President Obama left little doubt during his State of the Union address as to what his top priority will be in the years ahead. “A growing economy that creates good, middle-class jobs”, the President declared, “must be the North Star that guides our efforts.”
These weren’t mere platitudes. In what was by all accounts a very ambitious address, Obama put forward a vast array of proposals that he believes will help foster growth and create a “rising, thriving middle class”.
The President opened his remarks by encouraging Congress to work together to enact sensible debt reduction measures as an alternative to the $1.2 trillion in automatic spending cuts that are set to go into effect on March 1. Any deal, he explained, must include new revenues through “bipartisan, comprehensive tax reform that encourages job creation and helps bring down the deficit”.
Tax reform is a worthy goal - especially if it helps avoid the looming spending cuts that would do serious harm to the economy - but it’s not a panacea for the country’s current woes. The US unemployment rate sits near 8% not because of a complex tax code, but rather a simple lack of demand and goods for services. As such, businesses remain reluctant to hire new workers and the result is a painfully slow recovery. The best short-term course of action is not for the government to cut spending but rather increase it, temporarily compensating for the lack of private sector investment.
This brings us to what should be the most obvious, “no brainer” idea from Obama’s speech: new infrastructure.
The President proposed a “Fix it First” program, which would create a public-private partnership to repair the nation’s transportation system. These kinds of programs are vastly overdue; as Obama highlighted in his speech, roughly 70,000 bridges are in serious need of repair. Investing in roads, bridges, canals and smart power grids would improve efficiency and public safety and make businesses more willing to grow and develop. It would also put Americans back to work and provide a jolt of new spending at a time when the economy desperately needs it.
Obama would offset the short-term costs of the spending by closing tax loopholes, but simply borrowing the money wouldn’t be a bad policy either. Concerns about the stability of the European economy have caused investors to flock to US government debt, driving interest rates to near record lows. In fact, when you account for inflation, the real interest rate on Treasury bonds is actually negative, meaning people are paying the government to hold onto their money.
Getting Congress to approve any new spending measures is a monumental task at the moment. But here’s hoping Obama finds a way to tack the “Fix it First” program onto the debt reduction plans that the White House and Congress are currently negotiating.
Perhaps the most intriguing idea in Obama’s speech was to create a universal preschool program for four year olds. It’s a bold proposal, and one that’s sure to galvanise support from liberals and perhaps even some moderate conservatives as well.
The idea of government-funded preschool has a lot of intuitive appeal and fits well with Obama’s emphasis on expanding economic opportunity and reducing inequality. But actually figuring out how it would work in practice is a significant undertaking.
The research I’ve seen shows that for these early childhood education programs to show much benefit, they need to be intensive and require substantial amounts of funding. However, if done properly, they have the potential for large returns on investment.
In any case, such a plan has zero chance of becoming law in the next four years. But simply putting it on the agenda is significant in itself. I wouldn’t be surprised to see it become a central part of the campaign platform of a future Democratic presidential candidate.
Obama’s laid out a broad and daring economic vision in his speech today. The extent to which it will bear fruit depends not only on the cooperation of the current Congress, but on the choices of politicians who will come after him.