Five Challenges for Obama’s Tough Second-Term

By :: November 7th, 2012

Barack Obama has pulled off the easy part. He got re-elected. Now, he faces a second term full of painful choices.

You could see it in his campaign, which focused more on Mitt Romney’s flaws than on what the president would do in the next four years. Much of this, I suspect, was the result of the terrible budget constraints under which he operates. In short: Not even a Democrat can do very much new when faced with a trillion dollar deficit.

That and the reality that Republicans still control the House and can block most anything in the Senate, is why Obama is likely to spend most of the next year or two struggling with budget issues even as he consolidates health reform. Bold new initiatives will be off the table until the deficit is addressed.

His biggest challenge: Find a way to break the logjam between Democrats who are reluctant to slow the growth of programs such as Medicare and Medicaid, and Republicans who insist that all deficit reduction must come from spending cuts and none from new taxes.  Obama will find some moderates of both parties eager to deal, but he will also face hardliners who are not.

It is not an understatement to say that the success of his second term will depend on whether he finds a way to build a coalition of those moderates.

Here is what is likely to happen with five major domestic issues:

The Fiscal Cliff:  On Jan. 2, the 2001-2010 tax cuts are due to expire and automatic across-the-board spending reductions will hit all federal programs except for Social Security and Medicaid. Obama has the leverage to force Congress to extend  the tax cuts on his terms (see below), and could well link such a step to a framework for deficit reduction that delays the spending cuts until later in 2013. Such a deal could include spending and revenue targets, a specific timeline for action, and a temporary extension of the debt limit which will be reached in early 2013.

The 2001-2010 Tax Cuts: Obama has vowed to extend most of them, except for those that benefit taxpayers making more than $200,000 ($250,000 for couples). While Republicans want to continue the tax cuts for all, they have little chance of success. One unsettled issue:  Will Obama try to replace the 2010 payroll tax cut, also due to expire in January, with some other tax reduction for working people?  Congress and Obama are almost certain to agree to extend the Alternative Minimum Tax patch, which would protect about 25 million middle- and upper-middle income households from the levy.

Tax Reform: The president has shown no interest in individual tax reform but has supported the idea of a rate-cutting, base-broadening corporate tax rewrite. His aides insist corporate reform is easier, though I have my doubts. House Ways & Means Committee Chair Dave Camp (R-MI) has been working on a corporate reform of his own. There is an opportunity here, but will it get buried by divisions in the business community and other fiscal conflicts?

Medicare and Medicaid: Obama has vowed to preserve the basic designs of both. However, Senate moderates of both parties are exploring substantial changes in the health programs, including shifting Medicare to a form of premium support and capping federal Medicaid funding to a formula based on inflation and enrollment. Will Obama agree to some of those reforms as part of some grand bargain?

Health Reform: The 2010 Affordable Care Act will take effect as planned. Republicans have lost their chance to repeal it or even make significant changes. That means the law’s tax increases on high-income households will kick in as scheduled in 2013. And in 2014 major insurance reforms, including a broad expansion of Medicaid for the working poor, the requirement that insurance companies sell coverage to all regardless of pre-existing conditions, and the health exchanges will take effect—at least in most states.

The biggest question for the next couple of years is not about Obama, however. It is about congressional Republicans. Will they respond to yesterday’s defeat by doubling down on their no new taxes pledge? Or will they accept a fiscal grand bargain that includes both tax hikes and serious efforts to slow the growth of Medicare and Medicaid. If they do, it is a good bet that Obama will meet them somewhere in the middle.

 

6Comments

  1. Michael Bindner  ::  2:47 pm on November 7th, 2012:

    Flake and Pence are both out of the House, so the nutjob caucus in the House is greatly diminished, leaving Boehner in a much more powerful place. McConnell’s blocking was always in service to Boehner, who could have faced a Tea Party revolt. This is less likely now, so McConnell can be more reasonable, although he may have electoral issues to deal with because he is up for re-election next time. He may have to wait until there is no possibility of a primary challenge to let anything go through of meaning.

    The sequestration provisions are only there in case the players want to kick the tax issue down the road. If they agree on taxes, the sequester will be repealed.

    Tax reform is not hard, actually. The main thing is to put business taxes, the top tax rate, and capital gains and divident taxes at the same rate with cuts witho some, but not all, tax expenditure reduction. The only question is where the rate resolves. The range is between 25% and 29%. The challenge is finding a number in the middle. 27% is a good number. Of course, a VAT may be part of the deal (with an end to employer payroll taxes and maybe even the business income tax). Playing games with the calender is not really needed as rich people know that they will be paying more in tax, regardless of what Grover Norquist tells them. Luckily for Grover, however, the GOP did keep the House, so they did not lose all of their leverage.

