BARACK OBAMA’S strategy on the long-term deficit has been, for the most part, to talk tough but waffle on the specifics in the hope that a better economic and political backdrop will present itself. Unfortunately for him, that approach allowed Republicans to lay down the first marker last week with a budget plan that slashes the deficit with savage cuts to entitlements and no increase in taxes.
Mr Obama has quickly responded, with a plan announced in a speech today that also promises hefty cuts to the deficit, but relying more heavily on increased taxes while allowing only modest tweaks to entitlements.
Mr Obama’s plan would cut deficits by $4 trillion over the next 12 years, considerably more than the $1.1 trillion over ten years his budget promised. That is still less than what’s on offer from Paul Ryan, the Republican budget committee chairman, who promised to cut the deficit by $4.4 trillion more over ten years than Mr Obama’s budget. A senior administration official says under Mr Obama’s plan the budget deficit would fall as low as 2% of GDP in the coming decade, lower than the 3% his February budget aimed for but higher than Mr Ryan’s 1.6%.
Significantly, he endorsed the aim of the Simpson-Bowles debt commission that deficit reduction should come via two dollars of spending cuts for every dollar of increased tax. He also embraced the commission’s steep cuts to discretionary spending outside defence (discretionary spending must be authorised each year) of $770 billion by 2023.
Mr Obama proposed the creation of “debt failsafe” triggers, which are also at the centre of a plan under consideration by a bipartisan group of senators called the Gang of Six. In the event the public debt is not declining as a share of GDP from 2014 onwards as planned, the triggers would impose across-the-board cuts to spending and increases in taxes via the closing of loopholes. However, Social Security, Medicare, and low-income programmes (such as Medicaid and food stamps) would be spared.
On taxes, Mr Obama endorsed the debt commission’s call for a tax reform that lowers rates and broadens the base by enough to, on net, raise additional tax revenue. But while the commission recommended lowering the top rate from its current 35% to 28% or lower, Mr Obama insists that the top rate on the wealthy be left alone. Whether that means it must therefore return to 39% in 2013 as now scheduled, Mr Obama’s stated preference, or whether it should be allowed to remain at 35% is unclear.
While Mr Ryan aimed for a simple and, to his critics, savage conversion of Medicaid to block grants and Medicare to vouchers, Mr Obama proposed a grab bag of measures with ambitious goals but of murky efficacy. The most important of these would be to instruct the Independent Payment Advisory Board created under his health care reform to devise solutions for holding growth in Medicare costs to the growth rate of per capita GDP plus 0.5%, instead of 1%. But it does not significantly expand the tools IPAB has to do this with, such as allowing it to alter benefits or eligibility or to touch hospital payments before 2020. For Medicaid, he suggested a simplification of the formula for sharing costs with the states and heightened efforts to cut waste and fraud.
Mr Obama’s plan has as many question marks over it as Mr Ryan’s. Triggers have a checkered history in American budget politics. They are designed to force congressmen to take painful steps to avoid more indiscriminate, mechanical actions. But when such actions are hanging over them, Congress and presidents have often decided to sidestep the triggers. The Gramm-Rudman-Hollings Act did not succeed in its stated aim of forcing down deficits. Medicare has had several triggers which have been routinely ignored or overridden. In an interview with the Wall Street Journal, Peter Orszag, Mr Obama’s former budget director, disparaged any deficit-reduction action that premises future legislative action on a failsafe mechanism. Such a mechanism could be “extraordinarily easy to waive. Given how polarised the political system is, anything that requires future legislative action doesn’t have a lot of teeth to it.”
Mr Obama also does not seem to have a cogent plan to control entitlements. Mr Ryan’s approach was to cap federal health-care costs and shift the burden of health-care inflation to the states and individuals. Mr Obama’s is to rely on a handful of largely untried mechanisms to cap health-care inflation without targeting the overall federal health-care bill. Even the Simpson-Bowles commission is tougher. In truth, none of these three competing plans has a satisfactory solution.
More perplexing is the refusal of both Mr Obama and Mr Ryan to put forward a plan on Social Security, whose problems are more manageable and for which Simpson-Bowles advanced a balanced solution.
In truth, Mr Obama’s speech today was less a blueprint of how to save America from fiscal ruin than a means to establish a stronger negotiating position. Until last week, Simpson-Bowles had represented the centre of the fiscal debate; it was the basis for the Gang of Six’s deliberations. Mr Ryan’s plan threatened to move the centre of debate significantly to the right. By staking out ground to the left of Simpson-Bowles, Mr Obama may succeed in moving the debate back to the centre.
