Barack Obama on the economy

Fortune: Obviously a lot of bad economic news came out on Friday. But what I'd like to do is ask you to look beyond that, look to the horizon. As a potential president, what worries you most? What single economic issue will worry you most that day that you step into the Oval Office?

Obama: I think that if we don't get a handle on our energy policy, it is possible that the kinds of trends we've seen over the last year will just continue.

Demand is clearly outstripping supply. It's not a problem I think we can drill our way out of. Consumers are obviously painfully having to adapt to rising gas prices, but it can be a drag on our economy for a very long time unless we take steps to innovate and invest in the research and development that's required to find alternative fuels, make our transportation system much more energy-efficient. Retool our industry and our buildings. And the market can accomplish a lot of that through some pretty wrenching retooling, but I think it's very important for the federal government to have a role in that process as well. So that's something that is immediate.

Now I would just, if you don't mind, I'll broaden it to say this: that the overarching challenge I think that we have is to make our economy more competitive while at the same time making sure that the ladders of opportunity remain broadly available to all Americans. Globalization is making the entire world more efficient.

And I am a strong believer in the powers of this global integration to create more goods and services and raise living standards as a whole. But it also means that a lot of the world is catching up to us and if we want to remain at the forefront and pass on an economy that is improving living standards for each successive generation, then we're going to have to make some basic investments not only in energy, but fixing our health care system, improving our infrastructure.

Our investment in science and technology is going to have to significantly increase. Our commitment to our education system and training our workforce is going to have to drastically improve. And so I think that is the challenge.

We're going to be doing it under severe constraints because the entitlement that we've already set up for an aging population is going to cost a lot of money as well.

Fortune: Let me follow up on both of those. Creating alternative energy. You support the Climate Change legislation which essentially puts a penalty price on fossil fuel to move us toward alternatives. Are consumers and businesses going to have to be prepared to pay higher energy costs as we transition?

Obama: I've said this before. There is no doubt that in the short term, changing, adapting to this new energy economy is going to carry some costs.

Fortune: How long a term?

Obama: Well, I would never underestimate the power of American innovation. I'll just give you one example that isn't directly related to oil prices, but when the crisis around acid rain came up several decades ago and a decision was made to retrofit power plants to stop emitting as much sulfur dioxide, industry said this is going to be wildly expensive and is going to be a huge drag on the economy.

It turned out that once you priced the cost of this pollution, that - and money was there to be made by figuring out how to reduce it - that we actually did it much faster and much cheaper than anybody had anticipated.

So my instinct is that if we get in place a system that says carbons that are emitted into the atmosphere, we're going to price that, that people are going to respond and that there are going to be technological breakthroughs that end up not lowering our standard of living and that end up actually reflecting maybe declining energy prices over the long term.

Fortune: Short term?

Obama: Let me give you a very specific example. If we have a cap-and-trade system, then utilities are going to have to make investments to use energy more efficiently. That's going to cost money. They will try to pass on those costs to the consumer. And what I've said is that the price that they pay in penalties for carbon emissions, part of that money is going to have to be plowed back in to protect low-income, fixed-income individuals, who just can't manage sudden spikes, shocks in electricity prices.

On the other hand, folks like you and me, we're probably going to change our lightbulbs and insulate our home better, start thinking differently about how we use energy. Buying energy-efficient appliances when our current appliances need to be replaced. And our net electricity bill five years up may end up being the same or even lower because we will have gotten much more efficient in terms of how we use energy.

So I think that the key is to make sure that if there are any short-term spikes in energy that we protect those who can least afford it. And that same principle applies when it comes to oil prices. We've got to make sure that people who are burdened by high gas prices right now get some relief. I think it's a mistake to do it artificially by, for example, taking away the gas tax, suspending that. I think that is a short-term gimmick that will end up actually increasing our consumption of oil. But on the other hand, making sure we provide a tax rebate or a permanent tax cut to middle-class and working-class Americans so that they can absorb these costs into their budgeting, that I think is absolutely critical.

Fortune: Going back to global competitiveness, the rise of China and India is threatening American dominance on the world stage. What steps will you take to regain that dominance, or should we be prepared, even as we try to keep some competitiveness, to acknowledge that we're not going to be the dominant force anymore?

Obama: Look, the U.S. economy remains the biggest, the most dynamic, the most entrepreneurial of the world economies. And it's going to be that way for some time to come.

But what is absolutely true, China and India, as well as some Eastern European countries, and countries in Latin America like Brazil, they are on the rise. That's generally a good thing. It's good just for basic humanitarian reasons. These are achingly poor countries - at least up until very recently. It's good because it creates new markets. It's good from a national security perspective. If managed properly, these are countries that are being absorbed in the world economy and are less likely then to want to shake up the world order.

