State of the Union: A Chance to be Wise

“Only a fool learns from his own mistakes. The wise man learns from the mistakes of others.” – Otto von Bismarck

Tonight, U.S. President Barack Obama has an opportunity to be wise. As he makes his first State of the Union address before a Congress that is controlled by his fellow Democrats, Obama can decide whether to learn the lesson of the last president from his party, or doom himself to defeat.

In the 1994 mid-term elections, President Bill Clinton saw his Democrats lose both houses of Congress in what became known as the “Republican Revolution.” Clinton had been elected two years earlier as a centrist, tax-cutting “New Democrat.” Once in office, however, Clinton announced the largest middle-class tax hike in history and embarked on a national health care plan that was expected to cost one trillion dollars (of course, this was back when a trillion dollars was considered a lot of money).

The parallels are potent. In 2008, Obama was elected to quell an economic crisis, including a record budget deficit, while ushering in an era of bipartisan comity. Since then, he has quadrupled the deficit, adding trillions to the national debt, and tried to enact purely partisan, widely unpopular health care reform. The voters have rendered their opinion on these policies, first by electing Republican governors in Virginia and New Jersey – states Obama carried in 2008 – and last week, the Democratic stronghold of Massachusetts elected Republican Scott Brown to the United States Senate.

So where to from here? Former Speaker of the House Newt Gingrich, who led the Republican takeover in 1994, explains the binary choice Obama faces thusly: “He either has to double down, or he’s got to say, as Bill Clinton did, ‘the era of big government is over.’”

Massachusetts was the canary in the coal mine, and Obama should be grateful for it. Bill Clinton got no such warning.

If Obama does not shift his agenda, he can expect a 1994-style shellacking in November, en route to a single-term presidency that makes Jimmy Carter’s tenure seem like the Golden Age. Obama has stated he would rather be a spectacular one-term president than a mediocre one for eight years. One has to go back to James Polk to find a one-termer who is generally considered to have been successful, and the most common scenario is that presidents get retired after a single term when voters do not care for their work.

Tonight, will Obama show he has absorbed the lessons of Bill Clinton in 1994 and Massachusetts in 2010? The auguries are not good. Of the Republican senate victory, Obama says, “The same thing that swept Scott Brown into office swept me into office.”

This is either false bravado or a sincere belief. One hopes it is the former, because if Obama truly believes this, it reveals delusion that is unsettling in someone who has access to the nuclear football. As Hamlet’s uncle opined, “Madness in great ones must not unwatched go.”

Let us assume and hope that the president is not insane. He must therefore believe he can benefit by claiming solidarity with voters who have just handed him the most explicit repudiation that the election calendar allows. Obama amplifies his rationale, saying, “People are angry and frustrated.”

We heard this in 1994 as well, when the late Peter Jennings summarized the GOP victory by saying the electorate, “had a temper tantrum.” This is a common spin: When voters pull the lever for a Democrat, they do so while adjusting their pince-nez with their free hands as they study the intricacies of current accounts and marginal rates. But when they vote for a Republican, they’re just “angry.”

Warming to his “angry” theme, we can expect that tonight, Obama will promise to “fight.” He’s fighting for Americans, against bankers, insurance companies, special interests and corporations. Unfortunately, if those Americans pay bank fees, require credit, purchase health insurance, or work for a company, they will be caught in the crossfire.

A better choice for Obama would be to rediscover that compromising coolness that helped get him elected, while adding a dash of regret – not heated, but hopeful; not combative but contrite. This is a lot to expect from a man who has a harder time than The Fonz saying he was “wrong,” but it is still the president’s strongest option.

If Obama were to say to Americans tonight, “I have heard you, and we will change course,” the nation, and his presidency, would benefit. One hopes he has that wisdom.

theo@halfgreat.com

Theo Caldwell is the author of Finn the half-Great.

The 2010 Economy: A Glass Three-Quarters Full

Just a couple weeks into 2010, the year looks like a glass that`s three-quarters full. That is, nine of the next twelve months augur economic and market strength in North America. But when the leaves start to turn, so may our fortunes, unless the right moves are made.

