Will Proposed Debt Deal Cost Obama A Second Term?

No End In Sight To Obama's Job-Killing Policies

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No End In Sight To Obama's Job-Killing Policies

Monday came word of the outlines of a debt ceiling deal. But it's not a deal until the President signs a bill. And what will happen if some members of the House don't like it and refuse to go along with the leadership?

Even if the deal does go through, it could be the death knell for Obama's hopes for a second term.

The proposed deal raises the debt ceiling and cuts spending in two stages. The first stage would increase the debt limit by $900 billion in the first installment, subject to a Congressional vote of disapproval that Obama could veto. To prevent a default, $400 billion would be added immediately.

Subject to a second vote of Congressional disapproval, $1.2 trillion to $1.5 trillion would be available. The provisional deal would create a joint Congressional committee to find cuts about equal to the increase in the debt limit.

But if that committee could not agree on a plan, Congress would either have to approve a balanced budget amendment or accept an across-the-board cut in spending with 50% of the savings coming from the Pentagon beginning in 2013. While there would be cuts to Medicare, Social Security and other programs would be exempt.

Why does this matter for Obama's re-election? If you look at the work of Yale economist, Ray C. Fair, it is pretty clear that anything that reduced economic growth in the nine months preceding the election is going to hurt politically.

As I posted, last November, Fair forecasted that the U.S. economy would grow at 3.69% in the months before the 2012 election, yielding Obama about 56% of the popular vote. But with first quarter GDP up 0.4% and second quarter GDP a slightly less anemic 1.3%, the proposed debt deal is sure to lower the odds of 3.69% GDP growth in 2012.

It is pretty clear that the government has run out of ideas for how to boost economic growth. But one thing that is certain to cut economic growth is a reduction in the amount of money that gets spent in the U.S. And the proposed debt deal reduces that spending by at least $2 trillion.

It is unclear how much that will reduce economic growth -- but that is certainly far short of the target that S&P set to avoid a downgrade of the U.S.'s debt rating. If S&P follows through on its threat to cut the U.S.'s debt rating, the result could be higher interest rates. And the more money that goes to interest rates, the less is available to be spent elsewhere.

Fair's latest estimate for 2012 GDP growth -- made in April 2011 is 2.69% giving Obama 52.8% of the vote. Even this mediocre growth rate looks like it will be difficult to achieve in light of the severe spending cuts mandated by this proposed debt deal.

The most distressing thing about Obama's surrender to the Tea Party is that it seriously damaged his re-election chances in exchange for nothing but a guarantee of more reminders of his lack of political standing the next time he wants to raise the debt ceiling.

If there is any lesson that comes out of this, it seems to be that the way to get things done in Washington is to stand for something and refuse to budge. What does Obama stand for?

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