Australian Literary Review

By Geoffrey Garrett

THE mid-term referendum on US President Barack Obama in today's congressional elections will be unremittingly negative. Nonetheless, it may be the unlikely dawn of a more successful Obama 2.0 (as Obama is already dubbing the next two years), in which the President will be more leader of his country than numbers man for his party, and from which Australia will benefit through a greater focus on issues that matter to it, such as US engagement in Asia and leadership on free trade.

The state of the Obama presidency is a paradox. He has probably achieved more in two years than his Democrat predecessors Jimmy Carter and Bill Clinton did in their combined 12 years in office. But the US, an inveterately confident and optimistic nation suddenly caught between anger and despondency, is in no mood to listen.

On the road to the White House, Obama was feted as being Abe Lincoln, FDR and JFK rolled into one. Now he is dismissed with Carter-like putdowns -- incompetent, ineffective, out of touch -- from the Right and Left. Conservatives spit out that Obama is a socialist, a Muslim and even an illegal immigrant, with the Tea Party capturing and fuelling the just-say-no venom. Those on the Left disdain Obama for being too cosy with Wall Street and lament what they consider his indifference to the plight of Main Street.

When all the results are in, Obama's Democrats will probably lose control of the House of Representatives, come close to losing their majority in the Senate and lose a brace of state governorships in the mid-terms. Things have become so bad for Obama that Democrats desperately seeking re-election turned to Clinton to try to save them in the waning days of the campaign.

How can this have happened to a President who entered office with untold political capital, got out of Iraq ahead of schedule, staunched the bleeding from the financial crisis before it could turn into a second Depression, and slayed the giants of health care and financial reform?

The key lies in two Es: expectations and the economy.

The Obama-mania tsunami that swept him to office in 2008 pushed expectations so high that Obama could never have met them as President. But in the heady days of 2008, Obama and his ''hope you can believe in'' bandwagon fuelled rather than quelled the hype, despite the grim realities of two ongoing wars and the deepest economic downturn in 70 years. The US, not to mention much of the world, had grown disillusioned, tired and angry about the Bush administration. Obama was the perfect anti-Bush on every dimension.

But the higher the high, the worse the hangover. This is nowhere more apparent than in the Democrats' worry that the very people so energised by Obama and on whose backs he rode to historic victory in 2008 -- the under-30s, ethnic minorities and metro area voters -- are so alienated that they won't even bother to vote this time.

The expectations downer has been driven by the perfect ongoing storm of near double-digit unemployment, one-fifth of Americans owing more on their homes than they are worth, the highest poverty rates since the 1930s and a budget deficit drowning in red ink in the trillions.

''It's the economy, stupid'' was Clinton's rallying cry in his winning 1992 campaign; it has become the epitaph for Obama's first two years in office. Whether Obama inherited rather than caused America's economic woes doesn't matter. Voters are out for vengeance, and Obama and the Democrats have bullseyes on their backs.

There is a lot of other mud being flung at the President these days: the charge that he is impossible to work for, that is why so many of his senior leaders are leaving; the lament that he is a legislator, not a leader; the psychological analysis that he is a cold fish who cannot empathise; and, the ultimate critique for someone heralded as a once-in-a-generation communicator, that he cannot connect with people.

Still, history tells us the Obama phoenix may yet rise. Clinton and Ronald Reagan suffered mid-term repudiations after their first two years in office. But both soon recovered, getting more done with a congress they no longer controlled, riding the wave of an improving economy, then pummelling weak opponents in landslide re-elections.

This is a hope Obama can believe in, and here's how. The better the Tea Party does this year, the more the Republicans will be pushed to the unelectable right in 2012. No longer the leader of his party in congress, Obama will finally have the opportunity to be the leader of his country. Two years out from the next presidential election, it is hard to find a Republican who could credibly challenge Obama.

