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The Democratic Strategist

Political Strategy for a Permanent Democratic Majority

Obama’s Fiscal Realism

Note: this is a special guest post from Will Marshall, president of the Progressive Policy Institute. We hope to hear from other Democrats offering varying views on the political and policy strategy challenges facing the Obama administration.
We’ll find out soon enough whether President-elect Obama is as adept at governing as he is at campaigning. But this much is already certain: Barack Obama has presided over a spectacular presidential transition – maybe the best in modern times.
In picking a crew of political heavyweights to run his administration, Obama has radiated both self-confidence and seriousness about governing. And in recent weeks, he has crystallized the key dilemmas facing the country with greater candor and specificity than ever before.
Yesterday, for example, the President-elect promised to reform Medicare and Social Security. “This, by the way is where there are going to be very difficult choices and issues of sacrifice and responsibility and duty,” Obama told The Washington Post. “You have to have a president who is willing to spend some political capital on this. And I intend to spend some.”
Now that’s audacity. Despite some vague rhetorical gestures toward social security reform during the campaign, Obama gave little reason to believe he would give high priority to modernizing America’s mammoth social insurance programs. This might strike some as nothing more than a bow to fiscal reality, but it’s a reality that many in his party have had a hard time accepting.
Looking back ruefully on his White House tenure, President Bush has conceded that his 2005 push to “reform” Social Security was a miserable flop. The public’s negative verdict, however, had the unfortunate side effect of reinforcing the “just say no” reflex that grips many liberals when the subject of entitlement reform comes up.
But Obama, like President Clinton before him, knows that the unsustainable growth of retirement and especially health care costs, poses a threat not only to America’s fiscal health, but also to progressive government itself. Already, the big entitlements consume more than half the federal budget. If unchecked, their automatic spending growth will squeeze out space for public investments in health care, education, childrens’ well-being, public safety and everything else progressives care about.
As Obama told the Post, social security is, relatively speaking, the easy fix. Its funding gap is modest (“only” around $4.3 trillion, according to the Social Security trustees) compared to Medicare’s (an estimated $36 trillion). The menu of options for closing that gap while at the same time strengthening Social Security’s ability to lift seniors out of poverty are well known.
Obama, for instance, has called for raising the cap on salary subjected to the social security payroll tax. But rebalancing the generational compact embedded in social security will also require action on the benefit side of the equation. The best approach, developed by Bob Pozen, is the “progressive indexing” of social security benefits. It would trim benefits only for well-off retirees who are less reliant on Social Security than middle- and low-income people. The proposal is detailed in Memos to the New President, a “big idea” book the Progressive Policy Institute released this week.
While social security essentially presents a demographic challenge – fewer workers supporting a rapid expansion of the nation’s elderly population – fixing Medicare is a more complicated matter. In addition to the worsening “dependency ratio” as the baby boomers flood into retirement, the costs of medical services themselves are growing much faster than the economy. Unless the Obama Administration can find ways to reduce the rate of health care cost growth, even as it expands coverage to the uninsured, the United States is headed toward a fiscal trainwreck.
Obama also announced his intention to hold a fiscal responsibility summit. He clearly recognizes that America’s faces a dual economic crisis. Our immediate challenge is to get credit markets working again, and stimulate the economy to reduce the severity and duration of today’s recession. The long-term challenge is to impose discipline on the federal budget, so that America’s burgeoning debts won’t undercut our future growth or shrink our childrens’ economic prospects.
Striking the right balance between the short- and long-term needs of the country will be the central drama of the Obama administration. It will require the President to pursue ostensibly contradictory policies over the next four years: first, a spending surge, then, as the economy starts to recover, a smart pirouette toward fiscal restraint. It will be a tricky maneuver and will require consummate political skill. Obama’s full-throated embrace of fiscal realism suggests he is up to the task.

One comment on “Obama’s Fiscal Realism

  1. mjshep on

    Two things seem clear. One Social Security is not in immediate danger and is, as Obama said, an easy fix that requires neither serious cuts in benefits, especially to the most needy, nor raises in taxes to most Americans nor, most of all, privatization.
    Medicare, on the other hand, seems like it can only be fixed in the context of an overall health care strategy for the entire population along with reductions in spiraling costs. As much as a crisis this appears an opportunity, and even a mandate, to address these issues in a comprehensive way. Therefore, the “entitlement” conundrum is really the door opener to much needed and substantial reform. Obama’s comments seem to indicate he understands this.
    At least, one can hope.


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