Jonathan Chait

What Deal Should Obama Take?

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Ezra Klein has a nice rundown of the Obama administration's rationale for cutting a deal to reduce the deficit as part of the debt ceiling negotiations:

Here’s their thinking:

You can’t spend till you cut: The deficit is sucking the oxygen out of everything else in Washington. It isn’t just powerful as an issue in and of itself, but as a response to any significant investments the administration might propose. If you believe we need to do more on jobs, or more on anything, you need finish the deficit conversation. And as an added bonus, if you finish the deficit conversation in a way that convinces the American people you’ve made sacrifices and forced government to live within its means, you have, at least in theory, more credibility when proposing new initiatives that would expand the size of government again.

It’s your only shot at stimulus: A big deficit deal could include mild stimulative measures such as unemployment insurance and an extension of the payroll tax cut. That’s not much, but it’s better than nothing. A small deficit deal, or no deficit deal, won’t include any extensions of stimulus.

It’s a way to control the timing: If you strike a deal that lasts 10 years, you can backload the savings to protect the recovery over the next three or four years. If you don’t strike a deal, Republicans are likely to take out their frustrations on the 2012 appropriations, which is to say we won’t have much long-term deficit reduction, which most economists think we need, but we’ll have a lot of immediate austerity, which most economists think would be poison for the recovery. It’s the worst of both worlds.

Getting Obama reelected is important: The White House believes striking a major deficit deal would be good for Obama’s reelection chances. They also believe that getting Obama reelected would be good for the priorities that Democrats care about. President Mitt Romney’s spending cuts would be worse than theirs, his hostility to taxes would be more implacable than theirs, and he’d repeal or hollow out both the health-care law and financial regulation.

Deficit reduction is good economic policy, both now and later:There’s something close to a consensus view that we need deficit reduction within the next five to 10 years or the odds of the market turning on us rise to unacceptable levels. But many in the White House also believe that a credible commitment to deficit reduction in the long and medium term could help the economy in the short term. In his July 2 radio address, for instance, Obama said, “Government has to start living within its means, just like families do. We have to cut the spending we can’t afford so we can put the economy on sounder footing, and give our businesses the confidence they need to grow and create jobs.”

To put all this slightly differently, White House officials believe a big deficit reduction deal would do them enough good, both politically and economically, that it’s worth making very significant compromises on the details of that deal.

I find this mostly, but not completely, sensible. I'm pretty skeptical that Obama could pass any new government-expanding initiatives in a second term if Republicans control the House. That means he needs to help democrats take what may be their best chance in a long time to win the House in 2012, which means not giving Republicans serious cover on Medicare. That doesn't mean Obama can't offer some cuts, he just needs not to agree to take the Paul Ryan budget off the table in 2012.

It also seems clear tome that Obama's own reelection depends on being able to draw a contrast with Republicans over budget priorities. Obama's goal here seems to be a fiscal adjustment that takes the deficit off the table as an issue. But that would just lead to an election focused on the state of the economy, and that's a bad grounds for Obama to fight on. What Obama needs is to be able to contrast his proposals to reshape government -- sensible cuts plus closing tax loopholes and phasing out the Bush tax cuts on the rich -- against the Republican plan to cut taxes on the rich and phase out Medicare. Positioning himself in the center is good. Taking his own issue off the table is bad.

As for policy, which is the most important element, I'm not convinced Obama is prioritizing the right things. Eliminating wasteful government programs is a good thing. Small entitlement cuts is tolerable, given the political constraints. Where should Obama be looking to fight? Place number one is Medicaid and the domestic discretionary budget. People hate paying taxes, and they love entitlements, and defense spending has tons of clout. For that reason, Medicaid is always an inviting target, and elected officials in both parties have been finding savings in domestic discretionary spending for three decades. There's not more blood to squeeze from that rock. Indeed, projected budget levels here are already too low.

Next, revenue. Obama's main trap is that he promised not to raise any taxes on income below $250,000 a year. That realistically prohibits the government from raising sufficient revenue to fund its current commitment levels over the long term. It also bars a lot of good tax policy. The tax code is filled with inefficient subsidies that are regressive but still provide some benefit to the middle class. (Think home mortgage deduction.) Because of his 2008 campaign promise, Obama can't close those tax expenditures. He needs Republicans to give him cover. In return for that, he can offer entitlement cuts, which is something Republicans crave but can't get without Democratic cover.

What Obama can't do is surrender his leverage over the Bush tax cuts. That's a political imperative -- it sets up the priority fight he needs going into 2012 -- as well as a policy fight. There's simply no way Obama can get sufficient revenue out of this Republican House to fund the long-term budget. He needs to ability to get more when the Bush tax cuts expire. Obviously Republicans don't want to give him the chance to raise taxes twice, but they're also apparently eager to fight the 2012 election over tax cuts.

So if a deficit deal is to be had, these are the contours for Obama. Root out wasteful spending on the domestic side, with some balance between domestic and military. Cut spending on Medicare and Social Security in return for closing some tax loopholes. Leave the fate of the Bush tax cuts to the 2012 election.

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