The Sequester, Now What?

President Obama gambled that the threat of the automatic sequester of $85 billion in domestic and defense cuts would force the Republicans to accept major tax increases, and so far he is losing the wager. The Republican leadership, which was badly divided over the New Years deal that delayed the fiscal cliff, is now re-united around the proposition that Republicans will accept no further tax increases.

So the president is left to court individual Republican House members to support loophole closures in exchange for the restoration of some popular domestic and military spending. But for the moment, Republicans got what they wanted—big spending cuts, party unity around no tax increases, and a weakening of a newly re-elected president.

For Obama and the Democrats, there are three big risks going forward. First, the sequester slows down economic growth—cutting it in half this year from about 3 percent to 1.5 percent, according to the Congressional Budget Office. Obama, more than the Republicans, will take the political blame.

Second, popular domestic spending programs that Democrats ordinarily defend will suffer deep cuts. And third, the politics of the situation pushes Obama further in the direction of the elusive “grand bargain” long sought by Wall Street, in which Democrats agree to cut Social Security and Medicare and Republicans agree to close some tax loopholes.

Among the revelations of the dust-up between columnist Bob Woodward and White House economic chief Gene Sperling last week was confirmation that such a grand bargain was the White House's goal all along and that Sperling and others miscalculated that the sequester, especially its defense cuts, would force such a deal. In the bargaining over the 2011 budget deal, Obama offered this sort of grand bargain only to see it rejected by the House Republican caucus. 

The recent New Yorker profile of House Majority Leader Eric Cantor by Ryan Lizza written before the sequester hit suggested a House GOP caucus badly divided and in disarray, with Cantor and Boehner at each other’s throats. A majority of House Republicans voted against the New Years deal brokered by Senate Republican leader Mitch McConnell and Vice President Joe Biden.

But that was then. Since the sequester hit, the tactical advantage has passed to the Republicans, and their price for a grand bargain to avoid some of the sequester cuts has likely increased—less in the way of tax increases, and more cuts in Social Security and Medicare.

That sort of deal would be even worse than the sequester. It’s better for President Obama to take his case to the country—on the folly of deep spending cuts (whatever their composition) given how weak the economy is. 

If that is indeed President Obama’s position.

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