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Obama's Call For American Revival

Authors: Sebastian Mallaby, Paul A. Volcker Senior Fellow for International Economics and Director of the Maurice R. Greenberg Center for Geoeconomic Studies James M. Lindsay, Senior Vice President, Director of Studies, and Maurice R. Greenberg Chair, CFR
Interviewer(s): Robert McMahon, Editor
January 26, 2011

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[Editor's Note: This is part of CFR's Renewing America initiative , which examines how domestic policies will influence U.S. economic and military strength and its ability to act in the world.]

President Obama's 2011 State of the Union address focused heavily on economic rejuvenation and raising U.S. global competitiveness. Foreign policy and the U.S. military campaigns in Afghanistan and Iraq received much less attention. Two CFR experts offering rapid analysis of the speech said its emphasis on the economic situation was understandable. But Sebastian Mallaby, director of CFR's Center for Geoeconomic Studies, said the president should have stressed deficit reduction instead of public investment in his speech. The size of the federal debt burden raises great concerns about loss of confidence in the dollar and greater dependence on foreign states to finance U.S. policies, Mallaby writes. CFR Director of Studies James Lindsay says the focus on economic revival is "smart politics" but noted the absence of discussion about deteriorating conditions in Pakistan, shaky Mideast peace talks, and Mexican drug violence doesn't mean he can avoid those problems.

Sebastian Mallaby, Paul A. Volcker Senior Fellow for International Economics and Director of the Maurice R. Greenberg Center for Geoeconomic Studies

In his State of the Union address, Barack Obama stated the challenge confronting the American people in explicitly geoeconomic terms. He invoked the paranoia of the 1957 Sputnik moment, when the Soviet Union drew (briefly) ahead in the space race, and offered China's recent advances in solar power and computing as modern versions of the same phenomenon. Previously, the president framed his calls for government investments in scientific research, green technology, or high-speed rail as ways to slay the dragon of recession. Now he presents them as the required response to scarily industrious foreigners: "We need to out-innovate, out-educate, and out-build the rest of the world."

Obama's concerns about U.S. competitiveness are justified. Even before the financial crisis, growth in the United States had been slowing for demographic and other reasons, while younger emerging nations were powering ahead. In 2002 and 2008 more than 85 percent of developing economies outgrew the United States; between 1960 and 2000 less than one in three developing countries did so. Now, in the wake of the financial crisis, the United States finds itself in an even weaker relative position. The U.S. federal debt burden has jumped from 36 percent of GDP on the eve of the crisis to 61 percent by last September, creating a drain on national resources stretching out into the future. By contrast, the debt-to-GDP ratios in the leading emerging nations actually fell during the crisis years.

Yet while Obama is correct in his diagnosis of U.S. vulnerability, his prescription is less obviously on target. The public investments he touts sound pleasingly growth-enhancing: education, research, and state-of-the-art infrastructure are indeed the ingredients of future dynamism. But these investments are obviously in tension with the goal of deficit reduction, and Obama appears far too hopeful that he can achieve both at the same time. He acknowledged the tough entitlement reform that is needed to make both possible, but seemed only half-serious about achieving it. On Social Security, for example, he undermined his professed appetite for reform by saying it must be done "without slashing benefits for future generations."

If Obama sees entitlement reform as politically impossible, he must choose between public investment and deficit reduction. His speech sounded far more enthusiastic about the investments, but the deficit should come first.

If Obama sees entitlement reform as politically impossible, he must choose between public investment and deficit reduction. His speech sounded far more enthusiastic about the investments, but the deficit should come first. For one thing, there are diminishing returns to all investments, including public ones; and the Obama administration has already splurged on its spending priorities in the stimulus of 2009. For another, the sharp jump in the federal debt burden has increased the risk that continued deficit financing could trigger a loss of confidence in the dollar.

If Obama does nothing to rein in the deficit, the United States will be saddled with more than just a higher debt-service burden. The Council on Foreign Relations tracks the share of U.S. federal debt held by foreigners. Some 14 percent is owned by foreign private investors, while foreign governments own an unnerving 41 percent. This means that the U.S. government depends on foreign leaders, not all of whom are friendly, to finance its policies, not all of which its foreign creditors support. Superpowers that put themselves in this position tend not to remain superpowers for long.

James M. Lindsay, Senior Vice President, Director of Studies, and Maurice R. Greenberg Chair, CFR

President Barack Obama's State of the Union address confirmed what everyone suspected in the wake of the GOP rout in the November 2 midterm elections: foreign policy will play second fiddle to domestic policy when the administration talks about its agenda in the year to come. The mantra going forward will be opportunities, jobs, and growth, not threats, war, and diplomacy.

Obama's speech was primarily about rebuilding the American economy. Foreign policy first got a mention halfway through the speech when Obama called on Congress to pass the trade agreement that he recently renegotiated with South Korea. But he pointedly did not ask Congress to pass similar agreements with Panama or Colombia, or to give him trade promotion authority to negotiate new trade deals. Trade remains an unpopular issue with most Democrats, and the president had no good reason to pick a fight.

Obama did not address traditional foreign policy issues until he was about two-thirds of the way into his speech.  When he did, he mostly touted his successes. U.S. involvement in Iraq is coming to an end, and U.S. troops will begin to leave Afghanistan this summer as promised. We have taken the fight to al-Qaeda in Afghanistan and Pakistan, paved the way to a world of fewer nuclear weapons with the New START treaty, and imposed "tougher and tighter" sanctions on Iran. We have insisted that North Korea abandon its nuclear weapons, and we helped South Sudan vote for independence. And we support the democratic aspirations not only of Tunisians but of all people.

Obama's focus on domestic issues does not mean that he is looking to get out of the foreign policy business in the coming year. He doesn't have the luxury of that choice even if he wanted it.

Obama did not talk, however, about the dangers the United States faces overseas. He said nothing about the broader threats posed by political instability wracking Pakistan, or drug cartel violence in Mexico, or the continued emission of heat-trapping gases that will irrevocably alter the world's climate. The peace talks between Israelis and Palestinians that he once heralded as crucial to resolving many of the Middle East's conflicts went unmentioned. He sidestepped the distressing problems with Afghanistan's political leadership that may be nullifying the success of his surge policy with the bland observation that "the Afghan government will need to deliver better governance."

Obama's decision to emphasize domestic policy and to pitch his foreign policy accomplishments in the State of the Union address is smart politics. Opinion polls show that Americans are much more worried about problems at home than problems abroad.

Obama's focus on domestic issues does not mean that he is looking to get out of the foreign policy business in the coming year. He doesn't have the luxury of that choice even if he wanted it. Trouble overseas doesn't go away just because the White House wants to attend to domestic matters.

So like the rest of us, the president will need to multi-task. Except that he will be playing for higher stakes. He has to balance the demands for action at home with the need to confront a slew of foreign policy troubles that did not become any less difficult just because he chose on this night not to dwell on them.

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