Obama's Deficit Dilemma

Jackie Calmes |The New York Times

President Obama was backstage at an auditorium at George Washington University last April preparing to give a major speech, when William M. Daley, then his chief of staff, spied an unexpected guest in the audience: Representative Paul D. Ryan, the Republican chairman of the House Budget Committee, whose budget plan Mr. Obama was about to shred.

“Try to tell the president!” Mr. Daley directed an aide.

It was too late to deliver a warning. Mr. Obama went on stage and outlined his proposal to reduce deficits — but not before he flayed the Ryan plan, saying its deep tax cuts and deeper spending reductions would harm students, seniors, the disabled and the nation.

“It’s not going to happen as long as I’m president,” Mr. Obama vowed.

Ten months later, the attack that left Mr. Ryan fuming in the front row is better remembered than the ideas Mr. Obamapresented that day, administration supporters lament.

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It came just a few months after the president had opted not to endorse the recommendations of a deficit commission he had created in hopes of brokering a bold, bipartisan deficit deal. That gave rise to a portrayal that has stuck, popularized by Republicans, pundits and some Democrats: that the president, out of political timidity, snubbed his own panel’s plan.

Mitt Romney, a Republican presidential candidate, recently charged that Mr. Obama “simply brushed aside” the plan by the so-called Bowles-Simpson commission (named after its two chairmen) — even though he and most Republicans reject it for its proposed tax increases. Warren E. Buffett, an Obama ally, has said ignoring the plan was “a travesty.” Former Representative John M. Spratt Jr., a Democrat on the commission, said the administration had had an opportunity “to stand up and be counted, and for the most part they weren’t there.”

Yet starting with that April speech, Mr. Obama has come to adopt most of the major tenets supported by a majority of the commission’s members, though his proposals do not go as far. He has called for cutting deficits more than $4 trillion over 10 years by shaving all spending, including for the military, Medicare and Social Security; overhauling the tax code to raise revenues and lower rates; and writing rules to lock in savings.

But he did so months after the commission’s report in December 2010, and largely without acknowledging that he was borrowing from its recommendations. That caution reflected White House concerns about liberals’ hostility to the plan and, aides say, Mr. Obama’s certainty that Republicans would reject anything he endorsed.

The story of how Mr. Obama dealt with Bowles-Simpson illuminates his struggles with the deficit politics that have curbed his ambitions and forced him to confront the limits of his persuasive powers. Faced with an even more intransigent opposition after Republicans captured the House in the 2010 elections, Mr. Obama made a tactical retreat, suppressing his instincts to “go big” in favor of a go-slow approach.

House Budget Chairman Paul Ryan, R-Wisc., holds a copy of his budget proposal 'The Path to Prosperity' during a news conference on the FY2012 budget resolution on Tuesday, April 5, 2011.
Bill Clark | Getty Images

He settled into trench warfare, waiting for House Republicans to make their fiscal moves and betting they would get so much criticism that ultimately they would compromise — much like what happened between President Bill Clinton and Republicans in the 1990s. Last summer, Mr. Obama and Speaker John A. Boehner nearly clinched a “grand bargain” reducing deficits up to $3 trillion over 10 years, but the deal fell apart over taxing the wealthy — an issue that continues to divide the parties.

Today, Mr. Obama and Republicans are battling rather than making deals, positioning themselves for an election that will determine which side has the upper hand in December, when critical budget deadlines could force a compromise in a lame-duck Congress.

Despite the impasse, Mr. Obama appears to have reaped some advantages. Polls show that voters overwhelmingly agree with him that higher taxes on the wealthy must be part of a solution. And by smaller margins, voters favor him over Congressional Republicans when asked who can better reduce deficits while protecting needed programs. That plays to his re-election strategy: while the midterms amounted to a referendum on his record, Mr. Obama is framing 2012 as a choice between two distinct approaches.

But the downsides for Mr. Obama have become clear. His partisan turn undercuts a central promise of his 2008 campaign, to rise above the rancor. And by neither embracing Bowles-Simpson nor explaining his objections and quickly offering an alternative, Mr. Obama arguably failed to show leadership on perhaps the country’s biggest problem. This month, in a New York Times/CBS News poll, 59 percent of Americans disapproved of his handling of the deficit.

National Commission on Fiscal Responsibility and Reform co-chairmen Erskine Bowles, and Alan Simpson.
Scott J. Ferrell | CQ- Roll | Getty Images

Looking back, administration officials insist that Mr. Obama was right not to adopt the commission plan. “You couldn’t get a C-plus on a political strategy paper that argues that would be the way to get something done,” said Gene Sperling, an economic adviser.

Three weeks ago Mr. Obama met with Erskine B. Bowles, a former chief of staff to Mr. Clinton who was a co-chairman of the commission along with former Senator Alan K. Simpson, a Republican. In speeches nationwide, the chairmen have expressed disappointment that the president — and Republicans — did not take up their plan.

On a quiet Friday in a room off the Oval Office, Mr. Bowles and Mr. Obama chewed over cheeseburgers and their differences.

