Bloomberg News

Obama Bets Re-Election Gave Him Power to Win Fiscal Cliff

December 03, 2012

U.S. President Barack Obama

President Barack Obama. Photographer: Andrew Harrer/Bloomberg

President Barack Obama is betting that his re-election gave him the political clout to force Republicans to accept higher taxes on upper-income Americans as a step toward reducing the federal deficit.

In positioning for advantage in negotiations on the fiscal cliff, Obama has been replicating some of the tactics used in his successful campaign for a second term, including speeches, meetings with stakeholders and using social media to make his case to voters. Today the president spent about 45 minutes answering questions on Twitter Inc.’s microblogging service.

Geithner Fight on Fiscal Cliff Invokes Dodd-Frank Resolve

“Keep pressure on Congress,” Obama wrote at the conclusion of the session in which he reiterated his main arguments for raising taxes on top earners as a start for a plan to cut the deficit. “Call, email, tweet your member.”

Republicans have rejected Obama’s proposal, which was laid out for congressional leaders last week by Treasury Secretary Timothy F. Geithner laid out for congressional leaders last week, to avert a so-called fiscal cliff, with more than $600 billion in spending cuts and tax increases starting to take effect in January.

Geithner offered a reprise of the president’s previous budget proposals, with $1.6 trillion in tax increases and about $350 billion in health-care savings, primarily in Medicare. He also asked for an Aug. 1 deadline for decisions on an income-tax overhaul and further spending cuts.

Republican ‘Shock’

“You could see the shock in the Republicans -- this is not what they were expecting from the White House,” said Stan Collender, managing director of Qorvis Communications LLC in Washington and a former staff member for the House and Senate budget committees. “There was almost euphoria among Democrats that the president was playing hardball.”

The two parties are in a stalemate over what spending cuts and revenue increases should be approved to cut a budget deficit that’s exceeded $1 trillion for each of the four years Obama’s been in office.

The administration says no agreement is possible unless Republicans agree to increase tax rates for the highest-earning Americans, a stance underscored by Geithner in a sweep of the Sunday talk shows. Republicans oppose any tax-rate increase and demand deeper cuts than Obama has offered.

Boehner Plan

House Speaker John Boehner sent Obama a proposal today calling for $800 billion in new revenue over the next decade and cuts in entitlements such as Medicare and Medicaid of at least $900 billion. Another $300 billion would be saved through cuts in discretionary spending, according to the plan.

Obama ignored reporters’ shouted questions about his reaction to the Republican plan, as he concluded remarks with Prime Minister Boiko Borissov of Bulgaria.

Both administration officials and congressional Republicans say they want a deal before year’s end -- without either side publicly offering compromises.

“There’s not going to be an agreement without rates going up,” Geithner said in a taped interview that aired yesterday on CNN’s “State of the Union” program. Republicans will “own the responsibility for the damage” if they “force higher rates on virtually all Americans because they’re unwilling to let tax rates go up on 2 percent of Americans.”

Obama wants to boost top income-tax rates back to the levels they were when President Bill Clinton left office. The top rate then was 39.6 percent, compared with 35 percent today.

Taking Lead

Boehner said Republicans aren’t giving in and that the president should take the lead by offering concessions. After Republicans made a proposal “the White House responded with their la-la land offer which couldn’t pass the House, couldn’t pass the Senate,” Boehner told reporters today.

Collender puts the odds of failure at 60 percent, as both sides need to prove their mettle to core supporters.

The risk for Obama is that Republicans will match his brinkmanship and no deal will be reached. The result would be the “fiscal cliff,” the automatic spending cuts and tax increases that start kicking in automatically at the beginning of the new year.

The nonpartisan Congressional Budget Office said in an August report that the tax increases and spending cuts would shrink economic output next year by 0.5 percent and push the unemployment rate to about 9 percent.

Markets React

Moody’s Investors Service said in September it may join Standard & Poor’s in downgrading the U.S.’s credit rating unless the president and Congress reduce the percentage of debt to gross domestic product.

Stocks have been whipsawed since the election as Obama and Boehner dueled in public.