The fate of the economy remains the biggest question mark. Economists call what the US is going through a square root shaped recession: first a steep dive, then a short recovery, and now a long flat line of stagnation. No one is quite sure whether the kind of growth the US can reasonably expect during the next few years will be strong enough to pull the unemployment rate down appreciably.

With near zero interest rates and annual budget deficits measured in the trillions, Obama has already fired most of the bullets he has. All he can really do is trust and cheerlead the innovation and entrepreneurship that has brought the American economy back to life so many times before. And it probably will again. The question is whether the bounce will be big enough and soon enough to save Obama.

Things only need to be improving, not fixed, for the President to benefit. Unemployment peaked at 10.8 per cent in November 1982 when Reagan's Republicans were swept away in the mid-terms. When Reagan was re-elected as president in November 1984 the rate had dropped to 7.4 per cent, almost exactly where it was when Reagan entered office.

Unemployment in the US sits at 9.6 per cent, up from 6.9 per cent when Obama was elected, about the same rise that Reagan had to endure. It seems unlikely that US unemployment will dip below 7 per cent before November 2012; 8 per cent even seems a stretch, but it may be enough for Obama.

If he is re-elected he probably won't be the Reagan in reverse he wants to be: an admired leader who stuck to his ideological guns and won the fight with congress by appealing directly to the American public. Rather, he may look more like a president Obama respects less: Clinton, who revived his administration by moving to the pragmatic centre to get things done in Washington. Banishment from office in Carter-like ignominy seems the least likely fate for Obama, unless the jobs numbers do not improve or an international crisis (potentially Iran, as it was for Carter) suffocates the US and its President.

Remembering Obama's achievements is an important corrective to all the negativity swirling about his administration in the US. Delivering on four big promises from his 2008 election campaign is no mean feat in what have proved two very tough years.

Obama shot to prominence because of his pristine anti-Iraq credentials, and getting out of Iraq within 18 months in office was his first core election promise. The last US combat troops left Iraq 2 1/2 months ago, a few months ahead of Obama's schedule. But it has received scant acclaim. Part of the reason for the muted reception is that ongoing violence in Iraq remains civil war-like, the country's elections in March this year have yet to produce a new government, and tens of thousands of US troops are still in Iraq to help with security matters.

But the bigger story is that the Iraq war was a disaster for the US, dividing the country at home, alienating much of the world, and with a staggering human and financial toll.

Obama said he would turn the page on Iraq so the US could move on. He has done this, but no one, least of all the President, wants to claim mission accomplished the way George W. Bush did so naively only weeks into what turned into a war lasting more than seven years.

After the collapse of Lehman Brothers in the heat of the presidential campaign on September 15, 2008, Obama was far more vocal about the need for a substantial fiscal stimulus to revive the suddenly swooning economy than his Republican opponent John McCain was. Obama's second important achievement was to sign into law less than one month after taking the oath of office a $US800 billion stimulus package that was both the largest such bill passed in the US and the world's biggest stimulus in response to the financial crisis.

There is no denying that the sausage factory of congress that produced the Obama stimulus was ugly. Only three Republicans in the Senate, and none in the House of Representatives, voted for a package they derided as pork-barrel politics on steroids. Republicans argued that there were not enough shovel-ready projects to stem the haemorrhaging of jobs, and that the stimulus would wreak havoc with America's already parlous public finances and shackle private sector investment in government chains. There was, of course, some truth to their critique.

But 18 months later, the independent Congressional Budget Office concluded that the stimulus package saved as many as 3.3 million jobs and lowered the unemployment rate by as much as 1.8 percentage points. This was not as much as Obama, who predicted that US unemployment would peak at about 8 per cent, had hoped for. But the pain the US is still feeling would have been even worse had Obama not led his Democrats to act so decisively.

Obama's third great accomplishment, passed into legislation in July this year, was the largest set of American financial reforms since the 1930s, transforming US regulation very much along the lines called for by the G20 and providing the foundation for better global regulation.

