Obama’s Second-Term Agenda and the Global Economy

Author: Uri Dadush
Originally published by the Carnegie Endowment for International Peace

Last night’s State of the Union address, the first of President Obama’s second term, provided an important opportunity to set the new administration’s agenda. The overwhelming emphasis will be on domestic issues and among those, job growth and social inclusion—rather than, for example, deficit reduction. As Obama put it, “let’s be clear: deficit reduction alone is not an economic plan.“ Despite a nod to trade agreements and foreign aid, the speech pointed to an America that is far more intent on fixing its damaged labor market, revitalizing its middle class, and restoring its frayed social fabric than on projecting its economic vision abroad.

Obama’s primary objective is to be remembered for leaving a growing and more equitable American economy. If he is successful, it would be of clear benefit to the rest of the world and help ease many sources of tension. However, it is now even more difficult to imagine, in the near term at least, that the world’s sole superpower will provide the leadership to move forward on a host of global challenges.

Few scenes in modern-day politics suggest such immense power as the entry of the U.S. president into the House of Representatives to deliver his annual State of the Union address to Congress. As the president is announced and applause erupts, arrayed before the speaker’s lectern are representatives and senators, members of the cabinet, the joint chiefs of the world’s most powerful armed forces, and Supreme Court justices. For about an hour the president addresses a packed chamber in a televised prime-time address that is followed by tens of millions across the nation.

The pomp and ceremony is, however, more than a little deceptive, since at a time of divided power the president’s capacity to drive change is seriously circumscribed. The State of the Union address is at best a serious proposal and at worst a wish list destined to remain unfulfilled. The president is bound in nearly every major aspect of his agenda by the legislative authority of a Congress which, unlike in parliamentary democracies, the executive only influences rather than controls. Far from the commander in chief he is on military matters, on the strategic issues requiring legislative agreement, the president is at best the convincer in chief.

Against this background, those keen to understand Obama’s proposals need to keep two overriding features of the American economy firmly in mind—soaring income inequality and the persistence of unemployment. Over more than a decade, poverty has become more prevalent and the U.S. middle class has seen its income decline, even as earnings of a relatively small group at the very top of the income distribution have surged. These trends combined with soaring unemployment during the Great Recession, from which the nation is still recovering, have spawned a pervasive uncertainty about the average family’s ability to sustain, never mind improve, its living standard.

In his electoral campaign and the State of the Union address, Obama sought to respond to these concerns by promoting three central agendas: job creation, preserving and fine-tuning the social safety net while exacting more tax revenues from the wealthy to pay for it, and the naturalization of illegal immigrants that are overrepresented among the poor and economically vulnerable. In doing so, he aims to consolidate his electoral victory and retain the support of the rapidly growing Latino minority. Though inveterately predisposed to distrust government, most Americans oppose the cuts to social spending advocated by the Tea Party and some mainstream Republicans, and instead favor the tax increases on high-income earners that those groups oppose.

Much of Obama’s speech was devoted to measures designed to further his agenda for social inclusion. These included increasing the minimum wage and tying it to the cost of living, achieving equal pay for women, furthering voting rights, creating jobs in public-privately sponsored manufacturing hubs, incentivizing the hiring of the long-term unemployed, strengthening preschool education, strengthening science education, making college more affordable, facilitating finance for housing for low-income groups, helping disadvantaged communities, and investing in job-creating infrastructure.

He strongly opposed allowing the so-called sequester to happen—automatic cuts in defense and social spending that will take effect imminently if a deficit reduction plan is not agreed. As part of his plan, Obama pushed for closing tax loopholes that benefit corporations and the wealthy and made no mention of reducing the cost of social security. And the Medicare savings he proposed rely in good part on means-testing and reducing subsidies to drug companies.

Though a full page of his speech was dedicated to gun control—a heartfelt and widely supported reaction to the Newtown school massacre—mention of the two “mega-regional“ trade agreements under discussion, Trans-Pacific and Transatlantic, occupied a short paragraph. Foreign aid was similarly briefly referenced and China hardly appeared throughout the speech. Considerable space was dedicated to advocating measures to curb climate change, albeit in general terms and framed in a manner seemingly accepting that Congress would not act on the agenda and so the administration would therefore resort to what it could do through executive order and environmental regulation.

But Obama’s domestic economic agenda is one that may just have a chance of succeeding—and it could pay large dividends. Even though a fight over the sequester looms, the United States appears likely to avoid a fall over the fiscal cliff. Success by the new administration in overcoming America’s economic problems will likely help everyone. A weak American economy, especially one with a polarized political class embroiled in what appears to them to be a zero-sum game, is bad for the world economy. It fails to act as a demand locomotive for its trading partners, it is tempted by protectionist sentiment, and its loose monetary and fiscal policy can be destabilizing for the rest of the world, especially if it creates inflationary pressures (not the case so far) or results in a weaker dollar. Greater attention to fighting inequality and promoting social inclusion by the world’s most powerful nation will also convey an important message to other countries confronting similar social challenges, from China to Russia to the United Kingdom, India and Israel.

Despite the potential benefits of overcoming these issues, there is a big economic cost associated with an inward-looking United States. In a globalized world economy, the issues requiring an internationally coordinated response continue to grow in number and importance. They range from the stalled Doha round of trade talks and the increasing irrelevance of the World Trade Organization, to a serious legitimacy deficit at the IMF and World Bank, the inefficacy of the G20 and G8 set up, the failure to move forward on climate change negotiations, currency tensions, the simmering euro crisis, international financial regulation, and the economic travails of countries caught up by the democratic revolutions in the Middle East.

The United States cannot solve any of these problems on its own, but a durable solution to any and all of them requires its committed and purposeful engagement. This, judging by last night’s speech, is something the new Obama administration appears unlikely to deliver.