from Macro and Markets

Obama’s Modest Proposals for Growth

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As signaled in recent days, President Obama’s State of the Union address puts the spotlight firmly on domestic policy. Creating economic opportunity was a major theme. In addition to a hike in the minimum wage for government contract employees, the president called for a economy-wide minimum wage increase, an extension of unemployment benefits, immigration reform, and other measures to attack income inequality. The only surprise was a new Treasury instrument, MyRA, to encourage retirement savings.

Overall, the speech was pragmatic, balancing a willingness to use executive action against offers to negotiate. Some have criticized the speech as small ball, and like many State of the Union speeches the need to cover many, many issues limits effectiveness.  But it is also a realistic assessment of the hurdles he faces at this stage of his presidency.

My colleague Ted Alden has a companion blog on what the president has to say about immigration, trade, and tax policy, and Heidi Crebo-Rediker discusses the message on infrastructure. Here are additional thoughts on the economic themes in the speech.

Inequality, Upward Mobility and Jobs

Ahead of the speech, reports signaled the president was focusing on income inequality, but last night he put the issue in more hopeful terms, highlighting the importance of expanding opportunity.

"What I offer tonight is a set of concrete, practical proposals to speed up growth, strengthen the middle class, and build new ladders of opportunity into the middle class."

Many of the proposals to boost middle-income jobs and welfare—e.g., early childhood education, expansion of the earned income tax credit—require legislation and it’s easy to be skeptical. If there are to be compromises, they would likely involve small initiatives “paid for” with modest entitlement cuts.

More attention was focused on President Obama’s announcement that he would use his executive power to increase the minimum wage to $10.10 per hour for workers on new government contracts. Because the ruling would not apply to existing contracts, the effects will be felt only gradually, eventually affecting less than 500,000 workers according to one study.

He also challenged Congress to pass a comprehensive increase in the minimum wage, a proposal that I presume is dead-on-arrival in the House of Representatives.

Executive order

President Obama plans to make 2014 a “year of action” with expanded use of executive power, a move sure to stir anger among Republicans. In addition to the minimum wage, reports are that we could see presidential action on infrastructure, climate change and education. From an economic perspective, executive action can have a substantial effect on individual sectors and prices, but it is hard to see it making a big difference on the overall macroeconomic trajectory of the economy.

Light on Finance and Fiscal

On housing reform, Jaret Seiberg of Guggenheim Securities noted that the president treaded lightly, calling for legislation but not making it a priority and not putting markers down on what it should contain. Other proposals in the financial space, including a new Treasury savings instrument for those without 401k’s and working with Congress on student loan refinancing initiatives, are unlikely to lead to major changes in the financial landscape.

In last month’s speech on income inequality, President Obama declared: “When it comes to our budget, we should not be stuck in a stale debate from two years ago or three years ago… A relentlessly growing deficit of opportunity is a bigger threat to our future than our rapidly shrinking fiscal deficit.”  Indeed, what was striking about last night’s speech was how little fiscal policy mattered. A bitter war has been waged over the last three years, with multiple fiscal cliffs, threats of shutdowns (and one real shutdown), and enough drama around the debt limit to badly unsettle money markets. Both sides now are exhausted, and a truce has been called. Fiscal policy looks broadly neutral next year, with political tail risks from government shutdowns and debt limit showdowns looking much reduced. Good news for a clean passage of the upcoming extension of the debt limit.

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