Monday, December 3, 2012

Obama Bets Re-Election Gave Him Power to Win Fiscal Cliff

President Barack Obama’s hard stance on the “fiscal cliff” talks is a bet that his re-election gave him the political clout to force Republicans to accept higher taxes on upper income Americans as a first step toward reducing the federal deficit. 

Obama’s aggressive posture was shown in the proposal Timothy F. Geithner laid out for congressional leaders last week: a reprise of the president’s prior budget proposals, with $1.6 trillion in tax increases and about $350 billion in health care savings, primarily in Medicare. He also asked for an Aug. 1 deadline for decisions on income tax overhaul and further spending cuts.

“You could see the shock in the Republicans -- this is not what they were expecting from the White House,” said Stan Collender, managing director of Qorvis Communications LLC in Washington and a former staff member for the House and Senate budget committees. “There was almost euphoria among Democrats that the president was playing hardball.”

The two parties are in stalemate over what spending cuts and revenue increases should be approved to cut a budget deficit that’s exceeded $1 trillion for each of the four years Obama’s been in office. The administration says no agreement is possible unless Republicans agree to increase tax rates for the highest earning Americans, a stance underscored by Geithner in a sweep of the Sunday talk shows. Republicans oppose any tax rate increase and demand deeper cuts than Obama has offered, a line that House Speaker John Boehner drew on one show yesterday.

No Compromises

Both administration officials and congressional Republicans say they want a deal before year’s end -- without either side publicly offering any compromises.

“There’s not going to be an agreement without rates going up,” Geithner said in a taped interview that aired yesterday on CNN’s “State of the Union” program. Republicans will “own the responsibility for the damage” if they “force higher rates on virtually all Americans because they’re unwilling to let tax rates go up on 2 percent of Americans.”

Obama wants to boost top income-tax rates back to the levels they were when President Bill Clinton left office. The top rate then was 39.6 percent, compared with 35 percent today.
Boehner said Republicans aren’t ready to give in, and the president should take the lead by offering concessions.

House Majority

“They must have forgotten that Republicans continue to hold a majority in the House,” Boehner, an Ohio Republican, said on “Fox News Sunday.” “The president’s idea of a negotiation is ‘roll over and do what I ask.’ We need to find common ground, and we need to find it quickly.”

Collender puts the odds of failure at 60 percent, as both sides need to prove their mettle to core supporters.
The risk for Obama is that Republicans will match his brinkmanship and no deal will be reached. The result would be the “fiscal cliff,” the more than $600 billion in automatic spending cuts and tax increases that start kicking in automatically at the beginning of the new year.

The nonpartisan Congressional Budget Office said in an August report said the tax increases and spending cuts would shrink economic output next year by 0.5 percent and push the unemployment rate to about 9 percent.

Moody’s Investors Service said in September it may join Standard & Poor’s in downgrading the U.S.’s credit rating unless the president and Congress reduce the percentage of debt to gross domestic product.

Markets React

Stocks have been whipsawed since the election as Obama and Boehner dueled in public.
The benchmark Standard & Poor’s 500 Index (SPX) increased 0.5 percent to 1,416.18 last week and it extended its rally since Nov. 16 to 4.1 percent. The Dow Jones Industrial Average advanced 15.90 points, or 0.1 percent, to 13,025.58.

The bond market hasn’t demonstrated the same level of concern. While total national debt has soared to more than $16 trillion from less than $9 trillion in 2007, U.S. borrowing costs have tumbled. The yield on the 10-year note touched a record low 1.379 percent July 25, down from more than 5 percent in mid-2007.
Obama’s strategy is borne, in part, out of lessons Obama and his advisers take from the failed 2011 attempt to reach a grand bargain on long-term debt reduction.

Obama and Boehner tried to forge a compromise in private talks. Instead of clearing the path, their effort collapsed and served to increase resistance among members of both parties in Congress.



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