President Obama is by all accounts more confident than ever since his re-election, telling everyone he sees that he’s certain he can pound Republicans enough to get his way on taxes and spending. And if he can’t, well, then he can always go over the fiscal cliff and blame Republicans next year for whatever happens to the economy.
And maybe he’s right. If nothing else, he’s been expert at dodging responsibility. The line he’s taking so far in budget negotiations could hardly be tougher. House Speaker John Boehner was decidedly downbeat Thursday after a phone call with the President Wednesday night and a Thursday meeting on Capitol Hill with Treasury Secretary Tim Geithner and White House aide Ron Nabors.
Our GOP sources say the President is insisting on about $1 trillion in new tax revenues immediately by raising tax rates, plus another $600 billion in net new revenue as part of tax reform next year. He also wants $150 billion in new public works “stimulus” spending, $50 billion of it next year, and another extension in unemployment benefits (one year cost: $30 billion).
In return, Mr. Obama will only promise some $400 billion in entitlement savings next year, details to come later. Keep in mind this negotiation is supposed to reduce the deficit. We’re told Mr. Geithner also demanded a permanent increase in the debt limit, meaning that no future action would be required to raise it again. There’s more, or shall we say less, but you get the idea. As one senior Republican told us, “This was almost insulting.”
This doesn’t come close to an offer that Mr. Boehner can accept, not least because it couldn’t get through the House, and maybe not even the Senate. If Mr. Obama really does want to force the GOP over the cliff, he’s well on the way to doing it.
But if we may offer the President some friendly advice, his real challenge in a second term isn’t the Republicans. He’s beaten them like the Washington Wizards. His real problem is illustrated by the nearby table. It’s his economic growth deficit.
For each of the last three two-term Presidents, the economy went a long way to determining success or failure. George W. Bush’s eight years ended in an economic panic that ruined his legacy. But note in the nearby table the tales of the Reagan and Clinton second terms. In the Gipper’s last four years, GDP growth averaged 3.73% a year. In Bill Clinton’s last four years, the economy averaged 4.45% growth.
Those numbers are more than abstractions. The booms raised incomes and created millions of jobs. They made it possible for both Presidents to erase, or nearly so, the budget deficits of their first terms.
They also created an aura of good feeling in the country that boosted their approval rating and helped them ride out second-term scandals. In the case of Mr. Clinton, the dot-com-fueled boom helped him survive impeachment. Who knows how the Senate trial might have gone without 4.8% growth, gasoline of $1.17 a gallon, and a jobless rate of 4.3% in January 1999?
Now look at Mr. Obama’s first term. His average annual growth rate so far over his four years is 0.8%. Take out the negative growth of 2009, and it is still only 2.1% a year. Mr. Obama’s great challenge for the next four years is leaving behind this Japan-like stagnation and getting the economy back to the growth of the Reagan and Clinton eras.
Without 3%-4% growth, Mr. Obama will never get middle-class incomes back to what they were even in 2007. Without faster growth, he’ll never raise enough tax revenue to reduce his trillion-dollar deficits, much less finance ObamaCare. Without faster growth, he’ll be forced to choose between cutting entitlements, raising taxes again, or facing a debt crisis that may not wait until 2016.
With that in mind, Mr. Obama might want to think twice about those Democrats who say don’t worry about raising taxes or going over the tax cliff because he and they can always blame the Republicans. The truth is that any recession, even a short one, would steal another year of growth from an economy that is barely growing as it is. And once a recession starts, no one can predict how deep it would be or how long it would last. To adapt Jack Kennedy’s famous phrase, an ebbing tide strands all politicians.
The great mistake of Mr. Obama’s first term was putting his social and political agenda above nurturing a faster economic recovery. It nearly cost him re-election, even against a weak opponent. Mr. Obama won by telling voters he only needed more time. Without faster growth, his second term ambitions will vanish faster then he and his preternatural self-confidence imagine.
A version of this article appeared November 30, 2012, on page A14 in the U.S. edition of The Wall Street Journal, with the headline: Obama’s Real Fiscal Problem.
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