Barack Obama’s next two years


STRANGE and unpredictable are the ups and downs of American politics. On Capitol Hill this week Barack Obama gave the state-of-the-union speech that launches the second half of his first term as president. He told the nation that America had broken the back of the recession and had now to “out-innovate, out-educate, and outbuild the rest of the world”, tackle the deficit, reform the government and become “the best place on earth to do business.” It was a surprisingly confident performance from the same battered and bruised president who only last November had sullenly to admit, after the Republicans wrested the House from the Democrats in the mid-term elections, that the voters had delivered a “shellacking”.
What has restored the apparent spring to the presidential step? After the thumping of the mid-terms, the man who had developed flat feet suddenly got his moves back. First, in December, came a crafty piece of deal-making over taxes. Mr Obama dropped his plan to raise taxes on the rich and extended the Bush-era cuts for everyone, thereby maddening his own left wing but talking the Republicans into a slug of new borrowing that will help stimulate the economy (though adding to the deficit) and his own chances of re-election in 2012. Then, and still before the newly elected 112th Congress started work, came a spate of victories: repeal of the ban on gays serving openly in the armed forces and ratification of the New START deal with Russia.

A tragedy also worked to the president’s advantage. Just after the new House convened and Nancy Pelosi passed the speaker’s gavel to John Boehner came a shooting spree in Tucson, Arizona, that killed six people and severely injured a congresswoman, Gabrielle Giffords. At a memorial service, Mr Obama’s plea to Americans to transcend their differences won admiration from all quarters and surely contributed to the recent bounce in his approval rating from 45% in November to 50% this week.

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The shooting had another consequence. It stole some of the thunder from the House Republicans’ first big move: their repeal, by 245 votes to 189, of what they call the “job-killing” health-care act. Tearing up Obamacare, the far-reaching law the Republicans accused the Democrats of “ramming through” Congress less than a year ago, was a striking symbol of how the balance of power has changed since the mid-terms. But, of course, it is only a symbol. The Democrats still have a majority in the Senate, and the president has a veto, so Obamacare will stay on the statute book for the time being.

Welcome to the masochistic pleasures of divided government in America. For two years the Democrats controlled both ends of Pennsylvania Avenue. That did not give Mr Obama the power to enact every measure he wanted (an energy bill and immigration reform were two that fell by the wayside), but the 111th Congress was indeed extremely busy. The Democrats poured hundreds of billions of borrowed dollars into efforts to stimulate a sagging economy, bailed out Detroit’s failing carmakers and passed scores of laws, including one to reregulate the financial sector.

With the House theirs, the Republicans can at last block this legislative juggernaut. But they are no less stymied than the Democrats now are when it comes to passing laws of their own. This predicament does not always have to result in gridlock. When Bill Clinton found himself in Mr Obama’s position in 1995, he was ultimately able to work with the Republicans on crafting big reforms.

Can Mr Obama pull off a similar feat? If you take what the parties say at face value, it might not look so hard. Many of the aims Mr Obama outlined in his speech are shared by Republicans. Both parties claim that they want to make America more competitive, simplify its tax code, reduce its deficit, expand its trade, streamline its government and fix its underperforming schools. The trouble is that they are utterly divided on how to achieve these goals. Add the fact that it is a mere 21 months to the next presidential election and the scene is set for bitter trench warfare, even if it is interrupted by the occasional opportunistic truce.

The two sides enter this battle with different strengths and tactics. Hovering in the memory of both is the titanic struggle of 1995 between Mr Clinton and Newt Gingrich, the Republican speaker at the time. He is still a presence in Republican politics, pondering a run for the White House (see Lexington), but he overreached as speaker. After a standoff over the budget forced the federal government to shut down, voters were more inclined to blame the Republicans than Mr Clinton, who went on to win a second term.

Mr Boehner, a pragmatic politician who has in the past worked comfortably with Democrats, will try to avoid Mr Gingrich’s mistakes. But many of the new Republicans in Congress think they were sent there to slay Leviathan, not rub along pleasantly with the big-spending Democrats. Behind them, the grassroots of the tea-party movement are already spiky with indignation after the compromises of the lame-duck session and are standing guard against further betrayal.

Taking a scythe to government

Mr Boehner and Eric Cantor, the House majority leader, have moved fast to placate the tea-partiers. In deference to the movement’s awe of the constitution, the sacred document was for the first time read aloud as the House started business. Framers of legislation must henceforth explain which part of the constitution gives Congress power to enact the relevant law. These, however, are mere sops compared to the main task the Republicans have in mind, which is to stop what Mr Boehner calls the Democrats’ “job-destroying spending spree” and to scythe down the size and reach of government.

