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The Obama Proviso

Bart Taylor //July 27, 2011//

The Obama Proviso

Bart Taylor //July 27, 2011//

In this surreal week, it’s easy to buy-in to the dire forecasts relating to a government default. But a compromise will be reached, if one that postpones any meaningful resolution to the budget deficit issue – the “kicking the can down the road” idiom favored in Washington D.C. these days.

An equally serious issue is the state of federal policy-making and the troubling Obama proviso that now attends to deliberations in D.C.: much of what Mr. Obama touches will be debated on visceral, emotional grounds. Substantive dialogue has given way to a simple calculation involving political capital, as in, what does supporting or opposing this President mean for the 2012 election? Among Mr. Obama’s foes, Sen. McConnell has confirmed as much.

The debate about raising the debt-limit has brought this reality into sharp relief.

Facts suggest there’s plenty to agree about. David Kelly, Chief Market Strategist for J.P. Morgan Funds, put it like this last month:

“First, over the past 50 years, federal revenues have averaged 18.0 percent of GDP but in the current year they are set to amount to just 14.8 percent. During the same period, federal spending has average 20.5 percent of GDP but in the current fiscal year it should amount to 24.3 percent. This strongly suggests that any honest approach to balancing the budgets will require both revenue increases and spending cuts. Second, the budget cannot be balanced purely by hammering discretionary spending. The cold reality is that we are currently borrowing almost 40 percent of total government spending or $1.4 trillion. If we eliminate all non-defense discretionary spending, it would still amount to only half the current deficit. As an alternative, if we eliminated all spending on Social Security and defense, it would still just cover the deficit. As a practical matter, the federal budget cannot be balanced without increasing taxes and cutting spending on Medicare, Medicaid, Social Security and defense.” (His bold and italics.)

A regular columnist on this site, Bill Greiner, president and chief investment officer of Scout Investment Advisors, has also suggested the numbers present a fairly straightforward case for action. In a briefing last year anticipating the current debate, Greiner was optimistic that politicians would eventually find the will to compromise and arrive at a balance of spending cuts and new tax revenues that would well received by global financial markets.

Would he be as optimistic forecasting similar events today? Does the political will exist to arrive at meaningful compromise on key issues with President Obama in the White House? Blame who you will; by now most of us have well-entrenched biases that transcend any one policy debate.

But even those who support Mr. Obama may be forced to concede that without a dramatic and unforeseen change, he may be incapable of leading the nation to an agreeable conclusion on key policy issues. And a Democratic primary may be in the cards as a result.

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