Obama’s failed debt ceiling gamble - FT.com

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Obama’s failed debt ceiling gamble

By Clive Crook
Bromley

Amid disturbing signs that the US recovery has stalled, President Barack Obama took a huge gamble in his approach to the debt-ceiling talks last week. Believing he had an understanding with John Boehner, leader of the Republicans in the House of Representatives, he declared he wanted a $4,000bn “grand bargain” on the budget. Barely a day later, Mr Boehner said the deal was off. By Sunday evening, with talks about to resume at the White House, the president’s gambit appeared to have failed.

The weak economy makes a budget breakthrough all the more urgent. Jobs figures released on Friday were shockingly bad. They show that the US unemployment rate has risen again, to 9.2 per cent. In June, net job creation all but stopped. Even if uncertainty over the fiscal outlook is not the main reason for the setback, it certainly is not helping.

Quite what Mr Obama was thinking – and where things go from here – is unclear. Was his intervention a tactical feint, to weaken his Republican opponents? Was it a sudden conversion to the case for fiscal consolidation? What did the president expect to achieve?

Whatever else the policy was, it was new. Until recently Treasury officials had believed that the big fiscal issues could not be resolved with the debt-ceiling clock running down. After standing aside for months, Mr Obama took the opposite approach: nothing short of a grand bargain would work. He even promised to veto a stopgap measure. Liberal Democrats were stunned, because savings of more than $4,000bn cannot be found without changing Social Security and Medicare, which the party wants to keep off-limits. Mr Obama was offering these programmes up for cuts.

In return, he demanded movement from Republicans on revenues. This appeased few Democrats, much as they want to see taxes rise as part of a long-term budget solution, because the president was ready to settle for a ratio of three dollars of spending cuts for every dollar of extra revenue. These are proportions that a moderate Republican might prefer, if there were any such thing as a moderate Republican.

Many Democrats concluded that Mr Obama was preparing to reward the enemy, yet again, for its obduracy. With no shred of intellectual justification, and controlling just one house of Congress, the Republicans say, “No tax increases, ever” – and Mr Obama, instead of resisting, moves three-quarters of the way toward their position. Merely for the sake of appearing to take charge, he all but surrenders.

Then what happened? Mr Boehner’s House Republicans tell their leader they will settle for nothing less than unconditional surrender. The modest revenue increases envisaged by Mr Obama are still too much. The president tried for a bold solution that would have reflected well on both him and Mr Boehner. Liberal Democrats and, most crucially, rank-and-file Republicans in the House, were having none of it. For the moment, the president and the speaker of the House look equally impaired.

Could Mr Obama’s calculations have been more devious than this? Could this breakdown have been the White House plan all along? A theory to this effect is circulating. Maybe the president decided that the debt talks were going to fail anyway, and his main concern was to make sure that Republicans got the blame when they did.

Perhaps Mr Obama was pulling what Paul Krugman of the New York Times called an anti-Corleone: make them an offer they can’t accept. This tactic always had a fair chance of succeeding, because of the GOP’s mulishness on taxes. There was a fair prospect that the Republicans would reject even modest extra revenues, regardless of the spending-cut prize – even defying their own leaders to do it. And so they have.

But there is a catch, of course, even if the plan is working out: the cost of blaming a debt-ceiling breakdown on Republicans is a debt-ceiling breakdown. I doubt you could call plotting such an outcome, if that is what the president is doing, responsible leadership.

I think it more plausible that the president was sincere – far too late, but sincere nonetheless. By intervening in the budget talks and staking his own reputation on a dramatic new proposal, he hoped to break the stalemate. He knew he risked his party’s anger by putting entitlement reform, which is necessary, on the table. By doing so, he hoped to force Republicans to soften their resistance to tax increases, which are also necessary. A more balanced approach to long-term fiscal restraint would be possible – and if all went well, Mr Obama would get the credit.

It was too little leadership, too late. To make this strategy succeed, Mr Obama needed the pressure of public opinion to force Republicans to compromise. That pressure is still too weak, and the time to fix this is running out fast. Mr Obama has infuriated much of his party – again. And he has failed to budge a pathologically intransigent Republican party – again. He has come to a moment that could settle the fate of his presidency.

Does he press on for the big deal, fighting for public support at this absurdly late hour, risking even more? Or does he climb down from his threat to veto a smaller measure, settle on terms dictated by the GOP, and look still further diminished? Neither choice looks promising. Meanwhile, the debt-ceiling clock runs down.

clive.crook@gmail.com