Obama's Doomed Deficit-Reduction Plan More Political Than Practical

With the scars from the summer's budget battles still fresh, U.S. President Barack Obama yesterday (Monday) unveiled a deficit-reduction plan that is aimed more at winning votes in the 2012 election than it was to win support from congressional Republicans.

The president's deficit reduction plan includes approximately equal amounts of spending cuts and revenue increases to reach its target of $3 trillion over the next decade.

The proposals won't pass – and even if they did, they probably don't go far enough to fix the ailing U.S economy, said Martin Hutchinson, a Money Morning columnist and former global merchant banker who's an expert on how the political process impacts the world economy.

"Most of Obama's proposals are bait for his left wing," Hutchinson said in an interview yesterday. "However, reducing deductions for such things as home mortgage interest and charities, if done in moderation (say, make them deductible only to a 20% tax rate), could yield a lot of income and might even do the economy good, lessening wasteful resources devoted to housing and the nonprofit sector."

President Obama's spending cuts – unveiled in a morning speech – included:

• $1.1 trillion saved from winding down the wars in Iraq and Afghanistan.
• $248 billion from Medicare savings (mostly from reducing overpayments).
• And $430 billion from savings on interest payments.

Revenue-increase proposals include:

• An expiration of some Bush-era tax cuts expire for those making more than $250,000, a move that would yield $800 billion,
• Capping certain exemptions, such as itemized deductions for that same high-income group, which would generate $400 billion.
• A new minimum tax on millionaires to make sure the nation's hyper-wealthy pay at least the same tax rate as average wage earners.
• And closing tax loopholes for certain wealthy individuals and large corporations to bring in another $300 billion.

A Doomed Deficit-Reduction Plan?

Mimicking the strategic obstinance employed by the Republicans during the summer debt-ceiling debate, President Obama said he would "veto any bill that changes benefits for those who rely onMedicarebut does not raise serious revenues by asking the wealthiest Americans and biggest corporations to pay their fair share."

Republicans, who have not backed off their promise to reject any deficit-reduction plan that includes revenue increases, said President Obama's proposals would not help the congressional joint "supercommittee" charged with developing a plan to reduce the deficit by at least $1.5 trillion.

"Veto threats, a massive tax hike, phantom savings, and punting on entitlement reform is not a recipe for economic or job growth – or even meaningful deficit reduction. The good news is that the Joint Committee is taking this issue far more seriously than the White House," Senate Minority Leader Mitch McConnell, R-KY, said in a statement.

By the terms of the deal reached in the debt-ceiling compromise in August, the 12-member Joint Committee has until Nov. 23 to submit its proposal to reduce the deficit. That proposal then must be passed by Congress by Dec. 23, or a series of automatic cuts will go into effect in 2012.

That scenario would result in an arbitrary 2% budget cut to all agencies of the federal government, with a few exceptions – such as Social Security, Medicaid and civilian and military retirement.

Populist Appeal

Although President Obama obviously would prefer that Republicans and Democrats alike on the committee adopt his deficit-reduction plan, his speech yesterday made it clear that he wants to score political points regardless of the outcome. That's why his speech touched on populist themes that would appeal to working-class voters.

"Middle-class taxpayers shouldn't pay a higher tax rate than millionaires and billionaires," President Obama said. "I reject the idea that asking a hedge fund manager to pay the same tax rate as a plumber or teacher is class warfare. I think it's just the right thing to do."

He also devoted part of his speech to making congressional Republicans appear unreasonable.

In a reference to Speaker of the House John Boehner, R-OH, President Obama stated that "the Speaker says we can't have it "My way or the highway,' and then basically says "My way – or the highway.'That's not smart. It's not right. If we're going to meet our responsibilities, we have to do it together."

Daniel Gross, in his "Contrarian Indicator" column on Yahoo! Finance, said that President Obama – by unveiling a plan aimed at resonating with middle-class America – is trying to capitalize on sentiment that favors his position.

"The public tends to favor preserving entitlements in their existing form, cutting spending, and raising taxes on the wealthy and corporations," Gross wrote. "Can President Obama translate those [deficit-reduction-plan] policy preferences into political preferences?"

News and Related Story Links:

• Money Morning:
  Obama's Jobs Plan Will Barely Dent Unemployment
• Money Morning:
  President Obama Tackles Deficit Reduction and Debt Ceiling as Budget Battle Continues
• White House.gov:
  President Obama's Debt Reduction Proposal to Congress
• The Washington Post:
  Obama proposes new taxes on wealthy for half of debt plan
• Los Angeles Times:
  Obama outlines $3-trillion deficit plan, rejects 'class warfare' claim
• The New York Times:
  Obama Vows Veto if Deficit Plan Has No Tax Increases
• The Hill:
  McConnell, Boehner: Obama proposal doesn't help supercommittee.
• Money Morning:
  These U.S. Companies Made Billions in Profits – And Received a Federal Tax Refund!

David Zeiler

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Dave has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.

Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.

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