The benchmark Standard & Poor’s 500 Index (SPX) increased 0.5 percent to 1,416.18 last week and extended its rally since Nov. 16 to 4.1 percent. The S&P 500 fell 0.3 percent at 1,416.73 at 1:56 p.m. in New York after climbing as much as 0.5 percent. Ten-year Treasury yields added one basis point to 1.63 percent.

Obama’s strategy stems, in part, from lessons he and his advisers take from the failed 2011 attempt to reach a grand bargain on long-term debt reduction.

Obama and Boehner tried to forge a compromise in private talks. Instead of clearing the path, their effort collapsed and served to increase resistance among members of both parties in Congress.

Lessons Learned

The president’s team, particularly his political advisers, concluded that it was a mistake to stay in Washington instead of campaigning on behalf of his plan. So on Nov. 30, Obama took Air Force One to Pennsylvania, where he spoke at a toy factory on the need for deficit action, including raising top-income tax rates. His appearances have been tied to campaign-style appeals for support on the Internet.

In 2011, Democratic backers were alienated by Obama’s willingness to offer cuts in entitlement programs, such as Medicare and Social Security, without getting Republicans to agree on more revenue from taxes on high-income earners.

Jim Manley, a Democratic strategist and former aide to Senate Majority Leader Harry Reid, said Obama’s team made the mistake of holding on too long to the idea that Boehner and Senate Minority Leader Mitch McConnell would compromise.

“They took that lesson to heart, and they’re not going to allow themselves to get suckered into reaching bad agreements to get a deal,” Manley said.

‘Negotiating Leverage’

Obama’s allies say the president’s election victory and polls showing a majority of Americans support raising taxes on top earners mean he doesn’t have to make the same concessions on entitlements that he did in the summer of 2011.

“Unlike last year, Democrats now have all the negotiating leverage, and Republican hostage-taking threatens not just the economy, but the future of the Republican Party,” Richard Trumka, president of the AFL-CIO who attended a fiscal cliff meeting at the White House last month, said in a Nov. 30 statement. Republicans “are still insisting on the very things voters rejected so resoundingly: tax cuts for the wealthiest 2 percent and benefit cuts to Social Security, Medicare and Medicaid.”

The administration has rejected Republican complaints that it isn’t offering enough specifics.

Spending Cuts

The White House is proposing spending cuts of about $2.4 trillion. That consists of $1 trillion in cuts already enacted last year, $350 billion in health-care savings, $250 billion on non-health programs, such as farm subsidies, and $800 billion as war costs are pared.

The administration proposes $1.6 trillion in tax increases, with about $866 billion of that from allowing income-tax and estate tax cuts to expire for the wealthiest 2 percent of Americans. Obama also proposes about $200 billion in “economic growth” incentives, including stimulus programs, subsidies for mortgages deemed underwater and extension of the 50 percent bonus depreciation.

Besides campaigning outside Washington, Obama has been selling his stance at the White House. Over the last several weeks, he has hosted groups of business leaders, assuring them he’ll accept entitlement cuts if he can win his push for higher tax rates on wealthy individuals like themselves.

Republicans, who won another two years in control of the House, are warning Obama that he isn’t the only one to have re- election on his side and say he’s overplaying his hand.

Going Over

Before the election, Republicans privately said they expected Obama would cave in a budget deal to avoid risking the fiscal cliff. Yet after the last week, they see the latter as a possibility.

“The president has decided, I am convinced, that he wants to just go over this contrived cliff because that’s exactly what he’s wanted,” Senator Jim DeMint, a South Carolina Republican, said in an interview. “He wants more tax revenue, and he wants to cut the military. So that’s what’s going to happen.”

Republican opposition to $1.6 trillion in tax increases over a decade, $50 billion in stimulus spending, home mortgage refinancing and Obama’s plan to end direct congressional control over raising the debt ceiling should be taken in context, said Patrick Griffin, former legislative affairs director under President Clinton.

“You’ve got to open with something,” Griffin, who is associate director of the Center for Congressional and Presidential Studies at American University in Washington. “And they’re still talking.”

To contact the reporters on this story: Julianna Goldman in Washington at jgoldman6@bloomberg.net; Roger Runningen in Washington at rrunningen@bloomberg.net

To contact the editor responsible for this story: Steven Komarow at skomarow1@bloomberg.net


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