There are four principal provisions to Obama's law: a new consumer watchdog to protect against unscrupulous financial firms; a Volcker rule to limit the ability of banks holding deposits to make risky investments; greater regulation of derivatives; and rules for the orderly liquidation of banks in crisis to avoid the substantial bailouts of the GFC.

Obama's financial reforms have been criticised by Wall Street for being an over-reaction, like the Sarbanes-Oxley law after the Enron fiasco a decade ago. Critics on the Left have criticised the law as not going far enough, in particular for not breaking up mega institutions such as Citibank and Bank of America that were at the centre of the global storm two years ago.

Everyone agrees that the ultimate impact of the legislation will depend on how it is implemented because many of its provisions are more indicative than definitive. But the bottom line is clear: Americans and the world wanted Obama to do something big to respond to the worst excesses of buccaneering finance, and he delivered as soon as the darkest days of the crisis had passed.

In many ways Obama's last achievement is the most surprising. Healthcare reform has been the third rail of American politics; touch it and you will die. A decade and a half ago, Clinton walked away from his personal disaster of failed healthcare reform with his tail very much between his legs. But Obama was undeterred. Earlier this year he signed into law the biggest changes to US healthcare since Lyndon Johnson introduced Medicare for senior citizens and Medicaid for the poor in the mid-1960s.

The signature achievement of Obama's reforms is to add more than 30 million people to the ranks of those with health insurance, giving them regular access to doctors rather than having to rely exclusively on hospital emergency rooms. The total cost of Obama's reforms is about $US1 trillion by 2020. But the Congressional Budget Office estimates the law will generate savings that will reduce the budget deficit by more than $US100bn during the same period.

AS with Obama's other key domestic reforms, there are loud criticisms of the new law from the Left and the Right. The Left's main gripe is that Obama abandoned the idea of a public option alternative to private health insurance, choosing instead to subsidise private healthcare for poorer Americans in ways that may make the health insurance industry even more profitable than it has been in the past.

The Right considers ''Obamacare'' socialism in action, forcing people to pay for health insurance and dramatically expanding government regulation of the health industry. Suits challenging the constitutionality of different aspects of the law have been brought in a dozen states and the Republicans are vowing to overturn it next year.

But the fact Obama was able to pass healthcare reform underscores a reality of his presidency that virtually no one is talking about: it has been remarkably active and successful, particularly on the legislative front.

Early sceptics of the administration said Obama was risking disaster because his agenda was too big and he was too inexperienced. Today, there may be lots of different ways to attack the President, but too much ambition and too little experience is not one of them.

None of Obama's main initiatives is immune from serious criticism. But this is always the case with big reform. It is also true that Obama did not achieve all he set out to. Closing Guantanamo Bay was easy to say but very hard to do. Energy and climate reforms have been shelved because the issues are just not so important to Americans when unemployment is high and oil prices are low. Obama has been unable to extend the Bush-era tax cuts for most Americans as he promised he would do on the campaign trail because of worries that letting the high income tax cuts lapse would be seen to cut job-creating investment at a time the country can ill afford it. Nonetheless, any reasonable analysis has to underline two things about Obama's first two years in office.

First, his administration has delivered on the bulk of its election manifesto. Second, Obama's achievements have on balance made things better, not worse, for America.

In any normal times, this would be more than enough to generate acclaim and deliver votes to the President and his party.

But these are not normal times. Average Americans are in no place to give Obama a reasonable hearing. For so many of them, things are worse today than they have been in their entire lives, and if there is light at the end of the tunnel it seems faint and far off. The broad story is well known, but the statistics remain staggering.

The GFC began when the US housing bubble burst in mid-2006, triggering a cascading series of defaults and write-downs on trillions of dollars of esoteric financial instruments whose viability was wholly dependent on the proposition that American housing prices could only rise.

The cataclysmic consequences of this folly for the global financial system are now clear to all. The grinding carnage in middle America has grabbed many fewer headlines. But it is a driving force of US politics today.

