international analysis and commentary

Obama’s debt recipe

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In a speech in Washington, D.C. on April 13th, US President Barack Obama laid out his vision on how to reduce America’s mounting fiscal indebtedness – saving $4 trillion over twelve years – while preserving its social safety net and nascent economic recovery. The debate on the budget deficit and federal debt has been consuming US politics for several weeks and on April 8th nearly drove the federal government to a shutdown.

The President had been under intense criticism, particularly from his liberal base, for playing mediator and giving the GOP the upper hand in the negotiations over this year’s budget. His speech aimed to re-shape the narrative of cost cutting and debt reduction in his favor.

However, by embracing the idea that government spending is out of control and must be reined in promptly – thus accepting the basic premises of the conservatives’ argument (most liberal economists believe the sense of urgency is exaggerated) –  the President is allowing the debate on the debt to continue sliding further into Republican territory. This strategy, critics say, risks weakening Obama’s bargaining position.

In his remarks, President Obama pushed back forcefully against the Republicans’ budget plan for 2012 – unveiled last week by House Budget Committee Chairman Paul Ryan of Wisconsin. The GOP proposal promises to reduce the deficit by $4.4 trillion over the next decade. The President, in one of the most partisan speeches he has given in a long time, characterized that plan as “less about reducing the deficit than it is about changing the basic social compact in America.” He described the spending cuts envisioned by the Republicans to education, clean energy and transportation – combined with the de facto privatization of Medicare (the healthcare plan for seniors) and more than $1 trillion in new tax breaks for the rich – as “the kinds of cuts that tell us we can’t afford the America that I believe in and I think you believe in.” Obama vowed not to let the GOP plan go through. “That’s not right. And it’s not going to happen as long as I’m President,” he said.

Nevertheless, the President acknowledged the need to put a break on runaway government spending. “If we truly believe in a progressive vision of our society, we have an obligation to prove that we can afford our commitments,” said the President speaking to those in his own party who oppose any reform of Medicare, Medicaid or Social Security.

Obama countered the Republican proposal with his own, which borrows, partially, from the recommendations of the bipartisan debt reduction commission he created last year – and which he had, initially, largely ignored – and partially from a 2012 budget blueprint the White House released in February, which trimmed $1 trillion from the deficit over the next decade. Barely two months later, under immense pressure from the Republicans, he felt compelled to match, at least in part, their more far-reaching plan. Obama hopes to achieve $4 trillion in savings in the next twelve years via a mix of spending cuts, lower interest payments, and tax increases.

“Any serious plan to tackle our deficit will require us to put everything on the table,” Obama said, “and take on excess spending wherever it exists in the budget.” The President criticized Washington’s obsession with reorganizing government finances by focusing exclusively on the 12% of the federal budget known as non-defense discretionary spending.

While pledging to put everything on the line, including traditionally untouchable items like entitlements (except for Social Security) and defense spending, the President did not offer a particularly detailed roadmap of how he intends to proceed.

He vowed to keep, in future budgets, the cuts to domestic spending agreed to by both parties – in which the White House say would save about $750 billion over the next twelve years. He promised to work with Defense Secretary Robert Gates and the Joint Chiefs of Staff to find greater cuts in military spending ($400 billion) without endangering national security. He also pledged to build on his healthcare reform, which alone should save the government $1 trillion, to further reduce spending in the areas of Medicare and Medicaid, while still preserving “these health care programs as a promise we make to each other in this society.” 

Overall, cuts would make up about $2 of the $4 trillion in savings the President promised. Another trillion would come from lowered interest payments on the federal debt, which now stands at a historical $14.3 trillion, and increased tax revenues would guarantee the final trillion.

“In December,” said Obama, “I agreed to extend the tax cuts for the wealthiest Americans because it was the only way I could prevent a tax hike on middle-class Americans.” However, the President said, that was the last time he would allow something like that to happen. “I refuse to renew them again,” he said. Obama also encouraged Congress to study ways to reform the tax code – limiting itemized deductions for the wealthiest 2% of Americans – to make it fair and simple, “so that the amount of taxes you pay isn’t determined by what kind of accountant you can afford.”

The success of the President’s debt reduction plan would be ensured by what he called a “debt failsafe” – a mechanism that would trigger automatic, across-the-board cuts if, by 2014, the debt-to-GDP ratio of the United States were not stabilized (this would not affect Social Security, Medicare or low-income programs).

Overall, the President’s remarks were yet another effort on his part to strike a middle ground between a more conservative philosophy of debt-reduction and a more progressive vision of social justice. Obama wanted to assuage the anxieties of those independent voters concerned about the growing federal debt while rekindling the romance with his own base, which is tired of constantly hearing about fiscal austerity and not nearly enough about job creation and the safeguarding of America’s social safety net.

In what is considered the first speech of his reelection campaign, which he announced on April 4th, President Obama also tested a few slogans, such as “winning the future” or “a country we can believe in,” which will probably be oft-repeated between now and the 2012 elections.

After Obama’s speech, Rep. Ryan said he was “very disappointed in the President” and described the speech as partisan. “We need leadership,” Ryan said. “We don’t need a doubling down on the failed policies of the past.” The House votes on Ryan’s 2012 budget proposal on April 15th.

There is little doubt that themes such as the economy, the budget deficit, and the federal debt will remain of paramount importance to the electorate throughout the campaign season. For President Obama the challenge will be to appear reasonable enough to independent voters, without moving too far to the right – and alienating his own base in the process – in a never-ending battle with Republicans on who is more fiscally responsible. So far, Republicans appear more successful in setting the tone of the debate. The President’s speech has not disproven this, despite Obama’s attack on the GOP agenda and muscular defense of his own liberal beliefs.