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State of the Union: Confronting the Limits of Power 

Peter Lefkin 

 

2/7/2014 

Peter Lefkin, head of government and external affairs at Allianz of America, analyzes the president’s annual address and why he’s pursuing a more modest agenda that includes items like MyRA accounts for retirement savers, but doesn’t include tax reform.
In a State of the Union speech that acknowledged the unlikelihood of major legislation making its way through a divided Congress, President Obama deviated from the lofty ambitions of the past. Instead, he focused on a number of smaller issues that wouldn’t require a congressional vote.

The speech follows a bruising political year in which the president’s popularity fell significantly because of a string of controversies: the problems with his signature health-care law, the lack of decisive action in Syria, the illegal national security leaks by Edward Snowden, the IRS enhanced scrutiny of conservative organizations and the Benghazi cover-up. Republicans had their own troubles, including how they mishandled the funding for the US government. In that fight, they unsuccessfully sought to tie major modifications in the Obama health-care law to keeping the government open. They accomplished nothing and there was a lot of public anger directed at Republicans, resulting in a three-week closure of essential government services.

From a historical perspective, the sixth year of a two-term president is always difficult. Many of the key people in the administration have grown tired from the pace. Equally exhausting is watching the rhetorical flourishes of promises of a better tomorrow wilt from their exposure to practical difficulties of attempting to manage and change a huge government machine.

Obama’s problems might be greater than most past presidents because of the unrealistically high expectation that greeted the start of his presidency in 2009. Not to mention the lingering problems of a nation that hasn’t totally recovered from the 2008 financial crisis.

Addressing Income Inequality,
Not Addressing Tax Reform

The president’s key but unstated goal was to make himself seem engaged, energized and relevant while trying to bolster his popularity ratings among newly disaffected voters who were unhappy about the health-care law. Many of these people are barely getting by despite their own hard work. And a lot of them have remained unemployed for more than six months—some even for several years. Affirming his longstanding position that income inequality in the United States was a growing problem, the president said he was offering “a set of concrete, practical proposals to speed up growth, strengthen the middle class and build new ladders of opportunity into the middle class.” To accomplish this goal, he proposed raising the earned income tax credit available to low-income workers without children, and restoring unemployment insurance to the long-term unemployed. Additionally, he pressed Congress to raise the minimum wage to $10.10 per hour, an amount which would raise a family of three out of poverty. He also pledged to unilaterally raise the minimum wage of federal employees and contractors to $10.10 per hour.

As expected, the president steered away from embracing comprehensive tax reform, but once again spoke out generally against unnecessary tax breaks and perceived incentives that motivate businesses to move jobs overseas.

Pension and Retirement Savings

Building upon his concerns about income inequality, Obama used the State of the Union speech to announce a new plan that would help ensure greater savings for lower-income individuals whose employers do not currently offer retirement accounts. Entitled “myRA,” the Obama proposal would be structured like a Roth IRA. Similar to savings bonds, the investments would be backed by the federal government.

"It's a new savings bond that encourages folks to build a nest egg," Obama said during his speech. "MyRA guarantees a decent return with no risk of losing what you put in.” All individuals making less than $191,000 per year would be allowed to make a contribution; although once the size of the account exceeds $15,000 it would have to be converted into a traditional private retirement account. White House officials said Obama intends to create the plans through executive actions, and thus obviate the need for Congressional approval.

Immigration Reform

Immigration reform might be the one major policy area advocated by the president that has a possibility of success in Congress. The Republican Party, which has consistently resisted providing a pathway to citizenship or legalized status for those who came here illegally, is re-examining its position. Many Americans are concerned that their failure to budge is costing them dearly in the polls, particularly among the rapidly emerging bloc of Hispanic and Asian voters, whose support has withered during the past decade. Also, a number of conservative evangelical churches that have backed Republicans in the past are weighing in in favor of immigration reform. Some of their leaders have expressed concerns that that something needs to be done to protect families from being disunited, and to provide a mechanism that would allow people who have been in the country for years to fully participate in US life—and stop being exploited by living an underground existence.

