Four years ago, President Obama followed the advice of Rahm Emanuel never to let a crisis go to waste. He proposed an economic stimulus package brimming with pork and favors for Democratic interest groups. House Republicans were fearful of crossing a new president as the recession deepened, but they mustered the moxie to vote no, unanimously. It turned out to be one of the smartest moves they ever made.
Freshly reelected, the president wants to exploit a crisis again. This time it’s the fiscal cliff mess. His plan would avoid the cliff, but at the cost of strangling the economy. Republicans are wary of mounting full-throttle opposition, especially to Obama’s bid to raise taxes on the rich. But that’s what is required, and it will benefit them—and the country—in the end.
Republicans are in a stronger position than in 2009. Obama isn’t. He won reelection thanks to a negative campaign of historic proportions. He has no mandate. And now he’s made the mistake of thinking he’s more popular and powerful than he really is. This is how second terms crumble.
House speaker John Boehner has rejected the president’s proposal as unserious. Senate minority leader Mitch McConnell broke into laughter when Treasury Secretary Tim Geithner outlined it for him. It’s a wonder even Geithner kept a straight face. Because what the president wants is the same-old same-old: tax hikes immediately, spending cuts down the road. We know how this plays out. Taxes go up, spending cuts never materialize. Obama is also seeking a new $50 billion stimulus. And there’s more. Obama wants to raise the debt limit without the approval of Congress and force banks to refinance troubled home mortgages.
At the moment, Republicans don’t have the option of walking out of compromise talks with the White House. They may have to later if Obama refuses to back down. But for now, their assignment is to negotiate wisely with Obama on an array of issues.
* Taxes. An increase in the individual income tax rate for the affluent may be unavoidable. Obama did spend the past two years proselytizing for such a hike and, as he says, voters were well aware of it when they reelected him. But the White House has said the rates don’t have to return to Clinton-era levels—to a 39.6 percent top rate from the current 35 percent—and Republicans can take advantage of this concession. Obama’s nemeses, as he has often told us, are “millionaires and billionaires.” So why not urge that the higher tax rates be applied only to those with incomes above $1 million and not to couples earning more than $250,000 and individuals making $200,000? Also, Republicans could agree with Obama on taxing “carried interest” as regular income rather than capital gains without aggravating anyone except hedge-fund plutocrats.
* Tax reform. In his zeal for redistribution, Obama would hit prosperous Americans and small businesses with a double whammy. He’d raise their tax rates now, then use tax reform in 2013 to eliminate their deductions and preferences—in effect, two tax increases. Republicans can upset Obama’s scheme by substituting deductions as much as possible for rate hikes now. The reason? In tax reform deliberations, higher rates would probably be a nonstarter.
* Spending cuts. Besides deferring the so-called sequester, which would ravage military spending, Obama is vague about spending reductions. His proposal refers to “savings from non-entitlement mandatory programs.” Douglas Holtz-Eakin, the former head of the Congressional Budget Office (CBO), insists specific cuts are easy to find. “It would take 15 minutes,” he says. Republicans should find them.
Good places to look are food stamps and Social Security disability payments. When he met with congressional leaders on November 16, the president mentioned both programs, whose costs have skyrocketed. His actual proposal, however, didn’t cite them.
Obama has a favorite cut: a $1 trillion reduction in Overseas Contingency Operations (OCO)—that is, wars. But this cut is imaginary. It would count—as savings— funds that never would be spent, American forces having left Afghanistan. Bob Woodward, in The Price of Politics, his book on negotiations on a “grand bargain” on taxes and spending, says Republicans secretly agreed to fake OCO cuts in 2011. They shouldn’t agree again.
* Medicare. Obama’s plan includes $400 billion in entitlement savings over the next decade. The cuts are unspecified, but Democrats always favor smaller payments to providers like doctors and hospitals. After campaigning against the president’s $700 billion cut in these payments to help finance Obamacare, Republicans can’t credibly flip now, nor should they. Republicans have embraced Medicare reform, not cuts. McConnell says a fiscal cliff agreement should include structural changes in Medicare such as a higher age for eligibility and “genuine means testing.” He’s right, though these would merely be a downpayment on full reform based on premium support.
To strengthen their hand, Republicans would be smart to stress two things. One is the Simpson-Bowles commission’s strategy for handling the debt and deficit crisis. The Obama-created commission said uncontrolled spending is the cause of the problem, that the best way to gain more revenue is through tax reform, and that any deal must be bipartisan. Republicans agree and should say so loudly. Obama doesn’t agree.
The other is the prospect of a recession. The fiscal cliff is really a tax cliff. Taxes would instantly soar by $400 billion on January 1 and, according to the CBO, would drive the economy back into recession. So might the tax increase of $1.6 trillion advocated by Obama, in addition to higher taxes to finance his health care law that begin next year. Surely the president understands this.
If he doesn’t and insists on something close to his plan—that’s when Republicans take a walk.