Obama Faces Political Minefield Over Deficit

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President Obama's State of the Union address this week could say a lot about the state of his own agenda. Obama hopes to use the speech Wednesday to regain some traction after the Democrats' stunning loss in last week's Massachusetts Senate election.

In addition to jobs, the president is expected to talk about steps to reduce the federal deficit. Mounting red ink has been a growing concern for independent voters.

"They see the tote board spinning and wonder, 'Where is all the money coming from?' — and particularly worry about whether it's going to be coming from them," said Democratic pollster Geoff Garin.

A survey by the anti-deficit Peter G. Peterson Foundation found that 4 out of 5 voters believe controlling the deficit and the federal debt should be a high priority for the president and Congress. That popular concern has amplified the warnings regularly sounded by fiscal watchdogs.

"As you build your credit card deficit, ultimately you have to pay for it," said former Rep. Charles Stenholm (D-TX). In the spirit of Yogi Berra, he said: "That which cannot go on forever usually won't."

The government debt held by the public will climb to nearly 70 percent of gross domestic product by 2019, according to projections from the Congressional Budget Office. The federal government posted a $1.4 trillion budget deficit in the fiscal year that ended in September.

Phasing In Spending Cuts And Tax Hikes

Stenholm co-chairs a budget reform task force that recommends a combination of spending cuts and tax hikes to keep the federal debt from ballooning as a share of the U.S. economy. The task force is careful to say any spending cuts or tax hikes should be phased in slowly, after 2011, to avoid making the recession worse. But some liberals worry that even talking about deficit-fighting measures at this point is premature.

"The time to start reining the deficit back is when the economy starts to recover, and not one moment sooner," said Josh Bivens, an economist with the labor-backed Economic Policy Institute.

Bivens argues that in the current environment, fear of big deficits is misplaced. After all, interest rates are low, inflation is no threat, and there's little danger that government borrowing will "crowd out" still anemic private investment. If anything, Bivens said, the government should be going deeper into debt in an effort to create more jobs.

"Deficits are not always and everywhere bad," he said. "Sometimes the federal budget should go into bigger deficit to aid prosperity. Sometimes it should go to smaller deficits or even surplus. We're absolutely in a time right now where we need bigger deficits to aid that prosperity."

A Political Minefield

Here's the rub: The same polls that find that voters are concerned about the deficit show they're downright alarmed about unemployment. And tackling either one of those problems is likely to make the other one worse. Spending money on job creation adds to the deficit, while fighting the deficit with spending cuts or higher taxes could choke off the recovery.

It's a political minefield for the president. But pollster Garin said there is a path of escape.

"The voters accept the premise that you have to deal with the deficit in a way that is consistent with growing the economy," Garin said.

That means bigger deficits now, along with a promise of more budget discipline later. That's the path Obama is likely to take in his State of the Union address.

Over the weekend, Obama endorsed legislation that would set up a bipartisan budget commission, to make recommendations on tax hikes and spending cuts later this year. One appeal of this approach is that it offers the promise of deficit reduction, while postponing any hard decisions until the economy is on more solid ground — or at least until after the November election.



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