Stephen Foley: What seemed a good idea has become a lethal trap for Obama and his allies

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The Independent Online

US Outlook: It sounded like a good idea at the time. When President Barack Obama set up a cross-party commission to recommend ways of cutting the US deficit, it seemed a way to provide bipartisan cover for unpalatable choices. But the framing is all wrong; the first draft proposals have been a disaster; and the US is now trapped on a frightening course.

The commission chairmen, Erskine Bowles and Alan Simpson, published their smorgasbord of awfulness this week. They ought to have borrowed from David Cameron and called their first draft We're All in This Together. With cuts to defence spending, reduction in healthcare and social security benefits, rises in petrol tax, and an end to mortgage interest tax relief, there was something for absolutely everybody to hate. (Although, on balance, more for liberals to hate.)

The commission has been asked to find ways to cut the federal budget deficit to 3 per cent of GDP by 2015, and make recommendations about how to start paying down the national debt thereafter. The chairmen's draft plan actually gets the 2015 figure down to 2.2 per cent. They are trying to smoke out the proposals which will be politically impossible, in the hope that what is left might do the trick. The firestorm of protest from across the political spectrum must have disheartened them.

But, onwards. They need to get 14 of the 18 commissioners to agree on a final set of plans, before presenting their report to Congress, which may or may not take it as the start point for discussions about legislation. The current US Congress began life horse trading over what became the $787bn economic stimulus law. The next one, to be sworn in in January, could therefore begin by horse trading on an anti-stimulus. With state and local government laying off staff on a daily basis, the last thing the economy needs is a dose of federal government austerity, too.

The tragedy of this exercise is that it asks for front-end loaded cuts, which are by far the most politically difficult and economically dangerous, and downplays much more significant long-term problems, such as the impending insolvency of the social security system and unfunded future healthcare and benefits promises.

The deficit-to-GDP ratio that the US will have in 2015 is affected less by front-end loaded cuts than it is by the rate of GDP growth and by the interest rate the Government must pay on its debt. So it's double jeopardy. Federal austerity hits GDP growth in the short run. And the almost comically weak long-term proposals (the chairmen proposed raising the US retirement age to 68, but not until 2050) suggests to the credit markets that US politicians have still not got serious about the country's longer term crisis, a suggestion that risks pushing up interest rates.

It is often said that financial markets love gridlock in Congress, a facile point made by people who think the only thing an economy needs is for politicians to stay out of the way. That obviously isn't going to be true in this case. Credit markets – and China – don't want to see that the US is chronically incapable of dealing with its debt and unfunded liability problems.

So I can't simply hope, as some do, that the deficit reduction commission just fails, that it cannot agree a final report, or that Congress ignores it if it gets one.

Because of the mis-framing of the commission, the choice is this. On the one hand, more contractionary pressure on an economy with an intractable 9.6 per cent unemployment rate. On the other, a demonstration of the paralysis of politics in the US, which will not go unnoticed or unpunished by financial markets.

President Obama has set a terrible trap.

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