On the very day of Mr Obama’s speech, the House Republicans passed a resolution to cut the budget for the coming fiscal year back to 2008 levels. Exactly how much they will ultimately cut remains to be seen: budget battles are fought out over months, with many feints and counter-feints. The Republicans promised before the mid-terms to cut spending this year by $100 billion, but say now that they will settle for $60 billion. Their original plan called for leaving defence, homeland security and mandatory programmes such as Social Security (pensions) untouched, which would have required spending on the remaining items, from firefighting to disease prevention, to shrink by about 20% across the board. But Mr Cantor now says that “every dollar should be on the table”.

If the final number is in doubt, the party’s fighting mood is not. It has given Paul Ryan, its leading fiscal Wunderkind and chairman of the House Budget Committee, sweeping new authority to demand deep spending cuts. The Republican Study Committee, an ultra-conservative group with a record 175 members in the House, has meanwhile written its own plan for $2.5 trillion in spending cuts over the next ten years.

Mr Obama acknowledges the need for “painful cuts”, though he failed to explain them. One proposal is to freeze some categories of domestic spending for the next five years—at an outrageously pumped-up level, critics say. But he also insisted that to compete with the likes of China and India, the country must invest more in education, science, clean-energy technology and infrastructure. This leaves the parties far apart on both the pace and magnitude of the required cuts, so making a collision over the budget inevitable.

March could bring a government shutdown, when the present “continuing resolution” authorising its operations expires. A bigger fight could follow when the Treasury hits the debt ceiling, which bars new borrowing. A few Republicans have said the ceiling should not be raised, an eventuality that Austan Goolsbee, Mr Obama’s chief economist, claims over-dramatically would amount to an unprecedented default that damages the “good faith and credit” of the United States. More likely is that the Republicans will use the debt ceiling to extract further deep cuts or legal limits to government borrowing or spending. The two parties will ultimately strike a deal, but it will be a miracle if America makes it to the autumn without some serious disruption to government services.

Defending Obamacare

As the Republicans prepare their budget offensive, Mr Obama is bracing to protect the gains of his first two years. Foremost of these, in his eyes, is health-care reform. Though safe for the present from outright repeal, its long-term survival is far from guaranteed, and depends mainly on whether Mr Obama is re-elected in 2012. Should the Republicans win the presidency (and, as seems likely, a majority in the Senate), Obamacare will certainly be swept aside, at least in its present form. At some point, too, the Supreme Court may agree with those who complain that the “individual mandate”—the new obligation to buy health insurance on pain of a fine—is unconstitutional.

Until then, control of the House gives the Republicans some tempting opportunities for mischief. Congress is supposed to hold the executive branch to account, so the Republicans can try to gum up the works by subjecting the federal bureaucrats charged with bringing reform to life to endless oversight hearings and investigations. Kathleen Sebelius, the health secretary, and Donald Berwick, the head of the Centres for Medicare & Medicaid Services, can expect to spend much of the next year and a half running back and forth from Capitol Hill. A few foes of Obamacare think it may even be feasible for Congress to “defund” the reform by blocking the extra resources the civil service will need.

What is not so clear is whether an all-out assault on Obamacare is good politics for the Republicans. Polls show that most people want to see the new health law amended, not scrapped altogether. Some provisions, such as stopping insurance companies from denying sick people coverage on technicalities, or because of pre-existing conditions, are popular. So in their battle over Obamacare, as over the budget, the Republicans must balance their dislike of the law against the danger of looking as if they are intent merely on obstruction.

Besides, Mr Obama shows no signs of confining himself to defence. Bear in mind that for all their present triumphalism, the Republicans in Congress are in fact held in lower esteem than he is (see chart 1). His recent bounce is a reminder that a president who has lost control of the House still has vast influence, not least through the bully pulpit, which Mr Obama has started lately to use to better effect. In Tucson a fortnight ago, and this week in Congress, he contrived to soar loftily above petty politics. And now, having been accused in his first two years of paying too much attention to health care and too little to jobs, he will level precisely this charge at the Republicans if they give the impression of being keener on rehashing yesterday’s fights than facing the problems of tomorrow. “Instead of refighting the battles of the last two years,” Mr Obama said in his speech, “let’s fix what needs fixing and move forward.”

Jobs, jobs, jobs

As to what those problems of tomorrow are, Mr Obama has plainly learnt the error of his ways. Jobs, jobs, jobs, is the new mantra. A recent Pew survey reported that 84% of Americans thought jobs should be his priority. With unemployment at 9.4% (see chart 2) and more than 14m Americans still out of work, the president knows that he stands to lose his own job in 2012 if he fails to expand employment.

