The final State of the Union address of any president evokes thoughts that vary with his success while in office. For the successful, such as Dwight Eisenhower, Ronald Reagan and Bill Clinton, it is a moment on which to look back with some satisfaction. For President Obama, with only 27 percent of his countrymen believing he leaves a nation that is on the right track, last week’s must evoke in his supporters thoughts of what might have been, if only….
For both the successful and less so it is goodbye to the walk down the aisle to the podium, shaking hands and air kissing admirers, hello to irrelevance as the lame duck president lays out his vision of a future about which he will have little to say. Example: President Obama received the usual numerous standing ovations from members of his party, but when he extolled the virtues of the Trans-Pacific Partnership he hopes will free up trade and set the rules of international commerce for generations to come, only the members of his cabinet rose to their feet in enthusiastic approval, while Democrats sat on their hands, indicating that TPP is unlikely to be approved during his remaining months in office.
That is not to say that Obama lacks privilege or power in this, his final year in office. Air Force One remains at his disposal; he can and will issue executive orders, by-passing congress and stretching the constitution to or beyond its limits; he can use his continued popularity with black voters to campaign for congressional candidates who share his vision of more government – building infrastructure with funds from higher taxes on families with annual incomes in excess of $250,000, providing free tuition at community colleges, consigning fossil fuels to the ash can of history, replaced by renewable energy, raising the minimum wage, tightening controls on gun purchases, supporting "collective bargaining", by which he meant trade unions, even though they are the bitterest opponents of his trade policies.
Most Republican candidates are offering what their party once called "a choice, not an echo": cuts in taxes on corporations to discourage them from pulling up sticks and heading to greener lands such as Ireland, where taxes are lower and regulations lighter; repeal of regulations, including those promulgated as part of Obama's "war on coal"; a shift from taxing incomes to taxing consumption, which can be more regressive; less reliance on entitlements and more on incentives to get "discouraged" and merely work-shy workers back into the work force. In short, it will be a battle of competing visions of the role of government in Americans' lives, with the result having a profound effect on the U.S. economy.
These doctrinal differences will play out in an economy that seems to be weakening rapidly. Retail sales and industrial production both fell in December. Pessimists (17% percent of economists surveyed by the Wall Street Journal, the highest percentage in three years) foresee an impending recession as the current recovery grows long in the tooth. Optimists say growth will struggle to reach a flaccid 2 percent rate this year, which makes them optimists only be comparison with their gloomier colleagues. All agree that manufacturing, already in recession, will be hard hit by a strong dollar, kept aloft by its safe-haven status and efforts by the European Central Bank to weaken the euro, and the Chinese regime to steer the yuan down even more – it is down 3 percent against the dollar since early December -- without causing capital flight, a tricky business at best: capital outflows from China set an all-time monthly record in December. Many are predicting something like a 5 percent decline in corporate profits, a continuation of a downtrend from their peak in the third quarter of 2014; continued weakness in share prices, now searching wildly for a bottom; a tough road ahead for railroads as the collapse of commodity markets reduces traffic; and trouble for banks that have been generous lenders to an oil industry that has seen the price of its product fall by two-thirds, with no relief in sight.
The age of zero interest rates is over, which means it will be more expensive for businesses, the government, and potential home and car buyers to borrow money, and that junk bond funds will continue to scramble to sell highly illiquid assets to meet cash demands of investors.
Add strong headwinds from overseas, especially from China, struggling to move from an economy based on exports and huge infrastructure spending to one relying on growth in domestic demand. America is not quite so independent of the world economy as it proved to be during the 1997-1998 Asian financial crisis. Morgan Stanley's Ruchir Sharma reckons that the share of foreign trade in the U.S. economy has risen from 18 percent to 23 percent since the Asian crisis, and the share of profits earned by American companies from overseas operations has jumped from 17 percent to 27 percent in that time. America is still the best house in a bad neighborhood, but the encroaching blight can no longer be completely ignored. The Fed might want to do something to stimulate growth and weaken the dollar, but it is moving in the opposite direction, with further interest-rate increases scheduled during the year, unless signals of trouble including continued drops in production, sales and inflation, force a pause. That possibility was raised this week when James Bullard, president of the Federal Reserve Bank of St. Louis suggested that low oil prices might restrain inflation more than had previously been thought, preventing it from reaching the 2 percent Fed target. And fellow-monetary-policy-committee member Eric Rosengren, president of the Boston Fed, said "While monetary policy should not overreact to short-term, temporary fluctuations in financial markets, policy makers should take seriously the potential downside risks to their economic forecasts". Given that Fed forecasts have tended to err on the optimistic side, and that 80 percent of the economists surveyed by the Wall Street Journal see just such risks lurking, a well-aimed warning. So we are in for another year of Yellen-watching as she and her colleagues continue their data-watching.
If the bleak economic forecasts prove correct, the politics of this election year will be seriously affected. Hillary Clinton, the certain Democratic nominee barring an indictment for her misuse of her e-mail server or for merging the national interest with those of the Clinton Foundation while Secretary of State, will have to move further left to appease an even angrier Main Street. That will require stepped-up attacks on the left's traditional piñata, Wall Street, and more promises to reduce inequality by taxing the rich and increasing income transfers to the unrich. On the Republican side, voters will be more convinced than they now are that the system is rigged against them, providing the meat on which anti-establishment candidates in the Republican primaries feed and encouraging the right to join the left in more strident banker bashing. That would be a plus for Donald Trump and Texas senator Ted Cruz, more bad news for Jeb Bush, his candidacy already on life support, and result in calls for massive tax cuts on upper income entrepreneurs to stimulate investment, a paradoxical position since lower-income workers dominate the Trump camp. Whether Democrats get to increase infrastructure spending, or Republicans to push through tax cuts, the existing $18 trillion national debt, which has doubled as a percent of GDP to 73 percent since 2007 and is projected to increase as spending caps are relaxed and boomers age, will balloon.
Possible? Yes. Inevitable, no. The American economy might just prove to be the engine that can pull the global economy forward. Auto sales remain buoyant and automakers bullish, the labor market is in passable shape, commercial rents are on the upswing as service-sector firms demand more space, consumer balance sheets are strong. And in twelve months the presidential succession will be completed, eliminating uncertainty and, with luck, reducing the verbal pollution that has made the American air almost unbreathable.