The Economist
Obama's counter-punch
By G.I. / Washington
BARACK OBAMA'S strategy on the long-term deficit has been, for the most part, to talk tough but waffle on the specifics in the hope that a better economic and political backdrop will present itself. Unfortunately for him, that approach allowed Republicans to lay down the first marker last week with a budget plan that slashes the deficit with savage cuts to entitlements and no increase in taxes.
Mr Obama has quickly responded, with a plan announced in a speech today that also promises hefty cuts to the deficit, but relying more heavily on increased taxes while allowing only modest tweaks to entitlements.
Mr Obama’s plan would cut deficits by $4 trillion over the next 12 years, considerably more than the $1.1 trillion over ten years his budget promised. That is still less than what's on offer from Paul Ryan, the Republican budget committee chairman, who promised to cut the deficit by $4.4 trillion more over ten years than Mr Obama’s budget. A senior administration official says under Mr Obama’s plan the budget deficit would fall as low as 2% of GDP in the coming decade, lower than the 3% his February budget aimed for but higher than Mr Ryan’s 1.6%.
Significantly, he endorsed the aim of the Simpson-Bowles debt commission that deficit reduction should come via two dollars of spending cuts for every dollar of increased tax. He also embraced the commission’s steep cuts to discretionary spending outside defence (discretionary spending must be authorised each year) of $770 billion by 2023.
Mr Obama proposed the creation of “debt failsafe” triggers, which are also at the centre of a plan under consideration by a bipartisan group of senators called the Gang of Six. In the event the public debt is not declining as a share of GDP from 2014 onwards as planned, the triggers would impose across-the-board cuts to spending and increases in taxes via the closing of loopholes. However, Social Security, Medicare, and low-income programmes (such as Medicaid and food stamps) would be spared.
On taxes, Mr Obama endorsed the debt commission’s call for a tax reform that lowers rates and broadens the base by enough to, on net, raise additional tax revenue. But while the commission recommended lowering the top rate from its current 35% to 28% or lower, Mr Obama insists that the top rate on the wealthy be left alone. Whether that means it must therefore return to 39% in 2013 as now scheduled, Mr Obama’s stated preference, or whether it should be allowed to remain at 35% is unclear.
While Mr Ryan aimed for a simple and, to his critics, savage conversion of Medicaid to block grants and Medicare to vouchers, Mr Obama proposed a grab bag of measures with ambitious goals but of murky efficacy. The most important of these would be to instruct the Independent Payment Advisory Board created under his health care reform to devise solutions for holding growth in Medicare costs to the growth rate of per capita GDP plus 0.5%, instead of 1%. But it does not significantly expand the tools IPAB has to do this with, such as allowing it to alter benefits or eligibility or to touch hospital payments before 2020. For Medicaid, he suggested a simplification of the formula for sharing costs with the states and heightened efforts to cut waste and fraud.
Mr Obama’s plan has as many question marks over it as Mr Ryan’s. Triggers have a checkered history in American budget politics. They are designed to force congressmen to take painful steps to avoid more indiscriminate, mechanical actions. But when such actions are hanging over them, Congress and presidents have often decided to sidestep the triggers. The Gramm-Rudman-Hollings Act did not succeed in its stated aim of forcing down deficits. Medicare has had several triggers which have been routinely ignored or overridden. In an interview with the Wall Street Journal, Peter Orszag, Mr Obama’s former budget director, disparaged any deficit-reduction action that premises future legislative action on a failsafe mechanism. Such a mechanism could be “extraordinarily easy to waive. Given how polarised the political system is, anything that requires future legislative action doesn’t have a lot of teeth to it.”
Mr Obama also does not seem to have a cogent plan to control entitlements. Mr Ryan’s approach was to cap federal health-care costs and shift the burden of health-care inflation to the states and individuals. Mr Obama’s is to rely on a handful of largely untried mechanisms to cap health-care inflation without targeting the overall federal health-care bill. Even the Simpson-Bowles commission is tougher. In truth, none of these three competing plans has a satisfactory solution.
More perplexing is the refusal of both Mr Obama and Mr Ryan to put forward a plan on Social Security, whose problems are more manageable and for which Simpson-Bowles advanced a balanced solution.
In truth, Mr Obama’s speech today was less a blueprint of how to save America from fiscal ruin than a means to establish a stronger negotiating position. Until last week, Simpson-Bowles had represented the centre of the fiscal debate; it was the basis for the Gang of Six’s deliberations. Mr Ryan’s plan threatened to move the centre of debate significantly to the right. By staking out ground to the left of Simpson-Bowles, Mr Obama may succeed in moving the debate back to the centre.
Mr Obama has now asked Democratic and Republican leaders to engage in bipartisan negotiations starting in May. Presumably, this would be after, or a condition of, raising the debt ceiling. Whether Republicans can be brought along remains to be seen. After extracting significant concessions from Democrats over this year’s budget and grabbing the pole position with Mr Ryan’s plan, they may feel the wind at their back.
http://www.economist.com/blogs/freeexchange/2011/04/americas_budget_fight
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