Obama is in trouble. Big trouble.

Obama must take lead on budget plan

Douglas Schoen
Politico.com
April 4, 2011

President Barack Obama is in trouble. Big trouble.

Despite the news that unemployment has dropped, Obama is still in trouble. The most recent Rasmussen poll shows that only 22 percent of Americans believe the country is heading in the right direction – the lowest since Obama took office. This is a clear indication that the administration is veering dangerously off course.

Food costs and oil prices are now spiking to alarming levels. So there is every reason to believe that the president’s approval rating – which fell below 50 percent, to 47.6 percent, in the most recent Real Clear Politics average — will continue to slide in the weeks and months to come.

Moreover, Obama’s short-term strategy of striking a centrist pose on budgetary matters and demonstrating at least a rhetorical commitment to job creation and regulatory reform may not matter if he continues to vacillate. His unwillingness to offer clear plans and policies has been evident lately – both domestically and overseas.

To turn these numbers around, what the president and the Democrats need to do is to adopt a new strategy on fiscal matters.

Instead of remaining disengaged, Obama must take the lead in developing a plan for a balanced budget. This needs to address the administration’s short-term and long-term strategic concerns — offering a long-term path to economic growth, tax reform, fiscal stability and energy independence, even as it holds spending and the size and scope of government constant or more likely, reduced.

If Obama can do this, he will most likely retain the support of the independents, who have been coming back to him since the midterm elections. With this, his reelection in 2012 looks more certain – as it was for President Bill Clinton, who adopted a similar approach in 1995.

If Obama continues to try to stay above the fray, however, he could suffer the fate of Jimmy Carter in 1980. He also faced crippling economic problems at home and a crisis in the Middle East — the Iranian hostage crisis.

So what should Obama do?

First, he must respond positively to the 64 Republican and Democratic senators, who sent a letter to the White House in March, calling for broader budget talks. He should engage the Gang of Six senators – three Democrats and three Republicans – who are pursuing a broader-based balanced budget settlement.

In addition, he must pursue a series of bold, specific policies — growing out of the Bowles-Simpson and Domenici-Rivlin proposals to manage and reduce the deficit.

The emphasis of this Obama plan must be to promote growth and job creation in the short-term, and deficit reduction in the intermediate and long-term. At the same time, the administration must avoid making draconian cuts in domestic spending that could retard job creation and send the nation into a double-dip recession.

What policies can the administration pursue to accomplish this? There are five basic initiatives that need to be pursued:

1) Permanent 2 percent reduction in payroll taxes: While the temporary 2 percent payroll tax cut Obama signed is a start, the U.S. needs a permanent reduction in payroll taxes – which inflate hiring costs more than 15 percent. This can stimulate job creation to keep pace with the growing labor market, and bring down unemployment.

The Congressional Budget Office has found that lowering the payroll tax burden creates more jobs, per federal dollar spent, than any other action. A permanent reduction can spur growth and job creation to generate a stronger and more competitive economy.

2) Research and Development Tax Credit: We must expand this tax credit to businesses that invest in this. We should also increase research grants to small businesses that are developing new technologies to encourage investment and innovation – the drivers of job creation.

3) Regulatory reform: A key component of any plan to balance the budget and promote growth should be the elimination of regulations that businesses – both large and small – identify as significant impediments to expansion.

In the short-term these steps might reduce revenue, but the CBO has shown that every 1 percentage point increase in economic growth can generate an additional $150 billion in national income and incremental tax revenue of approximately $27 billion a year. Maintaining a 1 percent higher growth rate could add an additional $1.5 trillion in federal revenue over the next 10 years.

4) Growth enhanced tax reform: We need a comprehensive plan to get rid of the tax code’s distorting effects on businesses and individuals. We could reduce corporate deductions and the corporate tax rate, simplify the tax code for individuals and reduce personal tax rates to make for a pro-growth system.

a) Reduce the 35 percent corporate tax rate. The U.S. has one of the world’s highest corporate income tax rates. This encourages companies to site their most profitable operations outside the U.S and their least profitable here. A lower corporate rate would lower the cost of capital for U.S. firms, making them more competitive in relation to foreign firms — both abroad and at home.

b) Broaden the corporate tax base: We need to increase revenue by closing loopholes; by reducing the chances for tax evasion and cheating, and by eliminating or limiting special exceptions.

c) Limit corporate tax deductions: The current corporate tax system has many provisions that encourage businesses to invest in certain assets or engage in certain activities for tax reasons — rather than for economic efficiency. (Volcker Report, August 2010)

d) Reduce Individual Tax Rates to range between 8 percent and 26 percent: We need personal tax reform to lower rates across-the-board to provide real tax reductions for all Americans. Even with the Bush tax cuts, personal tax rates still range between 10 and 35 percent with the Obama surcharges.

e) Reduce or eliminate all tax expenditures and deductions like the home mortgage exemption and charitable exemption: Tax expenditures are revenue losses attributable to tax loopholes. Making tax expenditures part of formal budget process can put the U.S. on a path to reducing our deficit and living within our means.

