Politics & Law

President Obama’s real proposal (and why it’s risky)

Robert Reich

Paul Ryan says his budget plan will cut $4.4 trillion over ten years. The President says his new plan will cut $4 trillion over twelve years.

Let’s get real. Ten or twelve-year budgets are baloney. It’s hard enough to forecast budgets a year or two into the future. Between now and 2022 or 2024 the economy will probably have gone through a recovery (I’ll explain later why I fear it will be anemic at best) and another downturn. America will also have been through a bunch of elections – at least five congressional and three presidential.

The practical question is how to get out of the ongoing gravitational pull of this awful recession without cow-towing to extremists on the right who think the U.S. government is their mortal enemy. For President Obama, it’s also about how to get reelected.

(Yes, we also have to send a clear signal to global lenders that America is serious about reducing its long-term budget deficit. But in truth, global lenders don’t need much reassurance. Bond market yields in the U.S. are now lower than they were when the government was running a budget surplus ten years ago.)

Seen in this light, Obama’s plan isn’t really a budget proposal. It’s a process proposal.

Stage 1, starting now and ending in June, requires that Republican and Democratic leaders devise a budget for 2012. Apparently they’ve already agreed to try.

That budget would also include a “framework” for deficit reduction over the longer haul. But that framework will be mainly for show. It will give House Republicans enough cover to vote to raise the ceiling on the amount the U.S. government can borrow. (The vote has to occur before the Treasury runs out of accounting maneuvers, in early July.)

And because the framework’s details will be filled in after Election Day, it will give Obama wiggle room before the election to campaign on his priorities. If he wins big – and if Democrats retake the House – its details will look completely different from what they’d look like in the alternative.

Stage 2 occurs in 2014 – fully two years after Election Day. Then, according to Obama’s proposal, if the ratio of the nation’s deficit to the GDP hasn’t fallen to 2.5 percent (it’s now over 10 percent), automatic across-the-board cuts will go into effect to get it there.

Importantly, these cuts wouldn’t apply to Social Security and Medicare, or to Medicaid and other programs designed for the poor. And they wouldn’t be limited to spending. They’d also apply to tax expenditures – that is, to tax deductions and tax credits.

The betting in the White House is that by 2014 the recovery will be in full force, and the economy will have grown so much that the ratio of deficit to the GDP will be in the range of 3 to 5 percent anyway. That means any across-the-board cuts wouldn’t have to be very deep.

The White House is also betting that a strong recovery will take the sting out of any recommendations to slow the growth of Medicare spending emanating from the Medicare board set up under the new health care law (officially known as the Independent Payment Advisory Board.) Under Obama’s new plan, such proposals will be necessary if Medicare spending grows .5 percent faster than growth of the economy (under the law, it’s 1 percent faster).

All told, it’s a clever strategy. It might well avoid a dangerous game of chicken over raising the debt ceiling. It still allows the President to charge Paul Ryan and other Republicans who join him as ending Medicare as we know it – which they are, in fact, proposing to do. (This may help Democrats win back seniors, whose support for Democratic house candidates dropped form 49% in 2006 to 38% in 2010.) And it gives the President lots of room to maneuver between now and Election Day, and between Election Day and 2014.

But there’s one big weakness. The whole thing depends on the recovery picking up steam. If the economy doesn’t, the process could backfire — leading to indiscriminate budget cuts later on, as well as big cuts in Medicare. Indeed, if the recovery fails to fire up, Obama’s own chance of reelection is dimmed considerably, as are the odds of a Democratic House after 2012.

Yet what are the chances of a booming recovery? The economy is now growing at an annualized rate of only 1.5 percent. That’s pitiful. It’s not nearly enough to bring down the rate of unemployment, or remove the danger of a double dip. Real wages continue to drop. Housing prices continue to drop. Food and gas prices are rising. Consumer confidence is still in the basement.

By focusing the public’s attention on the budget deficit, the President is still playing on the Republican’s field. By advancing his own “twelve year plan” for reducing it – without talking about the economy’s underlying problem – he appears to validate their big lie that reducing the deficit is the key to future prosperity.

The underlying problem isn’t the budget deficit. It’s that so much income and wealth are going to the top that most Americans don’t have the purchasing power to sustain a strong recovery.

