Make the president a spending offer he can't refuse

Reuters

U.S. President Barack Obama makes a statement to the press about the government shutdown in the briefing room of the White House in Washington, September 30, 2013.

Article Highlights

  • It’s true that granting Obama flexibility to make cuts could allow him to reduce funding for Repub priorities.

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  • The rigid across-the-board cuts that the sequester demands maximize the disruption caused by cost reductions.

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  • If Republicans are careful not to overreach, they may be able to accomplish more than just political gain.

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  • Federal spending has grown twice as fast as GDP over the past 10 years.

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  • Federal debt relative to GDP has risen to nearly twice its 40-year historical average.

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Have right-wing Republicans fooled the moderate wing of their party into pursuing a quixotic effort to defund Obamacare at the risk of severely disrupting the government and reducing their chances in the 2014 midterm elections?

That seems doubtful. With the Standard & Poor’s volatility index below 15, there is little evidence the financial markets, much less other serious observers, think Congress will fail to pass a spending bill. What, then, can Republicans accomplish with a strategy that many see as doomed to fail?

The Republican-backed House bill, which ties passage of a continuing resolution to a one-year delay of the Affordable Care Act, forces Senate Democrats to reaffirm their support for Obamacare. For many Democratic politicians, taking this stand doesn’t matter.

But seven Democratic Senate seats are in play in the upcoming midterm elections in conservative states that voted for Mitt Romney in the 2012 presidential election — South Dakota, West Virginia, Montana, Arkansas, Louisiana, Alaska and North Carolina. Polling shows that support for the health care law is low among swing voters. This is especially problematic because the electorate in midterm elections tends to skew toward older and more affluent voters, namely, those with health care.

Given that Democrats have a 54-46 majority (including two independent senators who vote with Democrats), these seven seats could make the difference in which party controls the Senate.

This strategy only fails if Senate Republicans shut down the government, which seems quite unlikely. If the strategy unfolds correctly, right-wing Republicans can grandstand, moderate Republicans can say they wanted to defund Obamacare but were sensible not to force a government shutdown, and at-risk Democratic Senate seats will be left in greater jeopardy. While Obamacare stays funded, Republicans improve their chances of taking back the Senate next year and the presidency in 2016.

If Republicans are careful not to overreach, they may be able to accomplish more than just political gain. To succeed, Republicans need to make the president an offer he cannot refuse — they can, for example, grant him the authority to give government agencies greater flexibility in making budget cuts required by the sequester.

The rigid across-the-board cuts that the sequester demands maximize the disruption caused by cost reductions, which increase the likelihood of a public backlash. By replacing these blunt cuts with a scalpel, Republicans can increase the effectiveness of the sequester and hold the president responsible for the success of their implementations.

Sens. Patrick J. Toomey, R-Pa., and James M. Inhofe, R-Okla. and Reps. Paul D. Ryan, R-Wis., and Jim Cooper, D-Tenn., have written bills that grant this flexibility, but the president and his party have rejected them in order to make any cuts as difficult and damaging to implement as possible.

It’s true that granting the president flexibility to make cuts could allow him to reduce funding for Republican priorities. But Republicans could negotiate reasonable restrictions to the president’s discretion.

Without a congressional majority large enough to override a presidential veto, Republicans can’t slow mandatory spending increases except by truly withholding their support for a continuing resolution or debt ceiling increases, thereby significantly disrupting the government, which the public strongly opposes. Given their weak negotiating position, the only mechanism likely to slow government spending is the sequester.

The sequester, however, drives discretionary spending to less than 6 percent of gross domestic product in five years — 30 percent below its 40-year historical average. Those low levels of spending will be difficult to sustain if for no other reason than strong public sentiment, and harder still without the flexibility to implement cuts intelligently. With the sequester likely to be the only practical vehicle available to limit spending increases, Republicans should use what little negotiating leverage they have to make the sequester as sustainable as possible.

Federal spending has grown twice as fast as GDP over the past 10 years. Despite marginal tax rates that are higher than those during the Clinton administration, this level of spending has opened up a projected $650 billion per year deficit, nearly a hundred billion dollars more without an expected one-time increase in reimbursements from Fannie Mae and Freddie Mac, and hundreds of billions of dollars more at normalized interest rates.

Federal debt relative to GDP has risen to nearly twice its 40-year historical average — a level that threatens U.S. prosperity — with no end in sight. Nevertheless, the president and the Democrats refuse to modify entitlement spending, are eager to unwind the sequester, and have proposed further increases in spending.

Americans are depending on Republicans to use their negotiating leverage to slow the rate of spending increases. But they are also depending on Republicans to negotiate responsibly. Given the public’s insistence that negotiations not jeopardize government operations, the only proposals likely to succeed are ones that paint the president and his party as unreasonable if they reject them — like one that grants the president greater flexibility to implement sequester cuts. And even then, the odds may be long.

Edward Conard, a former managing director at Bain Capital, is a visiting scholar at the American Enterprise Institute. He’s the author of “Unintended Consequences: Why Everything You’ve Been Told About the Economy Is Wrong.”

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About the Author

 

Edward
Conard
  • The author of the New York Times bestselling book "Unintended Consequences: Why Everything You've Been Told about the Economy is Wrong" (Portofolio / Penguin, 2012), Edward Conard was formerly a partner at Bain Capital, where he led the firm's acquisition of large industrial companies. Earlier, Conard worked for Wasserstein Perella & Co., an investment bank specializing in mergers and acquisitions. He also worked for the management consulting firm Bain & Company, where he headed their industrial practice, as well as Ford Motor Company, where he worked as a product and manufacturing engineer. At AEI, Conard will continue his work on US economic policy - in particular, on the effect of taxes, government policies, and finance on risk-taking and innovation. 

  • Email: edward.conard@aei.org

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