American housing prices have declined 30 per cent in the past four years, a big drop made much worse by the amount of borrowed money that drove housing prices up in the first place, borrowing that has now gone bad. According to Robert Shiller, the Yale economist who famously dubbed the dotcom bubble ''irrational exuberance'', and Moody's chief economist Mark Zandi, almost 15 million American households today owe more for their homes than they are worth. Almost one-third of all American mortgages are under water, with a total of $US2.4 trillion in outstanding debt that is about $750 billion more than the value of all these homes. Lenders are expected to foreclose on more than one million homes this year, about one-quarter of all houses and apartments that are likely to be sold.

Since their homes are by far the biggest assets owned by most Americans, the real estate downturn on its own would be enough to put the country in a tailspin.

But the disastrous jobs picture make things so much worse for ordinary Americans.

The headline unemployment rate in September this year was 9.6 per cent. Nearly 15 million people were out of work and filing for benefits, while about 40 per cent of them had been unemployed for at least six months: a new reality in a country that has long prided itself on being immune to the social slight of long-time unemployment. According to the US Bureau of Labor Statistics, another 9.5 million Americans are in part-time work when they want full-time jobs and another 2.5 million people without jobs don't show up in the unemployment statistics because they are no longer signing up as jobless.

Almost 33 million American are unemployed or underemployed, more than 20 per cent of the total labour force and approaching the figures for the Depression.

Put together, the dire state of the housing and job markets and it is no surprise that about 44 million Americans -- one in seven -- are officially living in poverty, earning less than $US22,000 a year for a family of four. This is the highest poverty rate recorded in US statistics that have been kept since World War II. Could more be done? Apart from more ''quantitative easing'', where the Federal Reserve Board purchases more US government debt to keep long-term interest rates down, it is hard to see how.

Short-term interest rates have been near zero for almost two years. The first two Obama budgets recorded the two largest deficits in US history, both more than $US1.25 trillion, with most of the money thrown at job creation and support for poorer Americans. The deficit next year is slated again to exceed $US1 trillion.

With an ageing population entitled to public health care and public pensions, the GFC-induced debts and deficits only worsen what was already an unsustainable path for America's public finances. This leaves the Obama administration with an invidious Sophie's choice between spending more money it doesn't have to help today and saving money today it knows the country will need in the future. Who would want to be president given all this?

OBAMA defiantly told The New York Times in a recent interview that he was still the best man for the job and that he was looking forward to not two but six more years in office. He may be right. But to chart the possibility that Obama will rise again, it is important first to understand the fall. And here the anti-government and anti-Obama Tea Party may play a surprising role in Obama's resurrection. At the beginning of last year, Obama's net approval rating (approve-minus disapprove) was more than +50. Today it is -5, with only about 40 per cent of Americans thinking he is doing a good job.

Things are even worse for Democrats in congress, who are now about 10 percentage points behind the Republicans in ''generic ballots'' (with just party names, not candidates, on the ballots) among Americans who say they are likely to vote in the mid-terms.

In the early 80s, Reagan notoriously declared that government was the problem, not the solution. Today, the Tea Party is Reagan in overdrive. Sharron Angle, a disarming Nevada grandmother who has raised more than $US15m in the past three months in her bid to unseat the Democrats' Senate leader, Harry Reid, wants to abolish the US departments of energy and education and the Environmental Protection Agency, and to privatise America's public pensions program, Social Security, its aged-care program, Medicare, and the Veterans Administration.