“The president wanted to make sure that we understood that he had had a strategy to take the framework of what we’d negotiated” on the commission, Mr. Bowles said, “and to use that as a vehicle to negotiate a deal.”

Mr. Obama said that if he had “put his arms around” the plan immediately, Mr. Bowles recalled, it “would have been savaged by Republicans, and that would have killed it.”

A Commission Is Born

From the start, some Obama advisers were wary of a commission. But while the administration was consumed in its first year with initiatives that critics would denounce as big-government liberalism — the stimulus package to help revive the economy and the health care law — the president had mused to aides about a bipartisan panel to address the mounting debt . He had inherited a $1.3 trillion deficit for 2009, roughly the size of the 2012 shortfall, and benefits for an aging population soon would increase deficits to unsustainable levels.

In the summer of 2009, he charged economic advisers with researching the history of presidential commissions. Their findings were discouraging: in decades of such panels, only one, the 1983 Greenspan commission to save a bankrupt Social Security system, had produced results.

Peter Orszag
Getty Images

By 2010, signs of economic recovery alternated with reports of continued high unemployment and home foreclosures. Inside the White House, an intensifying debate over a commission reflected the tension between those seeking continued stimulus, including Lawrence H. Summers, then the senior economic adviser, and those emphasizing deficit reduction, chiefly the former budget director, Peter R. Orszag.

Mr. Orszag argued that forming a panel could buy the administration support for more stimulus measures and time to write a deficit plan. His allies included political advisers David Axelrod and David Plouffe, who saw a commission’s appeal to independent voters.

Mr. Summers had backing from Treasury Secretary Timothy F. Geithner, who shared others’ concerns that a commission might box the president in with proposals he could not support or pass. Also opposed were legislative aides, who channeled the objections of Congressional Democratic leaders to a panel they could not control.

U.S. National Economic Council Chairman Larry Summers
Getty Images

But the president, by all accounts, still favored the idea, arguing it was the only way to get Republicans to accept tax increases and Democrats to support savings in entitlement programs. Ultimately, the White House was backed into creating a panel: it was the price moderate Democrats exacted to raise the debt limit that winter so the nation could keep borrowing to pay its bills.

On Feb. 18, 2010, Mr. Obama signed an executive order creating a panel of 18 lawmakers and outsiders, without the support of Congressional leaders of either party. Weeks earlier he had endorsed bipartisan legislation establishing a commission, but the Senate minority leader, Mitch McConnell, and six other Republican co-sponsors of the bill then switched course to help defeat it. Their reversal was seared in Mr. Obama’s memory, aides say, and later would influence his decision not to adopt the commission report, lest he spoil it as a basis for compromise.

An Ambitious Plan

When the commission finished nine months later, the political landscape had been upended by Republicans’ takeover of the House.

On Dec. 1, 2010, Mr. Bowles and Mr. Simpson unveiled an ambitious package of spending cuts and revenue increases that was supported two days later by 11 of the 18 commissioners — five from each party, including all three conservative Senate Republicans, and an independent business executive. While three votes short of the 14 needed to force a Congressional vote, it raised hopes that the blueprint could lead to compromise between Mr. Obama and Republicans.

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But all three House Republicans on the panel opposed the plan. One was Mr. Ryan, a darling of small-government conservatives and a Republican with presidential ambitions, who was about to become chairman of the Budget Committee.

For all of its subsequent import, Mr. Obama’s initial response to Bowles-Simpson was little debated at the White House, aides say. Not one adviser supported embracing it.

The plan called for more revenues and deeper military cuts than Mr. Obama supported. If he were to adopt it, aides worried, Republicans would assail him not only for raising taxes on all Americans but also for cutting Medicare — this after a campaign in which Republicans had successfully attacked the Medicare savings in the health care law. Advisers also saw no prospect that Mr. Obama’s endorsement would prompt the newly empowered, Tea Party-inspired Republicans to compromise.

And economic stimulus was the main concern as a lame-duck Congress met that December. The administration, fearful of another recession, wanted tax cuts for workers and small businesses and continued unemployment assistance, while Republicans needed a deal to force Mr. Obama to extend the Bush-era tax cuts on the wealthy, due to expire on the last day of the year.

“The White House’s focus was totally, rightly, on making sure that we bought that recession insurance,” Mr. Summers said.

On Dec. 3, Mr. Obama issued a statement praising the commission and promising to review its work. Yet his priorities seemed clear. “Jobs and growth are our most urgent need,” he said, before nodding to deficit reduction.

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Republicans and conservative commentators would accuse Mr. Obama of pandering to his liberal base; centrist Democrats would call the moment a missed opportunity, when Mr. Obama should have put down his fiscal marker.

“There were lots of ways he could have grasped hold of it and used the fact that we had Republican support for it — and even conservative Republicans’ support — without completely walking away from it,” Mr. Bowles said.

Mr. Simpson was similarly disappointed. But he said Mr. Obama’s endorsement would never have won over Republicans, and might have been toxic. When it comes to Mr. Obama, Mr. Simpson said, “Their venom is even better than rattlesnake fangs.”

Debate Over Emphasis

In early January, with Mr. Obama’s State of the Union address and annual budget request weeks away, aides debated what more he might say.

