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Obama's Investment vs. Deficit Dilemma

Author: Toni Johnson
January 26, 2011

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In his State of the Union address, President Barack Obama outlined a plan for investment (NYT) in critical areas like education, high-speed rail, and clean-energy technology and proposed a streamlined tax code to help the United States meet the challenge of globalization and emerging economies such as China and India. "We need to out-innovate, out-educate, and out-build the rest of the world," he said.  Obama noted the massive deficits facing the country (WashPost) and pledged a five-year budget freeze on non-defense discretionary spending, which he said could reduce the deficit by $400 billion over ten years.

But the president's emphasis on new investment over budget-cutting led many commentators, especially conservatives, to question Obama's priorities. "No economy can sustain such high levels of debt and taxation," said Wisconsin Representative Paul Ryan, who gave the GOP reply to the State of the Union. "The next generation will inherit a stagnant economy and a diminished country."

Tension over how and when to cut the deficit is a likely theme of the coming 2011 budget fight. Some experts and Republicans want sharp budget cuts immediately; others, including the White House and Democrats, favor more gradual reductions that will not disrupt what they see as vital social programs. "Cutting the deficit by gutting our investments in innovation and education is like lightening an overloaded airplane by removing its engine," Obama said in his speech.

Fights loom on all spending priorities, particularly defense, the new healthcare law, and the entitlement programs of Medicare and Social Security. Central to the fight will be an ideological struggle over the role of government. Obama argues that shared technology (Internet, cell phone, smart-grid) and infrastructure like high-speed rail--which necessitates government involvement--is actually more efficient, cost-effective, and globally competitive than no-holds-barred competition. But Republicans continue to stress free markets and limited government.

Another issue is whether to raise revenue through higher taxes. The president's budget commission stressed the need for a "painful mix of spending cuts and tax increases, each of them unpopular with one constituency or another." Some critics say Obama "missed another chance Tuesday night to embrace the tough medicine proposed by the commission," as Calvin Woodward writes for AP. CFR's Sebastian Mallaby argues that though the need to be more competitive globally is important, Obama should focus on deficit reduction, which is being funded largely by foreign governments whose interests are not necessarily in line with U.S. interests and has the crippling effect of weakening confidence in the dollar.

Other experts noted the lack of a strong foreign policy focus in the speech. The National Journal's Yochi J. Dreazen notes that Obama, who had taken "office with an ambitious foreign policy agenda centered on reviving what he saw as a faltering war effort in Afghanistan, has been transformed into one focused almost entirely on domestic concerns."

When Obama did address foreign policy, he primarily focused on his latest wins, such as ratification of the New START arms control deal with Russia and the trade deal with South Korea and bypassed a host of troublesome issues such as drug violence in Mexico, instability in Pakistan, and climate change. CFR's James Lindsay contends that Obama will be required "to balance the demands for action at home with the need to confront a slew of foreign policy troubles," which will not disappear.

Analysis

In this Expert Roundup, CFR's Sebastian Mallaby and James Lindsay examine the economic and foreign policy aspects of the speech.

In a blog, CFR's Michael Levi looks at Obama's pledge to have 80 percent of electricity come from "clean energy" sources by 2035.

David Sanger writes in the New York Times that one of Obama's "subtexts on Tuesday night was that doing big things these days may require a bit more humility, a lot more work, and some international partners that Americans rarely thought about twenty years ago but whose competition they have now grown to fear."

Politico's Daren Samuelsohn says a "clean energy standard" could be the most politically feasible way to reduce greenhouse gas emissions on Capitol Hill in this Congress.

The National Journal provides eight pieces of analysis on issues raised in the speech, ranging from education to clean energy to foreign policy.

Background

This CFR Issue Guide provides background on the numerous challenges facing the nation.

-- Roya Wolverson contributed to this report.

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