The Republican Party spent the next few days in a retreat trying to determine its position. Whatever happens will be far more modest than what’s being advocated by the president and congressional Democrats, such as limiting legal status to those to people who have served in the US military or other activities that demonstrate strong citizenship.

Executive Actions

The president identified several other areas where he’s prepared to move alone without Congressional action. Included among them are streamlining the permit process for new infrastructure, launching six more hubs for high-tech manufacturing and working with the industry to sustain energy production while preserving pristine federal lands for future generations.

Trade Promotion Authority

President Obama said that he would ask Congress to provide him with Trade Negotiation Authority for the Transatlantic Trade and Investment Partnership (TTIP) between the United States and the European Union—as well as the Trans Pacific Partnership (TPP)—with several Asian nations. These agreements would allow the United States special trade representative to negotiate trade and investment agreements that would be subject to a yes-or-no vote by the House of Representatives and Senate. It’s important because it doesn't allow for amendments by Congress, which would make it difficult for trade negotiators to do their work. Republicans are generally supportive of free trade but some party members worry about vesting this much power with President Obama. In recent years, Democrats have generally opposed free-trade agreements, and many of them will only vote for these deals if they’re negotiated by a Democratic president.

Observations

The president’s speech was more notable for what it didn’t say rather than what it did say. He made no major push for tax reform or provide any strong attention to mortgage and student-loan financing. In these areas, but particularly mortgages and student loans, there’s little likelihood of Congressional consensus, as Republicans and Democrats have a different perspective on how these issues should be addressed.

Similarly, he moved away from the issues of gun control and climate change, both of which got a lot of attention in 2013. But he did talk about the action by the Environmental Protection Agency to set limits on carbon pollution from existing power plants. The lack of attention to both issues might have been an acknowledgement that he doesn’t have adequate Congressional support to get legislation enacted, as well as a recognition that his own position on both of these issues was unpopular in several states—Louisiana, Arkansas, Alaska and North Carolina—where incumbent Democratic Senators are facing difficult elections in November 2014. In addition to the three vulnerable Democratic incumbents up for re-election, there are three seats belonging to retiring Democratic senators the party is desperate to maintain. These include West Virginia, South Dakota and Michigan, where the president's position on gun control and climate change is not overwhelmingly popular. A loss of any one of them could possibly imperil the ability of the Democrats to maintain control of the Senate.

As expected, the president touted some aspects of the Affordable Care Act, which broadened the number of people receiving health-insurance coverage. But he stayed completely away from the operational problems that have plagued enrollment over the last four months. Changing the subject matter is something that is quite normal in Washington, D.C. But on a subject such as health care, which tends to be much more personal than other matters, he may have erred in not addressing it head-on. His political problems arising from health care stem not only from its difficult rollout, but also from public dismay over promises they could retain their health insurance and personal physicians, which were somewhat disingenuous.

The budget deficit issue was discussed briefly with the president taking some credit for the fact that the anticipated deficit for 2014 is about half the size of 2009 when he took office. However, it still totals more than $525 billion and the mid-term trajectory looks weaker when the nation confronts an ever-growing number of baby boomers begin to receive Medicare and Social Security benefits. Nonetheless, while politicians of both parties decry the deficit, no one really wants to undertake the politically difficult task of raising revenues and reducing expenditures, which will be necessary in the future. Politically, it is easier to pass the problem along, thus making it more difficult to solve down the road.



The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Forecasts and estimates have certain inherent limitations, and are not intended to be relied upon as advice or interpreted as a recommendation.

 

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Peter Lefkin, senior vice president of government and external affairs at Allianz of America and our Washington correspondent, provides regular updates on what’s happening on Capitol Hill.
Market Insights 
AGI-2014-02-07-8936 

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