Bloomberg News

Obama’s Grand Deficit Bargain Lost Out to 2012 Politics

August 01, 2011

Aug. 1 (Bloomberg) - As late as last week, President Barack Obama was still calling for one, broad debt agreement that included cuts, entitlements and taxes.

That’s not what will go before Congress this week, and Obama’s strategic positioning contributed to the missed opportunity for a potentially historic bipartisan deal, said Democrats, retired lawmakers and former White House advisers with experience in bipartisan negotiations.

Obama came months late to the negotiations, allowed 2012 election concerns to shape his timing and willingness to advocate Social Security and Medicare reductions, and undermined his position by shifting his priorities, they said.

Senator Carl Levin, a Michigan Democrat, said Obama was unwilling to press the argument that the wealthiest should pay more in taxes to increase government revenues, causing many Democrats to view the deal with “a lot of unease,” he said.

“I just don’t think the president has been willing to really fight hard for revenues,” he said.

Trent Lott, a lobbyist, Mississippi Republican and former Senate majority leader who left office in 2007, said of Obama, “I don’t think the president’s involvement was early enough, that he really understood what was needed to get this thing done.”

Imperfect Agreement

In an appearance in the West Wing of the White House last night, Obama said the final compromise includes cuts of about $1 trillion and relies on a bipartisan congressional committee to propose by November $1.5 trillion in other deficit reductions that could come from cuts, changes to entitlement programs and tax increases. The agreement paves the way for Congress to vote to raise the $14.3 trillion debt ceiling and avoid an Aug. 2 default.

“Is this the deal I would have preferred? No,” Obama said. “I believe we could have made the tough choices required -- on entitlement reform and tax reform -- right now, rather than through a special congressional process.”

Obama “let the momentum die,” said David Gergen, director of Harvard University’s Center for Public Leadership in Cambridge, Massachusetts, and an adviser to Presidents Nixon, Ford, Reagan and Clinton. “There’s shared blame. Everybody’s fingerprints are on this mess. This will be a case study one day for college students on failed politics.”

William A. Galston, a former policy adviser to President Clinton and a governance scholar at the Washington-based Brookings Institution, a nonpartisan policy group, said the 2010 midterms dealt Obama “a very tough hand.” Republicans won control of the U.S. House with a freshman class that included dozens of lawmakers opposed to raising the debt limit. Within those limits, Galston said, Obama “tried to do a lot in a very short period of time, under great pressure.”

Presidential Engagement

White House officials say the president has been doing all he can to forge a compromise. “Every day. Every hour,” White House press secretary Jay Carney said on July 26. Carney said it’s “a fallacy” to suggest Obama didn’t propose enough detail or meet enough with congressional leaders.

“Either the president ‘isn’t engaged enough’ or ‘he’s too engaged,’” Carney said, expressing a sense that Obama will be criticized no matter what actions he takes. “We have operated in good faith. We have made extreme compromise.”

Throughout the negotiations, financial markets have avoided tumult. Yields on benchmark 10-year Treasury notes have fluctuated between 3.18 percent and 2.80 percent during the past two months. That compares with an average of 4.03 percent since 2001.

Early Mistake

As Gergen sees it, Obama made an early error when he failed to adopt the findings of the National Commission on Fiscal Responsibility and Reform. The Obama-appointed commission headed by Alan Simpson, a former Republican senator from Wyoming, and Erskine Bowles, a former chief of staff to President Bill Clinton, in December recommended a combination of spending cuts, entitlement program adjustments and tax changes to cut $3.8 trillion from the deficit.

White House Chief of Staff Bill Daley told CNN on July 28 it was clear House Republicans weren’t willing to accept the Simpson-Bowles recommendations.

Gergen said the prospects of Republican resistance may have been only one factor in the White House decision. “I suspect that the politics of 2012 had a lot to do with it,” Gergen said. “He wasn’t anxious to tie himself, I’m sure, to some aspects of entitlement reform that would have stirred up his base.”

