Let's Not Make a Deal
President Obama gave a pretty good speech on Friday about the economy and the budget. In his most quoted line, the president said, "I am not going to ask students and seniors and middle-class families to pay down the entire deficit while people like me, making over $250,000, aren't asked to pay a dime more in taxes."
So far, so good -- Obama is not willing to accept the Republican demand that all of the deficit cutting come out of spending. And House Speaker John Boehner appeared to give ground, conceding that some "revenue" increase would be necessary, though Boehner still deludes himself in thinking, as Mitt Romney did, that this can somehow be done by "closing loopholes." (The Congressional Budget Office has shot down that balloon. There aren't enough loopholes.)
Obama, evidently, is willing to play hardball to compel the Republicans to allow tax rates on the top two percent to revert to something like the Clinton era top rate of 39.5 percent but spare the bottom 98 percent any tax increases. As Obama put it, "On Tuesday night, we found out that the majority of Americans agree with my approach."
But that was about the only good thing in Obama's speech, or his posture towards the Republicans and the budget. Obama still believes that the economy needs budget cuts of $4 trillion over the next decade.
It doesn't. If anything, it needs spending increases.
We need more public spending both because the private economy is weak and because Hurricane Sandy just revealed the need for hundreds of billions of more outlay to protect our coastal communities from ocean waters that will continue rising. We will need hundreds of billions beyond that invested in renewable energy to keep global climate change from worsening.
But if Obama and the Republicans strike a deal to cut the budget by $4 trillion over a decade, there will not be a penny available for new infrastructure spending. And budget cuts of that magnitude will slow down the recovery.
We have heard a great deal about a "fiscal cliff."
The cliff is partly made up of mandatory budget cuts that take effect in January dictated by the House Republicans back in 2011 as their price for extending the debt ceiling. In addition, the cliff includes automatic tax increases scheduled to kick in as the Bush tax cuts sunset, as well as hikes in payroll taxes that take effect as the temporary two percentage point reduction expires.
All of these automatic budget cuts add up to $560 billion in the next fiscal year. According to the Congressional Budget Office, cuts of that magnitude in a still-fragile recovery would push the economy back into recession. Everyone seems to agree that this cliff is to be avoided.
But the president's own proposed budget cuts of $4 trillion over ten years average out to $400 billion a year. In other words, the Obama Cliff is almost as large as the fiscal cliff that everyone dreads. Whatever the precise mix of tax increases and spending cuts, $4 trillion is too big a cliff.
And while Obama's supposed new toughness on tax policy has gotten most of the attention, he seems poised to give away the store on spending cuts. Recently, Bob Woodward was given a leaked copy of the Administration's offer in the proposed budget deal of 2011 that fell apart because House Speaker John Boehner was unable to deliver his Republican caucus to support any revenue increases.
In that aborted deal, Obama was prepared to cut Social Security and increase the Medicare eligibility age. White House leaks have suggested that both items will be on the table this time. That's bad policy, and worse politics. The clearest principled differences that distinguish Democrats from Republicans is that Democrats are staunch defenders of Social Security and Medicare, while Republicans are eager to cut, privatize, and voucherize.
So the good news is that the Democrats won the election and President Obama's spine has been stiffened on the subject of taxes. The bad news is that the skids are greased for a budget deal that cuts more than necessary, risks putting the economy back into recession, and blurs differences between the parties on critical issues like Social Security and Medicare.
If Obama will just realize it, he holds most of the cards. He prevailed in the election. Most voters agree that the rich should pay higher taxes. Most don't want cuts in Medicare and Social Security.
Tactically, if he just waits and lets the automatic tax increases take effect, public pressure will mount on the Republicans to agree to tax hikes for the wealthiest so that the bottom 98 percent can get tax relief. If Obama just lets the automatic "sequester" take effect, there will be $600 billion in military cuts, and pressure will mount on the Republicans not to allow the cuts to start biting.
The stock market has been swooning since the election for fear that Republicans and Democrats will not agree to a deal in time. Well, let it. Obama should wait for Republicans to come to him.
But by all appearances, the eager-beaver bipartisan Obama that we saw in early 2009, (until he got his clock cleaned) is back. Despite his recent victory, if he is too eager to make a deal, he --and we -- will get rolled.
Last time, Boehner's Republicans saved Obama from himself. This time, it will be up to his fellow Democrats.
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