President Obama begins his second term with unemployment at 7.8 percent and a forecast for moderate economic growth in the coming years as the country continues to dig out of the worst economic downturn since the Great Depression.
The president has proposed spending on infrastructure projects, such as new roads and bridges, and aid to states and localities to help keep teachers on the payrolls. But he will have difficulty getting any traction for these measures in the Republican-led House. Instead, he faces a series of fiscal showdowns in the first several months of this year.
And, in fact, spending restraints enacted under the 2011 Budget Control Act that Obama negotiated with Republicans are likely to be a drag on growth in the next few years. A recent Reuters analysis found that spending caps enacted in 2011 will hamper Obama's efforts to boost investment in sectors that could help the country’s economy, such as scientific research and transportation. The caps will leave the government with effectively 16 percent less to spend in those areas by the end of Obama’s second term.
After winning an election that was all about getting the economy on the right track, the president begins his final term in a tricky spot, with legislative resistance expected on many of the items on his economic agenda. But there are things Obama can do to boost the economy—some in the short term, some in the long term—that a still-divided Washington might be able to accomplish. Here is a look at four of them:
1. Help determine the proper role of government in the housing sector. In the near-term, housing is likely to be one of the biggest economic success stories. Housing's meltdown set the stage for the financial crisis and recession and the sector's woes contributed to the sluggishness of the recovery. But the housing sector seems to have finally turned the corner, and economists are optimistic it will actually give the recovery some juice this year.
But the role of the government in the housing sector is something Congress and the White House are going to have to agree on, and soon. Right now, it’s still a major player in the mortgage market, with roughly 9 out of 10 new residential mortgages backstopped by government entities. Few economists (or politicians) think the current situation is ideal.
Winding that involvement down—although not too quickly—would help the sector on its path to recovery. But the relationship between the government and housing sector could take many forms in the future, and lawmakers will have to agree on which route to take. The White House could help lead that discussion.
2. Reduce Dodd-Frank uncertainty. Inauguration Day marks the two-and-a-half year anniversary of the 2010 Dodd-Frank financial reform law, and only 34 percent of the rules required by the law have been finalized, according to Davis Polk & Wardwell LLP, which tracks the law’s implementation.
Which side of the aisle you sit on might determine whether you think Dodd-Frank will ultimately help or hurt the economy. But no matter what your viewpoint is, you’ll probably agree that the uncertainty surrounding the unfinished regulations doesn’t help in the current environment of fiscal and economic uncertainty. This year is supposed to bring more progress on that front, with key provisions like the Volcker Rule, which would ban banks from making trades with their own money, expected to be finalized. Obama could spur progress on the law's continued rollout by filling key jobs at federal agencies charged with implementing it. Among those is the Securities and Exchange Commission, which is down one person after former chairman Mary Schapiro departed last month. Obama appointed then-commissioner Elisse Walter to serve as chairman, but as a result, one spot on the five-member commission will remain unfilled until the Senate confirms a nominee, which hasn't been put forward yet. Commodity Futures Trading Commission Chairman Gary Gensler's term expired in April 2012, although federal rules allow him to serve through the end of 2013 without additional Senate confirmation.
If Congress can reach agreement on immigration policy, it could help the economy. “Comprehensive immigration reform that legalizes currently unauthorized immigrants and creates flexible legal limits on future immigration in the context of full labor rights would help American workers and the U.S. economy,” Raúl Hinojosa-Ojeda of the University of California-Los Angeles, wrote in the Cato Journal last winter. More recently, Kevin Hassett of the conservative American Enterprise Institute argued that a “vast expansion of legal immigration could feed the next economic boom.”
4. Improve the nation’s education system. Education researchers Eric Hanushek and Ludger Woessmann found that a country’s gross domestic product growth rate is closely tied to its international test scores in math and science. Lower education levels also correlate with lower health, leading to a “health drag” on the economy, says Elaine Weiss, an education expert at the liberal Economic Policy Institute.
States have a lot of control over the nation's public school system right now, but Washington is going to have to re-engage at some point, National Journal’s Fawn Johnson wrote in December. “States already are working on implementing the Common Core standards, which were negotiated by governors. If Congress doesn't keep up with them, the tension between federal funding and state practices could become too taut and snap,” she said.
In light of those tensions, Obama could focus on K-12 in his second term. But a higher-education law authorizing many student-aid programs also expires this year, which means Congress and the White House will likely need to revisit it. Education will be an issue to watch, and one where the Obama administration’s actions have the potential to benefit the economy in the years to come.