President Obama Wins the First Round with Paul Ryan
Yesterday’s presidential address on fiscal policy was a very striking scene. The venue was a small auditorium at George Washington University. Invitations went out just two days earlier; and with so little notice, GWU students made up more than half of the audience. Former Democratic economic policy officials — myself and perhaps 10 others — directors of Democratic-allied policy shops, and a smattering of CEOs and senior Senate staffers filled up another row.  Just before the President took the stage, his economic team filed in — Bill Daley, Tim Geithner, Gene Sperling, Jack Lew — along with Vice President Biden and his new chief-of-staff, fresh from directing the Simpson-Bowles Deficit Commission.  Alan Simpson and Erskine Bowles were there too, along with other Commission members — here’s what added drama to the scene — including Representative Paul Ryan, this year’s Republican guru on the budget sitting uncomfortably in the first row. The moment the President finished — without exaggeration — Ryan bolted for the exit. Perhaps he suspected that the President’s plan is smarter, fairer, more balanced and more credible than his own.
Both blueprints would reduce deficits by $4 trillion over the 10 (Ryan) or 12 (Obama) years, but the real difference lies in revenues. The Congressman would give away another $1 trillion in new tax cuts to high-income Americans and business, while the President would collect an additional $1 trillion in revenues. The consequent $2 trillion difference explains how the President, unlike Ryan, can stabilize federal debt as a share of GDP while preserving the basic guarantees of Medicare and Medicaid.  And there was one telling moment during the speech which demonstrated how new revenues change the choices that Americans face with the debt: The President was interrupted by applause only once, and it was when he said, “They [Republicans under Ryan’s plan] want to give people like me a $200,000 tax cut that’s paid for by asking 33 seniors each to pay $6,000 more in health costs. That’s not right. And it’s not going to happen as long as I’m President.â€
Obama’s plan, then, recasts the issue from the GOP choice between spiraling debt and drastic cuts in Medicare, Medicaid and all domestic spending, to a new choice between higher taxes on the top one or two percent of Americans and preserving health care coverage for elderly and low-income people while also controlling the debt.  That choice can be cast even more starkly: Control the debt by forcing seniors to pick up two-thirds of their own health care costs by 2030 (CBO’s estimate of the impact of Ryan’s plan) or deny wealthy Americans their most recent and future tax cuts.  If you believe the polls, Americans today overwhelming favor President Obama’s priorities over Representative Ryan’s.
With his additional revenues, the President still has to find $3 trillion in spending reductions. Â One big chunk of cash would come from broadening and strengthening the cost-control measures in his signature health care reforms; including, reimbursing hospitals and doctors based on results rather than volume and authorizing a new federal board to mandate rather than merely recommend the use of proven, cost-saving approaches to treating Medicare patients. He also calls for a new version of an old budget mechanism, from the late-1980s, which would trigger automatic, across-the-board cuts in domestic spending whenever the deficit exceeds a certain level.
In the end, OMB number crunchers believe that these and other measures would shave $2 trillion from spending over 12 years, and the lower deficits would save another $1 trillion in interest payments on the debt.
President Obama’s approach also allows him to preserve the substantial new public investments in education, infrastructure, clean energy and basic R&D which he called for in his latest budget.  By putting together a plan to control deficits while increasing public investments — the “cut-and-invest†approach championed by Bill Clinton in the 1990s — he assumed an optimistic, can-do attitude that recalls Ronald Reagan. And the implicit contrast with the Republican “the sky is falling†recipe of large sacrifices may serve his reelection nearly as well as it did Reagan’s.
These choices will not be resolved anytime soon.  GOP leaders immediately rejected the President’s blueprint.  Yet, they and their Democratic counterparts know full well that any resolution will require real compromises that include both additional revenues and some paring of entitlements. They also know, based on the deficit struggles of the 1980s and 1990s, that it will likely take several years for both sides to find and comfortably claim some common ground.
Even so, the President’s speech will have more immediate consequences, because it may well make the GOP’s position on the debt limit politically untenable. They no longer can argue credibly that they have to hold the full faith and credit of the United States hostage, in order to force the President to get serious about the debt.  The country now has a choice, and the Republicans can no longer say, our way or no way, when it would risk pushing up U.S. interest rates and possibly shaking the global economy. The current impasse over debt limit will be resolved with some face-saving commitment by both sides to begin negotiating in good faith.