Keith Hennessey: Time to Call the President's Budget Bluff

By KEITH HENNESSEY

Flush with the adrenaline rush of his election victory, President Obama insists that Congress must now agree not only to raise taxes on the "rich," but also to adopt his previously ignored full budget. The president demands a $1.6 trillion tax increase over the next decade. He maintains that higher revenues must come from marginal-rate increases but offers no policy rationale. He wants to treat $900 billion in spending cuts he agreed to in 2011 (as part of the Budget Control Act) as if they now count on his ledger as new cuts. He says that he will consider Medicare cuts and tax reform in the future, maybe.
On the other hand, Mr. Obama says reductions in ObamaCare spending are out of the question, and Congress must now agree to at least $50 billion in new stimulus spending next year. The debt limit must be permanently increased without accompanying spending cuts.
By contrast, House Speaker John Boehner and Senate Minority Leader Mitch McConnell have offered on behalf of Republicans a significant concession in an attempt to close the negotiating gap. Mr. Boehner and Mr. McConnell propose to accept higher taxes on the rich as long as government spending is cut significantly and incentives to work and invest are not weakened. That way, higher taxes and entitlement-spending cuts would reduce future deficits, not finance even bigger government as the president proposes.
Unfortunately, it appears that President Obama cannot take yes for an answer. Republican leaders have shown him a legislative path to lock in his top policy priority with a strong bipartisan vote. Their proposal splits their own caucus, yet still the president refuses because he thinks he can get even more.
Oklahoma Rep. Tom Cole and a few lame-duck Republicans appear ready to capitulate. Cowed by a bully on the pulpit, afraid of being blamed for a stalemate, and convinced that they have no negotiating leverage, they bravely propose to embrace bigger government—and call it a win. These politicians prioritize their personal popularity over the policy consequences of major fiscal choices.

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They also misread the negotiating environment. While the president has a strong hand, he is overplaying it. Republicans have some leverage. They need to use it effectively.
• The president's veto threat is a bluff. Without a new law, tax increases and spending cuts will likely increase unemployment to 9% and might trigger a new recession. Even if he could shift all the political blame for such a legislative failure onto congressional Republicans, Mr. Obama cannot afford to risk a new recession that would irreparably damage his second term. He can neither veto a budget-deal bill that Congress sends to him, nor can he allow Senate Majority Leader Harry Reid to tie a bill up in the Senate. He can, however, try to bluff Republicans into giving away the store.
• The president's proposal for more spending and taxation puts him to the left of many in his own party, and Democrats up for re-election are not lemmings looking to follow Sen. Patty Murray, who has welcomed a plunge over the fiscal cliff. Democratic Sens. Max Baucus and Mary Landrieu oppose the president's proposal to increase the estate tax. Sen. Chuck Schumer has defined "rich" at $1 million of income, much higher than the president's $250,000.
Many Democrats don't want to raise taxes on successful small business owners without Republican votes as political cover. Members of both parties are terrified at the prospect of subjecting 27 million additional tax filers to the Alternative Minimum Tax if there is no new legislative "patch," as Congress has annually passed for many years.
If exposed to the light of day, these intraparty Democratic divisions provide opportunities for Republicans to negotiate a centrist or center-right agreement. In the short run, this requires Republicans to publicly challenge their Democratic colleagues on these specific policy questions. In the long run, Republicans must refuse to engage in ad hoc summitry and insist upon a return to a regular, committee-based legislative process that includes annual budget resolutions and open-floor amendments.
• Republicans can communicate more effectively by changing their tone. They can replace the wild-eyed threats of 2011 with steady negotiation and logical arguments. They can be insistent but not unyielding, firm but flexible. They can explain their policy views to voters and visibly demonstrate that they are trying to reach agreement with a counterparty still stuck in campaign mode. They can argue with their party leaders in private rather than weaken their leaders' hand with public statements that embolden the left and make it harder to reach agreement.
• Republicans must be willing to oppose bad policy even if it hurts their popularity. Agreeing to higher taxes is a major concession, and if the president is reasonable, Republicans need to be willing to move further to close a deal. But members of Congress have no obligation to vote for more than a trillion dollars in tax increases without significant spending cuts just because someone else won an election.
The president needs House Republican votes to enact a law, and he needs Speaker Boehner to bring a bill to the floor. The president is obliged to convince members of Congress that his proposal deserves their vote. Beyond a certain point, Republicans must be willing to risk undeserved blame rather than vote for damaging policy. Democrats will then be forced to choose whether to moderate their position, risk legislative failure, or take sole responsibility for massive tax increases without entitlement reform. Their unified partisan front will rapidly crumble.
• Republicans can leave the debt limit out of this bill. It's a shame that small debt-limit increases must be used as a tool to force future fiscal negotiations. But until the Senate returns to passing annual budgets, frequent debt-limit votes are the only method available to force a recalcitrant Democratic Party to address entitlement spending problems.
• Finally, Republicans underestimate their ability to win the fiscal-policy argument in the public arena. If everyone's taxes go up, voters will instinctively blame the party of higher taxes. Mr. Obama has spent two years hammering the country about the fairness of redistribution—but Republicans have inoculated themselves against additional demagoguery by conceding and proposing that the rich pay more.
The president's broader fiscal argument is even weaker. He demands new stimulus spending, abandons deficit reduction and serious entitlement reforms, double-counts previously enacted savings, and labels tax increases as a balanced approach. Republicans can win this debate and gain further negotiating leverage if they are willing to try.
Mr. Hennessey is a lecturer at Stanford's schools of Business and Law. He served as director of the National Economic Council for President George W. Bush.

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