360° Analysis

Obama: The Second Coming


January 19, 2013 08:51 EDT

Obama’s second term will be eventful: another financial crisis might occur, Reaganism could die and America will be more assertive abroad.

In the words of Justice Scalia, the American government was designed for obstruction. Fleeing authoritarian governments, Americans brought to life Montesquieu’s ideas about the separation of powers. The President, the Congress and the Supreme Court keep each other in check. This has meant that through most of its history America has had more freedom than any other country on the planet. It has also meant that the most powerful man in the world has sometimes little power to implement his agenda.

During his first term, Barack Obama was in the enviable position of having a Democrat majority in the House of Representatives and a Democrat super majority of 60 in the Senate. Theoretically, he had a great chance to push through his agenda. Yet, even his own party proved restive and the Tea Party emerged like a typhoon. His signature health care reform was passed only after the loss of Ted Kennedy’s Senate seat in blue veined Massachusetts, and was a touch and go affair.

This time Obama faces a House of Representatives with recalcitrant Republicans and a Senate where Democrats do not have a super majority. Yet, there is a swagger in his step, firmness in his tone and an appetite for a fight. The next four years will be a wild ride and will shape the destiny of America in the 21st century.

Expect Another Financial Crisis

The American economy is still weak. Unemployment is still at 7.8% and this is without counting those that have dropped out of the workforce. The deleveraging following the housing bubble has meant that people have less money to spend and growth will be moderate at best. The fight over the debt ceiling and the resulting settlement will also slow down the economy. Government spending will decrease and tax increases for the wealthy will suck out some money from the economy. Yet, neither the president nor the Congress have many options. American policy makers cannot become Keynesian and initiate a modern day equivalent of Roosevelt’s New Deal. The US deficit is simply too high. At the same time, they cannot embark on austerity because Friedmanite solutions would tip the economy into recession. The global economic scenario is not encouraging. Emerging markets are slowing down. Europe continues to be in crisis.

Manufacturing in the US is likely to start growing again. Hailing from the Midwest, Obama has been supportive of manufacturing and has saved Detroit. More importantly, labor costs have risen in China and increased energy prices have pushed up the cost of transportation, making imports expensive. American manufacturing is becoming globally competitive again and PwC is of the opinion that the US is about to see a resurgence in manufacturing. Fracking has led to a bonanza in natural gas and, to a lesser degree, in oil production. US government projections expect American energy production to grow faster than energy consumption. By 2020, the US is expected to be a net exporter of national gas. This means cheaper energy, lower cost of manufacturing and increased employment in the long-run. Some even have visions of a new “golden age” for America.

Yet, there are dark clouds on the horizon. The bailout of the banks was botched. It merged already huge entities to create monstrosities. Too big to fail was made even bigger to fail. Moral hazard, an economic term where one party is likely to take risks because the costs will be borne by someone else, has increased. Systemic risk in the financial system has also increased. Obama has responded to the systemic flaws in the financial system through supporting ham-handed regulation drafted by the Congress. The 848 pages long Dodd-Frank Act of 2010 is a badly drafted monstrosity that is muddled in its conception and onerous in its implications. Davis Polk’s famous summary of the law is itself over 100 pages long. Instead of regulation, Obama and the Congress needed to do what was once done in 1911 to Standard Oil. If something is too big to fail, chances are that it is too big. Instead of over regulating and then under governing huge companies, it is more efficient to break them up. However, financiers fund election campaigns and therefore, breaking big banks up is not a policy option. Dodd-Frank will fail. The monetary easing by the Fed is hiding weaknesses in the financial system that never went away. Another financial crisis is looming when the next shock hits the world economy.

Reagan is Finally Dying

Ronald Reagan buried Lyndon Johnson. There is a real chance that Obama might bury Reagan. By the early 1980s, the limitations of the Johnson model were beginning to show. The Great Society experiment, purported to lead to a more egalitarian society and pay for both guns and butter, ran out of steam. That gave Reagan an opportunity to unleash the markets, lower tax rates and get “governments off the back” of the people. The limitations of the Reagan model have been coming to the fore with rising income inequalities, booming budget deficits and market failures. Poor infrastructure and falling living standards in an age of global competition have created a rust belt in large parts of America. Obama’s reelection and the bitter battles over a spate of issues such as taxation, health care and gun control are part of a larger debate about the role of the state.

