A Fundamental Fiscal Disagreement

It's not about taxes on the rich. It's about the sort of nation America is to be. 

Most of the coverage of the big budget battle between President Obama and House Republicans has missed the significance and magnitude of the issues involved and in the process has given the president something of a pass on the matter. This is unfortunate because the stakes are much greater and more ominous than one would think from following the ongoing battle through the media. And Obama faces a much more serious leadership challenge than is generally understood.

It all boils down to two questions of immense consequence. The first is this: What is the U.S. government going to do about the debt overhang—currently at sixteen trillion dollars and rising—that threatens the financial stability of the nation? The second question: What kind of nation are we going to be—a European-style social democracy or a nation committed to traditional U.S. concepts of limited government and measured federal intrusion into the private economy?

Reading the accounts in major media outlets last week, one would get the impression that this is really a typical partisan battle of the kind that has marked U.S. politics for years—and which could be settled if House Republicans would merely abandon their aversion to tax increases and opt for an outcome approaching Obama’s last offer. Michael D. Shear of The New York Times reflected this outlook in the language he selected to frame the matter on Saturday. “Though it has been 45 days since voters emphatically reaffirmed their faith in Mr. Obama,” he wrote, “the time since then has shown the president’s power to be severely constrained by a Republican opposition that is bitter…[and] unmoved by Mr. Obama’s victory.”

This passage, designed to sum up the essence of the battle, misses it entirely. First, the voters did not emphatically reaffirm their faith in Mr. Obama. He won by a margin of 3.68 percentage points. Only three presidents have been elected a second time by smaller margins—and all had disastrous second terms (Grover Cleveland, Woodrow Wilson and George W. Bush). That is not the kind of victory that puts significant wind into the sails of a second-term presidency. The Washington Post’s Karen Tumulty wanders into the same thicket by suggesting Obama’s reelection victory, coupled with polls, demonstrates that the tax issue has been settled in Obama’s favor—or should have been.

In fact, the election was notable for the fact that it didn’t settle the fundamental issues facing the country—of which Obama’s insistence upon raising tax rates on the wealthy is such a small matter as to be essentially inconsequential. Although the president made much of the extent to which the top 2 percent of wealthy Americans could seriously ameliorate the country’s fiscal problems if they would just “pay a little bit more,” that simply isn’t true. The problem is much greater than that, and while the president’s appeal to the politics of envy may have galvanized a slice of his base in the election, it will never be a successful governing approach in a country facing dire fiscal consequences from a debt overhang very close to flipping out of control.

Though taxes clearly must be part of any effort to address this fiscal threat, the biggest contributor to the country’s problem is federal entitlement spending, something the president didn’t deign to discuss during the campaign and shows little interest in accepting as a subject for serious negotiations now. The president’s first post-election offer encompassed additional tax revenue of $1.6 trillion over ten years and spending cuts amounting to $400 billion—four dollars in tax increases for every dollar of spending cuts. This was not the proposal of a serious negotiator.

The president’s blithe attitude toward the talks was reflected also in the following exchange, reported in The Wall Street Journal, between House Speaker Boehner, who traveled a considerable distance on taxes, and the president:

Boehner: I put $800 billion [in tax revenue] on the table. What do I get for that?

Obama: You get nothing. I get that for free.

Later, when Boehner asked the president if he would revert back to his offer of 2011, when he had put forth a plan with a closer parity between tax increases and spending cuts, the president said no. “You missed your opportunity on that,” said the president, ignoring that he had upended those talks himself with a last-minute demand for a further $360 billion in tax increases beyond anything discussed up to that time.

Thus does the media’s fixation with the Republican tax philosophy shroud a significant element of the story, which is the Democrats’ fixation with keeping essentially intact the entitlement programs—primarily, Medicare, Medicaid and Social Security—that are the largest contributors to the country’s looming fiscal crisis.

But behind that reality is the broader question of what kind of country we are going to be. For the past four years, federal deficits have exceeded 8.5 percent of the nation’s Gross Domestic Product, far surpassing anything seen by the nation in the nearly seventy years since the end of World War II. Clearly, a contributor was the federal government’s stagnant revenue picture resulting from the Great Recession and the country’s anemic economic growth since the start of the recovery. But in the meantime federal spending has surged by 27 percent, or $812 billion, and spending has hovered between 24.1 percent and 25.2 percent of GDP throughout Obama’s presidency.