Obama and the inevitable cooling on warming

Obama talks a good climate change story. However, his hands are increasing tied on this issue as a result of the current financial crisis. The FT looks more closely.

I was going to write at length on this subject but the FT have fortunately beaten me to it. The environmental bits are in bold.

Ambition redefined by financial wreckage [FT]

Every now and then something unexpected transforms the political environment. For George W. Bush it was the September 11 terrorist attacks. For Barack Obama it took place even before he was sworn in. And it came from an unlikely quarter.

Last week’s report by the normally sub-radar Congressional Budget Office projecting a $1,200bn deficit for 2009 and $1,000bn fiscal deficits as far as the eye can see, sent shock waves through Washington, which look set to redefine what is possible for most of Mr Obama’s first term.

Just a few weeks earlier – and even amid the growing wreckage of the deepening US recession – Mr Obama’s transition team still felt confident enough to signal that they saw the financial meltdown as an opportunity to push through a “big bang” package of election promises.

These included a decisive move towards universal healthcare, enactment of a “cap and trade” system to tackle global warming and big new investments in education, infrastructure, scientific research, and expanding the size of the US military. Then the CBO dropped its fiscal bombshell.

Suddenly the crisis threatened to overwhelm everything. “Do not underestimate the deep psychological impact the CBO numbers have had on Washington,” says Bill Galston, a leading scholar of US politics and former Clinton White House official. “All of a sudden, it has become the gatekeeper of what is possible. If something fails the fiscal test, then it doesn’t look very possible any more.”

Even as Mr Obama was drafting and redrafting the most awaited inaugural address in a generation, the spread of red ink across Washington threatened to bring his honeymoon to a close before it had formally begun. In the absence of George W Bush, who all but relinquished his presidency many weeks ago, Mr Obama has been forced to take the heat in negotiations with Congress to push through an historic $800bn-plus fiscal stimulus to kick-start the economy.

More importantly, however, the deteriorating fiscal outlook has prompted an early and sobering reappraisal of what is now politically possible – an art in which aspiring great statesmen require no lessons. “There is one overriding measure that President Obama will apply to his first two years and that is whether he can get the economy going again,” says an adviser to the Obama transition team.

“It is ‘the economy, stupid’ squared. If he can persuade the American people this is his overriding priority and that he is making progress towards achieving it, then the American people will go along with him even if they are still hurting.”

Does this mean that Mr Obama must now shelve all the hope and promise that helped propel him to victory? Amid the relentless hammer blows of ever worsening economic news, Mr Obama’s all-star team of appointees have had little time to plan through the dynamic consequences of what is happening around them.

The internal debates over what is now do-able are nowhere near reaching conclusion. But it seems clear that some things, most notably any serious steps to tackle global warming and sharp increases in long-term public investment, will have to be postponed for at least a year and possibly much longer.

For “cap and trade”, the writing was already on the wall last October when the Senate voted heavily against the relatively modest Lieberman-Warner bill to control emissions. A few months earlier and it could well have passed.

Given the short-term contractionary effects of imposing an indirect tax on carbon, it will now almost certainly be shelved.

At a cost of at least $100bn a year, enacting universal healthcare may start to look increasingly difficult, given the rising alarm among the politically powerful centrist Democrats on Capitol Hill over the budget deficit. Even an essential move to release the second $350bn tranche of funds to revive the financial sector looked last week to be in jeopardy.

“Perhaps the best we can do in this environment is to ask Obama’s supporters to see the fiscal stimulus as a down payment on future domestic reforms and to appeal to people to understand that nothing big can get done unless the economy is thriving again,” says the adviser.

All of which puts a high and growing premium on delivering the kind of “change” that comes without a large price tag. Of these, closing Guantanamo Bay, proclaiming an end to torture and signalling a new approach to foreign policy – opening direct talks with Iran? – look more likely to top the political agenda than they were just a few weeks ago. As Mr Obama’s secretary of state, Hillary Clinton is likely to take a lot of limelight early on.

Even here, however, Mr Obama is already managing down expectations. In an interview with ABC last week, the president-elect sounded pessimistic about the possibility of closing Guantanamo Bay in the near future.

“It is more difficult than I think a lot of people realise,” he said. Yet Mr Obama will still probably telegraph his desire to close Guantanamo within his first few days in office.

Mr Obama can deliver significant changes within his first few weeks simply by issuing executive orders, as he is likely to do in a number of areas, including restoring federal stem cell research and rescinding Mr Bush’s recent flurry of “midnight” steps to dilute environmental regulations.

These have the advantage of costing nothing as well as leaving the increasingly irritable new Congress to concentrate on the overriding goal of passing a fiscal stimulus.

Even then, though, Mr Obama’s fiscal challenges will only just have begun. “His first priority is getting the fiscal stimulus passed, then there’s the budget which must be delivered to Congress by mid-February,” says Tom Gallagher, head of the Washington office of ISI, a boutique investment bank.

The new president, Mr Gallagher adds, will have to square the circle of reviving the economy while also setting down markers of how he will restore fiscal discipline in the medium term.

Not only will that threaten to swamp everything else but it could also force Mr Obama to confront the one issue that he – and virtually every other politician in Washington – has been studiously ignoring for years: the need to tackle the exploding costs of US entitlements.

These include social security, the hitherto untouchable highly charged “third rail” of US politics, and the Medicare and Medicaid programmes. Indeed, the more bleak the short-term fiscal outlook, the less Mr Obama will be able to avoid tackling rising entitlement costs, which are projected to start engulfing the budget before he has concluded a potential second term.

“Entitlement reform has gone within a few short months from being impossible to being inescapable,” says Mr Galston.

“Mr Obama will still have every opportunity to aim for his place in history. It just might not be in the way he was expecting it.”

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