The Johnson model did not factor in the desire on the part of most Americans for freedom. When the Tea Party talks about freedom, it is appealing to a core American value. It is relatively easier to set up businesses in America. Moving from Philadelphia to Denver is not that hard. Even buying a gun is relatively straight forward. This gives America dynamism because it lacks the millions of meddling bureaucrats in India or the forms in triplicate required in Germany. As high rates of gun crime demonstrate, it also makes America a dangerous place at times. Yet, freedom even in America is allied to justice. From the time of the earliest colonies, America has provided opportunities to its immigrants. While it is true that the availability of opportunity was not universal, that groups like Native Americans and African immigrants were horribly exploited, the realm of opportunity for the majority of its population was much larger than say in Europe or Asia. The Reagan model forgot that decent child nutrition and schools are important if society wants to avoid a stratification that eventually calcifies into a class society. The Reagan model blithely assumed that deficits did not matter and that America could always grow itself out of trouble. The Reagan model failed to fathom that there are some challenges that do require the intervention of the state such as the ending of slavery or segregation; a key role of the state is to balance freedom with justice. After the greatest economic crisis since the Depression of the 1930s, it is natural that Reagan is finally in question and a new model is being created before our eyes.

Obama’s tearful post election victory address to his volunteers had a reference to Reagan; he is conscious that he is dismantling the Reagan model bit by bit. First, he is going to push for higher taxes for the wealthy. The Republican commitment to more fiscal responsibility plays gives him a great bargaining chip to do so. Second, he is going to push hard for progressive social causes such as gun control, gay rights and women’s right to choose abortion. Third, Obama is changing the political discourse of the country from freedom to justice. Post reelection he is using the bully pulpit of the presidency to reach out to the public directly and put pressure on his opponents in the Congress. Even if the Congress stands up to him and does not give him what he wants, he will change the terms of reference of political discourse in America.

America Will Assert More: Bibi Should Start Worrying

By and large, Obama’s foreign policy has been adroit. His darkest foreign policy decision is his extensive use of drones. The case against indiscriminate use of drones is well documented. It is creating a generation of embittered enemies of America who will spend the rest of their lives figuring out how to strike back. No amount of security and intelligence will stop a major attack on America or American interests in the future. Obama’s policy is cheap in the short run as it avoids American casualties but, in the long run, America will reap the whirlwind that it is sowing.

When it comes to handling the other two big challenges for America, the Arab Uprisings and rising Chinese nationalism, Obama has done a decent job riding the tiger that is bounding through North Africa and the Middle East, toppling old elites and establishing new governments. Europe was set alight be the French Revolution for decades and the same will be true of North Africa and the Middle East: the region will remain in turmoil for years to come. With an untried and untested leadership, China will struggle with its slowing growth, regional and social inequalities, and the challenge of maintaining stability in such a fast-changing country. As of today, there is no challenger to America. No other country has the military might, economic power and diplomatic heft of the Rome of our times. A reelected Obama will be more assertive abroad and push for American interests more firmly.

This will be the case even with Israel. During the last four years, Israeli Prime Minister Binyamin Netanyahu was rude and insolent to Obama. Netanyahu’s calculation was that Obama would be compelled by America’s domestic politics to support Israel. As a black president who had to be seen as strong on security, Obama would cave in to the pressure exerted by AIPAC and Israel’s zealous allies on Capitol Hill. Netanyahu's actions such as allowing for building of settlements in East Jerusalem and the West Bank, and the timing of these actions were snubs to Obama. Romney’s visit to Israel was perhaps the height of Israeli meddling in American domestic politics. Under Obama’s first term, Israel forgot that it was the junior ally in the alliance. With the announcement of Republican Chuck Hagel as Defense Secretary, Obama has sent a clear signal that the days of the tail wagging the dog are over. Israeli interests do not mean American interests and Israel will have to heed a president under no pressure for reelection. The world is about to become very interesting.

The views expressed in this article are the author's own and do not necessarily reflect Fair Observer’s editorial policy.


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