WASHINGTON — In his State of the Union address this week, U.S. President Barack Obama got a second chance to make a first impression.  As part of a concerted strategy to reposition himself after his party’s electoral setbacks in November, the president’s remarks marked another step toward a strategic makeover with the American public.

Prior to the address, aides to the president promised a speech that would be light on specifics and substance.  Robert Gibbs, the White House spokesman, had said that no one should expect a laundry list of priorities or a spreadsheet of initiatives.  Instead, he said, the remarks would reflect an uplifting tenor, outline broad themes of engagement with the new Congress and the American public, and establish a new tone of “Beltway civility.”  The president delivered on many of these expectations. His speech was a confidence-building overture designed to prepare the collective American psyche for the economic challenges of a multi-polar world. He reminded his audience that the United States’ economy was still the most prosperous, that its workers were productive, and its companies still successful and entrepreneurial.

By and large, Obama’s effort to use American exceptionalism as a means of inspiring and unifying his audience was a tactic that worked, with few divisive issues eliciting partisan applause. At the same time, he cautioned that the rules of economic engagement had changed, and that the United States must upgrade its level of play by encouraging American innovation, rebuilding its aging infrastructure, and winning the race to educate its youth. Comparing the present moment to the Soviet launch of the Sputnik satellite, he urged Americans to wake up from their slumber, and make much-needed sacrifices—including federal government reforms, spending cuts, and lower deficits—to ensure the prosperity and security of future generations.

While he declared that the United States’ leadership and standing were being renewed, the reality is a bit more complicated.  The strength of national leaders begins at home, and the president’s ability to exercise leadership on the world stage will depend on his ability to make difficult domestic compromises.  In the next six months alone, he will face important decisions on trade, spending, and budget enforcement.. Since U.S. leadership is not solely a function of executive action, any major initiative will require the support and agreement of Congress. For this reason, international observers should follow interpretations of the president’s address and track the evolving Republican reaction closely.

In the official Republican response, Wisconsin Congressman Paul Ryan offered a willingness to work across the aisle, but reinforced fundamental Republican principles. The Republican path to prosperity lies not with incremental spending (above current levels) in education, infrastructure, and innovation, but through reducing the size of government and unshackling the American economy, thus allowing private sector investment to generate economic growth.  Like the president’s remarks, the Republican response was light on detail on how to bring about spending restraint. Ryan’s address was overshadowed in part by a second response by Republican Congresswoman Michele Bachmann, who was representing a diverse collection of “Tea Party” coalition groups. Her addition to the national conversation symbolized the political challenge Republican leaders face in their attempts at arriving at a compromise with the president.

At this point in his tenure, it is clear that Obama is arriving at a fork in the road.  One path is a minimalist engagement strategy with Congress anchored in partisan confrontation, a strategy designed to maximize his political base and engage with Republican legislators only when necessary.  The other path is a strategy of relying on Republicans as a key part of a ruling majority across several issues through two chambers of the Congress.

Obama’s recent announcements and compromises lead some to believe he has chosen the latter, and some elements of the State of the Union point to that.  In December, in exchange for other priorities and to the irritation of many Democrats, Obama made a significant compromise with Republicans over an extension of the 2001 and 2003 Bush-era tax cuts.  Other indicators include the hiring of former Bill Clinton White House aides, the conclusion of negotiations over the U.S.-South Korea Free Trade Agreement, announcements of a new regulatory review process, and a new advisory committee on job creation and American competiveness.

Others think the jury is still out.  In their minds, only the knowledge of Obama’s negotiating positions on specific issues, a verification of his willingness to compromise on legislative detail, and an expenditure of political capital in issue coalitions involving Republicans would equate to a truly new governing strategy.  Evidence of this strategy would include passage of trade agreements with Panama and Colombia as well as medical malpractice reform.

Over the next year, both an expiring continuing resolution funding the federal government in 2011 and a federal debt limit increase will trigger a clash of ideas on the size and role of government in American domestic policy, with implications for the United States’ ability to conduct international economic diplomacy. The reconciliation of contrasting visions will only happen through bipartisan, bicameral agreement with the President.  It won’t be elegant, and it won’t be pretty. But the tone and outcome of the debt limit increase debate will start to definitively answer the question of which path Obama has chosen.

Sean Mulvaney is Director of the German Marshall Fund’s Economic Policy Program in Washington DC.