Ryan Budget

The president waited to release his own deficit-reduction proposal until House Republican Budget Chairman Paul Ryan of Wisconsin unveiled a 10-year plan that cut spending on Medicare -- drawing accusations from Democrats that Republicans would weaken health insurance coverage for the elderly. Though that helped Democrats politically, it narrowed the time window for a large-scale deal, Galston said.

The White House defends its handling of the Simpson-Bowles report. By forcing Republicans to write their own deficit reduction plan, Obama gained more negotiating leverage when the public rejected it. Had Obama endorsed the commission’s recommendations, Republicans would have simply seized on the proposed cuts and forced negotiations on the commission’s recommendations rather than revealing their own intentions.

“OK, so he smoked them out,” Galston said. “What did it get him? If your objective is to be a president who achieves transformational change, then I’m not sure waiting from December to mid-April is wise,” Galston said. In the end, Obama “was forced into defense early on and it’s not clear to me he was ever able to regain the offensive.”

Obama Proposal

In April, the president proposed a $4 trillion, 12-year deficit-cutting plan, with $3 in cuts for every $1 in tax increases. Social Security benefit adjustments were not part of that plan.

From that point on, Obama’s position began shifting.

At first, Obama said Congress must not tie a debt-ceiling increase to the debate over reducing the deficit. After Republicans ignored his demand, he said a debt-ceiling increase should be as long-term as possible and tied to as much deficit- cutting as possible.

In July, Obama surprised Democratic lawmakers and activists when he discussed reducing cost-of-living adjustments to Social Security in deficit negotiations with House Speaker John Boehner, an Ohio Republican, Democratic officials said. In exchange for that, Obama insisted on tax changes that would produce at least $800 billion in new revenue.

When those talks collapsed -- with Boehner claiming the White House suddenly sought $400 billion more in revenues -- Obama continued to insist that any plan must have a balance of cuts and revenue increases. Last week, Obama backtracked and endorsed a cuts-only compromise proposed by Senate Majority Leader Harry Reid, a Nevada Democrat.

Cuts and Committee

The final compromise under discussions on Capitol Hill would include cuts and set up a committee that would later address changes in Medicare, Medicaid, Social Security and the tax code.

“Seeing a Democratic president take taxing the rich off the table and instead push a deal that will lead to Social Security, Medicare and Medicaid benefit cuts is like entering a bizarre parallel universe,” said Stephanie Taylor, co-founder of the Progressive Change Campaign Committee, a Washington-based Democratic group.

As the default deadline loomed, Obama said that the final deal must extend the debt limit through the end of 2012. Daley said he would veto a plan that didn’t. The Office of Management and Budget last week released a recommendation that Obama carry out such a veto, not a guarantee that he would.

Final Talks

After a weekend of discussions among Republicans and Obama’s team, congressional leaders were putting the final touches last night on a deal that would cut spending by about $1 trillion. The plan also calls on Congress to decide by year’s end how to shave another $1.5 trillion from long-term debt by 2021 -- or face punishing reductions across all government areas, including Medicare and defense programs, according to congressional officials.

Congress did agree to Obama’s demand that the deal take the issue of raising the debt ceiling off the table until after the 2012 presidential campaign, although the language provides opportunities for Congress to vote its disapproval.

White House officials said the ultimate shape of the deal left them well-positioned to protect Obama’s priorities before the committee. While there is no automatic tax increase in the enforcement mechanism, half the automatic spending cuts would target defense programs popular among Republicans, and Democratic priorities such as Medicare and Social Security benefits and programs for the poor would be protected. The automatic spending cuts would be delayed to coincide with the expiration of the Bush tax cuts in 2013, giving the president greater leverage to press to include tax revenue in the committee’s recommendations.

“It is certainly possible that Obama is playing a long game that will be effective over time, that despite the lumps he is taking now he would be seen in retrospect as taking a reasonably steady and balanced course, keeping his head while people on all sides were losing theirs.” Galston said.

--Editors: Jeanne Cummings, Mark Silva

To contact the reporters on this story: Margaret Talev in Washington at mtalev@bloomberg.net; Mike Dorning in Washington at morning@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net.


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