January 21, 2015

Obama State Of The Union Draws Economic Lines For '16 Race

By MOHAMED EL-ERIAN
INVESTOR'S BUSINESS DAILY

In his powerful and inspirational State of the Union address, President Obama devoted time to economic proposals that have no chance of being approved by the Republican-controlled Congress.
Yet he discussed an issue of considerable interest to the American people in order to frame the national economic debate before the 2016 elections. And if he is lucky, he may well end up achieving a few other goals, too.
In highlighting the significant accomplishments of the economy in 2014 — "a breakthrough year for America" — Obama correctly noted, "The shadow of the crisis has passed." Americans, he said, "have risen from recession freer to write our own future than any other nation on Earth."
Yet too great a share of the gains has accrued to only a small portion of the population: the very wealthy. So the president was correct to stress that it is time to "turn the page" and "commit ourselves to an economy that generates rising income and chances for everyone who makes the effort."
Now that America has recovered from the worst of a global financial crisis that almost tipped the global economy into a multiyear depression, Obama is urging Congress to help him execute a pivot: away from growth that is frustratingly sluggish and narrow, and toward long-term prosperity that is a lot more inclusive.
To that end, the president called upon Congress to "make child care more available and more affordable;" "to lower the cost of community college — to zero;" and to advance an "infrastructure plan."
To fund these proposals, he proposed increasing taxes on the wealthiest Americans and closing tax loopholes that disproportionately benefit them, as well as measures to raise more revenue from big corporations.
Obama is responding to growing concern about the significant worsening of what I call the inequality trifecta — of income, wealth and opportunity. This phenomenon has adverse consequences that extend well beyond its social, moral and ethical dimensions.
By undermining both consumption and improvements in labor productivity, worsening inequality also creates headwinds to a lasting and broad-based economic expansion.
Regardless of their merits, most of the economic proposals that the president made Tuesday evening face almost certain defeat in the Republican-controlled Congress. Indeed, it didn't take long for Speaker John Boehner, R-Ohio, to take to Twitter to dismiss them: "All POTUS offered is more taxes, more government."
Higher taxation is anathema to Republicans, as is greater government spending and involvement, both of which the president would like to see. Some will go further and assert that Obama is seeking to fuel "class warfare." At the same time, few Democrats or Republicans seem eager to cooperate with colleagues across the aisle for fear of making their own re-elections more challenging.
None of this would come as a surprise to Obama. He would be the first to admit that most of his economic proposals are unlikely to be approved by Congress. Yet it still made sense to put them on the table.
First, the proposals are likely to fuel and prolong a national discussion about inequality, the hollowing out of the middle class and the co-optation of parts of the political class by wealthy individuals and corporate lobbies.
Democrats believe that this debate will work in their favor as they position themselves to retain the White House and reclaim at least one chamber of Congress.
Second, by providing the Republicans with something they can visibly and successfully oppose — higher taxes — Obama could improve the chances of bipartisan agreement on some of the smaller issues that he mentioned and for which there already is some political common ground, including trade agreements, immigration and infrastructure.
Third, Obama could end up putting the Republicans in a position that undermines their party's efforts to come across as more encompassing. The more vocal and visceral the Republican opposition to the proposals, the greater the probability of the party being portrayed as beholden to the "one percent," possibly costing any chance of a Republican winning the White House next year.
Meanwhile, Democrats can position themselves as the party that embraces the idea that "this country does best when everyone gets a fair shot."
The unrealistic economic measures that Obama presented Tuesday evening weren't the political equivalent of a "Hail Mary" pass. Instead, he adopted a longer-term strategic approach aimed at improving the Democrats' chances of continuing the successes of his presidency.
• El-Erian is chief economic adviser at Allianz.