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Why Obama Should Think Medium

I have returned from my beach vacation to discover that we're still using dollars as currency rather than sea shells (drat!), the most likely debt ceiling scenario involves $1.5 trillion in spending cuts, and Ezra Klein thinks this is far worse for the White House than a $4 trillion Grand Bargain:

For Republicans, this plan is something close to the best of all possible worlds (sorry, but I do not consider a world in which "Cut, Cap, and Balance" passes to be a possible one): It's all spending cuts and no revenues. It's a little plan that denies the Obama administration the political and substantive benefits of a big plan. It's a multi-part plan -- which is more important than people realize -- that forces Democrats to take three hard votes between now and the election, and almost ensures that deficit reduction will be an issue in 2013 and beyond. It's a plan that smartly pockets more than a trillion dollars in spending cuts Democrats can sort-of accept and only then begins a grand bargain process, ensuring that if there's a grand bargain later, it will cut far deeper into the bone of Democratic priorities.

Is this really worse than a Grand Bargain? I'm sure the Obama administration thinks so, but I disagree. Let's consider both the politics and the policy in order.

First, politics. Klein argues that a Grand Bargain would means deficit reduction is no longer an issue in 2013 and beyond. If that's true, it means that the main issue will be the economy, right? That's not a good thing for Obama. What Obama wants is for the election to focus on policy contrast. If he signs a $1.5 trillion domestic spending cut, he can pretty convincingly position himself in the center. From that position, he can argue that we now have two choices going forward -- a balanced program with defense spending cuts and higher taxes on the rich, or the radical Paul Ryan plan. Alternatively, if deficit reduction really were off the table, it would be far easier for Republicans to portray their vote for the Ryan budget as some kind of bold statement or youthful indiscretion or post-college prank than a governing agenda for voters to endorse or reject.

Second, and more important, policy. The single largest impediment to good public policy over the next decade is that there's simply not enough revenue to fund the government at adequate levels. Budgets that assign insufficient outlays to social programs can be changed, because spending programs tend to command the support of the public and/or interest groups. But ginning up more revenue is extremely hard. Middle-class tax hikes are unpopular, and upper-class tax hikes run into determined elite opposition. The Grand Bargain would lock in revenue levels that just won't work. Obama may think that a big deficit deal will revive the possibilities for new spending initiatives, but it won't conjure up the money to pay for it.

The only chance Obama has to escape this trap is to maneuver the Republicans into killing off the middle-class tax cuts, by refusing to compromise on tax cuts for the rich. Failing that, the only two fiscal options are high deficits or insufficient outlay.

The Grand Bargain would restore the revenue from the Bush tax cuts on taxable income over $250,000. That's not really enough revenue. What's more, it's revenue Obama can get any if he wins re-election, be refusing to sign a tax cut extension. And if he loses, the next Republican president will almost certainly pass another tax cut for the rich. Indeed, a Grand Bargain will simply free up more fiscal headroom for such a tax cut, just as Bill Clinton's fiscal responsibility enabled George W. Bush to enact a slew of debt-financed tax and spending initiatives. Either way, securing Republican agreement to capture the revenue from the expiring Bush tax cuts for the rich is worth very little to Obama. It would deprive him of an election issue where he can draw a strong and popular contrast, and furnish him with little actual policy benefit.