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Obama should be bold with Congress

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STORY HIGHLIGHTS
  • President Obama delivers State of the Union address Tuesday
  • Fareed Zakaria says Obama should propose a bold plan of investing in America's future
  • He says Obama should combine GOP, Democratic ideas for faster economic growth
  • Zakaria: U.S. needs to be business-friendly, focused on technological innovation

Editor's note: Fareed Zakaria is an author and foreign affairs analyst who hosts "Fareed Zakaria GPS" on CNN at 10 a.m. and 1 p.m. ET Sundays and on CNN International at 2 and 10 p.m. Central European Time/ 5 p.m. Abu Dhabi/ 9 p.m. Hong Kong.

(CNN) -- President Barack Obama, who is preparing to give his State of the Union address to a joint session of Congress on Tuesday, should use the speech to outline a bold plan of investing in America's future, says analyst Fareed Zakaria.

He argues that Obama, buoyed by a recent rise in his approval rating after a bipartisan deal over tax cuts, should propose a plan that adopts Republican and Democratic ideas for putting the economy on a strong and sustainable growth track.

The author and host of CNN's "Fareed Zakaria GPS" spoke to CNN on Thursday. Here is an edited transcript:

CNN: The president is giving his State of the Union address on Tuesday. What do you think he should say?

Zakaria: I think this is a real opportunity for Obama because it's now clear that his move to the center has worked politically. His approval rating is up. It's up for a number of reasons, but I do think that a crucial one has been a sense that he's trying to find ways to get things done and trying to find ways to work with the Republicans. So what I think he should do is present an ambitious and bipartisan strategy.

Now the two things are usually seen as contradictory -- meaning that bipartisan is seen as being a kind of weak compromise that is bland, banal policies, a kind of lowest common denominator. But I actually think that there is a way to make bipartisanship work and that if it's done right, it can actually mean better policies than you'd get from either of the two parties.

CNN: And what kind of policies do you have in mind?

Zakaria: I think the central issue for the United States remains how to restore America to a trajectory of economic growth. Even though the economy is growing now, it's not growing enough to get unemployment down, it's not growing enough to recover some of the lost ground of the past few years, and certainly not enough to keep pace with the changes around the world, especially in the emerging markets.

So the United States has to come up with a set of strategies that will revitalize the growth engine. And what Obama should do is to really try to draw upon the best Republican ideas and the best Democratic ideas.

CNN: What are those ideas?

Zakaria: Republicans and Democrats basically disagree about economics in the short term. The Democrats feel there should be more direct government job creation. The Republicans feel there should be more deficit cutting and private sector job creation -- at least, that's what they say, their actions have actually increased the deficit.

Read Fareed Zakaria's column at TIME.com

Now what Obama should do is bypass this debate -- there's no way to get anything done if you stay on this short term issue. But on the longer term, there is a very significant agreement that the United States needs to foster innovation, it needs to get long-term growth, it needs to move into more cutting edge technology -- in other words, a strategy of growth through innovation and technological change.

CNN: What are the obstacles to that approach?

What Obama should do is to really try to draw upon the best Republican ideas and the best Democratic ideas.
--Fareed Zakaria

Zakaria: There is a disagreement. Republicans would want more of this done through regulatory and tax reforms that stimulates the private sector, the Democrats want more done through government research and technology infrastructure. But here's the beauty: They're actually both right.

What Obama should do is present an ambitious strategy that tries to do both and present it as a complete package that both sides have to accept as a growth strategy.

In order to get everybody invested in it and to support it, you have to give the other side significant concessions, just as he did on the tax deal. The tax deal is in a sense a good template for both sides accepting elements that they really didn't want.

CNN: What kinds of specific policies would be in this kind of a package?

Zakaria: The Republicans argue, and with some merit, that the United States has gotten quite uncompetitive as a place to do business and to grow and expand business. Our labor costs are already very high of course, which is natural as a rich country, but we also have a tax structure that's no longer particularly business friendly.

