President's Budget Carries Outsized Economic and Political Risks

by Patrick Lester, 4/23/2013

On April 10, President Obama released his proposed budget for the 2014 budget year. Unlike in the past, this year's budget came very late, after both the House and Senate had passed their respective budget plans. The president's plan is being billed by some as a compromise between the House and Senate.

The president's plan represents a substantial risk, both to the president's legacy and to the political fortunes of his allies in Congress. His budget would further reduce the deficit and cancel about $1 trillion in across-the-board spending cuts, called sequestration, largely by checking the growth in spending on entitlement programs and raising new tax revenues. Many of the proposed spending cuts target corporate subsidies, including agribusiness subsidies and excessively high prices paid to pharmaceutical companies in the Medicare program.

The plan also risks alienating several core supporters of the president. Among the more controversial proposals is one that would adopt a new inflation measure, called the "chained CPI," which would reduce benefits paid to Social Security beneficiaries. Another is the administration's primary tax proposal – a limit on income deductions for high-income taxpayers – which does not exempt charities and would therefore reduce individual charitable giving by an estimated 2.2-4.1 percent per year, according to the Urban-Brookings Tax Policy Center. Finally, by supporting further deficit reduction while the economy is still weak, the plan also risks prolonging the already slow economic recovery.

"Obama and his advisers don't necessarily view Chained CPI as good policy," wrote Greg Sargent at The Washington Post. "But they think a Grand Bargain is ultimately a better outcome than continued sequestration, and the only way to the former is to peel off individual Republicans who are open to new revenues."

So what has been the reaction among congressional Republicans? "It's just not serious," said House Speaker John Boehner (R-OH). "It's a step backwards."

Rep. Greg Walden (R-OR), chairman of the National Republican Congressional Committee, went further, calling the president's proposed Social Security cuts a "shocking assault on seniors."

Boehner later distanced himself from Walden's statements, but it is not clear how serious he was. "I've talked to Chairman Walden and I've had a conversation and I'll leave it at that," he said.

Republicans Angle for Midterm Gains

House Republicans may be crying crocodile tears. "Even if it is cynical for the party of Paul Ryan to object to assaults on Social Security and Medicare by a Democratic president, the cynicism works," wrote John Nichols for The Nation.

Nichols continued, "Pointing out—loudly—that a Democratic president and his allies are abandoning a historic Democratic commitment does not turn Democratic voters into Republican voters, it turns Democrats and Democrat-leaning independents into non-voters. This has long been the essential element to Republican success in mid-term elections."

Congressional Democrats have reason to worry. Headed into the 2014 midterms they possess a narrow majority in the Senate, where they hold 53 seats to 45 for the Republicans, with two independents that typically caucus with the Democrats. A switch of six seats would cost Democrats the Senate, something that is not impossible because Democrats are defending 21 seats compared to just 14 for Republicans.

Senate Democrats have already seen a wave of retirement announcements. Political analyst Charlie Cook rates three of these seats – those occupied by Sens. Tom Harkin (IA), Tim Johnson (SD), and Jay Rockefeller (WV) – as "toss ups." Several others also face danger, including Sens. Mark Begich (AK), Mark Pryor (AR), Mary Landrieu (LA), Max Baucus (MT), and Kay Hagan (NC).

Cook says it is "too early" to say that the Democratic Senate majority is in danger, but presidential missteps may make the difference.

Austerity Advocates Suffer a Setback. Is the Administration Listening?

Another recent development with major implications for budget policy came from the field of economics last week. A study by two Harvard economists, Carmen Reinhart and Kenneth Rogoff, that had been widely cited by proponents of austerity was punctured by a new paper that showed it suffered from missing data and database errors.

The authors originally claimed that their data showed that when national debt exceeds 90 percent of gross domestic product, economic growth slows dramatically. It has been used by many who argue that the United States must stabilize its own debt or risk prolonged stagnation.

"What the Reinhart-Rogoff affair shows is the extent to which austerity has been sold on false pretenses," wrote Paul Krugman in an op-ed for The New York Times. "For three years, the turn to austerity has been presented not as a choice but as a necessity. Economic research, austerity advocates insisted, showed that terrible things happen once debt exceeds 90 percent of G.D.P."

"But 'economic research' showed no such thing; a couple of economists made that assertion, while many others disagreed. Policy makers abandoned the unemployed and turned to austerity because they wanted to, not because they had to," Krugman said.

"There's basically no evidence that fast austerity programs, or ones undertaken during economic downturns, are even good at reducing the debt burden," wrote Dylan Matthews at The Washington Post. "It's very clear they're bad for growth."

If the Obama administration is not paying attention to this controversy, it should be. Poor choices that adversely affect the economy also have political consequences: the supposed political dividends of adhering to an austerity budget in Washington may vanish in the midterm elections of 2014.