Obama: Will he survive the tantrum?

By Tula Dlamini

Will US President Barack Obama survive the current mutiny by disgruntled House Democrats over his agreement with congressional Republicans, to temporarily prolong all the Bush-era tax cuts scheduled to expire by the end of 2010? Many House Democrats rejected the compromise and are particularly angry because, Obama, allegedly bypassed them and went straight to Republicans to hammer out the deal. The refrain is a potential risk for Obama, especially among major donors who now reportedly wonder whether they can support his re-election effort in 2012.

House Democrats voted 9 December 2010 against considering the tax package that Obama negotiated with Republicans, raising questions over the president's influence in his own party.

Democrats initially wanted tax cuts extended for the 98 percent of the population that earns up to $200,000 a year as individuals or $250,000 a year for families, while returning tax rates on higher income to levels from the 1990s. Republicans protested – arguing that allowing the tax rates on higher income to rise would stifle small business growth and harm the economy.

Obama is caught in-between following the compromise which, if passed into law, will see tax-breaks across the board. While he previously strongly opposed extending tax cuts for the richest Americans, Obama now says the compromise was ‘an essential step on the road to recovery’.

Regardless which way the pendulum swings - either option is costly. For example, the plan by Democrats would take more than $3 trillion out of tax receipts over the next 10 years, while the Republican demand to extend all the tax breaks would cost about $4 trillion. It is a juggle of note – one that caused congressional leaders from both parties to negotiate a compromise on 6 December 2010.

"For the next two years, every American family will keep their tax cuts, "Obama said in his statement to reporters. Further, “it will spur our private sector to create millions of new jobs, and add momentum our economy badly needs."

Plotted as an appeasement to Republican opposition, this tax deal includes an investment credit, which is expected to add $300 billion to the financial system. Analysts say Obama would have failed dismally to get such an amount as a pure stimulus package through the House of Representatives.

All in all, for the next two years, this Keynesian approach to economics will generate a $893 billion hit on the deficit over the next five years, according to figures released by the Congressional Budget Office.

The bulk of the deficit increase comes from loss of revenue -- $756 billion -- with the rest coming from additional direct outlays.

The 13-month extension of unemployment benefits adds no less than $57 billion to the deficit.

The highest price item is the extension of the Bush-era tax cuts, which will add more than $400 billion to the deficit, followed by the payroll tax holiday at about $225 billion.

All this amounts to a complex form of quantitative easing - a euphemism for printing cash, the way it was done in Zimbabwe and Uganda under late President Idi Amin. Such a scenario is expected do the trick in as far as keeping the economy afloat but can anyone rule out unintended consequences.

In Zimbabwe and Uganda, printing money that is not backed by real goods and services triggered inflation, pushed tax receipts and for a while helped the government’s debt receipts to stagnate; thus allowing it to settle the outstanding debt. In the US context, as was in Zimbabwe and Uganda, current buyers of debt will be stuck with negative real interest rates for decades – the value of the dollar would collapse significantly – threatening the current US dollar advantage as a global reserve currency.

Obama must decide what is in the interest of the broad citizens of America. He can only achieve such by transcending both his opponents, the Republican Party and his own Democratic Party constituency. This is not a career enhancing move but might prove character redeeming when the pages of history are ultimately written and when US politicians across the spectrum, will be interrogated by the simplest of citizens.

Like in the poem by Otto Rene Castillo, the Guatemalan revolutionary and guerrilla fighter, the simplest will ask, “What did you do when the poor suffered, when tenderness and life burned out of them?"

Obama will be able to answer and say; “Those tax cuts helped American families make ends meet. They helped them pay their kids’ college tuition, cover the cost of health care, and even offset the costs of energy-efficiency improvements to their homes. And they helped move the economy from free fall to growth...at least for the duration while I was still president”.

He might hasten to add, “Thereafter, the reality was difficult to fathom – not because the worst was unexpected, but because the US government was stuck with unbearable debt, fueled by among other factors, decline in tax revenue, subsequent huge cutbacks in public spending and a raise tax rates”.

So far, his administration has "stabilized" the economy and spurred private-sector hiring, but "people all across America aren't feeling that progress," Obama said in a news conference the day after Republicans seized majority control of the House and whittled down the Democratic majority in the Senate.

I do have a word of warning however to my American friends, who, like President Obama, appear to support Keynes’ ‘licking bucket theory’ hook-line and sinker. Today, the US government owes more money to more people than anyone in the world. Fast forward a few years and the stimulus fails to kick start the economy – it will be both the US Republicans and Democrats cringing with embarrassment as their own citizens thrash the streets, complete with vulgar t-shirts and tweets. And leaders of both parties will wonder just how they got into this predicament.