Obama Drops Stimulus for Benefit Cut to Woo Republicans
Less than a week after job-creation figures fell short of expectations and underscored the U.S. economy’s fragility, President Barack Obama will send Congress a budget that doesn’t include the stimulus his allies say is needed and instead embraces cuts in an appeal to Republicans.
“This is not our ideal budget,” Gene Sperling, director of the White House’s National Economic Council, told Bloomberg Television. “This does reflect a compromise offer. There’s measures in here we would prefer not to take.”
Obama’s budget for fiscal 2014, set for release April 10, will propose reducing Social Security recipients’ annual cost- of-living adjustments by changing the inflation calculation, according to an outline released last week. The Medicare insurance program for the elderly would be cut by reducing payments to health-care providers and drug companies and imposing more costs on high-income beneficiaries.
While the White House hasn’t yet released specific dollar figures for the budget, administration officials said the plan puts the country on a path toward lower deficits, cutting the gap by $1.8 trillion over the next 10 years.
That suggests the federal government’s fiscal policy will continue to withdraw support from the economy next year, as it has this year, possibly further sapping growth.
The expiration of the payroll-tax cut on Dec. 31, an increase in marginal tax rates for high-income earners and automatic spending reductions, known as sequestration, will combine to depress U.S. growth this year by 1.5 percentage points, according to the Congressional Budget Office.
March payrolls grew by 88,000, less than the most- pessimistic forecast in a Bloomberg survey, after a revised 268,000 gain in February, Labor Department data released April 5 showed. While stocks have recovered from the recession, the Standard & Poor’s 500 Index (SPX) last week took its biggest drop of the year.
U.S. Treasury debt remains strong amid Washington’s continued inability to enact long-term deficit controls. Ten- year note yields fell 14 basis points, or 0.14 percentage point, to 1.71 percent last week in New York, according to Bloomberg Bond Trader data.
Obama’s goal since 2011 has been a grand bargain with Congress on a long-term deficit-reduction plan that ends a pattern of repeated showdowns driven by budget or debt deadlines. The budget is a fresh attempt to restart talks.
“While it’s not my ideal plan to further reduce the deficit, it’s a compromise I’m willing to accept in order to move beyond a cycle of short-term, crisis-driven decision- making,” Obama said in his weekly audio address on April 6.
Some of the cuts have been offered to Republicans before less formally. Putting them in the budget is a “signal that they are open to a fiscal deal and willing to move on entitlements to get one,” said Steve Elmendorf, a Democratic lobbyist and former congressional aide with close ties to the White House.
Allies of the president say it’s probably a futile move, and may be politically damaging to him and his party.
“Every time the president has tried this strategy his popularity has plummeted and the Republicans have picked his pocket,” said Damon Silvers, policy director for the AFL-CIO labor federation. While Obama doesn’t face re-election, Democrats in the 2014 congressional elections could be hurt.
“Unless congressional Democrats stand up to the president, the release of this budget will give the Republicans the ability to say what they really want to do is cut Social Security and Medicare,” he said. “The Republicans can use the president’s budget to erode the fundamental political allegiances that underpin the Democratic Party outside Washington.”
Nancy LeaMond, executive vice president of the AARP, the largest U.S. group representing the elderly, said in a statement this morning that members of Congress who back Obama’s proposed reduction in the Social Security cost-of-living adjustment would risk alienating older voters.
“This cut to Social Security would break the promise to seniors,” LeaMond said.
Obama has indicated he’ll include jobs initiatives in the plan, such as a network of manufacturing institutes to boost industrial innovation and $50 billion in stepped-up spending on public works projects such as roads and bridges. That would create construction jobs and benefit equipment manufacturers such as Caterpillar Inc (CAT).
Obama also advocated greater government commitment to research and development and education as a way of bolstering the nation’s long-term economic competitiveness. Administration officials said his budget will include a proposal to make pre- school available to all 4-year-olds, funded by an increase in tobacco taxes.
