Obama’s Strategy to Win the Budget Fight

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Photo: Chip Somodevilla/Getty Images

In the days since the election, the outlines of President Obama’s strategy to win a favorable agreement on the deficit have grown fairly clear. All the elements of the plan were on display in his post-election press conference today.

Obama’s overarching goal is to secure an agreement to reduce the budget deficit over the next decade in a way that spreads the pain evenly, rather than forcing the middle class to bear most of the burden. That requires a significant tax hike on the rich. The way to get to that point is to negotiate with Republicans from a baseline that assumes the expiration of the Bush tax cuts on income over $250,000 a year. If Obama is negotiating for that goal, then he’s likely to wind up with a crummy deal, like the one he offered to John Boehner last summer in return for entitlement cuts and Boehner not blowing up the world economy. If Obama has that concession in his pocket, then the rest of the deal gets very easy — he can offer entitlement cuts in return for a little revenue.

That’s why Obama made the case that the Bush tax cuts for the rich not only must but will expire, saying that the only two possible options were an extension of the Bush tax cuts on income under $250,000 or the expiration of all of them. Treasury Secretary Tim Geithner and former Treasury Secretary Robert Rubin have both explained the administration’s view on this. It is possible to design a tax system on paper that cuts tax rates and raises more revenue. But actually passing a law like this is impossible. And thus tying Obama’s demand for higher revenue to a tax reform process is to bank on imaginary revenue. Obama thinks he needs to work from the assumption that the Bush tax cuts on the rich have expired, and then reform the tax code.

The Republican response is to frighten everybody about the fiscal cliff, forcing Obama to negotiate with them before January. A deal between now and December would give the Republicans more favorable terms, negotiating off the baseline of the current, Bush-set tax rates, not on the tax code that will take effect in January.

And so a big part of the game is for each side to blame the other for the fiscal cliff. Obama’s play is to rule out extending the Bush tax cuts on the rich, and demand an extension of the Bush tax cuts on income under $250,000. Will Republicans agree to do that? Almost certainly not. But a new poll shows Americans are predisposed, by a 53 percent to 29 percent margin, to blame Republicans over Obama for any failure to avert the fiscal cliff. And so, if Obama can’t make Republicans extend the middle-class tax cuts before January, he can at least use his platform to communicate that they and not he are responsible for the standoff. This riff from the press conference will be Obama’s message until a deal is signed:

The Senate has already passed a law like this. Democrats in the House are ready to pass a law like this. And I hope Republicans in the House come on board too. We should not hold the middle class hostage while we debate tax cuts for the wealthy. We should at least do what we agree on, and that’s to keep middle-class taxes lower. 

Another piece of Obama’s leverage play is to broaden the terms of the debate. The deficit topic has been dominated by Pete Peterson and his network of CEOs and lobbyists and friendly pundits demanding a grand bargain. Their doomsaying of the fiscal cliff is increasing the GOP’s leverage. Obama is meeting today with business executives associated with Peterson’s view. But he also met yesterday with labor leaders, and he cited that meeting today in conjunction with his CEO meeting. Obama’s play here is to elevate the left, bringing its perspective into the debate, so that the poles of the public debate do not run from pragmatic business executives to fanatically anti-tax Republicans.

And then the final piece of Obama’s strategy is to communicate constantly with the public. A great error of Obama’s 2011 negotiations was his belief that he could hammer everything out behind closed doors. Obama’s fiscal-cliff strategy is to campaign for public opinion as if he is still running for president, only this time with House Republicans, not Mitt Romney, as his opponent.

The common element running through the entire strategy is that Obama appears to have absorbed the lessons of 2011. The Republican Party, or at least its majority element, is primarily devoted to minimizing taxes for the rich. It is essentially impossible to bargain with them for higher taxes on the rich, because doing so runs counter to their maximal goal. Obama is going to have to bend. But he understands as well that Republicans won’t until he forces them.