The Independent Market Observer

4/10/13 – Barack/Boehner Budget Battle Begins

Posted by Brad McMillan, CFA®, CFP®

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This entry was posted on Apr 10, 2013 10:18:15 AM

and tagged Politics and the Economy

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I love alliteration. A game my family plays on long car trips is to see how many words starting with the same letter we can string together and still make sense. I hold the record so far with something like Cape Cod Canal Commission Community College Cheerleading Co-Captain’s Conference Center classroom chatter, or CCCCCCCCCCCcc. Top that!

The topic for today, however, is the budget battle. We now have three budgets out there—the Senate Democrats’, the House Republicans’, and the President’s. While none of them will be passed as presented, we can reasonably define the box that the final budget will fit in. I plan to do a detailed analysis and comparison in the next couple of days.

The important thing about the Obama budget, though, is political, not economic. Unlike the Senate and House versions, which hew reliably to the priorities of the parties that control each branch, the Obama budget is being billed as, and treated as, essentially a bipartisan document. The headlines say it all: “Obama Reaches for Middle Ground With New Budget Plan” in the Wall Street Journal and “Obama Unveils Budget Meant to Draw GOP to the Table” in the New York Times.

This illustrates what I’ve been talking about—the mean reversion of politics. While we still have the outliers, any deal that’s cut will fall in the middle. After the past debacles, there’s an incentive now to cut a deal rather than hold fast. The White House has decided to try and get ahead of this trend and stake out the high ground, so that any eventual compromise will be more on its terms.

The key to this move is an implicit concession on social security: the Obama budget changes the basis of future cost-of-living adjustments in a way that was part of a compromise more or less agreed to with John Boehner. By presenting a concession that would most likely have to happen anyway, that Republicans had basically agreed to already, and that was, in fact, opposed by many Democrats, Obama has made a strong public case that the Republicans must now respond with concessions of their own.

Of course, the Republican leadership doesn’t accept this. While they would accept the spending cuts, the other components of the budget, including tax increases and new spending, are being rejected by party leaders as recycled proposals that they’ve nixed before.

The other component of the Obama strategy is an attempt to work around the Republican leadership and get other, non-leader legislators in play. By splitting Republican unity, a deal becomes much more doable. By offering concessions up front as a good-faith gesture, the White House hopes to engage individual senators and congressmen rather than provoke a shouting match. The aim of the strategy is to take the discussion out of the hands of the leadership and to a more flexible group. It remains to be seen whether this will work.

Any way you slice it, though, things are moving in the right fiscal direction. The debate now is over how much to reduce the deficit, rather than whether to do so. If the White House budget is treated as an opening bid, the deficit should decline to below 4.4 percent in 2014, down from an estimated 5.3 percent in 2013. If no deal is reached, and the sequester spending cuts remain in place, the Congressional Budget Office estimates the deficit would be 3.7 percent of GDP in 2014.

The immediate goal is to get the deficit below the growth rate of the economy, as that will be when the overall debt stops growing as a percentage of GDP. We’re getting close to that, and with the deals now being presented, it seems that the government may continue to focus on solving the problem rather than yelling at each other.

I hope.

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