Obama rides the US around the corner

Barack Obama's State of the Union address outlined a range of economic, social and environmental reforms. Despite criticism from the right, his plans will fuel an already promising American comeback.

US President Barack Obama is kicking off his second term with gusto, no doubt buoyed with increasingly favourable economic news and robust financial markets which are adding trillions of dollars to household wealth. Obama’s State of the Union address to Congress outlined a progressive policy agenda including the introduction of a carbon price. While he saw many economic policy challenges ahead given the depth of the recent recession, Obama was upbeat as he plotted the course for the next four years and beyond.

For Obama, the US economy and its markets, the fiscal cliff and talk of a double-dip recession are distant memories. The rate of economic growth in the world’s biggest economy looks to be heading towards a six-year high, above 3 per cent, and the markets are anticipating a sustained expansion through 2013 and into 2014. Stocks are about to burst to new record highs and credit markets are priced for economic good times ahead.

According to Obama: "After years of gruelling recession, our businesses have created over six million new jobs. We buy more American cars than we have in five years, and less foreign oil than we have in 20. Our housing market is healing, our stock market is rebounding, and consumers, patients, and homeowners enjoy stronger protections than ever before”.

Clearly, there is some way to go before the US economy is back on an even keel. A full recovery, when it comes, will be when GDP growth is sustained at a 3 per cent pace, when the unemployment rate is heading towards 5 per cent, and when there is a balanced budget. On most scenarios, this is still three or four years away. This is why the US Federal Reserve is set to extend the zero interest rate for two more years, it is why the Fed is pumping $85 billion a month into the bond market via quantitative easing.

This policy approach is working, but it will take some time before the damage to jobs and wealth from the lesser depression, as Nobel Laureate Paul Krugman termed the recent slump, is repaired.

In the context of maintaining the recovery and decent rates of economic growth, Obama noted that policy makers were "more than half way towards the goal of $4 trillion in deficit reduction that economists say we need to stabilise our finances.” Obama noted that the remaining savings would not come from cuts to the already pressured education, job training, medicare or social security benefits. Rather, he will be pushing for some modest spending cuts, but also revenue measures with "with everybody doing their fair share”.

In particular, Obama was proposing to find the extra savings and moves to repair the budget by "getting rid of tax loopholes and deductions for the well-off and well-connected”. He suggested that there was bipartisan support for such measures and expected congress to pass the measures required to raise the revenue needed to repair the budget.

Other key aspects of Obama’s agenda were a push for greater education funding, job creation and rising real wages, and the boosting of infrastructure spending by $50 billion to repair "70,000 structurally deficient bridges across the country”. There were a range of other items that Obama has on his agenda, including raising the minimum wages, spending more on health, education and aged care.

In terms of his plan to raise the federal minimum wage to $9.00 an hour, Obama wanted to ensure that "no one who works full-time should have to live in poverty". The current minimum wage is $7.25 an hour.

All up, it is an ambitious agenda for Obama covering big picture economic themes, long-run microeconomic issues, a strong platform for environmental policy and social change.

While some of the right of centre analysts and commentators have been quick to criticise aspects of Obama’s plans, seeing them through a prism of anti-market tendencies, US financial markets took the news in their stride. Stocks are unchanged, locking in stellar returns over the past nine months while government bond yields have edged higher in reaction to continued positive economic news.

The US has turned the corner. The economy is locking in a decent growth trajectory while neglected infrastructure, prior under spending on education, social security and environmental issues are being addressed head on. There are more and more reasons to be optimistic about the US, with Obama helping to fuel that better tone.