Budget Politics

With August 2nd approaching and doomsday for the American economy just around the corner, Barack Obama is attempting once again to play mediator/hard ball ideologue in his attempt to get Republicans to raise a ton of taxes in exchange for future cuts. So far the Republicans are not falling into the trap that Obama is attempting to set by raising a ton of taxes and supporting his big government vision. And if the Republicans don’t sign off on a budget deal and raising the debt ceiling, he plans to blame them for any fall out like a massive sell off in the stock market.

Until recently, Obama had not shown the least interest in budget details but with the debt ceiling debate coming to a climax, he has decided to call for the big deal. The one problem with the big deal is when Republicans attempt to nail Obama down on budget cuts, the details comes out murky and that is being charitable. Obama has yet to propose a serious budget or any serious entitlement reforms and his own party has made it clear they are not onboard for any deals that seriously reform entitlements. He is simply playing a game of proposing the “big deal” while not producing a “big deal.” His goal is to simply get the Republicans on board in raising not just taxes but the marginal tax rates on millionaires (those making over $250,000, which by my own accounts is not a million but leave that aside).  He wants capital gains tax and marginal tax rates raised plus loopholes closed. He wants to sock it to the rich and figures that class warfare and hatred for the rich is enough to jump start his presidential campaign.

The conventional wisdom including many on the right is that he is so far the big winner in the debate and Republicans will take the heat for any disaster that's insured. It will be their economy, but this run counters to what the real world is producing.

First, the economy already sucks, and it is now Obama's economy because it is his economic plan that has hurt the recovery. In what has shown to be the weakest recovery on record in post World War II era, if not ever in the United States economic history; Obama can’t escape blame. The comparison to Bill Clinton and the 1995 election misses some important lessons. In 1995, Clinton popularity was on the upswing and so was the economy. During the 1995 budget debates, the Republicans got the worse of the PR war but with a growing economy in its fourth year, plus unemployment dropping to near full employment; Clinton held some important advantages that Obama does not have now and may not have going into 2012.

The second lesson is that much of the more foolish Clinton ideas were already defeated or on the shelf and by 1996, he made his grand deal with Gingrich on welfare reform and budget reforms that resulted in a balance budget. So Gingrich stopped any more tax increases from happening and even got a capital gain tax cut in the deal so Republicans maintain control of both houses of Congress in the 1996 elections. Clinton won but so did Gingrich.

Republicans ideas may be the only thing standing between Obama and his own defeat in 2012 since if their ideas actually get passed; much of it will be good for the economy. The Republicans have not only pushed for spending reduction but tax reforms that includes closing loopholes and lowering marginal tax rates. They even talked of closing a few loopholes among the wealthy as a sign of good faith (but they steadfastly refused to raise any marginal tax rates). Tax reform that mirrors what Paul Ryan has proposed, what moderate Republican Judd Gregg and liberal democrat Ron Wyden proposed, what Obama's own budget commission proposed is what the Republican leadership is proposing. This deal could send the markets soaring and provide certainty in the economy; allowing the full potential of the economy to roar beginning in 2012.

Obama has already nixed the big deal by not being forthcoming on any serious budget cuts and his insistence of big tax increases. So he is now beginning his retreat from the big deal to something smaller but he is also sealing his own doom. Much of the Republicans are now realizing that as long as Obama is President, nothing serious will get done.

Obama can’t blame Republicans for his own mismanagement of the economy. This brings us to the last and final lesson; the majority of Americans don’t want the debt ceiling raised and don’t want massive tax increases as part of a “balanced approach.” Obama is gambling his Presidency and the economy on the idea that massive tax increases will save the economy and his Presidency. If he believes this, his re-election efforts will end up with a massive election defeat. If he actually gets what he wants, he will be presiding over the economy sputtering as it is sputtering now. A sputtering economy is a best case scenario.

Photo attribution: Florian Hirzinger www.fh-ap.com