THE BLOG
02/14/2012 02:56 pm ET | Updated Apr 15, 2012

Obama's Budget Finally Gets the Politics Right

President Obama's budget for 2013 is a sharp improvement over his 2012 budget. What a difference a year makes. Back then, the emphasis was all deficit all the time. If I exaggerate a bit, it is because the Obama administration was so wrong-headed. He wanted to reduce discretionary spending to Eisenhower lows, for example. He told us a country must tighten its belt like a family, despite Keynes's convincing analysis otherwise. Since then, inside-the-beltway analyses have claimed he had little choice but to focus on the budget deficit given the Republican strength in Congress, their propaganda offensive, and what the opinion surveys showed. For what it is worth, I think this is badly wrong. Why should people have thought anything other than that the deficit was our problem -- and therefore big government as well? Almost no Democrats with a national platform were saying otherwise.

Last September, Obama changed his tune. He at last conceded that jobs were America's biggest problem, not the federal deficit. Fortunately, he has kept talking that line. The new budget reflects that wisdom. Was it the Occupy Wall Street effect? I think to some degree it was. But the relentlessness of high unemployment numbers until recently could not be ignored.

So we now have a pretty good budget proposal from the president -- that is, if we are content to put it in political context. Above all, the economy still needs stimulus, and he wants to extend the payroll taxes. The Republicans seem to have caved on the issue, a sign American voters may be waking up from their long sleep.

But more important, he is now willing to make proposals that will not win congressional support, a strategy he and his Clinton holdover advisers long resisted. He would tax high incomes at 30 percent, the Buffett tax. He would raise taxes on dividends for better-off Americans to the ordinary rates, and raise the capital gains tax as well. He will refuse to endorse a tax cut for those who make more than $250,000 a year -- that is, he will allow the Bush tax cuts to expire for the well off. Remember, he threw in the towel on that one in December 2010, a stunning concession. If Republicans say no, they will now bear the stigma going into the election.

Importantly, he is proposing some serious long-term investment in the economy, partly to be paid for by the wind down in military spending as wars end in Iraq and Afghanistan.

But in the end, the nation won't have all it will need. The obsession with cutting the federal deficit is still the subtext even of this proposal. He will generally keep federal spending historically low as a proportion of GDP. This is a national focus to which the Obama administration contributed enormously. Since he took office, deficit cutting was a key target for him. The following year, he appointed the Bowles-Simpson Commission, which came forward with a profoundly anti-government budget balancing act, limiting government expenditures significantly. Fortunately, the president has not bought much of that, but it did energize the destructive budget hawks. Throughout most of 2011, but for a brief exception following the November 2010 electoral rout, the administration was still refusing to raise jobs creation as a priority over deficit battles. The mantra was some stimulus now, but not much, and put in place a strong deficit-cutting program to kick in shortly thereafter.

Now we have a decent budget proposal, but only in the context of these political pressures. We have to face the fact that we won't have enough stimulus to result in a strong recovery or enough mortgage relief to get people spending adequately. We will not spend enough on rebuilding the country.

Some have long argued that despite Republican intransigence, Obama should have proposed politically impractical programs, including stimulus, and then when the economy slowed, he could blame the Republicans for fouling it up. The strategy made little headway among the political pundits inside the beltway. This had long been his best choice, but he took it only this fall. The new Obama may at last be re-electable.

The best hope for America remains his reelection and a big pro-Democratic surprise in Congress. But we will still face the phantom headwinds of the deficit. Will the president forge ahead anyway, directly into those political, if not economic, headwinds and do what's right? He refused to brag about how his first stimulus worked, undermining the possibility of a second one. He refuses even now to talk about how his healthcare policies may -- I stress, may -- be working to hold down health care costs. But he seems at last to have rid himself of much the Clinton legacy of moderate advisers who favored non-confrontation, so perhaps he will stand front and center to make jobs and poor wages the priority domestically -- and second, the rebuilding of American transportation, education, energy capacity, and so on. Gene Sperling, among others, seems more constructively combative these days, even defying his economic mentors to favor manufacturing subsidies. With this budget, Obama shows there are some grounds for optimism at last. But it is also a reminder of how much farther there is to go.

Cross-posted from New Deal 2.0.