Christine O'Donnell, the former witch who is running for Vice-President Joe Biden's old Delaware Senate seat, has said the US constitution should not be used to keep religious instruction out of American public schools and would make repealing Obamacare one of her highest priorities. Tea Party-ers not only want to extend the Bush tax cuts that are set to expire this year; they want to cut the state down to a bare minimum on lines that harken back to the 19th century. Just say no -- to Wall Street, to Obama, to the Democrats, to big government -- is the perfect slogan for 2010. No is not only the message of the Tea Party but the whole Republican Party. The grand total of Republicans who voted for any of Obama's stimulus package, health care and financial reform is four: none in the house; two female senators from maverick Maine, Susan Collins and Olympia Snowe; Arlen Specter, who is now a Democrat; and Scott Brown, who replaced Ted Kennedy after the liberal lion's death mid-term. But does no to the Democrats in 2010 mean curtains for Obama? Things could hardly be going worse for the President. But the smart money would answer this question in the negative. This unlikely answer proceeds in several steps. First, the US economy is recovering. The stockmarket is up 70 per cent from where it was in March last year at the depths of the GFC gloom. Economic growth returned to positive territory in the third quarter of last year and has averaged 3 per cent since. Even housing prices have increased more than 5 per cent since bottoming out in May last year.

Jobs are a notoriously lagging indicator in any recession and they may lag longer this time than in previous downturns. But the most important statistic for the future of the American economy may well be the mountains of cash companies have accumulated in the past two years as they have cut debt and investment. American corporations sit on roughly $US1.8 trillion in cash, too nervous to invest themselves or lend to others. Investment and lending will come back, and when they do so will jobs. The Obama camp is just hoping this happens soon enough to translate into a real jobs recovery by about the middle of 2012. Chances are that it will.

Second, Obama is an unpopular President, but according to most polls he is still twice as popular as congress, where Democrats are viewed as spendthrifts, Republicans are deemed obstructionist and partisan vituperation is poisoning the public. This gives Obama the opportunity to do what Reagan did so effectively in the 80s: represent the interests of the people against the congressional special interests in Washington and speak directly to America over the heads of congress. Rather than horse-trading with congress

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he would pressure that house indirectly by appealing to voters back home. Everything we knew about Obama before he entered the White House suggested this was exactly what he would do in office. But instead he has spent the better part of two years effectively being the leader of his party

in congress rather than the leader of the country getting congress to do its bidding. The more power the Democrats lose in the mid-term elections, the less sense it would make for Obama to remain their champion, the more scope he would have to hector and harangue congress, and the more credit he would get for so doing.

This may even mean a public stalemate with congress, such as Clinton orchestrated in the mid-90s when he allowed the federal government to shut down because the legislative branch would not pass his budget.

Third, the stronger the Republicans' position in congress next year, the harder it will be for them to continue to be the party of just say no. If the Republicans want to put a stamp on what they stand for rather than just what they are against (a near certainty in the run-up to a presidential election they hope to win), they will have to try to pass legislation rather than just block things the Democrats propose. This will mean at minimum working with Democrats in the Senate with its super-majority requirement and with Obama who can veto any legislation he doesn't want.

This environment will make it easier for Obama to shine than has been the case in the past two years because again it will emphasise his position as leader of the nation and play down his role as leader of the Democratic Party. Rising above the partisan din in the name of the national interest is a script Obama will surely follow.

Finally, the better the Tea Party wing of the Republican Party does in the mid-term elections, the greater will be the pressure on the Republicans to move even further to the right in the run-up to the presidential election. This is scaring the Republican establishment, which knows presidential success will inevitably require both its highbrow ''Rockefeller'' wing and the ''Goldwater'' maverick populists. What's worse, the Republicans don't have a candidate who can take on Obama. They know Sarah Palin can fire up the base, although she cannot be president. But try telling that to the Tea Party faithful.

More centrist Republicans such as former Massachusetts governor Mitt Romney and former Utah governor Jon Huntsman have mainstream conservative positions on the economy, but many Americans remain profoundly uncomfortable with their Mormonism and the Right is worried that they are ''social liberals'' who are not always and everywhere opposed to abortion, for example. Republicans are desperately seeking governors in the Bush mould from 2000, compassionate conservatives who have got things done at the state level. But every time one is proposed, the shine seems immediately to wear off. Louisiana's Bobby Jindal flamed out in his response to Obama's state of the union address earlier this year. Minnesota's Tim Pawlenty seems more underwhelming the more he is in the spotlight. That David Petraeus, the architect of the Iraq surge in 2007 who has been called on to save Afghanistan, is the subject of a presidential whispering campaign among Republicans despite his zero political experience and repeated protestations that he has no interest in changing, tells you just how worried they are about their viability in 2012.