The White House last week announced plans for a $100 million commitment next year to fully mapping the human brain to help discover treatments for disorders such as Alzheimer’s, autism, epilepsy and brain injuries. Pharmaceutical companies such as Roche Holding AG (RO) and Eli Lilly & Co (LLY)., two drugmakers racing to develop treatments for some of the least understood brain disorders, may gain from research breakthroughs.
Defense spending for 2014 will be proposed at $526.6 billion, according to a budget document obtained by Bloomberg News. About $8.4 billion will go toward Lockheed Martin Corp.’s (LMT) Joint Strike Fighter.
David Plouffe, a former White House senior adviser, said Obama’s budget will “make clear” that the president “believes we need to do more for jobs, right now.”
Obama also will continue to insist on more tax increases on the wealthy as a condition for agreeing to the entitlement cuts, as he did in December. One of his proposals is to slow inflation indexing of income-tax rates, which means people will hit higher brackets sooner than under the current system.
While the Social Security and Medicare cuts aren’t a change in Obama’s position, placing them in the president’s budget will get public attention on the details of the offer, Plouffe said. That in turn will demonstrate to voters that Obama has “a serious, balanced deficit-reduction plan” and “lay bare House GOP inaccurate whining to the contrary.”
House Speaker John Boehner, an Ohio Republican, initially brushed aside the proposal in Obama’s budget.
“At some point we need to solve our spending problem, and what the president has offered would leave us with a budget that never balances,” Boehner said in a statement last week. “If the president believes these modest entitlement savings are needed to help shore up these programs, there’s no reason they should be held hostage for more tax hikes.”
Meanwhile, the president is taking pains to convince his allies that the compromise approach is right.
He used a closed-door visit with House Democrats on March 16 to argue that his party should seize the moment to reach a deal with Republicans on the future of Medicare and Social Security. He told them Democrats will be in the best position to shape the terms of the bargain while the party holds the White House, several participants told reporters afterward.
Still, Elmendorf, the Democratic lobbyist, said the path to any deficit-cutting deal would most likely begin with moderate Republican senators and later winning over the Senate leadership. House Republican leaders would most likely be the last to come on board, he said.
Retired Republican Senator Judd Gregg, a former chairman of the chamber’s Budget Committee, said placing the entitlement plan in the budget may build momentum for negotiations. Though the administration may have offered the ideas before, they must be published in concrete terms in the budget plan and government analysts provide estimates of their financial impact.
“It’s significant because it sets out a marker, and it’s a constructive marker,” Gregg said.
Obama has begun a series of private meetings with members of Congress, particularly Republican senators, in recent weeks. He is scheduled to join a dozen Republican senators for dinner on the evening the budget is released. He took part in a similar private gathering last month.
“The ground is very fertile in terms of getting an agreement, said Gregg, now a co-chairman of the Campaign to Fix the Debt. ‘‘All that it needs is for the president to show serious engagement, which he appears to be doing, with the budget and with meetings.’’
Republican Senator Lindsey Graham of South Carolina, one of the lawmakers Obama has been speaking with, said yesterday on NBC’s ‘‘Meet the Press’’ television program that by including entitlement cuts in his budget proposal Obama is ‘‘beginning to set the stage for the grand bargain.’’
‘‘This is somewhat encouraging,’’ Graham said. ‘‘His overall budget’s not going to make it, but he has sort of made a step forward in the entitlement-reform process that would allow a guy like me to begin to talk about flattening the tax code and generating more revenue.’’
Jon Kyl, the Senate’s second-ranking Republican until he retired in January, dismissed the budget proposal as ‘‘old wine in a new bottle.’’
Still, Kyl, now a senior adviser for the Washington law firm Covington & Burling, said some Republican senators are concerned about the level of defense cuts in the automatic spending reductions under the sequestration and may be looking for a way to restart negotiations on the budget.
‘‘There’s no harm in talking,’’ Kyl said, ‘‘and I suspect some people will view this as an opening gambit and see if some middle ground can be reached.’’
To contact the reporter on this story: Mike Dorning in Washington at firstname.lastname@example.org
To contact the editor responsible for this story: Steven Komarow at email@example.com