Mr Obama has now asked Democratic and Republican leaders to engage in bipartisan negotiations starting in May. Presumably, this would be after, or a condition of, raising the debt ceiling. Whether Republicans can be brought along remains to be seen. After extracting significant concessions from Democrats over this year’s budget and grabbing the pole position with Mr Ryan’s plan, they may feel the wind at their back.
- Submit to reddit
- Tweet
- Recommend (13)
- Share
- Delicious
- Digg
- more…
- Permalink
Related items
TOPIC: United States federal budget »
- Government finances: Buy now pay later
- Letters from our readers: On Paul Ryan’s budget plan
- The debt ceiling: A threat to cost taxpayers money
TOPIC: Government spending »
- America’s deficit: A brief word about the budget deal
- The budget: Done deal
- Waiting for the shutdown: Ludicrous extremes
TOPIC: Government and politics »
- The Economist-MORI issues index: Libya rising
- American government debt: Do as Wall Street does, not as it says
- Rick Santorum: A presidential hopeful
TOPIC: Public finance »
- UK inflation: Prices fall, retailers cave
- Recommended economics writing: Link exchange
- Washington’s predicament: Hobson’s decree
More related topics:
- Paul Ryan
- Barack Obama
- Health and fitness
Readers’ comments
The Economist welcomes your views. Please stay on topic and be respectful of other readers. Review our comments policy.
Sort:
- Oldest first
- Newest first
- Readers’ most recommended
- 1
- 2
- >>
- Last
1-20 of 31 mjwilstein wrote: Apr 13th 2011 7:35 GMT
Here’s the clip of Obama laying down the law on no more tax cuts for millionaires: http://gtcha.me/i5VOTS
Recommend (2) Permalink Report abuse T.R. Brown wrote: Apr 13th 2011 7:38 GMT
As great as it is to see the powers that be finally paying attention to the deficit, it’s rather depressing to note that even the best case scenario envisions the federal debt increasing by several hundred billion dollars per annum during the next decade. It’s akin to being on an airplane that is in a nosedive and having the pilot say “well, the good news is that at some point in the future we won’t be heading toward the ground quite as quickly as we currently are. The bad news is that we’ll still be in a nosedive, just at a slower speed.”
Recommend (7) Permalink Report abuse silencedogood20 wrote: Apr 13th 2011 7:40 GMT
Obama’s plan fails in a number of key respects:
1) It eschews more substantial “real” cuts now for projections future savings. A projection 12 years out is virtually meaningless and punts the problem to future presidents and congresses–something that people realize is no longer feasible and which will make the pain all the worse when we are finally forced to make changes.
2) It does not balance the budget. We have a debt problem, not just a deficit problem. This is not addressed.
3) It makes the wrong cuts. Core government services such as the department of justice and the military are cut to give bloated entitlement programs more funds. Those priorities seem a bit out of whack, particularly when Obama has just sent our troops into harms way in Libya. Federalism needs a shot in the arm.
4) He is vulnerable to Boehner’s common sense counter-argument that Washington has a spending problem, not a revenue problem. And that’s true. Until you stop the spending no amount of tax revenue will be enough.
Recommend (7) Permalink Report abuse firoz12 wrote: Apr 13th 2011 7:41 GMT
I see this not.
Recommend (1) Permalink Report abuse firoz12 wrote: Apr 13th 2011 7:44 GMT
Obama’s plan fails in a number of key respects:
1) It eschews more substantial “real” cuts now for projections future savings. A projection 12 years out is virtually meaningless and punts the problem to future presidents and congresses–something that people realize is no longer feasible and which will make the pain all the worse when we are finally forced to make changes.
2) It does not balance the budget. We have a debt problem, not just a deficit problem. This is not addressed.
3) It makes the wrong cuts. Core government services such as the department of justice and the military are cut to give bloated entitlement programs more funds. Those priorities seem a bit out of whack, particularly when Obama has just sent our troops into harms way in Libya. Federalism needs a shot in the arm. 4) He is vulnerable to Boehner’s common sense counter-argument that Washington has a spending problem, not a revenue problem. And that’s true. Until you stop the spending no amount of tax revenue will be enough. I thank you
Recommend (1) Permalink Report abuse greenforce wrote: Apr 13th 2011 7:44 GMT
“Mr Obama proposed the creation of “debt failsafe” triggers, which [...] impose across-the-board cuts[...] However, Social Security, Medicare, and low-income programmes (such as Medicaid and food stamps) would be spared.”
That list on the end is everything that needs to be cut to actually balance the budget. This speech was merely another platitude to the IMF and China.