Contrast this with Obama. The notion Hillary Clinton would run against him the way Kennedy did against Carter in 1980 is a non-starter. It would be virtually impossible for Clinton to beat Obama in a Democratic nomination contest. If she did, things would be so bad for the Democrats that any candidate would have no chance of winning in 2012. Waiting for 2016 and hoping that Obama will pass the presidential baton to her is a much safer bet for her. The more you think about it, the more plausible the unthinkable becomes. A deeply negative mid-term referendum on Obama may well lead into a much better next two years for the President. And they might be better for Australia, too.

OBAMA was partly responsible for Kevin Rudd's ousting as prime minister, without ever conspiring with the mutineers or knowing about their plot. In the first week of June, Obama postponed a visit to Australia that was scheduled for June 18-21 because of the BP oil spill. This was after postponing the visit from March to June to get his healthcare reform through congress.

Both decisions made clear sense for Obama, who has said his biggest nation-building challenge is at home. Neither said anything about the rock-solid Australia-US relationship, other than that there were no problems so pressing that the visit had to go ahead.

But Canberra would have been in a frenzy with an Obama visit and Rudd would have been at the centre of it all. With the visit off, the plotters mobilised against Rudd no more than 48 hours after Obama would have left Australia. Will Obama make amends to Rudd and Rudd's new boss Julia Gillard? He probably will by visiting Australia next year. But he will likely do more by policy actions that will benefit the country irrespective of whether Air Force One lands in Australia.

Obama has said he wants to be his country's first ''Pacific president'', and not just because he spent time growing up in Indonesia, Hawaii and Los Angeles. With the broader Middle East still on the front burner in Washington, Obama knows the back burner where Asia sits grows bigger and bigger, and inevitably closer to the front, as its rise goes from strength to strength.

Obama's Pacific priorities are to engage China economically, strengthen the US's key alliances in the region and be a prime mover in Asia-Pacific institution building. These have been crowded out in the past two years by the expanding struggle against Islamic extremism (Iran and Pakistan, on top of Afghanistan and Iraq) as well as dealing with the fallout from the GFC.

Next year and beyond, there may be more space for Obama to explore new opportunities in Australia's neighbourhood. He is bound to try to make common cause with Republicans on a new free trade initiative in the Asia-Pacific, the Trans-Pacific Partnership, in which Australia is his most important ally. Trade was a no-go area for the Democrats in the past two years. This is unlikely to be the case for the Republicans in the next two years, and Obama would love to go to the election in 2012 with a TPP deal close to concluded, signalling his leadership on trade and on Asia at the same time.

More generally, it would seem likely that Obama will spend more time abroad, and more time on foreign policy, in the next two years in the Oval Office. This is the natural arc of most American presidencies, and it is likely to be accentuated for Obama first by Republican control of congress, then by American economic recovery. Iran's nuclear ambitions remain a wildcard.

But Obama clearly wants to draw down the US troop presence in Afghanistan as soon as possible, which could only be good news for the Australian government. He would also use the space this creates to invest more in Asian diplomacy, something he has already signalled by committing to attend the East Asian Summit next year. Given the justly celebrated closeness between Australian and American values and interests, this would be even better news.

It is less likely that Obama will be able to make much progress on a climate change agenda he certainly shared with Rudd. But given what has happened in Australia this may not be a bad thing for the country because it will not put any new external pressure on the decision-making process at home. So don't get too carried away with today's anti-Obama hype. As Mark Twain said, news of his demise is exaggerated. Obama is going to live to fight another day, and the chances are good that he will do better, and do better by Australia, in the next few years than he has in the past two.