published Tuesday, February 15th, 2011

Analysis: Obama hoping for Reagan-like rebound

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    President Barack Obama visits with students in a science class at Parkville Middle School and Center of Technology, in Parkville, Md., Monday, Feb., 14, 2011. (AP Photo/Carolyn Kaster)

WASHINGTON — Betting on an improving economy to reduce government deficits worked for Ronald Reagan, and it may for Barack Obama as well.

But the president’s big budget submission for 2012 does not deal with the deep problems of huge benefit programs such as Social Security, something Reagan did address. And it doesn’t cut nearly as deeply as today’s Republicans want. That guarantees a stormy — and probably lengthy — fight with congressional Republicans.

Despite GOP rhetoric, the bulk of the current budget deficit has little to do with Obama’s stimulus spending or other Democratic policies. It is basically due to a shortfall in tax revenues because of the recession combined with “structural” deficits — fast-rising costs of Social Security, Medicare and other guaranteed-benefit programs — carried over from previous budgets.

And these longer-term issues are not addressed directly — either in Obama’s new budget or in various GOP proposals.

“My view is that the president’s budget punted on the structural deficits issue. He did not give us any clear path forward to deal with them,” said David Walker, former U.S. comptroller general and now head of the balanced-budget advocacy group Comeback America Initiative.

Obama told Congress his budget embraced “hard choices” to chip away at the government’s mountain of debt.

But a large chunk of the deficit reduction he envisions would come from higher tax revenues, both from a return of healthy corporate profits and from selective new tax increases, and from lower recession-fighting costs associated with an improving economy.

And tax revenues are coming back. His budget projects revenues growing from $2.16 trillion in 2010 to $2.6 trillion next year and $3 trillion in 2013.

Reagan’s GOP lost 26 House seats in 1982, two years after his sweeping presidential victory. The losses were due in large part to the deep recession of 1981-82. But by 1984, the economy was once again humming. And Reagan was re-elected in a landslide.

As part of bringing down deficits then, Reagan signed a big tax increase in 1982, reversing much of his signature tax cuts of the year before. Obama also is proposing some tax increases, including a long-promised — but so far delayed — tax hike for households earning above $250,000 a year, beginning in 2013, after the next election.

“I don’t think there’s any question that the Obama team is focused on the Reagan re-election strategy,” said GOP consultant Rich Galen. “Reagan won 49 states in 1984 because it was ‘morning in America’ again because the economy had come back. I think the Obama people are rolling the dice.”

Reagan also later teamed with Democratic House Speaker Thomas P. “Tip” O’Neill to rescue Social Security from bankruptcy by raising the retirement age and Social Security tax rates while briefly lowering some benefits.

Obama did not embrace the key recommendations of his own deficit commission, which in December proposed stiff tax hikes and spending cuts it said would save $4 trillion over ten years. Obama’s new budget would trim just $1.1 trillion over that period. The commission also proposed an eventual rise in the Social Security retirement age to 69.

White House Budget Director Jacob Lew, who was O’Neill’s top domestic-policy adviser during the Reagan years and worked on that earlier Social Security compromise, said Obama’s budget “draws heavily on the ideas of the commission.”

“They put a lot of good ideas on the table,” Lew said. “We’ve done what’s most constructive and productive.” He said Social Security’s finances are not adding to budget deficits right now, and that crisis can be dealt with later.

In the earlier rebound of 1982, jobs returned relatively quickly.

Now the unemployment rate is at 9 percent even though the recession officially ended in the summer of 2009, and private forecasts suggest it will still be 8 percent or higher by Election Day 2012.

Obama’s own budget document projects jobless rates falling to just 8.2 percent in the final three months of 2012.

That’s still high, of course. But David Wyss, chief economist at Standard and Poor’s in New York City, said, “At least it will be going in the right direction, down.”

Still, Wyss suggested, deficits will keep rising even in the face of big spending cuts “if you don’t get tax revenues back.”

The White House predicts the annual deficit will spike at a record $1.65 trillion in the current budget year. The national debt, largely the sum of current and past annual budget deficits, stands at $14.1 trillion.

At the same time Obama promotes his budget for the upcoming fiscal year, House Republicans are pushing stiff tea-party inspired cuts for the current one, which ends Sept. 30.

“There’s so much jumbled this year,” said veteran budget analyst Stan Collender. “Republicans want to do a radical re-direction of the old budget even as the new one is being proposed. And they are talking about the deficit, but what they’re really talking about is spending cuts.”

Collender, partner-director of Qorvis Communications, a Washington consulting firm, said it’s still early in the budget game to expect compromise. “This is not a situation where everybody is ready to start negotiating,” he said. “The first thing you’ve got to figure out is where you’re standing, and what you’re standing on.”

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EDITOR’S NOTE — Tom Raum covers politics and the economy for The Associated Press.

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