Obama plays financial hardball

Barack Obama.
Barack Obama.
United States President Barack Obama has thrown caution to the wind, secure in the knowledge he will not have to stand for public office again and emboldened by the strong showing of the Democrats at last month's elections.

That flash of swagger reflects growing White House confidence it has boxed in Republicans when it comes to the looming showdown between scheduled spending cuts and tax increases. Taxes will go up for all Americans on January 1 when rate cuts dating from the George W. Bush era expire. The White House credits its strategy, crafted from painful lessons learned from past skirmishes with the Republican-led House. Rather than engaging intensely with the Republican leadership in high-profile meetings, Mr Obama has sought to isolate Republicans and exert pressure from all sides. He has picked a line and is sticking to it.

Instead of sitting in Washington DC waiting for a result, Mr Obama has hit the hustings, speaking directly to the people about what he wants to achieve. Despite receiving scathing reviews from Republican opponents, Mr Obama is receiving complimentary headlines and news broadcasts from all but the most staunch of right-wing media. This is his moment, and he knows it.

By Mr Obama insisting on higher tax rates for affluent Americans and winning public support for the idea, Congressional Republicans now find themselves in an increasingly difficult spot. Senior Republicans are quoted as saying they are contemplating a fallback position, since a standoff over expiring tax rates will be portrayed by Democrats as evidence their opponents are willing to allow taxes on the middle class to rise to keep taxes on the rich from rising. Republican intransigence could mean taxes go up on rich, poor and middle class alike. Mr Obama wants to extend tax cuts for the middle class and to raise $US1 trillion ($NZ1.23 trillion) to pay down the deficit by letting the top rate rise from 35% to 39.6% for families earning more than $US250,000 a year. That income figure is not insignificant and is being used as a weapon of sorts by Mr Obama to bludgeon Republicans into submission.

Opinion is falling behind Mr Obama, as his staunch supporters (comprising poorer Americans, African Americans and Hispanics - in fact most immigrants) start to question the amount of money earned by the mainly white male supporters of the Republican party. The tax and spending cuts debate is starting to divide the nation.

A handful of Republicans are suggesting Congress should pass the middle-class tax cut extensions now, leaving the fight over taxes and spending until later. Americans should not be questioning that Congress would ultimately raise taxes on low to middle-income people, they say. Congress should take that off the table while it grapples with tax cuts for the wealthy.

The issue is as important for the global economy as for Mr Obama and the Republicans. In the US, any move towards Republican compromise with Democrats on fiscal issues quickly comes under attack from conservatives as a surrender, and unsettles the GOP's grassroots supporters. Around the world, including in New Zealand, left-supporting politicians are contemplating tax increases in some form or another. And the rich are the easiest target.

The United States is still the world's largest economy and, while there are signs that economic growth will start in earnest next year, its huge debt problem is a major issue for the rest of the world.

The Republicans have one last card to play: a make or break issue for the party in many respects. Raising the debt ceiling is the next issue to be confronted by the president, who has requested he be given the authority to unilaterally raise the level of debt the United States requires early next year to pay its bills. Republicans could still demand deep concessions on spending and changes to Medicare and social security as a price for raising the debt ceiling. With two short weeks left before Christmas, the chances of another US recession are increasing daily.