Saturday, April 06, 2013

Obama's Chess Move

The White House has given details to Speaker John Boehner, and an overview to reporters, of the 2014 budget it will release next week.  And in a less-than-shocking development reported by Politico, Boehner promptly has rejected the package of entitlement cuts tied to increased taxes as “no way to lead and move the country forward.”    Firedoglake's DS Wright observes he "started his negotiations by scoring into his own net. In what may be the dumbest plan yet proposed, Obama has offered cuts to Social Security hoping for a change in the Republican’s position on tax loopholes for the wealthy."

Or maybe not so dumb.   The plan is based on the fiscal cliff offer made by the President to Republicans in December and

slices $200 billion from already tight defense and domestic budgets. It would cut $400 billion from Medicare and other health programs by negotiating better prescription drug prices and asking wealthy seniors to pay more, among other policies. It would also generate $200 billion in savings by scaling back farm subsidies and federal retiree programs, among other proposals.

The proposal to change the formula to calculate Social Security payments, also originally part of the offer to Boehner, would generate $130 billion in savings and $100 billion in revenue, a result of the impact of the formula change on other government programs.

The most controversial part of the President's scheme is this scheme to cut benefits for a program which has nothing to do with the deficit, but nonetheless plays a role in Obama's  continuing effort, as Paul Krugman explains, "to win over the Serious People."

Digby accepts Krugman's interpretation and adds

I keep getting asked why I think the President wants to cut the so-called "entitlements."  "It just doesn't make sense," they say.  "There must be some good reason."

I do not know the answer to that. But he does want to cut them, there can be no doubt.  He said he wanted to do it since before he took office in 2009 and has continued to say it ever since.  No, he has not been explicit about it very often (although he has upon occasion) and campaigned on a murky fill-in-the-blank phrase "balanced approach to deficit reduction" but it's been out there for the past four years.

The President's proposal is bad politics for his Party and bad policy, "sticking it to the poor and the middle class," as Krugman recognizes.   Annual cost-of-living increases for Social Security would decline with use of the chained CPI, which "slows the growth of entitlement programs by assuming that when prices go up for something, people switch to cheaper substitutes." Dean Baker gives the details:

President Obama's proposal would reduce benefits by 0.3 percent for each year after a worker retires. After ten years benefits would be cut by 3.0 percent, after twenty years 6.0 percent, and after 30 years 9.0 percent. Over a twenty year retirement, the average cut would be 3.0 percent.

This cut would be a bigger hit to the typical retiree's income than President Obama's tax increases at the end of 2012 were to the typical person affected. A couple earning $500,000 a year would pay an additional 4.6 percentage points on income above $450,000. This would amount to $2,300 a year (4.6 percent of $50,000). That is less than 0.5 percent of their pre-tax income and around a 0.6 percent reduction in their after-tax income.

By comparison, Social Security is about 70 percent of the income of a typical retiree. Since President Obama's proposal would lead to a 3 percent cut in Social Security benefits, it would reduce the income of the typical retiree by more than 2.0 percent, more than three times the size of the hit from the tax increase to the wealthy.

But the political hit is far more likely to be on Democrats seeking election, or re-election in the future, than on the sitting President. Krugman concludes by arguing "Oh, and wanna bet that Republicans soon start running ads saying that Obama wants to cut your Social Security?" Those ads, however, can wait.  It would be more effective for the GOP to air ads following adoption of a budget containing reductions proposed by the President.  Doing so in the near future would expose Democratic legislators as fools before they have a chance to approve Obama's scheme.  They would be forced to reassess their loyalty to the President or risk losing face, as well as considerable support with an age cohort that votes.

Paul Lind, one of the nation's foremost defenders of the program, believes "President Obama, in reportedly proposing to cut benefits for the elderly with chained CPI, should be careful, or he will end up looking as right-wing in retrospect as President Clinton does now for signing rather than vetoing the Defense of Marriage Act."

But that is President Clinton. Bill Clinton, the private citizen and ex-president, has renounced his earlier support for the measure and is clearly the most popular politician in the United States of America. (His wife is second.)  Sponsoring the Defense of Marriage Act thus has done little to tarnish his legacy and less to diminish his popularity. In the short run, it probably enhanced his standing with the public- and as the great economist John Maynard Keynes once wrote, "in the long run, we are all dead."

The President began negotiations, as is his wont, at midfield.  The House Speaker reacted quickly and negatively- as the White House probably expected- by rejecting the call for a modest tax increase. The rejection is not a drawback but a boon to the White House, which can proceed to please the Village with a "compromise," thereby moving closer to the GOP's position.  The President, as he calculates, can then present reluctant Democrats with a Hobson's choice: my plan or theirs. But as Firedoglake's Jon Walker realizes

As de facto leader of the Democratic Party, Obama’s budget can easily be made into the “Democratic” budget. During the campaign Republicans can turn this budget into a millstone around the neck of every Democrat. Cutting Social Security benefits is one of the most unpopular ideas in American politics and Obama just made Democrats the only party officially pushing for it. It is most strongly opposed by seniors, who also tend to make up a greater share of the electorate in midterm elections.

Prepare for a re-run of 2010 when Republicans run on Democrats “slashing Medicare” because (of) Obamacare. Except this time it will be way worse, because the attack will actually be 100% true.

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