Thursday, December 09, 2010

Obama again confounds supporters and critics

Business Times - 10 Dec 2010

Obama again confounds supporters and critics

Deal with Republicans and avoiding confrontation show his pragmatic approach


MEMBERS of the progressive wing of the Democratic Party were hoping that President Barack Obama would emerge from the 'shellacking' his party had endured in the midterm Congressional elections promoting a new political brand.

Gone would be the old bipartisan Obama who for two years had been trying to work with the Republican opposition in drafting legislation aimed at accelerating the economic recovery and getting a Big 'NO!' from them in return.

Instead, they hoped, a New Obama would be drawing out the ideological distinction between the pro-business and Wall Street oriented Republicans and pro-working class and the Main-Street leaning Democrats. He would be insisting that the Bush-era tax cuts not be extended to America's millionaires and billionaires, supporting 'fair trade' as opposed to free trade, and touting an aggressive populist message bashing the 'greedy' bankers and a selfish Corporate America.

And once again, Mr Obama has disappointed his supporters on the political left who had fantasised that he would come out of the Great Recession as the next Franklin D Roosevelt delivering a New New Deal.

President Obama announced on Monday evening that he decided to make a deal with Republicans and bring the issue of the tax cuts for a vote in the outgoing or lame-duck Congress before the end of the year. Hence he proved to be once again more of a Clinton than an FDR.

Rejecting the advice provided to him by many Democrats - stick to your presidential campaign pledge and refuse to extend the tax cuts to the rich (those making above US$250,000 a year) even if that would bring about the expiration of all the tax cuts by the end of the year - President Obama agreed to extend the Bush-era tax cuts to all Americans on all income levels for two more years. In return, the Republicans agreed to extend jobless benefits an additional 13 months.

The deal is part of a broader legislative package that also includes cutting payroll taxes by 2 per cent through the end of next year and extending a slew of tax credits for middle and low-income families as well as for businesses while imposing a 35 per cent tax rate on estates worth more than US$5 million.

Progressive Democrats had argued that a full-blown legislative and political fight over the extension of the tax cuts and the jobless benefit would be exactly what the White House and the Democrats needed after their electoral blow in November.

Let the Republicans tell the American people that unless wealthy Americans do not get their tax cuts, they would not agree to extend them to America's middle class and allow the benefits to thousands of jobless Americans to expire.

Moreover, President Obama could have made the Republicans look like hypocrites. Here the Republicans were blasting the White House for increasing the federal deficit while at the same time they were helping to raise the deficit to the stratosphere by extending tax cuts for the rich.

But Mr Obama has chosen to compromise with the Republicans over the issue of the tax cuts, a move that reflected both practical short-term considerations as well as the president's basic non-ideological and pragmatic approach to policymaking.

Indeed, the White House and the Democrats just didn't have the votes they needed in order to beat the Republicans in the lame-duck Senate where a coalition of Republicans and conservative Democrats that support extending the Bush-era tax cuts to all income levels would have made it impossible to even bring the issue for a vote this year.

And a legislative deadlock would have meant that both the tax cuts and the unemployment benefits would have expired before the end of the year, resulting in a major blow to the economic recovery and much agony for unemployed Americans.

On the other hand, the tax accord sends a strong message to the American public as well as to financial markets that the White House and the Republican Congress are ready to work together in trying re-energise the economy and help create new jobs.

In a way, the entire package which is expected to add more than US$700 billion to the rising federal debt amounts to a fiscal stimulus plan - the extended tax cuts and tax credits as well the reductions in payroll taxes - that will pump hundreds of billions of dollars into the economy and leaves more money for consumers to spend and for businesses to invest. Just the payroll tax cuts would allow consumers to keep an extra US$120 billion in their pockets.

President Obama's decision to make a deal over the tax cuts with the Republicans as well as the conclusion of a major US free trade accord with South Korea, suggests that the current White House occupant may be trying to follow on the political footsteps of Bill Clinton, another centrist Democratic president, who after his party's defeat in the midterm Congressional elections in 1994 had embraced a strategy of 'triangulation' - working with the Republicans and even adopting some of their ideas and in the process insulating himself from their attacks.

Indeed, the Republicans are expected to provide the Obama administration with the votes that the White House needs in order to pass the FTA with South Korea and other trade accords.

The Obama administration says that the FTAs will increase US exports by billions of dollars and support tens of thousands of US jobs - but that doesn't enjoy a lot of support among Democratic lawmakers and activists.

Moreover, Mr Obama also recognises that he will need strong Republican support for any serious plan to reduce the federal deficit as well as for the costly military operations in Afghanistan and Iraq that, like the trade accords, are not popular among the Democrats.

Contrary to the Republican election narrative, Mr Obama is doing now exactly what he has been doing in the last two years - pursuing the same kind of centrist and pragmatic policies. The only difference is that the Republicans will now be in control of Congress and will not have the luxury of saying 'NO!' anymore.

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