President Obama Announces Plan to Tackle the Fiscal Crisis

In a recent post, I said that the Republicans had "thrown down the gauntlet" on the issue of the long-term budget deficit. Yesterday, President Obama picked that gauntlet up. He delivered a much-anticipated speech yesterday at George Washington University, laying out his plan for dealing with the fiscal crisis. The two visions of how to tackle the great issue of our day are certain to frame the policy debates in Washington for the next year-and-a-half, and to shape the outcome of next year's presidential election.

President Obama made a good speech; indeed, he does not make any other kind. But what of the substance of the proposal? President Obama's solution to the fiscal crisis is a combination of large cuts in spending, including cuts to military spending, combined with tax increases on the wealthy. The President has clearly based much of his proposal on the December report of the National Commission on Fiscal Responsibility and Reform. Contrasting his proposal to that released last week by the Republicans (chiefly authored by Congressman Paul Ryan (R-WI), Chairman of the House Budget Committee), Obama declared that his plan will protect spending on critical "investments" such as education and infrastructure, while the Republican plan will not. He also proposed a series of reforms to the tax code that he claimed will substantially increase revenue.

All told, Obama's plan is intended to reduce the deficit by $4 trillion over the next 12 years. Half of this reduction will come through spending cuts, a quarter through the resulting lower interest rate payments on the debt, and the final quarter from increasing revenue through tax increases on the wealthy and a reformed tax code. If this vision were realized, it would bring America a long way towards a balanced budget and perhaps pave the way for us to begin paying down the national debt. The devil, of course, is in the details.

There are very clear differences between President Obama's plan and the Republican plan. President Obama declared that the Bush tax cuts for wealthiest Americans will be allowed to expire on schedule in two years, whereas the Republican plan will extend these tax cuts permanently. The President's plan includes substantial cuts to military spending (albeit not spelled out specifically), whereas the Republicans have essentially pledged to maintain military spending at current levels. The President's plan is committed to keeping Medicare and Medicaid intact in their present forms, whereas the Republicans are calling for a comprehensive restructuring of those programs to achieve massive cutting of costs. These are just a few of the gulf separating the two sides, and one worries that the chasm between them may be too large to be bridged in view of the present lack of bipartisan spirit in Washington.

The two plans have a few problems in common. Both seem to be based on unrealistically optimistic forecasts of economic growth. Neither plan addresses the issue of impending Social Security insolvency, as both apparently believe that this problem will somehow go away if we simply ignore it. While both plans are designed to address the budget deficit, neither truly acknowledges just how bad the fiscal crisis is. One wonders if these matters are being swept under the rug because Republicans and Democrats alike fear that, if told the straight truth, the American people would simply march on Washington and burn down both the White House and the Capitol Building.

The good news about these rival proposals is that they are proof that the two parties are, at long last, waking up to the magnitude of the fiscal crisis. They have put off the day of reckoning for as long as they possibly good, and far longer than was healthy for the prosperity of our republic. What we, the American people, need to do now is hold our elected representatives to account. Neither side is going to get everything it wants, and although hard bargaining is only to be expected, we must make clear to the President and Congress that we want this problem solved and that we expect them to be willing to compromise. If they don't, they need to know that we shall punish them at the ballot box in November of 2012.