US Politics: Obama changes rhetoric, continues same path

With his administration reeling from the loss of the Democrats’ effective super-majority in the Senate, Barack Obama was under pressure to deliver a state-of-the-union address on January 27th that could turn the political tide. The president’s speech was feisty, though its tone was moderated by renewed calls for bipartisanship and unusually candid admissions of his administration’s mistakes. Above all the speech emphasised, as expected, a shift of focus on to jobs and the economy. Difficult mid-term elections loom—and Mr Obama’s chances of enacting far-reaching reforms have dimmed—but improving economic data may offer a little respite in the months ahead.

The administration’s recent setbacks—its loss of a filibuster-proof majority in the Senate as a result of the Massachusetts special election, and its poor handling of healthcare reform—dictated the tone of the state-of-the-union address. Mr Obama defended his administration’s efforts to create jobs and stimulate the economy. At the same time, on several occasions he appeared to criticise the Republican Party both for helping to create the economic difficulties that his administration inherited and for blocking key legislation. This was clearly an attempt to counter criticism that he has been a passive and ineffective leader who has allowed his agenda to become mired in congressional horse-trading. Reminding voters of his government’s achievements in averting economic depression—even if unemployment is still high and the political momentum has turned against the Democrats—will be increasingly important in the run-up to the mid-term elections in November.

Mr Obama’s speech had to balance tough-guy partisanship with greater recognition of voter concerns about economic issues and his administration’s effectiveness. His address therefore had a prominent mea culpa element, in which he admitted partial blame for the policy stasis in Washington. The real reason for such an admission, of course, was only to reassure viewers that the government is going to do something about the problem. With the Republican victory in Massachusetts earlier this month, legislative progress is now much more dependent on bipartisan co-operation. Mr Obama’s speech therefore leavened its criticism of the Bush administration (and of the current Republican opposition) with calls for a more conciliatory approach by all. This also entailed not-very-subtly chastising his own party, reminding Democrats that voters still expected them “to solve problems, not run for the hills”. This rhetorical balance of aggression and deference reflects the difficult position in which Mr Obama and the congressional Democrats now find themselves.

Mr Obama’s shift of emphasis on to the economy was reflected in concrete policy announcements, although to no one’s surprise the speech did not present any grand new initiatives on the scale of the US$787bn stimulus bill enacted in early 2009. Still, Mr Obama made a key statement of intent by saying that “jobs must be our number one focus in 2010”. He pressed the Senate to pass a jobs bill (a version of which has already been approved by the House). He said the government would extend tax cuts for the middle class (but not for the rich). He also announced a range of tax breaks and other benefits for small and medium-sized enterprises (SMEs). The proposals include a fund to promote lending by community banks to SMEs; the scheme has a populist angle in that it is to be financed by US$30bn in repaid bail-out money from banks that used the Troubled Asset Relief Program.

Mr Obama also proposed creating a scheme to boost exports by farmers and SMEs, with the aim of doubling the US’s exports in five years and creating 2m jobs. However, he gave no details. To keep things in perspective, US exports will already naturally increase by about 60% in nominal terms by 2014, according to the Economist Intelligence Unit’s projections. Away from the SME sector, Mr Obama proposed creating jobs by expanding the use of nuclear power.

Another notable element of the speech was a proposed three-year freeze on discretionary government spending from 2011. This is to dispel fears, relentlessly stoked by Mr Obama’s political opponents, that the Democratic-controlled Congress will exacerbate government profligacy and further weaken the public finances. However, the three-year freeze will only have a relatively small effect on the budget, because national security, Medicare, Medicaid and Social Security will be exempt. The planned freeze had already been made known in advance of the state-of-the-union speech.

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No U-turn

Although the state-of-the-union speech was significant in serving notice of a shift of emphasis, there was no overall U-turn on policy. Indeed, Mr Obama re-asserted his determination to continue trying to enact the centrepiece of his agenda, healthcare reform, as well as climate-change legislation. Doing either is likely to be extremely difficult, however, now that the Democratic Party caucus no longer has a 60-seat super-majority in the Senate. Wisely, the administration has made it clear that it will not exploit procedural rules to ram healthcare legislation through Congress (for example, by having the House vote on the Senate’s healthcare bill). To do otherwise would invite a voter backlash in November.

But this means that passing healthcare reform will require offering greater concessions to the Republicans, possibly on issues like tort reform as a way of reducing medical costs, or that the administration will have to vastly scale back its ambitions. Passing a series of smaller, piecemeal reforms on which politicians on both sides agree—such as banning insurers from excluding clients because of pre-existing medical conditions—could be part of the answer. But the way forward for healthcare reform now is extremely uncertain. That said, for the administration to come away with nothing would be such a massive blow to its credibility that we think it will continue to strive to enact legislation of some form, even if greatly diluted. Expect healthcare negotiations to continue in earnest, but with a lower profile than recently. While this happens, the administration will try to keep the public message on jobs and the economy.

Outlook

Mr Obama faces a difficult few months in the run-up to the mid-term elections. Buoyed by the Massachusetts result, the Republicans scent proverbial blood and will be disinclined to co-operate over legislation. This means that Mr Obama may struggle to enact any policy of consequence, which in turn could hurt the Democrats’ election prospects in November.

More positively for the administration, the economy is slowly improving. Preliminary GDP data due out on January 29th are likely to show that growth picked up strongly during the fourth quarter of 2009. Financial markets have made large gains since early 2009, so Americans are likely to be feeling slightly better off than they were a year ago. If some of these improvements are sustained for a few months, the pressure on Mr Obama could ease and the Republicans could begin to pay the price politically for the shrillness of their obstructionist agenda.

However, the outlook for the US economy contains significant risks, and the fact that unemployment—currently at 10%—is likely to remain high remains a serious liability for the Democrats. Much will depend on whether the unemployment rate ticks down slightly by election time, in which case the damage to the Democrats in the elections may be reduced. Even so, the Democrats are likely to lose seats in the elections. Mr Obama ended his speech combatively, saying: “We don’t quit. I don’t quit.” He will certainly need such resolve in the difficult months ahead.