Obama's hard act: Keep friends in line

The president has worked up a budget that manages big spending and big deficit cuts. All he needs now is Democratic votes on the Hill.

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By Nina Easton, Washington editor

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WASHINGTON (Fortune) -- President Obama's "new era of responsibility" has already drawn criticism as a magician's math act: Add a trillion-dollar universal health care plan to a trillion-dollar (including interest) stimulus package to another quarter-trillion for bank bailouts to 7% average increases in domestic agency spending and -- voila! --the federal deficit drops by half in four years.

To make these numbers add up, the president's budgeting involves straight math, like tax hikes on top earners, and sleights of hand, like a stubborn insistence that the U.S. economy -- now in "the most severe crisis since the Great Depression," as Obama still insists -- will rebound to robust growth of 3.2% next year.

What Obama also needs is a cooperative magician's assistant. In this case, that means lawmakers from his own party.

But there are signs of trouble on-stage.

It began with reports that House Speaker Nancy Pelosi had nixed White House plans for a serious look at reforming Social Security, one of the three entitlement programs contributing to the nation's crushing debt load. Since any real savings in Social Security would raise the prospect of cutting benefits, Pelosi was signaling that her liberal Democratic allies aren't interested in opening that discussion.

A week later, Obama unveiled his $3.55 trillion 2010 budget, which includes massive spending increases that will mean two years of record trillion-dollar deficits after this year's $1.75 trillion gap.

The president promised to find savings to offset the deficits -- a near-impossible task given that most of the budget is already devoted to entitlement spending and interest payments on an existing debt of nearly $11 trillion.

Like budget-cutters before him, Obama's budget writers found one big-ticket item in the form of agriculture subsidies. The Obama budget phases out payments to upper-income farmers for a savings of $9.8 billion over 10 years. The only problem here are fellow Democrats from farm states, including Senate Budget Committee Chairman Kent Conrad, D-N.D., who made it clear he intends to protect this farm safety net -- especially because of the troubled economy.

Next up: limits on mortgage deductions and charitable deductions for top earners. Both are now drawing objections from powerful Democrats, including Finance Chairman Max Baucus of Montana and committee member Ron Wyden of Oregon, who fear harm to housing and to charities.

Meanwhile, leaders of nonprofits -- many with strong ties to Capitol Hill Democrats -- are gearing up to oppose deduction limits that could severely reduce the contributions that are their lifeblood.

Finally, there are those nearly 8,000 earmarks in the omnibus spending bill, crafted by last year's Congress. The president, calculating that these small bites are not worth skirmishing over with fellow Democrats, decided to let that spending bill get in under the wire while vowing cleaner future spending.

From a math perspective, he may be right: Earmarks may hardly reach a decimal point in federal budgeting. His vow this week to tackle $295 billion of waste in federal contracting promises to yield bigger bucks.

But, politically, allowing $1.7 million for pig odor research and $381,000 for jazz at Lincoln Center slip by also sent the message that that the one "vested interest" he may not be willing to take on is Congress' liberal bloc. (The omnibus spending bill came up one vote short in a Senate vote Thursday night, with Majority Leader Harry Reid acknowledging he would need to make changes to gain a couple Republican votes.)

Meanwhile, all this spending is producing a squeeze from the other end of his party -- fiscal moderates (yes, they still exist in the Democratic Party). Indiana's Evan Bayh called a meeting of 14 Democratic senators this week, some of whom emerged to raise alarms about Obama-level spending. Bayh urged Obama to veto the pork-laden omnibus spending bill.

In his speech this week vowing to take on federal contractors, Obama proclaimed "we must turn the tide on an era of fiscal irresponsibility" and promised to change the way business is done in Washington. But that means a recognition that members of his own party are part of that pattern of business. As Bayh put it: "This approach to spending represents business as usual in Washington, not the voters' mandate." To top of page

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