With House and Senate passage Thursday of a $38 billion budget reduction deal forged by GOP leaders and the White House, the stage is set for the next battle in the budget war consuming the nation’s capital: raising the debt ceiling while negotiating a long term solution to the deficit.
President Obama scored an important tactical victory in preparation for that battle with his soaring defense of government this week that reassured many liberal and moderate Democrats, even as he embraced a $4 trillion long-term deficit reduction plan almost identical to one authored by his deficit commission that he has kept at arms’ length until now. With a budget deal for the remainder of this fiscal year passed by the GOP-dominated House and Democratic Senate and a long-term deficit reduction plan on the table, the president is now pressing Republican and Democratic congressional leaders to come to the bargaining table this spring to try to reconcile two very different approaches to long-term deficit reduction and entitlement reform.
Congressional Republicans and Tea Party adherents warned they would block any effort to raise the $14.3 trillion debt ceiling – even if it meant risking another global financial crisis -- unless it was tied to a tough deficit reduction plan, along the lines outlined by House Budget Committee Chairman Paul Ryan, R-Wis. Ryan’s “Path to Prosperity” budget plan is likely to be approved by the House today, but has no chance of passage in the Senate.
But with a long term plan of his own and warnings from Fed Chairman Ben Bernanke and Treasury Secretary Timothy Geithner that a default on government borrowing would trigger an economic disaster, the president would be in a better position to make the case that Republicans were engaging in another round of budgetary hostage-taking at the behest of the Tea Party. Obama and Senate Majority Leader Harry Reid, R-Nev., made that argument in the final tense hours leading up to last Friday’s budget deal that averted a government shutdown.
“Ryan and the Republican House leadership thought Obama would not push from the left the way that Obama is asking them now to push off from the Tea Party right,” said Jim Kessler of Third Way, a centrist think tank. “But he did.”
House Speaker John Boehner, R-Ohio, and Majority Leader Eric Canto, R-Va., have said they don’t want to see the Treasury default on its borrowing, but will insist that a vote to increase the government’s borrowing authority be closely linked to tough measures to slash the $1.5 trillion budget deficit. "There is no way we Republicans are going to support increasing the debt limit without guaranteed steps being put in place to ensure the spending doesn't get out of control again," Cantor told Fox News Sunday. Yet even Ryan’s plan for bringing the long-term budget deficits under control would require lifting the $14.3 trillion debt ceiling, because continued increases in the deficit are unavoidable in the short term.
Obama received an added boost Thursday when his plan was endorsed by the co-chairmen of his fiscal commission -- Democrat Erskine Bowles and former Republican senator Alan Simpson. Bowles and Simpson, two of Washington’s most important deficit hawks, said that the GOP plan “falls short of the balanced comprehensive approach that we need for a responsible plan.”
Progressive critics, while grumbling about the size of Obama’s domestic spending cuts, cheered his ringing defense of Social Security, Medicare and Medicaid as vital safety nets for seniors and the poor. They also cheered his willingness to put higher taxes on the rich on the table. With Democrats coming together on entitlements and taxes, the president has clear sailing on his left as his 2012 re-election campaign takes shape.
Boehner, on the other hand, has a very different problem as he contemplates selling his side of the aisle on the deficit reduction plan authored by Ryan. Many Republicans are having second thoughts about backing a plan that would dramatically overhaul Medicare and Medicaid and impose deep cuts in domestic programs. Tea Party-backed members took a walk on Thursday’s House vote on the 2011 budget compromise that they claim doesn’t go far enough in cutting spending. The 260-167 vote in favor of the agreement saw dozens of Democrats voting to support $38 billion in budget cuts – most of them in future years. Fully 59 Republicans voted against the package. The Senate approved the package, 81 to 19, and sent it on to the president for his signature. Next up, the Ryan plan, which would turn Medicare into a voucher program that would cover a third of seniors’ health care costs for anyone under 55, grant a trillion dollars in tax relief to the nation’s wealthiest families and deeply cut domestic programs while leaving defense spending at current levels, which is about 20 percent more than at the height of the Reagan-era build-up. Democrats are chomping at the bit to attack the details of the Ryan plan on the campaign trail.
Ryan may have thought his vision could be portrayed as reasonable in an environment in which the administration had utterly failed to respond to public demands for a long-term plan to bring budget deficits under control. Now, Democrats have an alternative they can rally behind.
“We all know that to govern is to choose, and the choices made in the Republican budget are wrong for America,” Rep. Chris Van Hollen of Maryland, the ranking Democrat on the House Budget Committee. “It is not bold to give tax giveaways to the oil companies and executive board rooms while slashing investments in our kids’ classrooms, in scientific research, and in critical infrastructure for this country.”
Criticism of Ryan’s plan is beginning to pile up, as mainstream economists are cranking out scores of analyses of the proposal. For example, his plan asserts that immediately cutting domestic discretionary spending by $100 billion would create nearly one million new jobs and bring unemployment down to 4 percent by 2015.
“We don’t believe this finding, which was generated by manipulating an econometric model that would not otherwise have produced the result,” the St. Louis-based economic consulting firm Macroeconomic Advisers wrote in a note to clients on Wednesday. “We consider the analysis both flawed and contrived.”
A spokesman for Ryan countered that they used numbers from CBO in their assumptions. Economist Mark Zandi, chief economist of Moody’s Analytics, forecast on Thursday that Ryan’s plan would eliminate 1.7 million jobs in its first two years, with 900,000 jobs lost next year. Other economists were equally dismissive.
Diane Swonk, chief economist for Chicago-based Mesirow Financial and former president of the National Association of Business Economists, recently reduced her economic growth forecast for the first quarter to 1.5 percent from the 2.1 percent previously projected, and now believes economic growth for the year will be less than three percent. While the sting of additional federal budget cuts won’t be felt this year, a number of other factors are acting as major headwinds against more rapid economic growth: the end of the Fed’s QE2 stimulus, the massive budgets cuts underway in states and municipalities; the rapid rise in gasoline and some food prices; and stagnating real wage growth among Americans who have jobs.
Gus Faucher, the director for macroeconomics at Moody’s Analytics, found some cheer in news that most of the $38 billion in budget cuts contained in the plan that passed the House Thursday won’t be felt until next year and beyond. “The focus has been too much on cutting spending now,” he said. “It’s misguided because it is going to be a drag on growth.”
