December 4, 2022

Obama’s Debt Plan Sets Stage for Long Battle Over Spending

After spending months on the sidelines as Republicans laid out their plans, Mr. Obama jumped in to present an alternative and a philosophical rebuttal to the conservative approach that will reach the House floor on Friday. Republican leaders were working Wednesday to round up votes for that measure and one to finance the government for the rest of the fiscal year.

Mr. Obama said his proposal would cut federal budget deficits by a cumulative $4 trillion over 12 years, compared with a deficit reduction of $4.4 trillion over 10 years in the Republican plan. But the president said he would use starkly different means, rejecting the fundamental changes to Medicare and Medicaid proposed by Republicans and relying in part on tax increases on affluent Americans.

The president framed his proposal as a balanced alternative to the Republican plan, setting the stage for a debate that will consume Washington in coming weeks, as the administration faces off with Congress over raising the national debt ceiling, and into next year, as the president runs for re-election.

Mr. Obama named Vice President Joseph R. Biden Jr. to lead the negotiations with Congress, which the administration hopes will produce the outlines of a deal by the end of June, though a detailed agreement might have to await the outcome of the 2012 election. Mr. Biden played a similar role in talks that averted a government shutdown at the 11th hour, over issues far less thorny than those on the table now.

In a 44-minute speech to an audience at George Washington University that included Representative Paul D. Ryan of Wisconsin, the author of the Republican plan, Mr. Obama was often combative and partisan, saying the Republican approach would hurt the elderly by driving up the cost of medical care, deprive millions of health insurance and starve the nation of investments in its future.

“These are the kind of cuts that tells us we can’t afford the America that I believe in,” he said. “I believe it paints a vision of our future that’s deeply pessimistic.”

“There’s nothing serious about a plan that claims to reduce the deficit by spending a trillion dollars on tax cuts for millionaires and billionaires,” the president continued, as Mr. Ryan sat stone faced. “There’s nothing courageous about asking for sacrifice from those who can least afford it and don’t have any clout on Capitol Hill.”

Yet Mr. Obama acknowledged that the rising medical costs and the mounting debt required action. And he warned Democrats that his administration would have to cut cherished programs and strictly limit the growth of Medicare and Medicaid. “If we truly believe in a progressive vision of our society,” he said, “we have the obligation to prove that we can afford our commitments.”

Mr. Obama said he would meet his $4 trillion deficit-reduction target by cutting spending across a range of government programs, from farm subsidies to federal pension insurance.

He called for cutting $400 billion more in military spending — twice what his defense secretary, Robert M. Gates, told Congress was the largest cut he could recommend.

In a sign of the tensions the plan may cause within the administration, officials at the Pentagon said Mr. Gates was not told of Mr. Obama’s proposal until Tuesday. In a statement, a Pentagon spokesman, Geoff Morrell, said that “further significant defense cuts” would reduce the military’s capability. “It is important that any reduction in funding be shaped by strategy and policy choices, and not be a budget math exercise,” Mr. Morrell said.

Republicans criticized the plan, both for the cuts in military spending and for what they said was an overall lack of detail.

“Republicans, led by Chairman Ryan, have set the bar with a jobs budget that puts us on a path to paying down the debt and preserves Medicare and Medicaid for the future,” Speaker John A. Boehner said in a statement. “This afternoon, I didn’t hear a plan to match it from the president.”

Mr. Boehner repeated a threat to refuse to raise the $14.3 trillion ceiling on the national debt, which the government is likely to breach in early July, unless the administration agrees to rein in spending and deficits. The administration has sought to keep the debt ceiling issue separate from the broader budget debate, and Mr. Obama addressed it only indirectly on Wednesday.

“If our creditors start worrying that we may be unable to pay back our debts,” Mr. Obama said, “that could drive up interest rates for everyone.”

Still, in what some analysts said was a gesture to Republicans, Mr. Obama said his plan would contain a trigger to require across-the-board spending cuts if, by 2014, the federal debt was still projected to be rising as a percentage of the total economy.

The trigger would apply not only to spending but also to what the administration calls “tax expenditures” — essentially payments to taxpayers for deductions for charitable donations or home mortgages.

The use of the phrase “tax expenditures” allows the administration to lump tax-related issues into the spending category. Mr. Obama was more direct in his call for allowing the Bush-era tax cuts for higher-income Americans to expire in 2012.