Until steps are taken to alter this fundamental imbalance — for example, exempting the first $20K of income from payroll taxes while lifting the cap on income subject to payroll taxes, raising income and capital gains taxes on millionaires and using the revenues to expand the Earned Income Tax Credit up to incomes of $50,000, strengthening labor unions, and so on — a strong recovery may not be possible.

Cross-posted from Robert Reich’s blog.

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Comments to "President Obama’s real proposal (and why it’s risky)":
    • James R

      “The practical question is how to get out of the ongoing gravitational pull of this awful recession without cow-towing to extremists on the right who think the U.S. government is their mortal enemy. For President Obama, it’s also about how to get reelected.”

      The US simply doesn’t create enough wealth anymore to sustain current standards of living for its growing, increasingly unskilled population. 50% of households don’t pay any federal taxes, yet Obama’s vision is to provide then cradle to grave medical care and social services. This isn’t even a zero sum game anymore. Even if the US comes out of the recession, it won’t grow fast enough to maintain Democrat’s runaway social spending policies.

      If something cannot go on forever, it will stop. America is through as a prosperous country and a world power.

      [Report abuse]

    • Dave Callaghan

      Isn’t a long term plan or goal the best strategy when you cannot predict events in the short term? To me, it’s like setting your sights on a certain direction towards the horizon. You cannot see what fortunes or perils lie in that path but that is where you are headed. With this long term direction driving our decision making we make the necessary adjustments as we proceed. If we don’t do this, big problems can never be solved and our fate is truly random.

      [Report abuse]

    • Burt

      Thanks for pointing out that the real problem is not the deficit, but growing inequality.

      An IMF report makes the same case:

      We found that high “growth spells” were much more likely to end in countries with less equal income distributions. The effect is large. . . . Inequality seemed to make a big difference almost no matter what other variables were in the model or exactly how we defined a “growth spell”. Inequality is of course not the only thing that matters but, from our analysis, it clearly belongs in the “pantheon” of well-established growth factors such as the quality of political institutions or trade openness.

      There is some movement in the right direction. See the Patriotic Millionaires” asking for higher taxes on millionaires.

      And Rep. Jan Schakowsky’s bill to raise taxes on millionaires and billionaires.

      [Report abuse]

    • Burt

      Thanks for pointing out that the real problem is not the deficit, but growing inequality.

      An IMF report makes the same case:

      We found that high “growth spells” were much more likely to end in countries with less equal income distributions. The effect is large. . . . Inequality seemed to make a big difference almost no matter what other variables were in the model or exactly how we defined a “growth spell”. Inequality is of course not the only thing that matters but, from our analysis, it clearly belongs in the “pantheon” of well-established growth factors such as the quality of political institutions or trade openness.

      [Report abuse]

    • JohnH

      The unmentionable problem is that defense spending has skyrocketed over the last decade–over 9% per year. Obama’s budgets consistently show defense spending tailing off in a couple years. But then–magically–defense expenditures increase when it comes time to pass budgets for those years.

      The same has been happening in the UK, where Cameron’s draconian cuts were accompanied by increases in military spending.

      If you ask me, the real path to budget sanity is the roll back defense spending to FY2000 levels. Savings? $4.5 Trillion. Rescinding Bush tax cuts for the wealthy generate a couple $Trillion more.

      Instead of lavishing money on the military and on the wealthy, which have poor multiplier effects, it’s time to take those funds and put policies in place that will actually stimulate growth.

      Draining money from the military and from the wealthy is the only way to restore growth and eventually reduce budget deficits.

      [Report abuse]

    • carlyle 145

      What explains the ability of the rest of the industrialized world to provide the equivilent of Medicare to all of their citizens while the world’s greatest Democracy can’t handle it for people over 65?
      Is it possible that some Americans think that making public servants poorer will result in increased prosperity?
      Is it possible that the “tea baggers” do not know that taking one hundred billion out of the budget added to the two hundred billion in cuts needed by states and counties and municipalities to balance their budgets will drive us back to recession. The opposite of stimulate is depress.
      Recovery of the economy depends on the recovery of demand that depends on the economic recovery of working Americans.
      Failure to increase the income of middle America will keep this recession going forever. More jobs is not the answer. Better paying jobs and a progressive tax policy is the only path upward.
      It is time for a New Deal.

      [Report abuse]

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