On the Budget, Obama’s Opening Bid Was Reasonable

It would be difficult to imagine an uglier process of enacting legislation on important issues than the last two years of attempts by federal policymakers to reduce the size of the nation’s deficit. Although no single explanation would suffice to account for the difficulty of making bipartisan progress, a major philosophical difference between the political parties stands out as the major culprit.

Broadly speaking, Republicans want smaller government and lower taxes; Democrats want more government and higher taxes. Since enactment of the Social Security Act in 1935, the story of the federal government has been one of expanding programs, increasing federal spending, and increasing taxes. Republican denials notwithstanding, Republicans have often supported the thousands of laws that expanded government relentlessly over the years and even in raising taxes to support the programs, although they have often kept in check the higher levels of spending proposed by Democrats. Even so, for the last several years Republicans have talked more vigorously about the philosophy of small government and low taxes. Necessity met opportunity when the nation entered a slow-burning deficit mess, aggravated by a severe recession that soon convinced almost everyone that the federal government had to balance its books by cutting spending, raising taxes, or both. Roughly speaking, the need to reduce the deficit, combined with the fact that cutting spending would move the nation toward the Republican goal of smaller government, has given Republicans an opportunity to cut spending to an extent that would have otherwise been impossible.

By contrast, the deficit puts Democrats in a defensive posture because, as President Obama’s budgets show, they typically propose increased government spending. Ironically, Democrats also have been able to seize on an external force to support their cause. That force was the Great Recession that began in December 2007 with effects, especially high unemployment, that continues today. In 2009, Democrats were able to pass an $800 billion plus stimulus bill to fight the recession and that bill expanded a host of programs for the poor and unemployed. Some of those changes have been made permanent, which has had the effect of permanently boosting government spending.

The recession and the stimulus have allowed Democrats to advance their agenda; the deficit and the compromise legislation Congress has passed to reduce it over the past two years have allowed Republicans to advance their agenda, although the fiscal cliff agreement in January did contain a $600 billion tax hike on the rich.

Now comes President Obama with his budget proposal for 2014. He proposes to increase taxes by imposing a minimum tax rate of 30 percent on earnings over $1 million, limiting itemized deductions for those in the top tax brackets, and increasing the federal tax on cigarettes to pay for expanded spending on preschool. Republican leaders have been scathing in their rejection of the tax increases. But the president also proposes changes in health care, primarily Medicare, by encouraging more Medicare recipients to use generic drugs and by making elderly couples with incomes over $170,000 pay for more of their care. And most importantly, Obama proposes to change the inflation adjustment in Social Security benefits in a way that would reduce spending by about $130 billion over the next decade and even more after that.

Although Republican leaders have been hostile to many features of the Obama budget, the Medicare and Social Security proposals are important and would both cut spending. It is even possible to see the inflation adjustment proposal as a breakthrough because a Democratic president has, at the cost of infuriating his political base, proposed to reduce spending on the program that is the greatest policy achievement of the Democratic Party. In the past, Republican leaders have urged the president to make the specific inflation adjustment proposal he now offers in his budget. Republicans should take it.

The President makes a number of new spending proposals in his 2014 budget, notably on infrastructure, preschool expansion, support for manufacturing, and making permanent several existing tax credits that help low-income families. But the Office of Management and Budget estimates that as a percentage of GDP, the nation’s debt would decline from 76.6 percent in 2013 to 73 percent in 2023. Many analysts and politicians think the debt should be reduced more, but this reduction, if the OMB estimates are correct, would represent continued progress on the deficit and a major breakthrough on Social Security.

The opening question for serious negotiations about the 2014 budget and deficit reduction is whether both sides have shown enough give to justify serious bargaining. Whatever else it might do, the Obama budget proposal, by offering an important reduction in Social Security spending and a cut in Medicare spending that could be expanded in the future, shows considerable give on the president’s side. So far the response from most Republicans has been dismissive. Maybe Republican leaders should take a second look and make a counterproposal that falls between the Ryan budget and the president’s budget while retaining the Social Security and Medicare savings. If they have to offer something in taxes, which they will to get a deal, remind Democrats that the Social Security inflation adjustment would also increase income taxes by around $100 billion over ten years and accept the president’s cigarette tax proposal. Something along these lines would allow both Democrats and Republicans to achieve part of their traditional agenda.