It is difficult to imagine any other inauguration of an American President which has raised such immense hopes. John Kennedy comes to mind since his Inaugural Address was recalled round the world but more when he died than while he lived. Few recall that Kennedy was not a great success as President. Except that he initiated the civil rights legislation whose fruits 45 years on are in Obama?s inauguration.
Blame it on globalisation or his complex roots, but this time the whole world feels that they have a new President. Not only is he called Hussein but even Barack and Obama are pretty exotic as names go. But he is an American first and last and it is as an American President that he will be judged. The stock of America in the world has gyrated way up from its deep depression under Bush, but as we should now know markets always overshoot.
Obama will find it very hard to live up to the hype that he has generated. People have attributed to him qualities and ideas which are not his. He is mixed race, not black. He is from the centre right of the Democratic Party and not its left. He will be pro-Israel despite his middle name, and he will be militarily tough in Afghanistan. India has already been disturbed by his views on Kashmir and he does not speak without forethought. Any idea that he will be a Third World President or Africa?s best friend should be suspended. Obama did not just pretend to be middle of the road to get elected; he is like that politically.
But his real opportunity is in the domestic arena and not so much abroad. The economic situation is unique. It is a rare combination of a financial system breakdown and a real economy recession. In the years since 1945, we have never had the two together. Real output recessions were mild till 1971 and then there was a deep stagflation in the seventies. America had a Savings and Loans crisis and the UK had a secondary banking crisis. But neither coincided with recession in the real economy. This time we are back in the 1930s when these two coincided.
FDR was at the helm four years into the Depression and generated a lot of institutional changes in the American economy. He reformed banking legislation and encouraged trade unions. But there was no recovery of output through much of the 1930s. It was only in his third term, when war broke out, that the US economy revived. Obama?s worst fear must be that he may preside over a repeat of that experience. What Bush has tried ?bank recapitalisation and loan guarantees and insurance against debt default?has already cost a trillion dollars. There have been reflationary packages in the US and many EU countries. Interest rates have been cut near to zero. We are not repeating the mistakes of the 1930s, but there is no guarantee that any of this will work.
The longer run reason underlying the meltdown is the imbalance between savers and spenders, with the US living beyond its means for ten years. China and Japan have been over-saving. They parked their savings with the US, which in turn led to more overspending. So if Obama is to face the long term challenges, he needs to make Americans tighten their belts; if not now, pretty soon. He has to wean them off cheap gasoline and sub-prime mortgages. He will need to restructure the American economy towards more public transport and public housing, providing greener economy. He will need to dismantle uncompetitive industries like Detroit and launch new industries. He will need to do what Margaret Thatcher did as well as what Al Gore wants. The world is on the cusp of a change in the power balance. Asia will gain and the West?the US and EU?will lose. The first test will be in reshaping the Bretton Woods institutions. Those who set them up and wrote the rules are now debtors and the downtrodden of then are creditors now. The baton has to be passed on and it would require the best brains of the Obama team to manage this transition.
Such a profound change takes time and how to bring it about without exciting a backlash will be the test. In the 1930s, it brought to the fore fascist forces; Obama?s constituency, especially the poor or even middle class black Americans, are looking for an improvement in their life chances and more resources. Obama needs to retrench and redistribute.
Martin Luther King?s dream is a challenge to Barack Obama. His election is a first installment on its fulfillment. Will the balance be paid or will it be a sub-prime mortgage story all over again?
?The author is a prominent economist and Labour peer