    Medicare and Medicaid need a lot of work, but mostly in the area of Part B and Part D. The consensus answer is higher premiums to take care of more of the programs, but to do that, you must increase the base benefit. The other alternative is either higher payroll or income taxes or funding with a broader based tax than a very regressive payroll tax – meaning a less regressive consumption tax (see above) – possibly with employer offsets if they provide alternative coverage for retirees or long term care.

    Health reform could be a major blow up if health insurance stock investors are more risk averse than the uninsured are – meaning if people start cancelling insurance because the mandate is weak and pre-existing condition protections are strong, the entire program may need to be redesigned – either a single payer plan or a public option with repeal of the mandate and guarnateed coverage. The question is, if this blows up, who gets the blame in 2014?

  2. AMTbuff  ::  2:00 am on November 8th, 2012:

    If Obama’s top priority is to make a deal for fiscal responsibility, he can get just about anything he wants by putting repeal of ObamaCare on the table. ObamaCare irresponsibly expended much of our available tax increase ammunition to increase the scope of government rather than to cut the deficit.

    Will Obama offer to sacrifice his signature achievement? Only a truly humble man would do that.

    As to “Health reform could be a major blow up”: Michael, don’t you realize that blowing up the private insurance was the primary objective of that bill? The bill was designed to appear plausible but to be so structurally defective that it would leave the government as the only viable insurer. The bill was also designed so that attempts to starve it of funding would only accelerate this process. It’s ingenious in that respect.

    “The purpose of a system is what it does.” ObamaCare as enacted will destroy private insurance within a decade or so. That’s not an accident. It’s not a defect. It’s a feature. Astute progressives know this, but only a few have been willing to admit it publicly.

    I believe that within the next decade or so the US government will face bankruptcy, by which I mean inability to borrow sufficient money to fund the deficit and roll over maturing debt. The idea that the government would be able to pay for everyone’s health care will then seem completely ridiculous. If I’m right, then ObamaCare is irrelevant and the President would lose very little by trading it for a grand bargain that preserved programs which the truly needy rely on.

    Progressives ought to concern themselves with preserving the fragile credibility of the promises government has made. Bankruptcy will discredit the welfare state concept for the rest of the 21st century. On the bright side, it will cleanse our political system of all sorts of parasitic and rent-seeking organizations and activities that we have accumulated over the past century. Read Mancur Olson for an explanation of that point. Or read a summary at http://www.jonathanrauch.com/jrauch_articles/demosclerosis_the_original_article/

  3. Ralph H  ::  11:27 am on November 8th, 2012:

    This will be interesting. We will see what Obama’s true intentions are. If he insists on socking it to only “rich” guys, there will be no bargain. If he resurrects Simpson-Bowles (or something like it)there could be a chance for both parties to work together. I see no chance of dropping Obamacare, though possibly a bipartisin change might improve it. The worst case will be a temporary fiscal cliff solution essentially kicking the can down the road.

  4. Tax Roundup, 11/7/2012: Waterloo edition « Roth & Company, P.C  ::  4:44 pm on November 8th, 2012:

    […] Howard Gleckman, Five Challenges for Obama’s Tough Second-Term […]

  5. Vivian Darkbloom  ::  4:22 am on November 9th, 2012:

    “The biggest question for the next couple of years is not about Obama, however. It is about congressional Republicans. Will they respond to yesterday’s defeat by doubling down on their no new taxes pledge? Or will they accept a fiscal grand bargain that includes both tax hikes and serious efforts to slow the growth of Medicare and Medicaid. If they do, it is a good bet that Obama will meet them somewhere in the middle.”

    If you want to look at this objectively, the thing about compromises is that whether one is part of the problem or part of the solution depends entirely on which side one is on.

    Take, for example, Mr. Krugman’s latest Op-Ed piece in the New York Times (AptSo President Obama has to make a decision, almost immediately, about how to deal with continuing Republican obstruction. How far should he go in accommodating the G.O.P.’s demands?

    “So President Obama has to make a decision, almost immediately, about how to deal with continuing Republican obstruction. How far should he go in accommodating the G.O.P.’s demands?

    My answer is, not far at all. Mr. Obama should hang tough, declaring himself willing, if necessary, to hold his ground even at the cost of letting his opponents inflict damage on a still-shaky economy. And this is definitely no time to negotiate a “grand bargain” on the budget that snatches defeat from the jaws of victory.”

    Funny that “hanging tough” and “obstruction” are not considered synonyms here. Obama’s “challenges” are not restricted to those Congressional Republicans, as Howard would want us to think. Obama has a choice, particularly since he’s not running for a third term: He can strike a grand bargain that includes real long-term deficit reduction and genuine tax reform, or he can use this as yet another opportunity to advance his overriding agenda of expanding government and redistributing wealth and income.

    I suspect the latter, but I hope I’m wrong.

  6. Vivian Darkbloom  ::  4:27 am on November 9th, 2012:

    That third paragraph should read:

    “Take, for example, Mr. Krugman’s latest Op-Ed piece in the New York Times (Aptly titled “Let’s not Make a Deal”):