The logical contradictions of Obama’s debt ceiling stance

David Cohen Former Deputy Assistant Sec. of the Interior
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Treasury Secretary Timothy Geithner, President Obama’s point man in the debt ceiling debate, revealed much during his interview with Chris Wallace on Fox News Sunday — but not on purpose. Geithner did his best to obfuscate the issues to support the party line, just as representatives of any administration are often forced to do — but he inadvertently made two things perfectly clear. The first is that President Obama’s overriding concern in this debate is his own re-election. The second and more interesting point is that there is an inherent logical contradiction between Obama’s debt ceiling position and his desire to revive our moribund economy.

That Obama is motivated primarily by his own re-election hardly sets him apart from any other elected official, past or present. Geithner, however, could have served his boss better by not making it so obvious. Geithner repeatedly stressed that Obama’s objective was to “take the threat of default off the table through the election.” Obama has insisted on a long-term deal to raise the debt ceiling in exchange for debt reduction, and has threatened to veto a short-term deal that might give the parties more time to finalize a long-term deal. As Charles Krauthammer has noted, Obama’s position has no justification other than his desire to take this issue off the table for the 2012 election. Does anyone seriously believe that America would be better off with no deal rather than a short-term deal that sets a reasonable framework and timetable to properly negotiate a long-term deal?

Of course, President Obama cannot openly say that he wants to take the issue “off the table through the election” — that would be an admission that he is putting his political interests above the national interest. Instead, Obama must assert that he opposes a short-term deal on principle: It would just be wrong to “kick the can down the road” when The American People expect us to solve this problem right now. Geithner, then, bumbled into a refreshing moment of unintended candor by admitting his boss’s real objective was to take the divisive debt ceiling issue “off the table through the election.” Actually, Geithner bumbled into several refreshing moments of unintended candor, because he inexplicably kept repeating that point to Wallace. I’ll bet that’s the last time they let Geithner swallow Truth Serum before appearing on TV.

Obama’s political cynicism with respect to the debt ceiling issue is no surprise to anyone outside of the mainstream media. Obama and Geithner are Latter-Day Saints on the issue of debt reduction (or perhaps born-again virgins), having insisted until recently that we pass a “clean” debt-ceiling increase with no cuts at all.

Geithner’s more interesting unintended revelation, however, was that Obama’s strategy in the debt ceiling negotiations is at war with his strategy to jump-start the economy. Geithner asserted that we need to remove the threat of default and “get our fiscal house in order” so that Congress “can get back to the business of trying to do things to make the economy stronger and get more Americans back to work.” Getting people back to work is certainly our country’s most urgent priority, given that the current 9.2 percent unemployment rate would be much higher if so many people had not given up all hope of finding work in this lousy economy.

What’s troubling, though, is that Geithner and Obama view this as a two-step process: We have to get all of this deficit and debt reduction stuff out of the way so we can then turn our focus to the economy. If Obama gets his way on the debt ceiling deal, it is difficult to imagine how he could stimulate the economy without undoing the progress that we presumably would have made on deficit and debt reduction.

Obama is insisting that we raise taxes as part of a “balanced approach” to deficit and debt reduction. Raising taxes could only harm the economy’s ability to create more jobs. Once we’ve reached a deal to get our deficit and debt under control, would Obama then seek to stimulate the economy through tax cuts that would undo any deficit-cutting effect of the tax increases he is insisting on? Or would Obama again attempt to stimulate the economy through new government spending (since that worked so well the first time), hence undoing the effect of the spending cuts that would have to be the basis of any debt-control effort?

Any way you slice it, Obama’s two-step process of deficit and debt reduction now and economic revival later will almost certainly require him to undo in Step Two the effect of policies he claims are essential for Step One. And since the deficit and debt fixes can only be long term, they will not remain “fixes” if they are undermined or undone. Other options to stimulate the economy, such as free trade agreements and one-time tax holidays, would be ineffectual “small ball” in the face of our daunting economic problems. The only other significant thing that Obama could do for the economy would also be an “undoing”: undoing the burdens on job creation his administration introduced through Obamacare, Dodd-Frank, EPA activism, NLRB activism, etc. Since Obama views these as his signature achievements, the chance of his agreeing to undo them is nil.

Obama’s approach to debt and the economy will thus eventually collapse under the weight of its own logical contradictions. Of course, as Geithner has helpfully suggested, Obama isn’t worried about “eventually”; he simply needs to pray that his illogical patchwork of contradictory and mutually undermining policy band-aids will somehow hold together “through the election.” Obama’s two-step approach is a tacit admission that the measures he’s advocating to address the debt problem will undermine the equally important effort to invigorate the economy.

Obama could avoid this conundrum by simply acknowledging — as he once acknowledged — that raising taxes in a down economy is a bad idea. By dropping his insistence on tax hikes as part of the debt ceiling package, he could avoid the need to undo those hikes later. The problem is that his Democratic allies in Congress will no longer let him acknowledge this simple truth, just as they won’t let him agree to entitlement reforms that would undercut their dishonest “MediScare” ad campaign.

Geithner himself suggested a way out of this mess: In his interview with Wallace, the treasury secretary spoke not of tax hikes but rather of “tax reform that would generate revenues.” That is the Republican approach, which calls for tax reforms that will stimulate the economy and raise additional revenues at the same time. House Speaker John Boehner asserted at his press conference last Friday that he and the White House had agreed to raise $800 billion in new revenues through tax reforms that would lower rates. The additional revenues would be generated not through a higher tax burden on individual job creators and investors, but through the growth and greater compliance that would result from a flatter, fairer and simpler tax code with lower rates. It thus appeared that Boehner was rightly willing to do away with special tax breaks for corporate jet owners, big oil companies and other icons of Democratic demagoguery in exchange for lower rates and other pro-growth reforms to broaden the tax base.

Boehner said that his negotiations with the White House broke down after Obama “moved the goal posts” by insisting on an additional $400 billion in revenues through tax hikes. Tax hikes, unlike the revenue-generating tax reforms discussed above, make absolutely no economic sense in a fragile economy. If the president believes they make political sense, it’s a testament to the power of demagoguery and the pervasiveness of economic illiteracy.

Revenue-generating tax reforms remain the only way to satisfy Obama’s demand for more revenues without doing further damage to our economy. It is the only way to find common ground between Democrats and Republicans on taxes. Crafting a proper tax reform package will take a little time — more time than remains between now and when we hit the debt ceiling on August 2. Like it or not, Obama will not be able to take this issue “off the table through the election.”

David B. Cohen served in the administration of President George W. Bush as U.S. Representative to the Pacific Community, as Deputy Assistant Secretary of the Interior, and as a member of the President’s Advisory Commission on Asian Americans and Pacific Islanders. He hosts the debate show “Beer Summit” for PBS Guam.