President Obama's State of the Union Address

• New Jobs Bill: The president has put a new jobs bill at the top of the agenda. Key elements of this bill would include $30 billion in TARP funds redirected for community banks to support additional small business lending. Other small business initiatives include a business tax credit for hiring, eliminating the small business capital gains tax, and providing incentives for investment. The bill would include extending unemployment benefits and additional infrastructure spending, specifically a high-profile, new high-speed rail network in Florida.
• Taxes: President Obama once again proposed a tax on the large banks to cover the (lowered) projected costs of the TARP program. There is also a proposal to increase the child tax credit and extend the reduced tax rates beyond 2010 for households with incomes less than $250,000. The president is also proposing the closing of some tax loopholes that encourage shifting business activity to overseas locations.
• The Massive Fiscal Deficit: The president is proposing a three-year freeze on discretionary spending (excluding defense, homeland security, Medicare, and Social Security) starting in 2011. In addition, he is proposing a bipartisan fiscal committee to investigate options for long-term fiscal stability, and is asking Congress to reinstate "pay-go" rules.
• Energy: The president advocates the development of safe, clean nuclear power plants. He also supports further offshore oil and gas development, biofuels, and clean-coal technologies, but continues to support a comprehensive climate change bill, an initiative the Republicans are adamantly opposed to because of fears of rapid increases in the cost of doing business.
• Healthcare Reform: The president is advising that healthcare reform be put on the back burner for now, but he is not giving up on what he describes as a unique, historic opportunity for comprehensive healthcare reform.

Analysis

President Obama, responding to a rising voter backlash against the Democratic leadership in Washington, has swiftly re-ordered priorities to focus on the economy and fiscal discipline. This was an important and skillful move by the president to regain the support of the electorate, particularly the independent voters that swept the Democrats into office in the November 2008 elections.

The president is urging Congress to commence work immediately on a new jobs bill. The House already passed a stimulus bill in early December, but that bill was quickly eclipsed by the growing preoccupation of passing a healthcare reform bill before Christmas. The president asked the Senate to commence work immediately on its version of a new jobs bill, with the hope that a conference agreement could be crafted relatively quickly. The president will be meeting with the Republican leadership in the Senate over the next few days to see if some common ground can be brokered.

In the meantime, the healthcare reform bill has been put on hold. The president admitted the bill and the process became too complex, opaque, and unwieldy, leading to communication failures and rapidly eroding public support.

The main stumbling block to a Senate jobs bill is a potential Republican-led filibuster under the new seating arrangements. Nevertheless, many of the initiatives that the president is proposing are aimed at stimulating hiring and investment by small businesses, so there is the potential for some kind of bill to emerge from the Senate with bipartisan support.

There is also a distinct possibility the Senate bill could differ substantially from the House bill that was passed in December—that bill incorporated more spending measures and included a massive new multi-year transportation spending reauthorization. Thus, achieving a jobs stimulus conference agreement in the next few weeks could be a formidable challenge, but it is not outside the realm of possibilities.

A conference bill that incorporates support for small business expansion and limited spending increases, as well as a common-sense approach to a multi-year transportation reauthorization may be the best option. It would provide incentives at the margin for small businesses to step up hiring and eliminate the large cloud of uncertainty hanging over the future funding of transportation infrastructure. In addition, putting healthcare reform on the back burner may alleviate some of the concerns that some small business owners harbor about the potential costs, which is also acting as a potential roadblock to additional hiring.

Beyond the short-term jobs stimulus bill, however, the resolution of major policy issues such as the breadth and scope of healthcare reform, the expiration of the Bush tax cuts at the end of 2010, and restoring long-term fiscal discipline remain uncertain.

President Obama is fundamentally correct in refocusing on the challenge of the economy. Restoring buoyant economic growth is a necessary precondition for engaging the public in some of the deeper, more vexing issues on tax reform and sustaining critical government programs in Social Security, defense, Medicare, and Medicaid. The policy focus in 2010 needs to be shifted toward expanding the economic pie, rather than how to carve up a pie that has shrunk considerably over the last few years.