But it's going to present some challenges.

And what we have to do is to figure out how do we build on our strength. So, for example, we continue to have the best university system in the world by a long shot. But if we're starting to under-invest in our university system, or we're making it harder for foreign students to come and study here, then we could lose that edge.

Fortune: Do you see more federal investment?

Obama: It doesn't have to be federal. What's happening typically is that because states are under such financial burden, they're starting to provide less aid to their university systems and so the federal government should be thinking: Are we meeting all our obligations to the states, or are we putting the squeeze on them, and is that trickling down to state universities?

Our spending on basic science has flat-lined. It should double. It's an enormously important investment in terms of encouraging growth.

Our investment in the K-through-12 system - again, this is largely a local and state funded system - but I proposed very specific ways to start closing the achievement gap: investing in early childhood education, raising teachers' salaries and teachers' standards; making college more affordable to young people, encouraging lifelong learning for the nontraditional student and not just the traditional four-year college student; making our health care system much more efficient than it is; and making our energy system much more efficient than it is; and improving our infrastructure. Now [infrastructure] is something where I think the federal government has the very important role to play.

The fact that we rank now 16th or 20th in broadband penetration and speed makes no sense. And so all those things are designed to make us more competitive. If we do those things, then I'm confident that we can compete with China, India, and anybody else.

Fortune: And maintain dominance?

Obama: I think we can - I think we can continue to be the preeminent economy with rising living standards and have the highest living standards in the world. And I think that we can continue, most importantly, to attract the best and the brightest to this country, which is an enormous strength that sometimes gets underestimated.

I mean the fact that smart, creative people continue to want to move here and set up businesses here and raise their families here is an enormous boost. It creates a dynamism that you just don't see in a country like Japan, for example, that's got a falling birthrate and has great difficulty absorbing people from other places.

Fortune: On a different subject, corporate America, it's funny because we did, as you may know, a cover story on Hillary Clinton last spring.

Obama: I read it.

Fortune: Which concluded that business was lining up behind her, with a cover line that "Business Loves Hillary." You used that in your attack literature on her in Indiana. And I've been to enough of your events to know that CEOs, well-paid CEOs, are a stand-in villain in your stump speeches.

What is your view of corporate America? It is a destructive force?

Obama: No, no, no, no. Of course not. You know, the truth is there's a reason why the business community in Chicago as a whole has been very supportive of me. The reason is that they know I am a pro-growth guy and I'm a pro-market guy. And I always have been.

What I do get frustrated with is an economy that is out of balance, that rewards a very few - with rewards that are all out of proportion to their actual success - while ordinary, hard-working Americans continue to get squeezed. And this isn't speculation on my part or rhetoric. Here's what we know, that over the last decade or so, this economy grew substantially and about more than half of the total growth was captured by the top one percent. And if you look more carefully [at] the statistics, it is about one-tenth of one percent. Some of that has to do with globalization and the fact that with access to international markets, with global capital being able to move everywhere it wants, it has meant a winner-take-all environment. But a lot of it has to do with tax policies. A lot of it has to do with the fact that the Bush administration didn't see any role in providing ladders of opportunity for ordinary Americans. And so their costs keep on rising. Their incomes are stagnant. Meanwhile, people like me are finding ourselves doing better and better, and the tax code keeps rewarding us.

So that's been my general concern and I think that there are outstanding CEOs of companies who are creating jobs, strengthening communities. I still believe that the business of America is business. But what I also think is that with all that power and talent and all those resources at their disposal comes some responsibilities, to not game the system, to not oppose increased transparency in the marketplace, but to encourage greater transparency in the marketplace. To not oppose fiscally prudent measures to balance our budget, or invest in the infrastructure that's needed to keep the economy going strong. But to be supportive of those efforts.

Fortune: Name some CEOs you admire.

Obama: Warren Buffett is one of my favorite people.

Fortune: And he's been advising you on taxes -

Obama: He's been advising, not just on taxes, but also during the housing crisis.

Fortune: Do you call him on his cell and say, "Hey, Warren..."?

Obama: I call him, yes. He's one of the most refreshing people. He's one of those rare people who is exactly how you hope he will be. He's just completely down to earth and is as smart as they come. Really a wise, wise person. I got to know Jamie Dimon quite well when he was in Chicago. I think he's a very smart person, and I think he's doing his best to manage his bank under difficult circumstances.

Steve Jobs is somebody who is an example of the kind of entrepreneurial spirit that we have to build on as part of what makes America such a great country. So listening to him and thinking about how to be that successful and nimble in the current global environment has been very instructive.

Fortune: Tell me how your management style will be different than the Bush White House. Not policy, management.

