As the brouhaha of the election campaign dies down and the change in administration dawns, though, so the immense challenges and complications that Barack Obama inherits hove into view from the moment he’s sworn in as president at 17.00 hours Greenwich Mean Time.
Despite all the global attention on the election, Obama’s initial focus will be domestic. After sweeping to election victory with his motto of change, the new president will have to balance competing claims on limited resources while at the same time managing the high expectations of his ardent followers. In particular, Obama must confront the ongoing recession, rising unemployment and the collapse of housing asset prices and credit.
Working with Congress, the Federal Reserve and the Treasury, Obama’s immediate priority will be to restore confidence in the financial system and put in place a new regulatory architecture specifically addressing the shortcomings that fostered the current crisis. Only once these matters have been ‘dealt with’ will traditional issues – such as healthcare reform, immigration and the infrastructure deficit – come to dominate the political agenda, though probably not until year end.
Acting on the domestic stage
We expect Obama to use the first days of his administration to put in place several of the measures on housing that he presented during his campaign, such as some form of debt alleviation and moratoriums on foreclosures. The administration will adopt a very active stance, using federal funds to ensure the liquidity of the housing market and reduce the rate of foreclosures.
In this context, efforts to restore confidence in the financial sector will be caught between the growing fiscal deficit and the popular pressure on the administration and Congress to put in place an adequate regulatory structure, ‘punish’ those responsible for the current crisis and demonstrate that the Government is acting on behalf of ‘ordinary Americans’. The risk is that such pressure may translate into over-regulation or – worse still – negative changes in regulation.
The final form of the new system is uncertain: it will depend heavily on the outcome of key battles between reformers and vested interests. Regardless of the outcome, there will surely be plenty of rhetoric against speculators, banks and the inefficiencies of the regulatory system, but the final set of reforms is likely to be more pragmatic. It will most likely follow – in content if not in tone – the plan to overhaul the regulation of the US financial system presented by Treasury secretary Hank Paulson last March.
The starting point in the domestic situation is so low that any improvement will go a long way towards creating positive momentum, particularly given the change in tone that Obama brings to the presidency. However, if the economy doesn’t begin to improve its health by the second half of this year, Obama may have to fight against some of his (and his party’s) instincts and avoid overt protectionism and other forms of economic populism. Potentially at least, this may end up hurting the economy’s medium-to-long term prospects and sow the seeds of larger disappointments in 2010.
Restoring a battered world image
In the foreign policy arena, the change in administration and Obama’s popularity will go a long way towards helping to restore the US’ image around the world and to rebuild its battered alliances. However, expectations of significant policy changes will be dashed, especially if those intent on hijacking US policy prove successful in challenging the new administration through a terrorist attack or geopolitical crisis.
In the end, the main potential pitfall for Obama is the high expectations that the change in power will create. It’s our considered opinion that these expectations are likely to be dashed.
The likelihood of significant change on most foreign policy issues is relatively low for three main reasons:
US strategic interests
Irrespective of the change in administration and the reassessment of foreign policy goals that will follow, US strategic interests on most issues haven’t shifted.
Major priorities will continue to include preventing Iran from acquiring nuclear weapons, limiting the influence of Venezuela’s Hugo Chavez in Latin America, resolving the Israel/Palestine conflict, disarming nuclear North Korea and promoting democracy in the former Soviet republics.
Institutionalised character of foreign policy
US foreign policy is broadly defined through a dialogue between the White House, the National Security Council, the State Department and the Pentagon, all of whom harbour competing visions and shifting degrees of influence over how best to serve US interests.
Inevitably, this tends to result in a highly institutionalised policy-making process that’s slow to adapt, and favours gradual evolution over radical shifts.
Nuances in approach
The final caveat is that there are several ways to tackle the same problem. Pundits have tended to concentrate on the fact that Obama is more likely to work through international institutions and ‘soft power’ than his predecessor. Undoubtedly, he has thus far presented a gentler face to the world.
However, that doesn’t mean he wouldn’t use force – or the threat of force – if necessary. During the election campaign, Obama appeared to enrage a whole list of allies (among them South Korea, Pakistan, Colombia, Mexico and Saudi Arabia) with his policy proposals.
Reaching out to allies
The ‘Bush doctrine’ will not continue unchanged. The new administration will reassess the US’ stance on most foreign policy issues, and is sure to use the first few months in office to reach out to its allies in a bid to restore the US’ image abroad. There will be a window of opportunity to present a new foreign policy and a potential for a thaw in various foreign relationships merely because Obama will not be encumbered by the baggage that clings mercilessly to the Bush administration.
The US will soon wake up to the contrast between the hype of the election campaign and the reality of the challenges facing the nation. Obama will certainly bring a new impetus and desire to push the country out of its problems, and the amazing capacity of the US to regenerate and reinvent itself will certainly help to pave a new way forward.
As always, though, those expecting quick fixes and massive policy changes are highly likely to be disappointed.
Daniel Linsker is head of the Americas division at Control Risks