Belfast Telegraph

Thursday 21 August 2014

Obama must begin his roof repairs now, and top priority will be banking reform

Today marks a significant day in the US calendar, with President Obama set to deliver the 111th State of the Union speech.

Not only will it mark Obama’s maiden State of the Union address and the first of the new decade, but it will also represent the first address since the economic and financial world (post-Lehman) changed dramatically for the worse.

Statements by the leader of the world’s largest economy are always closely watched.

Indeed, Obama’s statement at the tail-end of last week to overhaul banking regulation sparked sharp falls in equity markets.

Not surprisingly, today’s speech will be dominated by the economy. However, comparisons with President Clinton’s address at the start of the last decade are in sharp contrast.

Back then, Bill Clinton was extolling the strength of the domestic economy, which was experiencing its fastest economic growth in more than 30 years and the lowest unemployment rate over the same period.

In terms of the public finances, there was also a reversal in fortunes, with record deficits turned into record surpluses.

Indeed, the 2000 State of the Union address highlighted the first back-to-back budget surpluses for the US in 42 years, with Clinton going on to boast that “we have built a new economy”.

Furthermore, the Clinton administration had just pushed its Financial Services Modernisation Act of 1999 through Congress.

This represented the most sweeping banking deregulation bill in American history and effectively did away with the famous Glass-Steagall Act (1933) which separated commercial and investment banking.

This was Franklin D Roosevelt’s regulatory response to the 1930s Great Depression.

In the 2000 address, Clinton trumpeted that “never before has our nation enjoyed at once so much prosperity and social progress with so little internal crisis or so few external threats”. Moreover, he went on to quote

that “the state of the union is the strongest it has ever been”.

They say a week is a long time in politics. By extension, the last decade has proved to be a lifetime in terms of the changes that have occurred in the financial and economic world.

The most notable external economic threat that has emerged has been the rise of China.

The situation that Obama faces today is markedly different from the America that Clinton spoke of in 2000.

The US is experiencing a record fiscal deficit and more than seven million jobs have been lost in the latest recession.

Meanwhile, the unemployment rate is at a level not seen since 1983. Against this background, there will be no prizes for guessing that the twin chal

lenges of tackling the fiscal deficit and employment creation will feature prominently in the President’s oration. Indeed, these are the challenges facing most economies today, including Northern Ireland.

Clinton’s 2000 address marked the last of his eight-year term and contrasted with his first speech in 1993.

Back then, the US economy was once again recovering from recession and the US administration’s immediate priorities were the same twin challenges of creating new jobs and addressing the fiscal deficit.

Deregulation was also a feature of Clinton’s tenure, with his flagship piece of legislation coming towards the end of his period of office.

The forthcoming address is also expected to have strong similarities with President John F Kennedy’s (JFK) 1961 and 1962 addresses.

Like Obama, JFK took over the reins as US President with the economy already in recession.

In his maiden State of the Union address he noted “the present state of our economy is disturbing” with the main thrust of the 1961 and 1962 addresses highlighting the need to start rebuilding a new economy and to get the economy moving again.

The 1962 speech also used the memorable quote; “The time to repair the roof is when the sun is shining”.

The Obama address is expected to follow in a similar vein.

However, the US cannot wait for the economic sun to return before it begins to repair its roof.

Repairing the banking regulation that has proved so damaging in recent years appears to be Obama’s priority.

The challenge for Obama will be to mimic his Democratic predecessor — Bill Clinton — by taking the economy from a low to a high by the end of his four or eight year tenure.

However, the scale of the challenge is much greater than the one Clinton ever faced.

Richard Ramsey is Ulster Bank chief economist, Northern Ireland

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