By Karen Tumulty and Lori Montgomery
The Washington Post
WASHINGTON — President Barack Obama's State of the Union address laid down the marker for a new, activist phase of his presidency — one in which he will not allow concerns about the deficit to dictate the major policy decisions that confront him.
But congressional Republicans insisted Wednesday that the problem they consider the biggest long-term threat to the nation's prosperity is still a long way from being solved, and that they will keep it front and center.
"It seems like they're just trying to sweep our fiscal problems under the rug and call it a day," said House Budget Committee Chairman Paul Ryan, R-Wis., who was the Republican vice presidential candidate last year. "We've spent years debating — inside groups, outside groups — talking about a debt crisis. And now they're trying to suggest that the problem is nearly solved, and don't worry about it."
As he begins his second term, Obama is convinced that he has gained the upper hand on fiscal issues, in part because the latest projections show the deficit is coming down from its record levels.
Obama also argued in his speech Tuesday night that continuing to focus so intensely on reducing red ink could hamper the country's ability to create "a growing economy that creates good, middle-class jobs — that must be the North Star that guides our efforts."
Those words were a signal that Obama does not intend to fight his battles on Republican terms, including the common GOP assertion that most other goals should be secondary to taming the deficit and reducing the debt.
Though few of the proposals he mentioned in the speech were new, the president believes that his re-election has given him new momentum to pursue them, aides said.
"The politics have shifted. It was intentional," said White House senior adviser Dan Pfeiffer. "The president put these issues at the forefront of the campaign for the purpose of shifting the politics."
How much the dynamic has shifted will be tested in a series of battles over fiscal priorities in the weeks and months to come.
On March 1, a set of deep automatic spending cuts known as a sequester will begin to hit the Pentagon and other federal agencies.
Obama is urging Congress to replace these cuts, at least temporarily, with a new debt-reduction package that includes more revenue from taxes.
Later next month, a stopgap funding measure that is keeping the government operating will also expire, setting off what promises to be another fight. And there will be yet another clash later this year on raising the government's borrowing limit.
Many Republicans are arguing in favor of letting the sequester hit — despite the likely short-term damage to the economy — and adopting an austere budget plan that would wipe deficits out entirely by 2023.
But Democrats say the economic impact of a sequester is a good argument for pulling back on the deficit-reduction throttle.
"We're saying we should deal with the deficit as part of our economic strategy, not political strategy," said Rep. Chris Van Hollen, D-Md., the senior Democrat on the House Budget Committee who is close to the White House. "We're not done with this, but we should be addressing this issue in the context of jobs."
Questions about the "right" amount of deficit reduction have been a hot topic in the policy world in recent weeks.
Liberal analysts, including economist and New York Times columnist Paul Krugman, have long argued that the deficit is hardly an emergency — and that government borrowing and spending had, in fact, provided a necessary counterweight to the collapse of private spending during the recent recession.
People in that camp believe the 2009 stimulus should have been bigger and that the federal government should have run up larger deficits to help put people back to work.
Lately, even some deficit hawks have begun contemplating the possibility that the budget deals of the past two years may have pretty much solved the short-term deficit problem. The latest Congressional Budget Office forecast, released last week, shows that this year's deficit will come in under $1 trillion — the first time that's happened in Obama's presidency.
And if the sequester takes effect, the deficit is on track to keep falling through 2015, according to CBO. Though it would start rising slowly again thereafter, the amount of debt held by the public would be fairly stable as a percentage of the economy, hovering between 73 percent and 77 percent for the rest of the decade.
Stabilization — stopping the rapid rise in government borrowing that accompanied the recession — has long been policymakers' primary goal. The bipartisan Committee for a Responsible Federal Budget argues that policymakers should be more ambitious, pursuing savings of at least $2.4 trillion, so that the debt is shrinking as a percentage of the economy by the end of the decade instead of growing again.
But others aren't so sure that's wise. The left-leaning Center on Budget and Policy Priorities this week argued that stabilizing for the next decade would not only "represent an important accomplishment," but buy time for policymakers to sort out their next steps at a time of great uncertainty.
For example, both Obama and congressional Republicans agree that soaring health costs are the most important driver of future borrowing. But in 2009, health costs suddenly stopped rising as fast. Last year, the growth of costs for each Medicare patient was essentially flat. In its new forecast, the CBO cut the projected cost of Medicare over the next decade by roughly $500 billion.
"No one would have predicted this slowdown four years ago," said the center's president, Robert Greenstein, adding that no one understands why it happened.
Until policymakers figure out what is happening, he said, it would be difficult to figure out the best way to continue to bring costs down.
"We know we have to do more on health care," Greenstein said. "But we're not in a position now to make intelligent policy choices."
Other economists warn that putting off action to address the longer-term problem of funding entitlements for an aging population could make them even more difficult to solve. In his address, Obama mentioned the need for entitlement reform, but offered no major proposals for achieving it.
"A cynical reading is [Obama] can skate by and leave his successor with a disaster," said Douglas Holtz-Eakin, a former CBO director who now heads the American Action Forum, a conservative think tank. "We've made zero progress on the structural problem, and they just don't want to do it."