How Obama wants to bring down our debt.

Everyone in Washington has released their own plan on how to close down our debt over the next 10-12 years. Progressives, conservatives, Paul Ryan, the Democratic caucus (due to release today) and the President. Throw all those plans out the window because none of them will likely ever become law. Big plans put out by partisan interests have very little chance of going anywhere and mostly serve as talking points and political footballs for debate. The plans that actually get passed are generally determined by the politics of the moment, deals worked out, and compromises made to placate special interests. You think it would be awesome to replace our  payroll taxes with a carbon tax? So do a lot of people, but it isn’t gonna happen. The two big events that will shape our debt debate will be the fight over the debt ceiling and the fight over the Bush tax cuts in Dec. 2012.

Most thinkers agree that the US needs to enact a plan that cuts $4 trillion in debt over the next decade or so. Let’s see how Obama is probably angling to get there, keeping in mind the two critical junctures we have coming up.

Republicans have forced a political crisis over raising the nation’s debt ceiling. Their demands are for about $2 trillion in spending cuts before they will agree to do what has  to be done anyway and raise the debt ceiling. This provides us with a political situation where debt reduction seems to be required. Obama has accepted Republicans’ terms on the condition that there also be $400 billion in revenue increases gained by getting rid of tax loopholes and tax breaks for the richest of the rich. Its obviously Obama’s intention for this plan to go through- $2 trillion in spending cuts and $400 billion in revenue increases for a total of $2.4 trillion in debt reduction this year.

So if that plan passes (which is far from certain) Obama is over halfway to his goal. The next test comes when the Bush tax cuts are up for renewal in December 2012. Note: this analysis assumes (as Obama certainly does) that Obama will be re-elected in 2012. Obama has all the power in December 2012 to say that he will not agree to renew Bush’s tax cuts for the top 2% and will veto any bill that tries to do that. That is what his base wants him to do and is likely what he will campaign on. At that point, Republicans have a choice- allow tax rates to rise on the top 2% or allow income tax rates to rise on everyone else. If they pick the first option, as is Obama’s intention, then there is another $830 billion in debt reduction, bringing Obama’s total to about $3.2 trillion in debt reduction. If the Republicans decide that everyone else’s rate should go up if they can’t get their precious tax cuts for the rich extended, then that would be $2.4 trillion in debt savings (we’ll call it 2.8 trillion including interest). $2.8 trillion would solve our debt problems by bringing Obama debt-reduction total to $5.2 trillion.

Even if only the cuts for the rich are ended, Obama can come up with an extra $800 billion in deficit savings by various methods like simplifying the tax code, enacting a public health insurance option, encouraging greater-than-expected economic growth, cutting down on tax cheats, cutting the military, etc.  He will work out a deal with Congress to save a bit more money. It will be a tough compromise and will burnish the President’s image as a compromiser and neutral arbiter. It would be small beans at that point.

Republicans seem to know that if Obama is re-elected, the scale beings to tilt in his favor, which is probably why they are pushing so hard right now for a completely one-sided debt deal. Its also no coincidence that a huge debt deal right now will hurt our economic prospects over the next few years. A weak economy makes  it harder for Obama to win re-election and if he doesn’t win re-election, the Republicans can basically dictate whatever “debt-reduction” deal they like.

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