President Obama’s first State of the Union address reflected dramatic changes in the political environment and public perceptions of his Administration’s effectiveness. The election of a republican to fill the Senate seat of the late Ted Kennedy raised new questions regarding whether a major healthcare bill could pass Congress, and if so when and in what form. Passing a comprehensive healthcare bill had been the major focus of both the President and Democratic Congressional leaders. With the healthcare initiative almost certainly delayed at the least, the President used the State of the Union opportunity to pivot his policy priority to jobs.

The change in focus was understandable. Increasing unemployment, now over 10%, and the slow pace of economic recovery have eclipsed healthcare as a policy priority in public opinion surveys. The complexity of the healthcare package alternatives made it hard for many voters to judge whether or not they constituted a significant improvement over the status quo, and opponents spent large sums on negative and often misleading advertising to convince them that it wasn’t.

President Obama jumped into the issue early, saying “jobs must be our number-one focus in 2010, and that's why I'm calling for a new jobs bill tonight.” The core of the proposal is to help U.S. small businesses expand since they are usually the first to start adding jobs in past recoveries. The President proposes to take $30 billion of the money Wall Street banks have repaid and use it to help community banks give small businesses the credit they need to stay afloat. Small business tax credits for firms who hire new workers or raise wages would also be part of the package, as would the elimination of all capital gains taxes on small business investment, and tax incentives for all businesses to invest in new plants and equipment. All of these proposals make sense to us.

The Senate Banking Committee will hopefully soon begin mark-up of financial regulatory reform legislation. At issue is whether or not it will include a strong, independent Consumer Financial Protection Agency (CFPA) similar to the House version. It is also unclear whether it will include a requirement that mortgage brokers and bankers will in the future owe a fiduciary duty to consumers. AHGA believes that this provision needs to be expanded to include real estate brokers and strengthened as well. Real estate agents and brokers already owe a fiduciary duty to their clients, and corporations owe a fiduciary duty to clients. Both fiduciary duties were violated by real estate agents who pushed naïve home buyers into buying homes they could not afford, and by mortgage bankers who abandoned sound underwriting practices and lent their stockholders’ money to them anyway. A fiduciary duty provision should have real teeth that would include substantial fines and potentially the loss of violator’s license to practice.

A caveat is that in our increasingly integrated world economy, regulation of financial services should be coordinated internationally to provide consistency. World leaders and financial services CEOs are meeting at the World Economic Forum in Davos, Switzerland this week to discuss alternative regulatory regimes. There is almost universal agreement among world political leaders in attendance that the root cause of a near global economic crash was irresponsible risk taking by bankers all over the world. Some bankers there agree. “The banks who stayed strong are angry at the banks who had poor management,” said Robert Diamond, President of Barclays, a large British bank. Just as happened in the last 100 international financial crises, financial services firms have managed to socialize the losses by passing them on to taxpayers while retaining their profits, according to the World Bank. This moral hazard must be stopped through unified international regulation, and financial services sector leaders must relearn that the purpose for their sectors’ existence is to efficiently provide credit for the real world.

The President also called for fresh approaches to other economic challenges that should appeal to many Republicans. Among them are opening new offshore areas for oil and gas development and building new nuclear energy generation facilities in order to keep energy costs low. He also proposed to freeze government spending in several areas for three years.  Spending related to our national security, Medicare, Medicaid, and Social Security would not be affected but all other discretionary government programs would be frozen. The President has already identified $20 billion in savings for next year and noted that, in the interest of reducing the deficit, we won’t be able to afford to extend expiring tax cuts for oil companies, investment fund managers, and for those making over $250,000 a year. 

While AHGA prefers budget austerity to tax increases, the growing deficit calls for additional steps beyond budget freezes. The expiring tax rate on high income individuals will only affect about 2% of taxpayers. A taxpayer in the top 1% of income today ($410,000) pays an effective income tax rate of 22.5%. A return to previous individual income tax rates will cause only a very small increase in their taxes, and the tax on high income earners in the U.S. will still be substantially less than those of their counterparts in other developed countries. The current 22.5% tax rate on the wealthy reflects a dramatic drop in taxes on higher earners through a series of tax cuts over recent decades, and this has been good for them and the economy. Their tax burden has now been reduced to reasonable levels, and a minor tax increase should not be too high a burden on them today. President Obama also announced that he will appoint a bipartisan fiscal commission to produce a specific set of long term budget reduction solutions. It will be modeled on a proposal by Republican Judd Gregg and Democrat Kent Conrad. All these steps will help reduce the deficit. They deserve the support of American homeowners, and many should attract republican support as well.