We can eliminate preferences by closing tax loopholes for the rich.

4) Entitlement reform: Another integral part of any long-term plan to balance the budget and promote growth.

Medicare, Medicaid and, to a far lesser extent, Social Security– which account for 41 percent of the federal budget deficit—are on the brink of bankruptcy after decades of Americans paying far less in taxes than they draw in benefits.

Both Bowles-Simpson and Domenici-Rivlin said that we must rein in $4 trillion over the next 10 years through a variety of entitlement cuts.

a) Rein in the growth of Medicare and Medicaid spending: If current laws do not change, the CBO projects that federal spending on major mandatory health care programs will grow to about 10 percent of the gross domestic product in 2035 from roughly 5 percent of GDP today.

b) Bring Social Security Closer to Solvency: In Obama’s 2011 budget, Social Security outlays account for $738 billion—equal to the entire amount spent on national defense in the middle of two wars.

To bring Social Security into balance, we can make small changes in the formula for determining retirement benefits for a variation on progressive price indexing that begins at the 50 percent income category, to lower benefits for higher earners. We can also slowly raise the retirement age to 68.

5) Revenue Enhancement: Any long-term comprehensive plan must include some sort of revenue enhancement. We cannot just cut to the bone.

We can compensate for the revenue losses from the payroll tax reduction with a number of revenue initiatives.

By endorsing the Gang of Six, particularly Sens. Tom Coburn (R-Okla.), Mike Crapo (R-Id.) and Saxby Chambliss (R-Ga.) – each of whom, in their own way, have embraced tax increases – Obama can acknowledge that additional revenue will be needed.

Finally, the administration can call for a new national initiative, in light of Japan’s unfolding nuclear crisis, for a bipartisan energy policy that uses both tax incentives to stimulate domestic production and a tax on offshore oil to reduce our dependence on foreign sources.

Obama must take on this important challenge and work across party lines for to continue the initial job growth we have just seen; show a clear path to deficit reduction, and move our country forward.

Douglas E. Schoen is a Democratic pollster and strategist. He is the author of “The Political Fix: Changing the Game of American Democracy, From the Grass Roots to the White House.”

Just out of interest, the news over here has said that this week he has launched his re-election campaign. That seems awfully early for a presidential election campaign so I would like to know if that means election for the party nomination for Presidency. Does he still have to go through the same sort of primart elections he went through against Hilary Clinton? I have probably asked this before so excuse my poor memory.

The_Amber_Spyglass wrote:Just out of interest, the news over here has said that this week he has launched his re-election campaign. That seems awfully early for a presidential election campaign so I would like to know if that means election for the party nomination for Presidency. Does he still have to go through the same sort of primart elections he went through against Hilary Clinton? I have probably asked this before so excuse my poor memory.

Actually, he has yet to stop campaigning. He's been in campaign mode since his inauguration...

But to answer your question, he would only have to go through the primary process if a challenger were to present his or herself. Typically, sitting Presidents are not challenged in a run for a second term, or at least not seriously challenged. And while someone may eventually toss their hat into the ring to challenge Obama, they have zero chance of being successful. So yes, he does have to go through the process, but it's really just a formality more than anything else.

And no serious contenders are likely to present themselves unless they think he has zero chance of winning.

However I do feel with politicians in general (as I've seen it over here) that rather than do that they would rather let the leader take the fall and afterward proclaim how they strongly advised their leader to change his/her course of action and lo and behold putting themselves forward for the next leadership contest.

The_Amber_Spyglass wrote:And no serious contenders are likely to present themselves unless they think he has zero chance of winning.

Exactly. And really, as we won't know that he has no chance of winning until we see what Republican candidate emerges from their primary races, no serious contender will present as they cannot know he has zero chance until it is far too late to mount a primary challenge.

The_Amber_Spyglass wrote:However I do feel with politicians in general (as I've seen it over here) that rather than do that they would rather let the leader take the fall and afterward proclaim how they strongly advised their leader to change his/her course of action and lo and behold putting themselves forward for the next leadership contest.

Yeah, that's a pretty typical political ploy even here.