Obama’s Challenges Ahead

President Obama’s recent spate of foreign policy successes has seemed to shore up his popularity.   He easily defeats any Republican rival in a CNN poll looking at 2012 — admittedly a ridiculously long time frame — and his approval ratings are stable at around 50%.    The President has proven he can make some difficult choices, compromising on many key points in order to get a health care reform bill planned, push for a new nuclear non-proliferation regime, and make key compromises with China and Russia to get a START Treaty signed and an effective sanctions regime against Iran more likely (though not yet a done deal).

Yet even as Obama starts looking like the transformational yet pragmatic President he was billed at, one challenge stands before him with daunting political risks:  the deficit.    This is an issue Obama has to address sooner rather than later.   That may seem like an odd thing to say when the recovery is only starting to take hold, and a sudden reduction in federal spending might stifle growth.   However, if the stimulus works and we get a spurt of jobs growth in 2011-12, we need to be ready to fundamentally transform economic and budgetary policy.

To handle the deficit the first issue to address is immigration reform. Right now Americans are aging, and as the baby boomer generation retires there will be fewer workers to support them.   In short, we need younger workers, and ones who are willing to have children.   That means allowing more people into the country and giving legal citizenship to many already here.   There are political risks with such a move, as we saw when President Bush tried it in 2007.

First, unemployment is high.   That makes it an especially bad time to talk about bringing in new citizens or workers from other parts.  Second, there is a kind of unspoken fear on the right that America might become ‘too brown.’     While the US in general has an easier time with such issues than European countries where ethnicity is coupled with national identity, the current “tea party” movement speaks to the fear by some that America is being ‘lost.’   The good news is that there are Republicans who believe in and support immigration reform, and if the debate ripens when the economy is picking up, Obama might be able to succeed where President Bush failed.

Without immigration reform, the demographic nightmare awaiting us will bring about either unsustainable deficits (and ultimately a weak dollar and higher interest rates) or cuts in government support for the elderly.   Bringing in more workers doesn’t alone solve the problem, but is a necessary step.

Just as necessary is a realistic restructuring of the budget to bring spending into line with income.   This will have to mix spending cuts with tax increases, likely some sort of value added tax.   The political challenges here are immense.  Ever since the tax payer “revolt” of the 1980s, the Republicans have relied on a mantra of ‘no new taxes.’   Attacking Democrats for increasing taxes works.    Until now, both parties were able to avoid economic reality and its political consequences with a devil’s bargain:  spend more and tax less.    That required a mix of economic growth and increased borrowing.   The latter has to if not cease, at least slow down.

Budget cuts will be as hard to swallow for the left as tax increases are for the right.    The future economic health of the country may rely on it, however.   The oft stated claim on the right that lowering taxes grows the economy and thus increases revenue is absurd on its face.   By that logic, the maximum revenue would come when tax rates are zero!   Also, it depends very much on how government spending taxes place.   Most economists recognize, for instance, that tax cuts do not work as well as direct spending as an economic stimulus.   Government spending on infrastructure and efforts to promote economic productivity and exports may do far more to increase revenue than a tax cut would.

By the same token, spending cuts do not necessarily mean that the poor or elderly will suffer more.   Just as tax cuts don’t always bring economic growth, government spending doesn’t always help citizens.   In a worst case scenario, it can promote a sense of dependency.    So there needs to be a real re-thinking of how government programs operate, spend money, detect fraud, and impact those they serve.   The same goes with military spending.   Spending more doesn’t necessarily make us safer.  We spend half the world’s military budget and have no foe rivaling us in military terms.   The threat of terrorism requires smart money, but not a huge military behemoth.

To tackle these issues, Obama has to chart a careful course.  Health care was a first step — without having some ability to contain health care costs, the demographic effects multiply.   The next step should be a focus on cutting spending on domestic programs.   In part, this is political.   To undertake the changes needed, Obama needs to keep independents on board, believing that the change he’s bringing is essential.    In fact, getting the left mad at him for questioning sacred cows might gain him political capital.   He should at the same time be laying the ground work for comprehensive immigration reform.   Highlight budget cut ideas and discussions this summer, and then early in 2011 make immigration reform the “big issue.”

In 2011 and 2012 the focus should be on the budget, both domestic and military.   At the same time, the ground work should be set for considering at least a small value added tax (VAT).   The VAT could be sold as necessary due to the budget, and not all that painful.   Sometimes, the President could say, we have to pay for what we buy.   The Republicans will be all over that, noting that the first income tax was also relatively painless, but it grew.  And they will be right — rising a VAT in place is much harder than creating one.  But we need more revenue.   We can’t cut our way to economic prosperity.

So does Obama have the political courage to take on this issue?   My sense is he does, he seems to realize that the current path is unsustainable.   But does he have the political skill and support to pull it off, especially with the Republicans in a mood to obstruct?   The answer, I think, ultimately rests with the Republicans.   Do they really believe that the answer to this crisis is to just cut taxes and spending?  Do they think such a path is feasible?   Or upon reflection, will they recognize (as many already do) that the problems the country faces cannot be solved by ideological solutions from the left or the right.   Ideology is a fantasy land of assumptions and simplifications.   Reality is complex and multi-faceted.

Obama cannot do this without at least some Republican support.   Yet for all the press the “tea parties” and talk radio have garnered, the rank and file of the GOP chose McCain as their candidate in 2008 (talk radio and the far right hated him), and aren’t into the political jihads of the extremists on either side.  If Obama remains popular, if he can still get legislation passed, and if the economy turns upward, suggesting that 2012 could be a Democratic year, the political landscape will change.   That is a lot of “ifs,” but not unrealistic.    Or, to put it more bluntly, health care reform was just a warm up exercise.

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  1. #1 by Mike Lovell on April 15, 2010 - 15:52

    Have you given much thought to the “fair tax” issue in place of the VAT? Both taxes eventually, as all do, go to the consumer, but potentialy raise billions more than the current system we’re in as it will shore up losses on “underground” incomes when its spent.

    As for raising money while making America stronger in the long run, what about reducing expenditures (such as redundant agencies that oversee the same things but cost more than they are worth) first, taking a chunk out of the deficits and debt, and setting a trigger date that results in automatic dropping taxes a few years down the road to increase investments and business production here?

    As for confering the status of “citizen” upon some of the illegal immigrants already here, instead of blanket amnesty, why not at least make them go through the basics of citizenship requirements, such as the learning of english, constitutional eduction, etc etc?

    • #2 by Scott Erb on April 15, 2010 - 18:19

      The fair tax is actually a good idea — though as with health care reform, I rely on my wife’s expertise here. She took a class where they had to figure out what the best tax system would be. She came up with a progressive fair tax (used the fair tax model, then tweaked it). Since she’s the CPA, who am I to doubt it? So I think you’re probably right there.

      Yes, I think there should be a road to citizenship, not blanket amnesty. I do think a lot of spending can be reduced. It sounds like smoke and mirrors when people say “cut waste and fraud,” but there is a lot of waste, fraud and redundancies! A trigger date to drop taxes might also be politically smart too — sort of a reverse of the tax cuts passed about eight years ago with an expiration date.

  2. #3 by Chris Hariss on April 16, 2010 - 00:36

    It fits our needs perfectly the advantage of immigration reform on the country: Greater supply of unskilled workers, a younger workforce, and skilled workers in needed sectors. But there is also a disadvantage of immigration reform like Greater poverty, more educational cost, lower unskilled wage levels, and increased danger of terrorism.

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