WASHINGTON – Months after losing control of the House in 2010, President Barack Obama and his vice president, Joe Biden, released a budget proposal that bowed to Republican warnings about the need to rein in spending by promising a freeze on popular programs such as education.
Now President Biden faces the same equation, with a bold new Republican majority in the House demanding deep spending cuts. But this time, Biden has made a sharp break from the past.
His proposed budget includes new steps to reduce deficits, but instead of talking about tough choices and spending freezes, Biden has vowed to defend popular federal programs from Republican attacks and instead rely almost exclusively on taxing businesses and high-income earners as the way to reduce deficit growth by nearly $3 trillion over the next decade.
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Biden’s shift in strategy is rooted in his determination not to repeat the political and economic mistakes of the Obama era, administration officials say privately. Economists say Obama-era mistakes slowed the recovery after the 2008 financial crisis. And publicly, officials point to polls to argue that voters side with the president on how to reduce deficits.
“The American people are absolutely right that the right way to reduce the deficit is to make the super-wealthy and special interests pay their share,” said Jesse Lee, a senior communications adviser for Biden’s National Economic Council.
The budget battle is expected to drag on for months as both sides try to blame the other.
Biden is attempting a different kind of budget triangulation than Obama’s plan, as he nods to concerns about the $31.4 trillion national debt but seeks to redefine the issue and turn conservatives’ longstanding antipathy to tax increases into a negotiating and electoral weapon.
“The Republicans have taken the table away, making the wealthy and the well-connected pay a little more to help reduce the national debt — that means they’re not really serious about the national debt,” Sen. Elizabeth Warren, D-Mass., said in an interview.
“Higher taxes targeting billionaires and giant corporations hiding their money overseas would have very little effect on our economy, other than the ability to reduce the national debt or to invest more,” she said.
House Republicans refuse to raise a ceiling on the debt the United States can have outstanding unless Biden agrees to major federal spending cuts, which could include slashing anti-poverty programs and new measures to combat climate change. They say the national debt burden and new spending programs approved by the president are weighing on economic growth, in part by raising the cost of borrowing for private businesses.
They are trying to piece together their own budget proposal that could pass the House, likely centered on cuts to housing benefits, health care programs and other help for the poor. In a caucus divided over key issues such as how much to spend on the military and whether to raise the retirement age for Social Security and Medicare, members have found common purpose in breaking Biden’s fiscal plans.
“After two years of economic failure, the American people desperately want results,” said Rep. Jason Smith, R-Mo., chairman of the Ways and Means Committee, at the start of a hearing on Biden’s budget on Friday. “The budget for us today calls for $4.7 trillion in new taxes and sinks $6.9 trillion in new spending amid a staggering debt crisis.”
Biden has refused to negotiate directly on raising the debt limit, but says he welcomes a conversation about the nation’s finances — on his own, populist terms.
“What are they going to cut?” Biden addressed an audience in Philadelphia on Thursday as he formally unveiled his budget and urged Republicans to follow suit.
“What about Medicaid? What about the Affordable Care Act? What about veterans benefits? What about law enforcement? What about rural aid? What about support for our military?” he asked. “What are they going to do—how are they going to make these numbers add up?”
This debate is taking place at an economic moment very different from 2011, when Obama issued his fiscal year 2012 budget.
At the time, the gross national debt was about $15.5 trillion, or just under three-quarters of what was the annual output of the American economy. But the economy was nowhere near recovering from the 2009 recession. Unemployment was 9 percent. The economy was running well below what economists call its potential—the amount of goods and services it would produce at what might be called optimal performance.
Progressive economists pushed Obama to use low interest rates to continue running large deficits and pump more money into the economy. After losing the House, however, he bowed to Republican demands to reduce the deficit and turned the other way. His budget proposed caps on government spending and called on Congress to “act now to secure and strengthen Social Security for future generations” by taking steps to strengthen its finances.
A bout of brinkmanship later in 2011 between House Republicans and Obama nearly resulted in the US defaulting on its debt before Obama agreed to a set of caps on future spending increases in return for lifting the cap. That deal helped cut the deficit by nearly two-thirds before Obama left office.
Many economists have concluded that these measures dragged out the time it took for the economy to finally warm up enough to generate sustained wage gains for workers.
Today’s economy has been running so hot that the Federal Reserve is trying to cool it down to tame high inflation. Unemployment is at 3.6% and companies are having problems finding labour. Republicans blame Biden’s spending policies for fueling inflation and say his tax proposal will further burden people and business owners struggling with high prices.
Progressive economists disagree — and increasingly say there is little threat to growth from big tax increases on businesses and high earners.
Even with his proposed savings, Biden’s budget still projects the gross national debt to rise by about $18 trillion through 2033, to just over $50 trillion, or 128% of gross domestic product. It projects that the deficit will average about 1.5% more, as a share of the economy, than Obama projected in his 2012 budget. Still, administration economists say that under their plans, “the economic burden of debt would remain low.”
Some progressive groups criticized Biden last week for even focusing on deficit reduction in the budget. Others cheered his emphasis on raising taxes on businesses and people making more than $400,000.
Budget hawks urged Biden last week to propose more — and more immediate — deficit reduction. Such reductions would pull consumer spending power out of the economy more quickly by raising taxes or reducing federal spending, or both. Proponents of deficit reduction said it could help ease price growth in the economy.
Fed Chairman Jerome Powell told lawmakers in the House and Senate last week that federal tax and spending policies “did not contribute to inflation” today. He was pressed on this view by Senator John Kennedy of Louisiana, a Republican on the Budget Committee.
“It’s undeniable that the only way we can get this sticky inflation down is to attack it on the monetary side, which you’re doing, and on the fiscal side, which means Congress has to reduce the rate of growth by spend and reduce — reduce the growth rate of debt accumulation,” Kennedy said.
“Now I understand you don’t want to stand in the middle of that fight,” he added. “But the more we help on the fiscal side, the fewer people you have to put out of work. Isn’t that a fact?”
“It could work that way,” Powell replied.
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