A New White House Economic Strategy?

Over the past week, top White House officials have been floating a trial balloon for their strategy on the economy. At its core is a decision to put deficit reduction ahead of job creation.

The premise is that the bond markets and allied deficit hawks are demanding action to cut the budget, that Obama lacks the votes in the Senate for a serious jobs initiative, and that polls show voters care more about deficit reduction than about jobs.

So the plan, modeled closely on the work of the Peter G. Peterson foundation and the anticipated report of the president's own fiscal commission, is a deal that includes cuts in Social Security plus a new Value Added Tax (VAT), in order to get deep cuts in the deficit. As a sweetener to get Republicans to back the VAT, White House officials would cut the corporate income tax.

The plan is dubious economics and worse politics. You could hardly hand the Republicans a better gift for the fall election. Imagine the GOP TV spots, Fox talking points, and Wall Street Journal editorial: Obama Administration Has Secret Plan to Raise Your Taxes and Cut Your Social Security.

White House officials are working closely with the president's new fiscal commission in the hope that the bipartisan commissions final report will provide Republican cover for the deal. The commission, due to report by December 1, needs fourteen out of its eighteen members to make an official recommendation. One hope of the deficit hawks is that a super-majority report could steamroll a lame duck session of Congress to act quickly, pending a more Republican Congress in January.

Of the eighteen members, thirteen are fiscal conservatives. Only four are liberals -- Reps. Jan Schakowsky and Xavier Becerra, Sen. Dick Durban, and Andy Stern of the SEIU. A swing vote is Sen. Max Baucus, who is something of a deficit hawk, but defends Social Security and doesn't like automatic fiscal formulas that weaken his jurisdiction as Senate Finance Committee Chair.

Stepping back from the fiscal wonkery, this astonishing White House course is root canal economics as well as political suicide. If the unemployment rate is still close to 10 percent in November, Democrats in the House and Senate face a bloodbath. Yet Larry Summers has ruled out any new large jobs initiative before the election, according to several well placed sources. And if the White House is planning to hit the middle class with a double whammy of increased taxes through a VAT plus Social Security cuts, that's like handing the Republicans a loaded gun.

The GOP, please recall, came within a whisker of killing health reform because of the diversion of Medicare money. If any program is more sacred to older voters, swing voters, and the Democratic base, it's Social Security.

What can the smartest guys in the room be thinking?

Their rationale goes like this:

First, a jobs initiative is pointless because at least a dozen Senate Democrats won't vote for it (similar defeatism by some at the White House nearly killed health reform.) But why not force a vote, even if it fails, to demonstrate that all Republicans plus only a few Democrats are against a jobs bill? And why not use presidential leadership to change some key votes, the way Obama belatedly did on health reform and financial reform?

Secondly, the public supposedly cares more about deficit reduction than about jobs or Social Security cuts. If that's true, they need another pollster. Public preferences depend entirely on the context and on how the question is posed. If the unemployment rate were coming down, the deficit would be a purely abstract worry. The president proves his chops with regular voters by delivering real economic relief, not fiscal rectitude.

It's far better, as economics and as politics, to use larger deficits now to get a stronger recovery going, and then add new progressive taxes (not a VAT) to bring down the deficit. But that alternative has evidently been rejected.

Finally, it is wildly improbable as a political proposition to think that Republicans, either on the fiscal commission or in the Congress, will vote for a VAT. This version of a grand bargain has been promoted for years by Pete Peterson and Robert Rubin, and has now been embraced by Rubin's protege, budget director Peter Orszag. The fiscal conservatives who dominate the 18-member presidential commission hope to co-opt the commission's four liberals.

In the end Republican opposition to a VAT is likely to save the Democrat budget hawks from themselves. But along the way, this politically bizarre fantasy will do real damage -- by preventing the White House from embracing a strong recovery program, by frightening both Democratic base and swing voters, and by giving Republicans even more ammunition to use in November.

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