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SOTU Viewer's Guide

e21 | 01/25/2011 |

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In recent weeks, the White House has signaled to the public that it intends to change course. After agreeing to a temporary extension of all of the Bush-era marginal tax rates, announcing an executive order devoted to fostering a more growth-friendly federal regulatory apparatus, and calling for a two-year wage freeze for federal workers, many are convinced that President Obama is open to a more conservative approach to the country’s fiscal future. Others see these as relatively minor concessions, focusing instead on the president’s reluctance to embrace deep entitlement and tax reforms. Tonight’s State of the Union address will give us a clearer picture of where the president intends to lead the country. The e21 team asked a number of our contributors to offer thoughts on what they hope to hear during the speech.

Josh Barro: There are three things that I would be very happy to see in the President’s State of the Union (and which I don’t think are pipe dreams). These are proposals that would foster economic growth and shrink our yawning structural budget gap.

First, the president should call for corporate tax reform. America has the second-highest nominal corporate tax rate in the world, and also has an excessively complicated corporate tax code with many loopholes. There is openness on both sides of the aisle to a reform that would broaden the corporate tax base while cutting rates. The Bowles-Simpson Chairmen’s Mark also called for switching to a territorial tax system, which would reduce the distortions created by the current system and encourage US-based multinationals to repatriate earnings to the United States. An endorsement from the President could lead to action in this area in 2011.

Second, he should recommit to cuts in Medicare. This program—not Social Security—is the key driver of federal budget unsustainability. The President has an opportunity to get to the right of Republicans who spent the 2010 campaign attacking the president for cutting Medicare. The president should defend the Medicare-cutting provisions of the Affordable Care Act and endorse further cost restraint along the lines proposed by Alice Rivlin and Paul Ryan, the latter of whom will deliver the Republican response to his speech. This would both put Republicans on the political defensive—will they put their money where their mouth is on spending restraint?—and shift the entitlement debate toward real cost control.

Third, he should promote cuts in other areas that have traditionally been sacrosanct—the military, agriculture subsidies, and government subsidies to homeowners. There’s never a great time to take on these popular spending areas, but recent polls show greater public openness to cuts in defense and the mortgage interest deduction than you might expect.

Again, this is a chance to dare Republicans to shrink the federal budget, but on ground Democrats are more likely to be comfortable with.

Josh Barro is the Walter B. Wriston Fellow at the Manhattan Institute.

Charles Blahous: The State of the Union address will give us our first clear indications of whether there is a reasonable chance at bipartisan cooperation in repairing the federal government's unsustainable fiscal outlook, which is driven largely by projected cost growth in Social Security, Medicare and Medicaid. Last year at this time the Obama Administration left it to a fiscal commission to chart the first steps. That commission was unable to agree upon recommendations to adequately scale back our unsustainable health care benefit commitments, but a majority did back a compromise template for Social Security reform. By so doing, they presented both the President and the Congress with an historic opportunity. Nothing significant can be expected from Congress on Social Security without the President's enthusiastic leadership.

President Obama has a chance to be remembered as the president who shored up the nation's largest and most popular domestic program, but to do so he will need either to signal strong support for the commission's product or something reasonably close in its fiscal effects. If he appears to distance himself or to move significantly left of his own bipartisan commission, chances of responsible bipartisan action will dwindle.

Charles Blahous is a research fellow with the Hoover Institution and the author of Social Security: The Unfinished Work.

Nicole Gelinas: As President Obama unveils new ideas in his State of the Union Tuesday night, congressional Republicans are sticking to their script: no new spending. Both sides can take lessons from President Reagan's experience to the upcoming fight. It's OK for Congress to miss specific targets for cuts for now - but only if lawmakers prod Mr. Obama to rearrange spending so that smarter investment helps companies to grow.

Mr. Obama should learn a lesson from 2009: Americans don't support spending for the sake of spending. The president should remember that when he first announced his "stimulus," people supported him. They favored the concept, though, because the president billed the stimulus as an infrastructure renewal project. Eighty-five percent of people thought that "repairing roads and bridges" was a "good idea," according to a Wall Street Journal poll back then. Voters grew disenchanted when it turned out that the stimulus bill wasn't an infrastructure bill, but rather a mish-mash of random spending.

The president may make the same mistake now. Early reports have him announcing plans for transportation, education and high-tech energy. The president should choose one thing - the first. People can see that their roads, bridges, airports and transit systems are still crumbling. Mr. Obama should say that he wants to do now what he should have done two years ago - fix and build that stuff so that we can compete with the rest of the world. Moreover, the president should say that we're starting this effort not to create public jobs -- but because companies need a firm backbone if they are to create private jobs.

(Excerpt from the Washington Times. See the full article here)

Nicole Gelinas is the Searle Freedom Trust Fellow at the Manhattan Institute and a contributing editor of City Journal.

David Malpass: In tonight’s State of the Union speech, the President will share his plan for leadership after the November 2 election. The fiscal crisis is so severe that triangulation toward more centrist rhetoric simply isn’t enough. Voters want a full upheaval in Washington’s tax and spend culture. That’s how people will listen to the speech. Let’s hope the President says “we can’t afford it” more than he says bipartisanship, a code-word for bigger government.

It is doubtful that the President’s new rhetoric really means a more modest role for government. The press reports on the speech give little comfort. The most recent legislative session, the December lame duck, included major expansions of the federal government. The delay until December to extend the Bush tax cuts cost the nation hundreds of thousands of extra job losses, many of which won’t be recovered. The Administration claimed job growth from deficit spending even as private sector jobs evaporated. Its response was a dramatic expansion of failed small business loan programs, including a new lending program established in December at the Department of Energy. It will take decades to pay for the industrial policy promoting solar and wind energy through multi-billion dollar tax-and-spend earmarks and the unaffordable promise of green jobs. The Obama Administration has been governing on the principle that big government is the solution rather than the problem. Markets and the public sense this and are cautious.

Tonight’s speech will give the President a chance to reverse course. He should acknowledge Washington's overreach, propose honest reductions in Washington's spending and power, ask the Federal Reserve to wind down its dramatic expansion and salvage the dollar, and commit his presidency to restoring a 55 percent debt-to-GDP ratio by downsizing. Don't hold your breath.

David Malpass is president of Encima Global, an economic research and consulting firm.


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