First, the good news. As Lawrence Kudlow and others have happily reported, the US Yield Curve, which measures interest rates by maturity from 91-day Treasury Bills to 30-year bonds, is not only positive – showing short-term rates lower than long-term – but steep. This upward slope indicates good economic times ahead. Manufacturing and production indices in both Canada and the US have risen above their magical 50 percent thresholds, suggesting economic expansion. For those who need quantitative assurance that better days are at hand, the numbers are there.

And on a personal level, the opportunity is palpable. People are tired of being pessimistic. There continues to be cash on the sidelines, held by individuals and institutions that have waited to invest until the turbulence of the previous year subsides. As Canadian and American equity markets inch upward, and bits of good news – nascent economic growth, improved retail numbers, solid corporate earnings, etc. – seep into the public consciousness, more and more money will be coaxed into the game.

But when the autumn comes, it will bring new challenges. For one thing, September and October have historically been tricky months for equity markets – the years 1929, 1987 and 2008 come to mind. Moreover, for American investors, there will be incentive to dump stocks before the end of the year to avoid higher capital gains taxes in 2011 (more on that in a moment).

One area in which even the most sanguine among us should not expect improvement by this fall is unemployment rates. This is invariably a lagging indicator, so an expanding economy with a lousy jobs market is not so inconsistent as it may seem. Even so, there are moves government can make to get folks back to work.

In the United States, the 2001 and 2003 tax cuts on personal income and capital gains are set to expire at the end of 2010, meaning rates will rise. Small businesses create three-quarters of the jobs in the US, and many of these companies pay taxes at individual rates. There has been scant commentary on the impact of America’s imminent tax increases on the employment picture. But entrepreneurs and small business owners, who must keep an eye on such things as a matter of economic survival, are keenly aware that government will be hiking their overhead in the form of higher tax rates (and, quite possibly, new health care and energy fees) in a matter of months. This will hamper the jobs market unless and until American employers get a better idea of what costs will look like in 2011 and beyond. Freezing US tax rates at 2010 levels – or cutting them, better yet – would go a long way toward reducing unemployment.

Bear in mind that government doesn’t create jobs; private enterprise does. Using so-called “stimulus” money to keep states and cities from having to trim their payrolls, while hiring folks for one-off projects like cleaning up after parades and counting birds at the airport, is not a sustainable way to grow an economy. Heaping fees and heavier taxes on an already groaning private sector is no help. So the shorthand message to America’s lawmakers and president for 2010 is: Stop borrowing and spending, freeze or cut tax rates, and give the economy room to grow.

In Canada, the federal government and central bank have two key jobs apiece, in order to make the most of the next nine months. Prime Minister Stephen Harper and Finance Minister Jim Flaherty must continue to focus on reducing and eliminating the nation’s budget deficit. Every other pro-growth ambition – including meaningful tax cuts – depends on keeping government from making overspending a habit. Second, these fellows must use every political and moral means at their disposal to convince our American trading partners to get their own budget deficit under control. A spendthrift government in Washington leads to a weak US dollar, which means America buys fewer Canadian exports.

As to that, Bank of Canada Governor Mark Carney must continue to keep interest rates low for as long as he can. Hiking rates begets a rising loonie and, for Canadian manufacturers and exporters, the dollar is already too high. Carney has indicated he will avoid raising rates before the end of the summer, unless inflation forces his hand. In the meantime, Carney should continue to talk down the loonie, reminding currency traders that the central bank will not allow our dollar to be speculated into the stratosphere. Canada is an exporter nation and, as such, needs a competitively priced currency for its products. If Carney can manage this, the country should thank him.

Barring some extraordinary incident, the first nine months of 2010 look good for the economy and markets. With the right moves, North America’s leaders can give that three-quarters-full glass a top-up.

theo@halfgreat.com

Theo Caldwell is the author of Finn the half-Great.