To that end, he started to change the direction of his administration well before this week’s speech and its emphasis on jobs and competitiveness. He is starting the second half of his first term with a new staff and new focus. Rahm Emanuel, a pugnacious congressional infighter, may have been the right chief of staff when the president’s priority was to push big bills on Capitol Hill; but Mr Obama has now tempted the smooth William Daley, once Mr Clinton’s commerce secretary, back from Wall Street to run a more business-friendly White House. One change sums it all up: the Economic Recovery Advisory Board, which Mr Obama created two years ago, is being replaced by a Council on Jobs and Competitiveness under Jeffrey Immelt, the chief executive of GE.

The Republicans insist that they are just as eager to restore jobs—but by unleashing the private sector, not government action. Mitch McConnell, the Republican leader in the Senate, heaps scorn on Mr Obama’s talk of “investment” in education, research and infrastructure. To Republican ears that is just fancy wording for more public spending and ever-bigger deficits. The deficit worries a lot of voters, too. The same Pew survey that found jobs such a concern reported that 64% of Americans also call the deficit a priority now, compared with 53% in 2009. Hence the Republican plan, in Mr Cantor’s phrase, to “cut and grow”.

In the best of all possible Americas, the two parties would co-operate to reduce a deficit that remains dangerously high, at an estimated 9.8% of GDP this year, according to the latest figures from the Congressional Budget Office (see chart 3). If Mr Bush’s supposedly temporary tax cuts remain in place, it will only fall to just under 6% of GDP in 2015, then head inexorably higher. This guarantees that the national debt will keep rising, to some 97% of GDP by 2021, when interest alone will consume about 4% of national income.

In his speech, Mr Obama acknowledged the need to avoid being buried under a “mountain of debt” by tackling the deficit. This would be an excellent time to start. Public opinion favours action and the recovery is slowly gaining strength, making the pivot from stimulus to restraint less likely to damage growth. A bipartisan commission set up by Mr Obama under Erskine Bowles, a Democrat, and Alan Simpson, a Republican, produced a plan last month to cut the deficit to 1.2% of GDP by 2020 and reduce the debt to 60% of GDP by 2023 via a mixture of spending cuts and tax increases. Mr Obama acknowledged in his speech that they had made “important progress”, but said he did not agree with all their proposals, and gave no impression he would implement any.

His own advisers have mulled three different ways to contribute to long-term deficit reduction: individual tax reform, corporate tax reform and changes to Social Security. Individual tax reform would raise new revenue by eliminating exemptions and loopholes while lowering income-tax rates. Corporate-tax reform would do the same without raising or losing revenue. The Social Security bill could be brought into balance by raising more money for it through a larger payroll tax and reducing benefits: for example, by making people retire later. At various times the Republicans have also shown interest in all these ideas.

And yet the chances of serious deficit-cutting look slim. Mr Obama has never matched his words with deeds on fiscal responsibility. A recent civil-service pay freeze was token at best. A case could be made against short-term austerity measures while the recovery was still tentative, but the president has shown no appetite for long-term solutions either. The few spending cuts and tax increases he has enacted have gone on other priorities, notably expanded health care. Mr Obama is unlikely to tackle health-care costs so soon after passing his reform. And fixing Social Security brings acute political pain with no near-term impact on the deficit.

Explore our interactive guide to the state of the United States, and see our word cloud of the president’s speech

On the Republican side, Mr Ryan made waves a year ago with a gutsy proposal to balance the long-term budget through breathtaking spending cuts, primarily to Medicare, the government-run health scheme for the elderly. But he has not won his party over. A mere 14 fellow-Republicans have signed on to it, and only one is a senior figure. Indeed, for all their purported hatred of government spending, Republicans are campaigning to repeal Obamacare partly because it would rein in spending on Medicare.

It is thus notable that Mr Obama’s address made only passing reference to Social Security and individual tax reform. He did make a pitch for lowering corporate tax rates by eliminating deductions, but that will probably founder on the reluctance of businesses to give up their favourite tax breaks. John Podesta, president of the Centre for American Progress, a liberal think-tank, predicts that serious deficit reduction will fall by the wayside over the next two years as Mr Obama and the Republicans pitch the different approaches they would follow after the next presidential election.

Divided we fall

Polls show that Americans like divided government. Its fans say that it forces politicians from opposite ends of the spectrum to seek common cause in the centre. “We will move forward together, or not at all, for the challenges we face are bigger than party, and bigger than politics,” said Mr Obama in his speech. For the time being, however, the parties are preparing for battle, not discussing peace terms.

Though both sides agree that the deficit poses a dreadful threat to America’s long-run economic health, the Democrats remain wedded to spending and the Republicans allergic to tax, so nothing happens. In the end, it may take an external shock to knock sense into the deadlocked politicians. Alan Greenspan, a former chairman of the Federal Reserve, said this month that he expected that Congress would in due time adopt a budget plan along the lines of the Bowles-Simpson commission. The only question, he added, was whether Congress would act before or after the crisis in the bond market.

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