President Obama's Real Proposal (And Why It's Risky)
Robert Reich
Robert Reich's Blog
April 14, 2011
http://robertreich.org/post/4615857415

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
kowtowing 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.

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