Risk & Compliance

A Brighter Future, but Who Pays?

Barack Obama, in his address to Congress, asks for sacrifice but skips the details.
Economist StaffFebruary 25, 2009

As a new president, Barack Obama’s first speech to Congress was not, officially, a state-of-the-union address. That was just as well: its current state is awfully precarious. On Tuesday February 24th, a few hours before he spoke to the Senate and House of Representatives, a survey reported that consumers’ confidence in the future was at its lowest in 40 years of polling.

Mr. Obama did not sugar-coat matters. The economic crisis “is the source of sleepless nights,” he said. His budget, to be delivered on Thursday, “reflects the stark reality of what we’ve inherited — a trillion dollar deficit, a financial crisis and a costly recession.” 

He promised that beyond this grim present lies a brighter future of plug-in hybrid-energy cars, wind- and solar-powered cities, digital health records, vanquished disease, and the world’s highest college-graduation rates. And, with the inspirational flourish for which he is famous, he insisted that Americans would triumph because there exist “amid the most difficult circumstances” — his voice descending to a throaty growl — “a generosity, a resilience, a decency.”

Such speeches are typically meant to sketch a president’s broad agenda rather than deliver specifics. This one at times felt like an economics class with simple explanations of how credit markets work, and at others like a late-night cable TV commercial: “The average family who refinances today can save nearly $2,000 per year on their mortgage.”

Still, he did give clues to his priorities. Congress, he said, had to act soon to overhaul America’s multiplicity of financial regulators, which struggled to anticipate and cope with the financial crisis. He called for a cap-and-trade system to reduce the growth of greenhouse-gas emissions. He gave warning that the Treasury would probably need more than the $700 billion that Congress has already authorised for propping up the banking system (while studiously avoiding the debate over whether banks should be nationalised in the process). He strongly indicated that there would be more aid for General Motors and Chrysler, which are now contemplating whether to file for bankruptcy to shrink themselves more rapidly. “The nation that invented the automobile cannot walk away from it,” he said.

A theme that permeated the speech was rapidly rising national debt, following the budget-busting $787 billion stimulus that Mr. Obama just signed. “Everyone in this chamber — Democrats and Republicans — will have to sacrifice some worthy priorities for which there are no dollars. And that includes me,” Mr. Obama said. But he has yet to say what he is prepared to sacrifice. He still plans to expand publicly financed health care, make permanent tax credits to the majority of workers, expand college assistance and invest in alternative energy.

The budget on Thursday is expected to show that Mr. Obama inherited a deficit of $1.3 trillion this fiscal year, and raised it to $1.5 trillion with the fiscal stimulus (a post-war high of some 10 percent of gross domestic product). Mr. Obama will promise to get it down to $533 billion or 3 percent of GDP by fiscal year 2013. Most of that drop will come from the expiration of temporary stimulus measures, the cessation of capital injections and the hoped-for start of economic recovery. The rest will come from withdrawing troops from Iraq, trimming payments to privately-managed Medicare plans, letting George Bush’s tax cuts expire as scheduled in 2010 for the richest 2 percent of Americans, the taxation of foreign corporate income and the sale of permits for carbon-emissions trading. He promised, as every previous president has, to vet the budget “line by line” for waste; he will find it just as hard as his predecessors to kill programmes with powerful congressional backers.

At a Monday budget summit with congressional leaders and again on Tuesday Mr. Obama rightly noted that the cost of old people’s health care and pensions are the country’s biggest long-term fiscal threats, but on neither occasion did he propose how to deal with them. In fairness it is early and stabilising the economy should be Mr. Obama’s priority, not long-term fiscal discipline. Premature fiscal tightening could abort a recovery. The summit on Monday and the speech on Tuesday were part of the process of softening up the public for future pain.

Both events also demonstrated that despite being jilted on his quest for some Republican support during the debate on the fiscal stimulus, he is not giving up on his pursuit of bipartisanship. On Tuesday night, at least, Republicans were co-operative, rising in applause almost as often as Democrats.