folk.

7. WHAT'S HOLDING THE ECONOMY BACK? In other words, why have so many working Americans lost faith in the future? Why has the rate of business startups halved? Why are existing businesses not expanding as much as they have in the past?

Is it because the rest of the world is terrifying, so people are afraid of the future? Are people holding back because of America's (and the world's) enormous debt? Is it that the world is holding trillions of dollars in U.S. dollar-denominated debt, but there is now a global shortage of dollars? Thus there is the potential for a growing global liquidity crisis. Or is it that the world's undercapitalized banks in many cases are in deep trouble?

Is it the result of bad deals on trade and currency relationships? Is it the problem of America's own compromised fiscal, regulatory, and immigration policies? Is it that the world's central banks, including the Federal Reserve, appear to have run out of monetary ammunition despite today's challenging environment?

Is it that Washington, D.C., has become captive of partisan hacks so nothing ever gets done? Is it because the public is well aware that potentially dangerous problems, like a ticking time bomb, remain unaddressed?

Is it that our central bankers can't tell us with much credibility whether the risk ahead is inflation or deflation (or disinflation), and whether the stock market is grossly overvalued, undervalued, or priced just right?

Is it that our leaders still believe in top-down economic design even as the world, whether through Facebook or ISIS, is in the midst of a bottom-up revolution?

Is it the result of the consolidation of finance since 2008, with a dozen giant, risk-averse zombie banks now in control of 75 percent of U.S. bank financing? The big and established firms receive loans; small and new ones often do not.

Is the entire nation simply overloaded on change? Is technological change, in particular, coming at people so fast they are feeling helpless?

Or is it an attitude problem? Have Americans themselves lost the courage, daring and optimism toward the future that have traditionally made the United States the world's hothouse of innovation?

The truth is, all of these elements are impeding America's GDP growth. They all collectively make up the headwinds holding back prosperity.

8. WHAT DO YOU MEAN WHEN YOU SAY WE NEED A BETTER UNDERSTANDING OF MONEY? Our new president's task is now clear: to produce a series of paradigm shifts that change the nation's expectations toward the future—to reverse today's negative psychology. The goal is to move from today's low "new normal" GDP growth rates of 2 percent to America's historic growth rates of 3 percent or higher.

The difference between 2 percent-plus growth and 3 percent-plus growth seems small. It's not. The difference is not a 50 percent increase in economic prosperity but more like a 500 percent jump in economic dynamism. It is the difference between America continuing to tear itself apart politically, socially, and racially, or becoming a country where the American dream is available for all.

Growth is everything.

But to try to create higher levels of growth, central bankers need a better understanding of money. Since the 2008 financial crisis, the world's central bankers have injected massive amounts of liquidity into the global banking system. Thankfully, the policy kept us out of depression. But the policy also failed to be a magic pill for prosperity and produced unintended consequences that distorted financial markets and increased inequality. Low interest rates mean very little to a person terrified of the future in an environment where risk capital for the little guy is hard to come by.

What policymakers should be more concerned with is another type of liquidity—the liquidity of confidence. Confidence (in particular, stemming from the knowledge that our leaders have a game plan for prosperity) creates liquidity.

9. YOU TALK ABOUT THE NEED TO AVOID A JAPAN-LIKE MALAISE. PLEASE EXPLAIN. Some experts worry about a breakout of global inflation and/or a second financial crisis. These developments could certainly happen. But my hunch is that the greater danger may be that large parts of the world, perhaps even the United States, become economically more like Japan.

By that I mean that Japan for the last quarter century has been an economic zombie. It has experienced mediocre GDP growth rates despite record low interest rates, massive debt, risk-averse banks, an aging population with an underfunded pension system, and millennials by the tens of millions still living at their parents' homes.

Sure, there are exceptions, but large parts of the world economy look to be at risk of falling into a Japan-like malaise—of having to muddle through for the long term. The world banking system is under enormous stress. The global economy is growing at less than half its rate of a decade ago. The tsunami of emerging market disinflationary pressure is ever-present. The risk is of the setting in of a permanent worldwide malaise.

The question is whether the U.S. economy can sidestep this quicksand. True, the American economy from time to time in recent years has shown signs of higher growth. But the progress has never been sustainable enough to produce prosperity for everyone. America can do better, but we need a game plan.

10. SO WHAT POLICY CHANGES DO YOU PROPOSE? The Great Equalizer offers Washington policymakers potential "grand bargains" on issues including infrastructure modernization, entitlement reform, healthcare cost reform, the financing of startups, the bolstering of existing businesses, more favorable corporate tax treatment in exchange for purchases of 1 percent infrastructure bonds (in an environment of even broader tax reform), elimination of corporate efforts to gain competitive advantage through regulatory arbitrage, and ways to allow families to be more economically mobile.

Each side—right of center and left of center—gives up something. In the process, the entire country prospers with a renewed sense of confidence that America now has an economic game-plan backed by a solid majority of its citizens. The goal is to shift expectations. Incidentally, the bipartisan legislative tactics of Republican Ronald Reagan in the 1980s and Democrat Bill Clinton in the 1990s provide a useful guide for such policymaking.

The book also calls for a Plaza II Agreement to try to establish order in today's foreign exchange markets which are at the doorstep of a currency war. With the world's combined public and private debt approaching an astonishing—and likely unsustainable—300 percent of GDP, there needs to be a global debt conference to establish contingency planning in the event parts of the world at some point initiate a scenario of debt default and/or debt restructuring.

11. YOU CALL FOR GROWTH, BUT ISN'T INNOVATION AN ECONOMIC DISRUPTOR? Today technology is feared by some as a disruptive force. And it is true that technological change can be scary. But that fear has been present throughout history. And the pessimists time and again have been proved wrong.

Today's innovative advancements in information and other technologies can also produce a powerful bottom-up growth phenomenon. All human knowledge is at everyone's fingertips and essentially is free. Customers are theoretically limitless.

Even though today's economic system still favors the elites, that situation is changing. Intellectual property, which is essentially free to everyone, is increasingly the most valuable property in today's changing economy. Theoretically, everyone will soon have access to the means of production. The doors of entry to the innovative economy are being blown wide open.

12. SO WHAT'S THE ULTIMATE TAKEAWAY FROM THE BOOK? It is that people are not going to give up on the American Dream without a fight. The building blocks are still in place to achieve higher levels of economic success. Thankfully, top-down design solutions and large, inefficient bureaucratic institutions are perceived increasingly with skepticism. We live in an increasingly bottom-up world where the empowerment of people can be an awesome force. But leadership is essential.

Compared to the rest of the world, America holds some unique advantages, including in the field of energy technology and production. America has a culture that has historically respected entrepreneurial risk-taking and tolerated failure. In the past, this culture has appealed to the Einsteins and Picassos of the world. For the United States, falling into a Japan-like scenario of muddling through for the next several decades does not have to happen.

So The Great Equalizer is an optimistic book. It is a call for the writing of a new American economic narrative in which not just the risk-takers of Silicon Valley and Wall Street are seen as the essential economic actors, but average folk are encouraged to dream big and dare big. This book is not intended as a comprehensive policy prescription. This is a starting point, an effort to kick-start some national, bipartisan brainstorming on how best to raise America's economic growth rates. This is the beginning of an important process of attempting to discover who we are as a nation.

But the time to start writing that new narrative is now. The clock is ticking.