How Obama killed the grand bargain
The president has no one to blame but himself for the lack of a budget deal.

Reuters

President Barack Obama's fiscal 2014 budget proposal is released and distributed to Senate staff members on Capitol Hill in Washington April 10, 2013. The White House on Wednesday proposed a budget that sharply trims the U.S. deficit over three years by forcing millionaires to pay more in taxes and enacting spending cuts that replace the "sequester" reductions that went into place last month.

Article Highlights

  • Prospects for a “grand bargain” on the budget finally seem dead

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  • The chances of a budget compromise have been low all year, and are due to the tactical choices made by the president

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  • The president should have known he was only going to get one shot at a tax increase, not two

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Prospects for a “grand bargain” on the budget finally seem dead, and, we’re told, the reason is the improved budget outlook. While it is certainly true that the Congressional Budget Office’s latest projections of federal deficits over the coming decade are less dismal than they were previously, that’s not the main reason Washington has lost interest in a bipartisan compromise on the budget. The chances of such a compromise have been low all year, and are due to the tactical choices made by the one person with the most to gain from a deal — the president.

There was a period when the prospects for a “grand bargain” were on the rise — right after President Obama’s reelection in November 2012. The president was riding high and had campaigned on a “balanced approach” to deficit reduction, by which he meant any deal to reform entitlements and cut spending must also increase taxes, especially on the rich. In the weeks after his reelection, the president might have been able to press a demoralized congressional GOP into agreeing to a large, multiyear budget framework along these lines.

That certainly would have been in his interests. Based on where things now stand, his presidency will be defined in part by the $7 trillion in debt he will run up during his time in office. A “grand bargain” on the budget at the beginning of his second term could have fundamentally altered the legacy of his budgetary performance in office, turning what is sure to be viewed as a rather large failure into perhaps a modest achievement. Moreover, a multiyear budget deal would have taken fiscal issues, including the sequester the administration despises, off the table for the remaining years of the president’s time in office, freeing up his administration to press for agenda items he clearly is more passionate about.

But for some unfathomable reason, the president decided to pursue a different strategic approach. Instead of moving quickly to do what was necessary to create the conditions for a budget deal, he chose instead to pursue a two-part strategy on taxes and spending. That was a huge mistake.

First, after his reelection, the president moved quickly to secure the largest tax increase on the rich that he could get out of a reluctant House GOP. The thinking was, apparently, that he had campaigned on taxing the rich, and won, and so he was going to secure the spoils of victory without having to concede anything to his opponents. He then planned to come back for another bite at the tax-increase apple as part of a “grand bargain” in 2013.

And that’s where he made a big miscalculation.

Sure, in late 2012 and early 2013, the president did have sufficient political momentum and leverage to force through the $600 billion tax increase as part of the fiscal-cliff deal. And, yes, the deal included no spending cuts to speak of. But what the GOP got in return was a permanent extension of about 90 percent of the Bush-era tax schedule. That’s a $3.6 trillion ten-year tax cut relative to the tax levels that would have existed if all of the Bush tax cuts had been allowed to expire permanently. That was enough for many in the GOP to go along with the tax deal.

But what the president apparently didn’t realize, but should have, is that, once this deal was struck, tax hikes were off the table for the foreseeable future, and probably for the rest of his presidency. What possible incentive would the GOP have to raise taxes again? To secure entitlement cuts? Maybe, but to raise taxes twice within a year, the entitlement changes would have to be really fundamental, like premium support in Medicare or block grants in Medicaid. And there was zero chance that these reforms could get enacted in 2013.

The president should have known he was only going to get one shot at a tax increase, not two. Instead of getting his tax increase — possibly a more substantial one — in the context of a comprehensive budget deal, what he got was a relatively insignificant tax hike as part of a deal to permanently extend almost all of the Bush-era rates. There’s no way to spin that into a major Obama victory.

That said, the congressional GOP should shed no tears over the fading prospects for a grand bargain this year. In the aftermath of the 2012 election, if a deal had been struck, it would have inevitably tilted toward Democratic priorities — higher taxes plus cost cutting in Medicare and Medicaid based on more price controls and government regulation, not genuine competition and consumer choice. The GOP is far better off pursuing its agenda of spending restraint and genuine conservative reform as individual legislative opportunities arise.

It’s often said that there hasn’t been a “grand bargain” because conservatives are rigidly opposed to raising taxes. But many Republicans voted for the president’s tax increase in early 2013, so that doesn’t look like the reason. Rather, the president has, at crucial moments, made decisions that have undermined the prospects for a budget deal.

He did it in 2011 when he essentially ignored the recommendations of the Bowles-Simpson Commission (a panel he appointed). And he did it again when he chose to pursue a tax deal at the end of 2012. In both instances, it was clear that the president wanted no part of any compromise that would offend his base of supporters (most likely via entitlement reform), even if he and many Democrats came out ahead. He wasn’t prepared to do anything to spook them in 2011 as he was gearing up for reelection, or in late 2012 after his supporters had done so much to return him to office.

Of course, the fact that a grand bargain is unlikely doesn’t mean the nation’s budget problems have been resolved. Far from it. CBO’s latest projections show the federal government will borrow an additional $6.3 trillion over the next decade, and that’s if the nation avoids a sharp jump in interest rates, a slower-than-expected recovery, or another recession.

The president had his opportunities to take action to reduce the risks of a debt-induced economic crisis. He chose instead to put other priorities ahead of forging a deal with his adversaries. For that, he will rightly be held accountable by those writing the history of his presidency.

— James C. Capretta is a senior fellow at the Ethics and Public Policy Center and a visiting fellow at the American Enterprise Institute.

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