Twenty-five years ago, we had the lowest corporate tax rate in the industrialized world. Today we have the second highest. The crucial thing to keep in focus here is that over those last 25 years, we haven't raised our corporate tax rate, other countries have lowered theirs.

We think of Europe as high tax, but Germany actually has lower taxes, both corporate and personal, than the United States today. So we haven't kept our eye on the ball, in terms of benchmarking to the rest of the world and asking ourselves whether we are still competitive.

CNN: How serious is the competition?

Zakaria: There are now many, many plausible alternatives to the United States as places to do all kinds of business from the most simple to the cutting edge: That includes India and China of course, but it also includes Singapore, South Korea, Canada, Germany and Holland. There are many more alternatives than there were before and I think we in the United States tend to assume that because we are the largest economy in the world, people will just come here or stay here. Increasingly, it's quite clear that that is not the world that we are moving into.

So I think tax reform, regulatory reform -- always with a focus on benchmarking so that we are as attractive if not more attractive than other industrial countries. I think the goal of the U.S. should be to remain the most business-friendly large industrialized country in the world.

The goal of the U.S. should be to remain the most business-friendly large industrialized country in the world.
--Fareed Zakaria

CNN: What would be a policy the Democrats could rally around?

Zakaria: The Democrats could rally around a strategy of significant investment. There's absolutely no question that the leadership in technology industries that the United States has been a product of, in part, very substantial government funding.

There would be no semiconductor industry today if not for the Defense Department in the 1940s and '50s. NASA was the lead sponsor of the nascent computer industry in the '60s. Al Gore may not have invented the internet, but DARPA certainly did -- the defense agency that funds new technologies and new ventures.

GPS, the technology that is now revolutionizing the mobile world, was created by the U.S. military. So there's no question that government investment has a huge payoff, and I think nobody would argue the idea that government investment, particularly in core infrastructure for the future, would have huge payoffs.

CNN: How would you structure this kind of investment?

Zakaria: The problem here is that to do it in a serious way you're talking about real money. Government funding of R and D is still way too low, it's below the Cold War average. It should really be, in my opinion, twice what it was in the Cold War, because we're in a knowledge economy and all the new good jobs are going to be created in this knowledge economy.

So we're talking about spending very significant amounts of money, and that will be something that will take some time, perhaps using an infrastructure bank such as Obama has proposed. But if he were to propose such a program, to invest in science and research and digital infrastructure in a clean grid, it's difficult for me to imagine you could find Republicans who, at least at a philosophical level, would oppose it, and of course Democrats would rally around it.

CNN: Where does the money come from?

Government investment, particularly in core infrastructure for the future, would have huge payoffs.
--Fareed Zakaria
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Zakaria: There are two or three ways to do this. One of them is to couple it with fundamental tax reform, which means rationalizing the tax code, but also eliminating a lot of loopholes and deductions. That could yield significant new revenues.

Let me be honest. Nobody likes to say they are raising taxes, but when you eliminate loopholes and deductions you are of course raising taxes on the people who are taking advantage of those loopholes and deductions.

A simple but very popular deduction is the one on interest on mortgages. It costs the government $100 billion a year and serves absolutely no social purpose. Countries like Canada and Britain which do not have it have absolutely the same level of home ownership. The only thing it does is give incentives to Americans to take on too much debt for their houses -- and we've seen what that results in.

There are many other places one could look, my own suggestion would be, coupled with fundamental tax reform, a small value added tax of even 5% would give very robust revenues. And finally, this would all have to be coupled with entitlement reform, which is where the big money in the federal budget is, specifically in health care.

CNN: What do you think needs to be done in the short term?

Zakaria: The key here is that you don't have to do it all right away, you have to get some of this stuff started, because you're not going to spend all the money right away either.

You're talking about setting up public-private partnerships, infrastructure banks, all these things would leverage money so that every dollar of government money attracts some private investment.

So this is all doable, people often forget the United States still has a $15 trillion economy, three times the size of the Chinese economy. There are a lot of things we can do if we can get public policy to be somewhat rational, focused on the long term and willing to make investments that will pay off in the long term.