Recommend Permalink Report abuse HealthySkepticism wrote: Apr 13th 2011 7:52 GMT
LIBS U MAD THAT BOEHNER IS STYLIN ALL OVER OBAMA? U MAD LIBS?
http://i.imgur.com/6mfDg.gif
Recommend Permalink Report abuse New Conservative wrote: Apr 13th 2011 7:52 GMT
Does this plan really have as many fanciful assumptions as the Ryan plan?
The 2% unemployment and “tax cuts will pay for themselves” being the ones that come to mind from this article.
http://www.economist.com/blogs/freeexchange/2011/04/facts_and_figures.
All of them are going to be fudging the numbers, but we know that anyway. I want an in depth analysis of where and how and which fudges are largely harmless and which ones invalidate large parts of their supposed savings.
It would be nice if Free Exchange or the Print Edition compared the plausibility/veracity of the claims made in Obama’s, Simpson Bowles, and Ryan’s budget in one article.
Recommend (7) Permalink Report abuse trustbutverify wrote: Apr 13th 2011 7:59 GMT
Agree with T.R.Brown, the fact that the best path still leads down into the fiscal basement is depressing. But there is cause for optimism too. At least the dialogue has shifted to using the right units – trillions. And who knows, in the future someone might actually be willing to tackle the Social Security and defence “holy cows”.
Recommend (1) Permalink Report abuse McGenius wrote: Apr 13th 2011 7:59 GMT
The World is Not Enough! I would like to apologize to Mr. Obama on behalf of the American people. I think it’s obvious by now that the American people will never be able to generate the kind of cash that Mr. Obama wants to spend. The fact that his destiny was to lead such an inadequate collection of humanity is a deprivation he ought not to have suffered.
Recommend (3) Permalink Report abuse Gary C wrote: Apr 13th 2011 8:00 GMT
Obama’s speech was vague enough that it’s hard to judge. But there are a couple of shortcomings.
1. The U.S. currently spends 1 1/2 times as much on the military as the rest of the world combined and this plan appears to only have minimal military cuts.
2. There are $2 in cuts for every $1 in additional revenue. To balance the budget increased revenue should be as large as cuts. In addition to limiting deductions tax rates should go up until the debt is paid down.
Recommend (4) Permalink Report abuse Spectacularj1 wrote: Apr 13th 2011 8:04 GMT
Return to 39% are you kidding? We didn’t have persistent debts until Reagan came along, to fix the budget means to undo his damage. The marginal rate needs to go back to 70%.
Recommend (5) Permalink Report abuse Southmouth wrote: Apr 13th 2011 8:06 GMT
“Mr Obama’s plan has as many question marks over it as Mr Ryan’s”. Here we have the inevitable false equivalency where lunatic republican proposals such as abolishing Medicare and Social Security are given the same credibility as other more obvious solutions proposed by actual adults. The republican strategy is to cut taxes relentelessly and to cut all social services. They equate ANY public service with communism. It is insanity, but mainstream publications like this one do a great job pretending it is not.
Recommend (5) Permalink Report abuse HyRay wrote: Apr 13th 2011 8:07 GMT
Obama is back.
I just wish that he was more definitive on military budget savings. It is one of the big three spending buckets and seems ripe for serious cutting as we wind down the Bush wars.
Recommend (3) Permalink Report abuse Gaelen Schumann wrote: Apr 13th 2011 8:09 GMT
Silencedogood20. We are just getting our a giant recession, now is probably not the time to slash government spending by 20%. Also, because the real long term problem is health care inflation the solutions to that problem are going to be long term solutions. Controlling health costs by actually trying to make the same level of care less expensive is a much better plan than just capping how much the government is going to pay for private insurance.
“Core government services such as the department of justice and the military are cut to give bloated entitlement programs more funds.”
Are you serious? We spend more on our military than every other country on earth combined, while having an relatively stingy well-fare. In reference to entitlements, we are going to have an older population, hence more spending on SS and Medicare. What we need to do is figure out a way to give our citizens the same level of care for less money (Kind of like other countries).
A Spending problem is a revenue problem if you don’t pay for it.
Recommend (4) Permalink Report abuse OneAegis wrote: Apr 13th 2011 8:09 GMT
“Cuts” to defense only through attrition? Come on. Get out of Afghanistan, Iraq and Libya. Give Europe, South Korea and Japan a 10-year heads up that we plan to draw down bases. Start cutting hundreds of billions out of the budget once the troops are home. The watch how hard it will be for terrorists to continue recruiting when there aren’t American soldiers storming around the world for them to vilify.
