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Obama the Bin Laden Killer Might Get 2013 Fiscal Cliff Gut Check

President Barack Obama has toggled between two personas: Daring and docile.

He’s the hawkish commander-in-chief who authorized the nighttime raid that killed Osama bin Laden. He personally oversees a covert drone war against al-Qaeda. He ordered Navy snipers to shoot and kill pirates in a bobbing boat.

On domestic fiscal issues, Obama has avoided the kill shot. He blinked first in his biggest showdowns with Congress: buckling to Republicans on extending the expiring Bush-era tax cuts at the end of 2010 and again over the debt ceiling a year ago.

If re-elected, the choices before him on the country’s fiscal future may make those he faced at the depth of the recession and during the debt-ceiling showdown seem easy.

The aggressive Obama option: call Congress’ bluff and refuse to sign any deficit-reduction plan that’s inadequate and continues income-tax cuts for top earners. Stick to his guns even if the stalemate triggers across-the-board tax increases and automatic spending cuts. The $607 billion fiscal retraction from those might throw the economy back into recession.

Then there’s the timid Obama scenario: Faced with the unbearable economic consequences, Obama flinches. He revokes his veto threat and signs a limited, compromise budget bill that preserves lower taxes for high-income Americans in hopes of a grand bargain later.

Cover of Bloomberg Insider Convention Magazine, Sept. 6 Edition Close

Cover of Bloomberg Insider Convention Magazine, Sept. 6 Edition

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Cover of Bloomberg Insider Convention Magazine, Sept. 6 Edition

Fiscal Cloud

Option Two might seem an easy choice. But the downsides of another failed solution are enormous. It would leave a fiscal cloud over Obama’s second term, cast a shadow over everything he’d want to accomplish, while deepening market worries that the U.S. isn’t serious about tackling its deficits.

“There are enormous risks, no matter what approach he takes, for the economy,” said Mark Zandi, chief economist at Moody’s Analytics Inc. Absent a solid, long-term plan, “the damage starts to mount pretty quickly after the election.”

The equation needed to reassure markets -- deficit reduction of about $3 trillion over 10 years -- would mean Obama standing up not only to Republicans but to fellow Democrats. Cuts in health-care entitlements, especially Medicare, would almost certainly be part of a major package, angering his core constituencies.

‘Extraordinary Gap’

Obama “knows exactly what he has to do” yet hasn’t done it, said former Wyoming Senator Alan Simpson, a Republican who was co-chairman of a deficit commission that offered Obama a draft plan that combined taxes and entitlement cuts. “I guess he thinks he can do it incrementally without ‘hurting anybody or getting anybody mad at him,’ and that’s a very extraordinary gap in getting things done.”

Whether it’s Obama or Mitt Romney, the Republican nominee, the next president “will have to bite not the bullet, but the rim and the casing, too,” Simpson said. If not, “the markets will pull the chain and they don’t give a damn about Republicans or Democrats or presidents. They care about their money.”

Ratings companies, such as Standard & Poor’s and Moody’s Investors Service, would immediately downgrade U.S. debt, said Maya MacGuineas, president of the Washington-based Committee for a Responsible Federal Budget. It’s a “dangerous tipping point” for the nation, she said.

‘Kicking the Can’

“They can’t duck it even if they wanted to,” said Bill Daley, Obama’s former White House chief of staff, who was a lead negotiator during last year’s debt fight. “You can’t keep kicking the can.”

Still, the obstacles to agreement are enormous. The president and lawmakers will start at the negotiating table right after the November election, with little time elapsed for emotions to cool from months of bitter partisanship.

Unlike with al-Qaeda terrorists, Obama can’t launch a drone attack on his congressional opponents. The credible threat of a veto -- something he’s done only twice, and on obscure legislation -- is his most powerful missile.

“He’s shown that he’s not a wuss and he’s got courage and the ability to lead,” said former Pennsylvania Governor Ed Rendell, a Democrat and Obama supporter. After Nov. 6, Obama can proceed “without having to worry about re-election.”

Republican vice presidential nominee Paul Ryan, a Wisconsin Representative and chairman of the House Budget Committee, said Obama doesn’t have the ability to get a deal done with lawmakers he considers “enemies.”

Leadership Questioned

“He just doesn’t have those statesman, leadership attributes, characteristics, to do this sort of thing,” Ryan said, before he was chosen by Romney.