Obama: Well, I think that in some ways during the course of this campaign people have gotten some good insight into my management style. I put together a very strong team. I insist on the suppression of ego. I call it the no-drama policy. And I think that what I look for is to bring the smartest, most capable people together in an environment in which everybody shares a common vision, but there's no ideological predispositions in terms of how to achieve that vision.

And I am a big believer in pragmatism. I think that's always been the strength of America, that's always been the strength of America. We're not an ideological people. We're common-sense people who say what's going to work and let's figure it out. And so I think the biggest difference in my management style and George Bush's is that I want a robust discussion around the table with a lot of different viewpoints and a firm footing in the facts.

I don't like ideology overriding facts. I like facts, then determining what we need to do. I believe in a strong feedback, so that if your strategy or tactics aren't working, that you're going back and saying let's start from scratch here. Let's figure out what exactly we did wrong.

Companies that are successful do that. I think campaigns that are successful do that. And I think a president has to constantly adjust to the facts that he's receiving. He or she has to make sure that the lines of communication are open so that people aren't intimidated and hesitant to bring bad news.

I always want bad news first. Good news takes care of itself.

Fortune: Speaking of facts, I have to ask you a trade question. NAFTA you called "devastating," "a big mistake." But a 2005 Congressional Research Service study shows that it has a mild, positive effect on our economy and the Mexican economy.

Obama: In the aggregate.

Fortune: In the aggregate. And you and Hillary Clinton, neither of you would support any of these trade agreements that did have ILO standards, and that did have environmental standards.

Obama: No, no I supported Peru.

Fortune: Right, but not Panama or Colombia. But to follow that up - even [Obama adviser] Austan Goolsbee has said he believes that the wage gap in the U.S. is really largely the information economy. It's not about these free trade agreements. But now that the primary is over and you're not in Ohio or wherever -

Obama: I'm going to be back in Ohio.

Here's what I agree with. I think that sometimes during campaigns the rhetoric gets overheated and amplified.

Fortune: Did yours?

Obama: Politicians are always guilty of that, and I don't exempt myself from that. But my core position has never changed. It's been consistent if you look all the way through. I've always been a proponent of free trade. And I've always been a believer that we have to have strong environmental provisions and strong labor provisions in our trade agreements. And that we've got to be better bargainers.

The Chinese love free trade, but they are tough as nails when it comes to a bargain, right? I mean they will resist any calls to stop manipulating their currency. It's no secret they have consistently encroached on our intellectual property and our copyright laws. There are all sorts of nontariff barriers.

Now that doesn't make them anti-trade. It just means they're trying to work the system to their advantage. My only point has been that we should make sure in our trade negotiations that our interests and our values are adequately reflected.

Fortune: Should we unilaterally reopen NAFTA?

Obama: I actually had a nice call with the prime minister of Canada, Prime Minister Harper, this morning. He called myself and called Senator McCain as well to congratulate us. I'm looking forward to a conversation with him. I'm not a big believer in doing things just unilaterally. I'm a big believer in opening up a dialogue and figuring out how we can make this work for all people.

By the way, just going back to NAFTA for a second. I don't dispute that there may have been some modest aggregate benefit in terms of lowering prices on consumer goods, for example. But I would also argue that not only did it have an adverse impact on certain communities that saw jobs move down to Mexico, but, for example, our agricultural sector pretty much devastated a much less-efficient Mexican farming system.

Now from a pure economic perspective - if you're just an economist looking at this in an abstract way - you'd say, well, the more-efficient producer displaced a less-efficient producer in Mexico. There's nothing wrong with that. As a practical matter, those are millions of people in Mexico who were displaced, many of whom now are moving up to the United States, contributing to the immigration concern, and so those human factors should be taken into account. They may not override every single decision that we make with respect to trade, but to pretend that those costs aren't there, I think does not do a service to free trade. And it's part of what has been the protectionist sentiment and the anti-immigration sentiment that is out there in both parties. And I think that if we manage trade more effectively, if we're better bargainers, if we're thinking about the dislocations that occur as a consequence of it, if we're true to our belief that labor and environmental standards should be part of raising living standards around the world, instead of a race to the bottom, then we can have free trade and it will be sustainable and we'll have political support over the long term.

Fortune: What do you think about using trade negotiations to get big polluters like China to clean up?

Obama: I think that's going to have to be a central part of our bilateral relations.

Now I mean the issue of carbon and climate change - we've got to get our own house in order before we're going to be able to have a serious conversation with China about it. I mean the fact of the matter is, as polluting as they are and as fast as they're growing per capita, our carbon footprint is still many times larger than the average Chinese person's. Their attitude is going to be, "Look, you were polluting pretty good when you were developing." We've got to take those arguments seriously by leading by example.