In late February, a week after signing the landmark $787 billion economic recovery bill into law, President Obama tried to change the focus of debate in Washington by shifting attention from the short-term necessity of reviving the economy to the long-term challenge of reducing soaring budget deficits.
On Monday, February 23, he hosted a “fiscal summit” with congressional leaders, other lawmakers and outside experts to highlight the problem. A day later, he spoke to a joint session of Congress and outlined his plans to begin addressing it. Two days after that, he issued a 134page budget blueprint.
Entitled “A New Era of Responsibility,” the blueprint proclaimed a sharp reversal from Bush-era recklessness. “[W]e must,” Obama wrote, “begin the process of making the tough choices necessary to restore fiscal discipline, cut the deficit in half by the end of my first term in office, and put our nation on sound fiscal footing.”
But, Obama would impose the “responsibility” of higher taxes only on those at the very top, making good on a key campaign pledge – that he would not raise taxes on anyone making up to $250,000 a year.
And therein lies the great contradiction of “Obamanomics” with which experts in the White House, Congress and the private sector are now grappling. This campaign pledge is the “800pound gorilla” of deficit cutting – that is, a huge obstacle to any serious effort to restore fiscal sanity in Washington.
For serious deficit cutting, tax increases on the well-to-do are but a first step. Obama’s plan to restore the higher Clinton-era tax rates and curtail write-offs for those making over $250,000 would raise $600 billion over 10 years – hardly adequate to address deficits that will likely average about $1 trillion each year for the next decade and more thereafter.
Serious policymakers – liberal and conservative, Democrat and Republican – know the reality: To restore fiscal sanity, Obama will have to raise taxes on the 98 percent of taxpayers who are covered by his pledge. What nobody knows for sure is whether he will and, if he does, when he will do so and whether he can survive politically.
Obama surely knows that the first President Bush paid mightily for violating his “no new taxes” pledge, that Democrats already face a tough political terrain as they approach the 2010 mid-term elections, that Obama himself faces re-election two years after that, and that middle-income Americans who have suffered stagnant living standards of late hardly feel fortunate enough to pay higher taxes.
Presuming that Obama waits until after 2010 to mount a major deficit-cutting effort – that bruising battles over health care and climate change, and fateful decisions about troops in Afghanistan and nuclear weapons in Iran will keep him occupied through next year – he will likely have a far less hospitable Congress to work with.
Republicans will pick up seats in 2010, particularly in the House, probably forcing Obama to seek a bipartisan deficit-cutting deal (akin to that of 1990) rather than try to impose consensus on his fractured Democratic troops and push through an all-Democratic one (akin to that of 1993). Besides, in this highly-charged partisan environment, in which each party seeks to capitalize on any misstep by the other, congressional Democrats will likely demand bipartisanship rather than act alone.
Under that scenario, neither party will support a plan that does not include spending cuts and tax increases – Republicans will demand the former to limit the tax increases, and Democrats will demand the latter to limit the spending cuts.
But, for Obama, the task of securing Republican cooperation will prove monumental indeed. No stance has proven more important to the GOP’s identity in recent years than opposition to higher taxes. Moreover, Republicans know that Bush’s tax-hike sign-on in 1990 depressed the GOP’s grassroots base and contributed to his re-election loss two years later, that a bipartisan budget deal that includes higher taxes could tear the party apart and that rising anti-government sentiments that Republicans are stoking make Americans even less willing to send more of their income to Washington.
But the fiscal reality remains. With each day, the risks of a deficit-triggered calamity grow – such as a loss of confidence in America’s finances, a run on the dollar and soaring inflation and interest rates.
Obama must confront his great contradiction. Republicans must do their own about-face. Only then can America confront its fiscal demons.