Obama Leans Right on Deficits

Posted by

Merrill Goozner

First published 4/13/11 on The Fiscal Times

In a belated embrace of many of his bi-partisan deficit commission’s proposals, President Obama shifted dramatically to the right on Wednesday by promising to cut projected budget deficits by $4 trillion over the next 12 years through spending cuts that included his first call to trim military spending and a tax increase that would fall largely on the well-off.

After castigating the Republican Party plan championed last week by House Budget Committee chairman Paul Ryan, which focused all its cuts on health care for the poor and non-defense government programs and offered new tax cuts for top earners, the president sought to establish a new center in American politics by calling for “shared sacrifice.”

Their “deeply pessimistic” vision “is less about closing the deficit than about changing the basic social contract in America,” the president said.

His vision was a budget where “we take responsibility for ourselves, but we also take responsibility for each other.”

Obama’s plan calls for achieving $3 trillion in cuts over the 10 years and $4 trillion in cuts over the next dozen years through a mix of domestic and military budget cuts, new reductions in Medicare, an end to the Bush-era tax breaks for those earning over $250,000 a year, and a curb on giveaways in the tax code while lowering rates for corporations. “I’m proposing a more balanced approach,” Obama said during a 40-minute speech at George Washington University. “It’s an approach that puts every kind of spending on the table.” He also vowed to never sign a bill that extended the high-end tax cut.

The bottom line: The president’s plan over the next decade would cut $2 in spending for every dollar raised in taxes. If that sounds familiar, it’s because it is the same formula laid out last December by the National Commission on Fiscal Responsibility and Reform, the president’s fiscal commission that was headed by Democrat Erskine Bowles and former Republican senator Alan Simpson, who sat in the audience during the speech.

Obama and cabinet officials revealed the details of the plan to Democratic and Republican congressional leaders in a morning briefing. The immediate reaction from Republicans emerging from the meeting suggested the two sides remain far apart, especially on tax issues.

“We can’t tax the very people that we expect to reinvent our economy and to create jobs,” House Speaker John Boehner, R-Ohio,  said. “Washington has a spending problem, not a revenue problem.”

The dueling proposals laid out by the two parties in the past week mark the starting point in what is certain to be contentious negotiations leading up to the next showdown  in Washington’s ongoing political confrontation over government fiscal policy: raising the debt ceiling. The government must raise the $14.3 trillion cap sometime in the next several months or the U.S. will default on its debts, an outcome that Federal Reserve Board chairman Benjamin Bernanke and Treasury Secretary Timothy Geithner have said would have catastrophic economic consequences across the globe. Just last Friday, the White House and Congress narrowly averted a government shutdown by agreeing to $38 billion of domestic cuts in this year’s budget.

The president’s rightward shift on budget issues reflects the extent to which popular anger and disgust over the bailouts and stimulus program needed to end the Great Recession have transformed American politics. Last November’s election – in which Republicans seized control of the House by pledging to cut spending –  greatly diminished the government’s commitment to helping millions of unemployed Americans. The emerging consensus among the nation’s policy making elite is that steering the nation toward budgetary balance is crucial to restoring long-term prosperity.

Obama embraced that vision in his speech, and sharply rebuked liberal Democrats who call for more spending to help the unemployed. “Just doing nothing on the deficit is not an option,” he said. “Our debt has grown so large that we could do real damage to the economy if we don’t start doing something.”

The president stressed the need to perform cuts with  a scalpel, not a machete. Yet he called for an additional $770 million from domestic programs over the next decade on top of the cuts included in the 2011 budget cutting deal reached last week with congressional Republicans. That would bring domestic spending under the plan “to levels consistent with the Fiscal Commission.” The president vowed to continue fighting for investments in education, infrastructure and research that will help Americans remain globally competitive.

Security spending, which is now 20 percent higher in inflation-adjusted dollars than it was at the peak of the Reagan-era build-up, would suffer its first cuts in over a decade. The president promised to cut military spending by $400 billion over the next ten years by holding increases “below inflation,” but left specific decisions until senior military officials completed a review and made recommendations later this year.

Obama repeatedly lambasted the Republicans’ plan for Medicare, which would cap government payments for everyone younger than 55 and require future seniors to pick up about two-thirds of their health care costs, according to the Congressional Budget Office analysis. “I will not allow Medicare to become a voucher program that leaves seniors at the mercy of the insurance industry with a shrinking benefit that leaves them at the mercy of rising costs,” the president said.

Yet his own proposal, which would reduce Medicare spending by more than $200 million over the next decade could leave the president open to political attack, just as the Medicare cost reductions in the Affordable Care Act were widely attacked by Republicans as “cuts.” The president’s plan calls for limiting the growth Medicare spending per beneficiary to a half percentage point greater than the rate of growth in the domestic economy. The health care reform law allowed for greater increases – GDP plus one percentage point.

Moreover, the president called for an “automatic sequester” if Congress didn’t enact the spending cuts recommended by the Independent Payments Advisory Board made up of health care stakeholders, including consumers.

In fact, the president’s overall plan called for creating a fail-safe mechanism should the deficit reductions not reach the debt-to-GDP levels called for in the plan starting in 2014. He said the trigger should be similar to the ones included in deficit reduction packages reached during the Reagan, George H.W. Bush and Clinton administrations, which did not apply to Social Security, low-income programs or Medicare.

Like Ryan, the president made no specific proposals on Social Security, which he said was not a cause of the current deficits. “We should work now to strengthen the program,” he said, “but we have to do it without putting current retirees at risk . . . or without subjecting Social Security to the whim of the stock market.”

Merrill Goozner is an independent health care journalist who maintains a blog at Gooz News.

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