They agreed his emphasis would be on “winning the future” — a new slogan for investments in education, infrastructure and technology. But officials recall economic advisers like Jacob J. Lew, then the budget director, pressing Jon Favreau, the chief speechwriter, for more on deficit reduction.

Opposition from Congressional Democrats scotched economic advisers’ idea of proposing to change the cost-of-living formula for Social Security, something Bowles-Simpson had urged. And Mr. Favreau pushed back to keep the speech broad, with support from Mr. Axelrod, and finally Mr. Obama.

“From the very beginning, we were very much supportive of the direction of Bowles-Simpson, but we had some reservations on specifics,” Mr. Lew said. Had Mr. Obama adopted its proposed $1 trillion in military savings over 10 years and $2 trillion in revenues, he said, “it would have been explosive” to Republicans.

But in hindsight, some advisers say Mr. Obama perhaps should have moved earlier to seize the high ground on deficit reduction and outline the proposals he would unveil in April. Other advisers say the administration simply was not ready. It was locked in a war over 2011 spending with Republicans, who threatened to shut down the government.

That spring, Mr. Ryan produced his budget, which had little in common with the Bowles-Simpson plan. Indeed, Mr. Bowles and Mr. Simpson objected that it would spare the military, weaken the safety net and slash taxes so much that deficits would persist for decades. Opponents staged protests, and Republicans, already dropping in polls, were fighting a losing battle for a special House election that turned on opposition to a Ryan proposal to make Medicare a voucher system.

At the White House, the Republicans’ troubles raised hopes for eventual compromise.

Mr. Daley, the new chief of staff, opened private lines to leading Republicans. Mr. Obama traded calls with Senator Tom Coburn, one of Congress’s most conservative Republicans, a member of the Bowles-Simpson majority who had joined a bipartisan “Gang of Six” senators struggling to write its recommendations into legislation.

Days before the House passed the Ryan budget, Mr. Obama unveiled his deficit-reduction framework at George Washington University. Loosely based on Bowles-Simpson, it similarly called for up to $4 trillion in savings, over 12 years instead of 10; for a ratio of $2 in spending cuts for every $1 of revenues; for all spending to be on the table, including military and entitlement programs, and for strict budget rules.

He proposed to “build on the fiscal commission’s model” — slashing popular tax breaks “so that there’s enough savings to both lower rates and lower the deficit.” But Mr. Obama, who to date has suggested few specifics, would raise fewer new revenues than Bowles-Simpson because he refuses to increase taxes on those who make less than $250,000 annually, though many economists say all Americans will have to pay more eventually. Despite liberals’ opposition, Mr. Obama called for unspecified changes in Social Security to ensure its long-term solvency. And he directed Vice President Joseph R. Biden Jr. to negotiate with Congress.

What captured attention, however, was his attack on the Ryan plan.

“My naïveté was thinking, O.K., we’ll put our budget out there first and then he’ll loosen up and start coming to us and we’ll really start talking,” Mr. Ryan recalled. “And what we got was the back of his hand.”

Mr. Ryan bolted from the hall after the speech. Mr. Sperling ran after him to explain that the Obama team had not known he would attend and had not set him up to witness the attack. “You just poisoned the well,” Mr. Ryan snapped.

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Mr. Obama, now hopeful, aides said, that he had set the stage for compromise, met the next day with Mr. Bowles and Mr. Simpson. Both had been in the audience. “What did you think?” he asked, according to Mr. Simpson. “I thought it was harsh,” Mr. Bowles said.

“I didn’t think I was,” Mr. Obama replied.

“I thought it was like inviting a guy to his own hanging,” Mr. Simpson said.

A Deal Collapses

After a golf game in June, Mr. Obama and Mr. Boehner began secret talks.

In a few weeks, they seemed within a handshake of a potentially historic deal. Mr. Obama offered more than ever before, including changes in the Social Security cost-of-living formula and slowly raising Medicare’s eligibility age to 67, an idea that went beyond Bowles-Simpson. Mr. Boehner would support $800 billion in 10-year revenues.

But in a drama that transfixed the world amid threats of an American default, the talks collapsed, revived and finally died.

Mr. Obama, in early August, accepted a smaller deficit-reduction package with only spending cuts to secure Republican votes to raise the debt limit. A “super-committee” charged with finding more savings failed last fall, setting in motion $1.2 trillion in automatic cuts beginning in January 2013 unless the two sides identify alternative savings.

Since then, in speeches around the country, Mr. Obama has emphasized job-creation spending and tax cuts more than deficit reduction. Gone from his still-pending legislation are some of the concessions he offered Mr. Boehner — presumably in reserve for the elusive grand bargain.

At their recent lunch, Mr. Obama assured Mr. Bowles he would not give up. Mr. Bowles said the president talked of seeing “a real opportunity” for compromise after the election, when Republicans will be eager to avoid the expiration of Bush tax cuts and automatic cuts in military spending — suggesting another chance for a deal inspired by Bowles-Simpson.

“To see his commitment,” Mr. Bowles said, “gave me real hope.”