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WASHINGTON — Next Tuesday’s U.S. midterm election is shaping into a debate about the role of government.  Age-old differences on the role of the market and the size of government are being used to score political points.  Candidates, most of them Republican, are making frequent references to “Europe” as  verbal shorthand for the heavy hand of the state. Some seem to be running against Europe rather than against their opponents.  But some Democrats are caught in the debate, too. They are at odds with their own president.

There is nothing trivial, nothing superficial about the topics of this election campaign. Serious philosophical differences about the degree of spending and taxation underlie campaign talking points and battles over the airwaves.  U.S. government spending as a share of GDP is now up to as much as 25 percent. Although the dollar costs of the military deployments in Afghanistan and Iraq are included in that figure, it is the government spending on the stimulus program, the bank bail-out, and healthcare reform that are drawing much of the ire.  Candidates of both parties are seeking to capitalize on voter sentiment.  NBC White House Correspondent Chuck Todd says that the role of government represents the bright line of distinction and debate between parties.

Europe is used to communicate campaign differentiation. Paul Ryan, Republican member of the House Budget Committee, and Arthur Brooks, President of the American Enterprise Institute, wrote in a Wall Street Journal op-ed: “Do we still want our traditional American free enterprise system, or do we prefer a European-style social democracy? This is a choice between free markets and managed capitalism; between limited government and an ever-expanding state; between rewarding entrepreneurs and equalizing economic rewards.” Mark Kirk, the Republican Senate candidate in Illinois, claims in a TV debate that “if the United States launches on a plan, as my opponent’s policies would do, to be a very high-tax, high-spending, high-regulation economy like many European economies, then we inevitably have the slow growth and high unemployment of those economies. That’s not the American way.” Joe Manchin, a Democratic Senate candidate in West Virginia, boasts in a campaign ad: “I’ll take on Washington and this administration to get the federal government off of our back and out of our pockets.”  The ad ends with him taking a rifle and shooting a page of the President’s climate change bill.

In its recent Transatlantic Trends survey, the German Marshall Fund asked respondents on both sides of the Atlantic about the free-market economy.  Significant majorities signaled support of capitalism, with 90 percent of Americans and 72 percent of Europeans saying they were better off with free markets.  When asked if government has an essential role to play in regulating the market, 78 percent of Europeans answered affirmatively while 69 percent of Americans responded positively.  At first glance, this result looks like a transatlantic rapprochement of opinion.  However, it is probably better read to mean that there is still a significant difference of opinion with Europeans believing more strongly in an essential role for the state than Americans. In fact, next week’s election results may show that Americans have identified a tipping point when it comes to the degree to which they tolerate or favor government intervention.  According to a poll published by NBC News and The Wall Street Journal in October, 50 percent of Americans believe that their government is doing too much. When President Barack Obama took office in February, 2009, that number was 10 percentage points lower.   Political winds have changed.  President Obama is now facing a headwind.

Should Europe be worried about being the bogeyman? Does the disagreement about the proper role of government portend acrimony in the transatlantic relationship?  Maybe not. Alternatively, the midterm election might create a greater sense of shared destiny.  Certainly, Europeans will detect that the political will for medium- and long-term fiscal consolidation is increasing all across the United States.  This convergence will be helpful in the fiscal policy process in which the transatlantic partners will need to hit the “reset” button when it comes to the role of government.   Across advanced economies, public indebtedness as a percentage of GDP is projected to increase to 110 percent by 2015.   Some predict that the U.S. percentage might be as much as 80 percent or higher by 2020.

After the election, the challenge will be for Republicans and Democrats to transition from the rocky, aspiration-filled campaign to the high-speed, broadband, reality TV process of domestic economic governance.   Unlike in the U.K., where the coalition’s budget blueprint does not require another vote in parliament, America’s constitutional process promises to deliver much rancor and entertainment.  In the near term, it is unlikely that either House or Senate will be able to reconcile differences with each other – let alone with the other end of Pennsylvania Avenue.  Therefore, it is unclear if the American economic governance process will fare any better than the one in Europe.

Europeans should recall prior American political party debates about the role of government.  In 1995, Republican Newt Gingrich confronted President Bill Clinton with a budget stalemate and refused to provide the resources necessary to keep government going.  So, while it might seem as if many American candidates are running against Europe during this electoral campaign, Europe and America will not be that far apart after the election.  At home and abroad, Americans and Europeans will be trying to improve economic governance.  Transatlantic destinies are intertwined; we should try to control our fate.

Sean Mulvaney directs the Economic Policy Program at the German Marshall Fund.

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