Obama’s Pyrrhic Defeat

Aug 1 2011 @ 7:03pm

Visit msnbc.com for breaking news, world news, and news about the economy Zoom out a little. Think of this latest skirmish, that ended tonight, as part of an endgame to a thirty years’ fiscal war in American politics. Reagan began it, by betting that slashing taxes would spur growth; he was right and wrong. Growth really did happen in the 1980s; but he bequeathed a debt that is with us today, and that he tried only fitfully to fix on his watch. The early 1990s saw the country draw down that deficit, by continuing Reagan’s tax hikes under Bush I and then Clinton, and thanks to a peace dividend. Clinton’s eventual surplus was, alas, more mirage than reality, for it hadn’t solved the long-term entitlement problem or the healthcare cost problem, and was inflated by the tech bubble. Bush II comes in and wreaks havoc. He doubles down on Reagan on taxes and declares that deficits don’t matter, while adding one major new entitlement, two massively expensive wars and throws in a financial collapse as a goodbye present. The result of all this was a recession that helped metastasize the debt even further. This was what Obama inherited. Despite this, the new president was able to borrow even more for a stimulus to prevent a second great depression, and insisted, even in hard economic times, on a modest bill for universal healthcare. He got both. They used up a lot of political capital. W-debt15-correction-gWhat then? I think the Grand Bargain is the final step of this thirty year debt dance, (along with serious cost controls in the healthcare sector, pencilled into Obamacare). The Grand Bargain is a big entitlement-and-defense cut package balanced by higher taxes on those who have done so well during the last thirty years. Much of this, in the view of many economists, could be done alongside tax reform to minimize the impact of more revenue on marginal rates of income tax. Last fall, we had a chance to do this, with the Simpson-Bowles commission. But the bipartisan Congressional will to act on it was weaker than the desire of both parties to play politics with entitlements and taxes. And Obama decided to lead from behind on this one, and ended up following. So where does that leave us? It leaves us with more time without a real solution to the deepest problems. That’s a huge defect in the current stop-gap deal. But it really is just a stop-gap deal. It points pretty quickly to a Grand Bargain in the super-committee, and for the first time has attached real incentives for both sides for it to work. What has just happened is, to my mind, therefore the following: 1. The Republicans used the debt ceiling as blackmail for a big cut in discretionary spending. This was a step too far, in my view, and redolent of a truly reckless attitude toward government and the American economy. On the other hand, this was not just “another raise” in the debt ceiling as some have argued. It’s a debt ceiling of over $14 trillion. And it’s a debt ceiling that in every single poll, a majority of Americans did not want to raise, without the equivalent or more of cuts being imposed. In retrospect, it’s not a huge surprise that Obama, especially because he is actually a responsible character, surrendered. 2. But the terms of surrender are to Obama’s advantage. He has taken the nuclear weapon of the debt ceiling off the table till after the election, neutralizing his opponents’ main weapon against him. He has revealed a split in the GOP between those who are fixated on no revenue increases and those who want continued Cold War level defense spending. He has also made his preferred Grand Bargain more likely to happen with the terms for the super-committee. And he is now free – better late than never – to throw caution aside and campaign around the country for a balanced solution of tax hikes and spending cuts that can resolve our future debt decisively.

He has won his own battle: he is perceived as more likely to compromise than the GOP in a country whose independent middle wants compromise. If the battle of 2012 is between low taxes or high taxes, the GOP wins. But if it’s fought on whether we should balance the budget solely by spending cuts, often for the elderly and needy, while asking nothing from the wealthy, then Obama wins.

For both Obama and the Republicans, a win-win scenario is therefore perfectly possible from now on, unless Obama has totally depressed his base or the GOP really wants to insist on an anti-government purity that isn’t shared by the public. In other words, the drama of this deal is far greater than the actual substance. It’s a tactical victory for the GOP; but for Obama, it could be a strategically pyrrhic defeat.

It’s still all to play for, in other words. This was just a ghastly revelation of the recklessness of the GOP’s current tacticians, not a measure of their strategic genius. Know hope.