Articles

The Outlines of a Budget Deal Are Obvious

November 28, 2012

With a big assist from Ohio, the president clinched a second term after a tough fight. In his victory statement, he pledged to "continue our economic progress" and see "our servicemen and women . . . come home." There were high hopes and a belief he had a mandate.

The year was 2004, and the president was George W. Bush.

The turbulence began almost immediately. Mr. Bush ran on Social Security reform. But in the election aftermath, no congressional Democrat supported it while many Senate and House Republicans were eager to see the issue go away.

Mr. Bush's comprehensive immigration reform floundered as congressional Democrats, especially Senate Majority Leader Harry Reid, did in the measure. Some of its supporters, including then-Sen. Barack Obama, voted for amendments that gutted the reform.

While Mr. Bush campaigned on a platform of winning the Iraq war, after the 2004 election many Democrats—including Mr. Obama—still tried to defund the war, even opposing a debt-ceiling increase in an attempt to starve its funding.

The lesson? A president doesn't get his way in a second term nearly as easily as he does in his first term. Like his predecessors, Mr. Obama can expect opposition not just from the other party, but also from his own. It's natural for congressmen in the president's party to begin looking out for themselves more. Their names will be on the next ballot, not his. And 2014 is likely to be ugly for Democrats. The White House party has lost seats in every second-term off-year congressional election except one—1998, when Democrats gained five House seats and stayed even in the Senate. 

The dissent has already begun over the president's calls for "the rich" to pay more in taxes. Republicans oppose raising tax rates, believing it will hurt small business and the economy. Yet Democrats are also expressing concerns about Mr. Obama's extensive tax increases. Some are red-state Democratic senators up for re-election in 2014, including Senate Finance Committee Chairman Max Baucus of Montana, who opposes raising the estate tax. Others are among the nearly 40 House Democrats from districts Mitt Romney carried, or who won their own seat with less than 55%.

The negotiations over how to avoid the so-called fiscal cliff will reveal Mr. Obama's real goals. Does he want to raise the income-tax rates on the rich to redistribute wealth or generate more revenues for the government?

If the president is dogmatic about raising tax rates, the country will know that his main objective is to pit congressional Republicans against one another, while furthering his redistributionist agenda. If his goal is increasing revenues, he can strike a deal by closing or limiting deductions and loopholes, perhaps even lowering income-tax rates in the process, as recommended by his own Simpson-Bowles deficit-reduction commission.

Then there's spending. In the past four years, Mr. Obama has spent $650 billion more than the Congressional Budget Office forecast in January 2009. While this fiscal year's federal revenues of $2.469 trillion nearly match 2008's total of $2.524 trillion, the budget is now $3.563 trillion, up 20% from 2008's $2.978 trillion.

Will a second term feature a new, fiscally responsible Barack Obama? We'll know soon enough.

Real spending restraint must involve changes to entitlements and other mandatory programs, which (along with interest payments) comprise 64% of this year's budget. But the White House says it's not considering any Social Security reforms, has offered little in the way of fixes for Medicare, and now finds that its union and liberal pressure-group allies vociferously oppose any entitlement changes.

As for Republicans, they are smart to offer reasonable solutions, conceding the need for more revenue without abandoning opposition to raising tax rates. They have rightly insisted on linking any revenue measures to entitlement reforms that bend the long-term budget base line to something that is sustainable. They know that America's real problems are too much spending and not enough economic growth, neither of which will be solved by higher taxes.

The outlines of a deal are obvious, but only the president can make it happen. That will require him to do in the next few weeks what he failed to do in his first four years: strive for genuine bipartisan solutions.

If Obama 1.0 is at the negotiating table, the country will go over the fiscal cliff. If that happens, public disgust at the political class—already near record levels—will go off the charts. Both parties will pay a price, and so will America's most visible politician. It would be an unfortunate way to begin a second term.

This article originally appeared on WSJ.com on Wednesday, November 28, 2012.

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