With time running out for Congress to raise the federal debt limit or see the nation face fiscal calamity and an almost certain end to the tenuous economic recovery, President Barack Obama has taken the lead on the issue with a proposal that accomplishes far more to reduce the nation's budget deficit than the Republicans have been demanding. It is tilted heavily toward spending cuts rather than tax increases, perhaps too much so. But it would both solve the immediate problem of the nation's debt limit and substantially address a long-term threat to American prosperity.
House Speaker John Boehner appears sincere in his desire to strike such a deal. But the division in the Republican caucus among those who recognize the importance of the opportunity they have been offered and those who can't see past the anti-tax dogma of the conservative base is scuttling the whole effort. Republicans are giving ample evidence that concern about the size of the federal debt that they have stoked over the last few years was empty rhetoric and that they put ideological purity over the good of the country. There is still time to salvage the situation and accomplish something meaningful, but Republicans will have to show that they are willing to compromise.
The exact parameters of a potential deal are unknown, but the broad outlines include cuts to defense spending and other programs, and reductions to entitlements — including Medicare and Social Security — totaling $3.2 trillion or more over the next decade. New revenues, including closing corporate tax loopholes — such as tax breaks for oil companies and the owners of corporate jets — plus the expiration of the Bush tax cuts for the wealthiest Americans after 2012, as scheduled, would total about $800 billion. That's a 4-1 ratio of cuts to new revenue. Mr. Obama has also suggested the idea of raising revenues by more broadly eliminating tax breaks and lowering tax rates — something Republicans have previously supported but are now balking at unless such a move is revenue neutral or a net tax cut.
Previous talks between Vice President Joe Biden and House Majority Leader Eric Cantor, aimed at perhaps $2 trillion in deficit reduction over the next decade, never came to fruition, and there is little indication that such a deal is any more politically likely than a big one. Either a small deal or a big one would be a tough vote for both parties, so, President Obama and Speaker Boehner rightly figured, they might as well go all the way.
Is deficit reduction really the most important issue facing the nation (and on the minds of voters) right now? Probably not. A few days after an extremely weak jobs report that brought the unemployment rate back up to 9.2 percent — a figure that understates the true extent of the problem — fixing the economy and putting people back to work is the most important thing. Nothing will reduce the size of deficits faster than strong economic growth, and in the short term, deficit reduction, and particularly steep spending cuts, will only make that task harder. It's important to note that the reason job creation has been so slow recently is that private sector gains have been nearly offset by cuts in the government workforce.
But in the long run, there is no question that our current deficits are unsustainable. Republicans are probably right that putting together a plan for restoring fiscal order — though perhaps not so precipitous a plan as they envision — would increase confidence in the economy.
But their contention that including tax increases in such a package would be the death knell of any recovery is belied by recent history. After cutting taxes, President Ronald Reagan increased them to help cope with the budget deficit, and prosperity followed. President George H.W. Bush and President Bill Clinton raised taxes, and we got the longest sustained economic expansion of the postwar period. President George W. Bush cut taxes, and we got years of anemic growth and stagnant wages, a decade in which what gains we had proved to be the product of a housing bubble whose lingering effects are still holding us back. Tax rates are a factor in economic growth, but they're not the only one and probably not the most important one.
With his news conference today, President Obama laid out a sensible position. Raising the debt limit is generally a routine matter, but the fight it has inspired this time has instead provided an opportunity to do something meaningful about the nation's long-term problems. The president said we should take it and that we should do so by adopting an approach that causes pain to both sides. "I am prepared to take on significant heat from my party to get something done, and I expect the other side to do the same if they mean what they say that this is important," the president said.
And that now becomes the crucial question: Do Republicans mean what they've been saying about the deficit, or was that all politics? Much more than the results of the 2012 election is riding on their answer.