We’re Not Out of the Woods Yet: 3 Dangers to the Economy Obama Should Tackle in Tonight’s Speech

What if, instead of an occasion for partisan polemics and balcony shout-outs, the State of the Union consisted of a dispassionate assessment of where the country really stands and what that implies for policy?

On the international economic front, the president would still have an opportunity to boast. The United States’ economic recovery is belatedly kicking into gear. In the international economic beauty contest, the United States outshines the competition, to seriously paraphrase the International Monetary Fund. The latest World Economic Outlook forecast puts 2015 U.S. economic growth at a reasonable 3.6 percent. That’s a lonely upward revision from the last forecast; almost everyone else in the world got a downgrade.

If the president were disposed to tell hard truths, he would note several looming economic dangers on the horizon. First, the world is full of smaller countries and territories with serious debt problems, from Ukraine to Greece to Puerto Rico. None of these is large relative to the size of global debt markets, but if any were to descend into crisis in 2015, the potential parallels to larger countries could seriously trouble global investors. If upcoming elections and moral hazard prevent Greece from muddling through, what would that mean for much larger euro zone countries with their own politics and hazards, such as Spain and Italy? If Puerto Rico cannot pull off a bankruptcy as a U.S. commonwealth, what would this mean for highly-indebted states like Illinois? The last time global investors seriously upgraded their assessment of lending risks, it rocked global markets.

Meanwhile, the last time the U.S. Federal Reserve tried to work its way back from a quantitative easing program and a dramatically-expanded balance sheet was…never. Hasn’t been done. This is a second threat the president might mention. The Fed balance sheet, which had been around $800 billion for a very long time, swelled through QE to roughly $4.5 trillion. It is possible that a return to normal monetary policy will be uneventful, but there are ample dangers. There is a great Warren Buffett quote that pertains: “When the tide goes out, you can tell who’s been skinny dipping.” When interest rates rise up from zero, we will see which borrowers left themselves vulnerable. Even the hint of monetary normalization in recent years has sent emerging markets into paroxysms.

A third threat is that the United States will have difficulty maintaining solid growth while Europe, Japan, China, and the rest of the world lag. Had the United States been a star saver in recent years, running current account surpluses and accumulating IOUs, it could use the upcoming time period to be the engine of world growth by cashing in those chits and demanding the world’s products. In reality, of course, the United States has done just the opposite. It has borrowed and run current account deficits. Looking ahead, a discrepancy between world growth and U.S. growth is likely to boost the dollar and exacerbate past imbalances. This could, in turn, temper U.S. performance.

So what might all this suggest on the policy front? It would be disappointing to hear the president issue elaborate calls for global fiscal stimulus or creative monetary measures. The efficacy of some of these measures, such as European QE, is dubious and appearing deaf to the countries’ political constraints could make the president seem naïve.

Better, instead, to shore up international institutions wherever we can. One such area would be a push for IMF reform. Ideally the president would refrain from his customary disdain and deal with the legitimate concerns of critics (e.g., has the IMF been too quick to back ineffective bailouts?). He could argue that, whatever its flaws, the IMF is invaluable in a crisis, since it can offer advice and assistance untainted by bilateral foreign policy tensions.

A second area would be through pursuit of major trade agreements, such as the Trans-Pacific Partnership (TPP) or the Transatlantic Trade and Investment Partnership (TTIP), which are more about creating new rules and approaches to trade issues than they are about old-fashioned market access. To get these done, the president will need Trade Promotion Authority (TPA) from the Congress. Unlike last year, he cannot afford to offer just cursory nods. The president needs to build the case for the agreements and to take on critics directly who link trade to job loss (including, prominently, his former self). He needs to explain why he needs TPA and to reassure concerned members of congress that this is not another example of executive overreach. He needs to explain to both parties why currency manipulation rules are unlikely to fly with our trading partners. He needs to address global concerns about investor-state dispute settlement.

Wait, you may say, that’s far too granular for a president. He should limit himself to lofty ideals.

That would be nice, but the president is far behind where he ought to be. The discussion of trade, because it is politically fraught, has been postponed for years. Now there is a narrow window of time in which the president needs to at least win workable TPA and wrap up the TPP (preferably in that order). If this is not one of the president’s top priorities for the next few months, he is very unlikely to succeed. If it is one of his top priorities, what better occasion to grab the nation’s attention and make a strong case?

The United States is unlikely to flourish for long economically if the rest of the world stumbles. IMF reform and the major new trade agreements would not be panaceas, but they would be strong signs of U.S. economic leadership and would reassure troubled world markets.

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