Recommend (3) Permalink Report abuse Vladimir Lemon wrote: Apr 13th 2011 8:12 GMT
@silencedogood20:
“1) It eschews more substantial “real” cuts now for projections future savings. A projection 12 years out is virtually meaningless and punts the problem to future presidents and congresses–something that people realize is no longer feasible and which will make the pain all the worse when we are finally forced to make changes.
2) It does not balance the budget. We have a debt problem, not just a deficit problem. This is not addressed.”
This is true enough, but as a number of commentators have pointed out, his extension of healthcare funding might actually force cost to be addressed in a real way sooner. Paul Ryan’s plan does not do that, merely shifting the burden to individuals who eventually will nullify any savings by voting to increase their vouchers substantially. Sooner or later, the government must make a move that cuts into the profits of the medical industry, by using its own purchasing power to bargain down the cost of procedures and by gutting import levies to flood the market with vastly cheaper foreign versions of similar or identical drugs.
“3) It makes the wrong cuts. Core government services such as the department of justice and the military are cut to give bloated entitlement programs more funds. Those priorities seem a bit out of whack, particularly when Obama has just sent our troops into harms way in Libya. Federalism needs a shot in the arm.”
How are these priorities out of whack, assuming that the developed and democratic section of the world is the standard of comparison? The United States boasts a puny social safety net by rich world standards, yet spends more on military that the next 10 countries combined and jails more people than any other country on Earth. Please go to the search archive for the Economist articles regarding “Why America locks up too many people” from last year.
As for Libya, the comparatively puny military budgets of France and England could, with greater difficulty, finance the enforcement of the no-fly zone on their own. I have never understood this ability of post-Cold War hawks to exaggerate third world armies into major fighting forces which require increases in our bloated military budget.
“4) He is vulnerable to Boehner’s common sense counter-argument that Washington has a spending problem, not a revenue problem. And that’s true. Until you stop the spending no amount of tax revenue will be enough.”
Boehner’s “argument” is nothing more than semantics. It is utterly false to claim that US spending can’t be paid for with enough revenue. It can, without cuts. It is just that people are unwilling to pay the tax rates required. Similarly, people are unwilling to stand the further erosion of America’s social safety net that Ryan proposes. A balance between spending and tax is required, not ideological pandering.
Recommend (5) Permalink Report abuse Anonymous in America wrote: Apr 13th 2011 8:15 GMT
President Obama’s plan does nothing about Ben Bernanke.
Inflation is a tax on The People, especially the middle class.
Recommend Permalink Report abuse SirWellington wrote: Apr 13th 2011 8:16 GMT
I give Mr Ryan the benefit of the doubt that he can cut healthcare spending by killing and disabling some nonproductive people, but transferring the spending and debt associated with health care from the public sector to overly indebted households is not cutting the deficit. The government ultimately has to rely on taxes from households or the money households spend on businesses other than health care providers. No matter what he’s allowed to tell the CBO the taxes collected in the US will be-snark-, his plan is just voodoo economics for the 21st century.
Recommend (5) Permalink Report abuse wilfred knight wrote: Apr 13th 2011 8:17 GMT
………….TAX and SPEND liberal running everyone else’s lives, stealing our incomes, and lording it over us serfs, as they arrogantly pass us by in their gas -guzzling carriages, with the disdain of a Marie Antoinette. The guillotine is too good for this lot.
Recommend (1) Permalink Report abuse
- 1
- 2
- >>
- Last
1-20 of 31
- Comment (31)
- Recommend (13)
- Share
- Delicious
- Digg
- more…
- Permalink
About Free exchange
In this blog, our correspondents consider the fluctuations in the world economy and the policies intended to produce more booms than busts.
RSS feed
Advertisement
Topics most commented on
Read comments on the site’s most popular topics
Period: 1 day1 week2 weeks30 days View full-size opinions cloud » Sponsored by
Economist blogs
- Americas view
- Babbage
- Bagehot’s notebook
- Banyan
- Baobab
- Blighty
- Buttonwood’s notebook
- Charlemagne’s notebook
- Clausewitz
- Daily chart
- Democracy in America
- Eastern approaches
- Free exchange
- Gulliver
- Johnson
- Leviathan
- Lexington’s notebook
- Multimedia
- Newsbook
- Prospero
- Schumpeter
- The World in 2011: Cassandra
Similar Posts:
- About that deficit
- Europe needs stronger financial firewall: Obama
- Typically constrained policy
- Hacked Fox News falsely reports U.S. President Obama Assassinated
- Up they go