The president agreed to extend the cuts last December, as part of a budget deal with the newly elected Republican majority in the House. Now, with the economy getting back on its feet, Mr. Obama attacked the demand by Republicans to make the lower tax rates permanent as emblematic of their plan to enrich the wealthy on the backs of the elderly and poor.

“They want to give people like me a $200,000 tax cut that’s paid for by asking 30 seniors to each pay $6,000 more in health costs? That’s not right, and it’s not going to happen as long as I am president,” Mr. Obama said, his only line that drew applause.

While Mr. Obama’s plan does not detail specific cuts, analysts said it offered enough detail to set off a substantive debate with Republicans. Some said the proposal for capping the annual cost increase in Medicare and Medicaid to just above the economic growth rate was surprisingly conservative. Others said they were pleased that Mr. Obama had called for overhauling Social Security, even if he was vague and said it was not a leading culprit for the deficit.

“It looks like Ryan smoked him out, so to speak,” said Rudolph G. Penner, a senior fellow at the Urban Institute.

Mr. Penner said Mr. Obama’s plan hewed closely to the recommendations of his commission on deficit reduction. Mr. Obama did not explicitly endorse those recommendations when the commission submitted its report in December — a decision that fueled criticism from Republicans and some Democrats that he was not facing up to the tough choices in the budget debate.

The co-chairmen of that commission — Erskine B. Bowles, who was a chief of a staff to President Bill Clinton, and former Senator Alan K. Simpson — were in the audience Wednesday, along with Mr. Biden. At one point, Mr. Biden appeared to nod off, closing his eyes for 30 seconds.

Jackie Calmes, John Harwood and Thom Shanker contributed reporting.

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In Congress, Bills to Speed Unwinding of 2 Giants

The proposals would dismantle Fannie and Freddie in a most ironic manner. The mortgage giants thrived for decades by behaving like private companies at public expense. The cumulative effect of the eight bills would make the companies behave like federal agencies while stripping away the advantages.

Fannie and Freddie would be required to pay their employees according to federal wage scales. The companies would be subjected to regular oversight by an inspector general and required to ask Treasury before borrowing money.

But at the same time, the companies, which provide financing to lenders, would be required to charge the same prices as private investors. They would be prevented from serving their basic purpose as a source of cheap money for mortgage loans.

“This will allow more private-market participation in the housing finance market, which is critical for the long-term health of the housing market and the overall economy,” said Representative Randy Neugebauer, a Texas Republican who is one of the eight party leaders who are each sponsoring one piece of the legislative package.

The proposal to shut down Fannie and Freddie answers a promise made by many House Republicans during the midterm elections. And by proposing eight separate bills, Republicans have preserved considerable flexibility to negotiate with the White House, increasing the chances that some elements will succeed.

There already is agreement that the companies should be closed, gradually allowing private investors the opportunity to finance mortgage loans.

The main difference is a question of timing. The Republican plan would require Fannie and Freddie to stop subsidizing mortgage loans through low-cost financing over the next two years, and to sell most of their enormous mortgage holdings over the next five years.

The administration envisions a process that may take a decade and it has shown no eagerness to begin while housing remains in the doldrums.

“We look forward to working with Congress to wind down the G.S.E.’s at a pace that does not damage the fragile housing market or threaten the ongoing economic recovery,” a Treasury spokesman, Steven Adamske, said, using the abbreviation for a government-sponsored enterprise.

The consequences of this disagreement were on display Tuesday as the administration introduced new rules intended to discourage reckless lending.

The rules require banks to retain some risk of loss when they sell loans to investors, except for loans made on the most conservative terms, including a down payment of at least 20 percent. But the rules also stipulate that loans sold to Fannie and Freddie are not subject to the requirement so long as the companies remain wards of the state.

Almost all the financing for new mortgage loans continues to flow through the federal government, and the administration is concerned that any new roadblocks would exacerbate the woes of the housing market. Moreover, the government can prevent Fannie and Freddie from using the exception to acquire high-risk loans.

House Republicans, however, say that investors will not return until the government leaves. One bill proposed Tuesday would make lenders retain risk even when they sell off loans to Fannie and Freddie.

Representative Scott Garrett, the New Jersey Republican who is chairman of the subcommittee that oversees Fannie and Freddie, said it was time to start the process.

“We have to make certain that government policies do not continue to crowd out the private sector,” Mr. Garrett said.

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