Under Obama, the U.S. budget deficit has ballooned, to $1.3 trillion in 2011. The markets and the public have demanded more action.

Last year, Obama and House Speaker John Boehner came close to a deal that would have lowered the federal deficit by $4 trillion over 10 years. Their talks collapsed.

In the aftermath, Obama signed the Budget Control Act. It created a mechanism to force a better result, $1.2 trillion in spending cuts triggered at the start of 2013 if Congress doesn’t approve an alternative plan. At the same time, taxes would go up because the income-tax cuts first passed under President George W. Bush expire, along with payroll-tax relief and other breaks.

The $607 billion in combined spending cuts and tax increases that hit the 2013 budget -- what lawmakers now call the “fiscal cliff” -- amounts to 4 percent of gross domestic product, a retraction that would send the economy back into recession, according to the Congressional Budget Office.

Legacy at Stake

In post-election talks, Obama would be a better negotiator than before because he knows how far Republicans will go and he’d insist on a long-term deal, said Jared Bernstein, Vice President Joe Biden’s former economic adviser, now a senior fellow at the Center on Budget and Policy Priorities in Washington.

“You can’t shape a legacy if you’re dickering around with fiscal train wrecks every six months,” Bernstein said.

In his first term, Obama has hardly ever visited Capitol Hill except for his annual State of the Union speech and rarely invited lawmakers to the White House for off-hour social events. Now, he may need to personally cajole members of Congress in the vein of predecessors such as Lyndon Johnson, Ronald Reagan and Bill Clinton.

Boehner, even if he might compromise, can’t secure the broader Republican caucus for Obama. Tea Party Republicans remain steadfastly opposed to any deal that includes the president’s policy of raising taxes on higher-income people.

Grassroots Effort

Obama should be ready to lock everybody in a room until there’s a solution. There’s no option because “the consequences are dire if we don’t,” said Rendell, who recently formed a group to build grassroots support around a grand bargain.

While the politics is hard, the building blocks of a deficit agreement are readily available.

There’s the plan put forward in December 2010 by the national commission led by former Senator Simpson and Erskine Bowles, a onetime chief of staff to President Clinton. It recommended a mix of spending cuts, entitlement program adjustments and tax changes to cut the deficit $3.9 trillion over 10 years, on top of what it then called a “plausible baseline” that assumed expiration of the Bush-era tax cuts for top earners.

Additional options have been offered by budget-conscious groups of lawmakers and a members of a congressional supercommittee.

Entitlement Cuts

Obama already has shown he’d accept a portion of Republican-supported cuts in entitlements such as Medicare and possibly Social Security.

Chief of Staff Jack Lew and National Economic Council Director Gene Sperling will lead Obama’s White House team. They played similar roles during the Clinton administration fiscal battles that resulted in a balanced budget.

Last year, “with Republicans threatening our nation’s first default, with high gas prices and a fragile Europe threatening our recovery, the president unquestionably was forced” to close an interim deal, Sperling said. Now, what’s needed is “an honorable grand bargain” to finish the job, he said.

White House officials are discussing internally a $3 trillion deficit-reduction proposal for after the election. Their plan includes spending reductions and revenue on top of about $1 trillion in cuts agreed to last year. Details have been held tight, for fear of election consequences.

‘Golden Opportunity’

A re-elected Obama would need to swiftly capitalize on his victory to pressure Boehner and House Majority Leader Eric Cantor, a Virginia Republican.

“He’s going to have a golden opportunity to participate or at least set up procedures to reach a substantive agreement, along the lines of Simpson-Bowles,” said former Senator Judd Gregg of New Hampshire, a Republican. “If he doesn’t take action, he’s going to be confronted with a fiscal crisis as the markets lose confidence.”

If Obama must swallow politically toxic positions, such as the entitlement cuts and limiting deductions of mortgage interest payments, there’s a reward: Breaking through the gridlock might spur markets and boost the economy.

“If they come out of it with a grand bargain, we’re going to be sitting very pretty,” said Zandi. “The economy is going to gain traction very quickly.”

Daley said if Obama shows his steel and succeeds, he might also save the legacy of his presidency. On the other hand, he said, “if they keep stumbling around, we’ll be like Europe.”

To contact the reporters on this story: Julianna Goldman in Washington at jgoldman6@bloomberg.net; Hans Nichols in Washington at hnichols2@bloomberg.net

To contact the editor responsible for this story: Steven Komarow at skomarow1@bloomberg.net

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