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It's the Deficit, Stupid

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It is increasingly clear that Barack Obama -- in a delicious irony -- may be sunk by his own deficit. As the old recession, which started under George W. Bush, stubbornly pushes unemployment ever higher and the new recession, caused by the deficit, raises interest rates and inflationary fears, the public will increasingly blame Obama's big spending ways for both.


Deficit spending has always been the bete noir of American voters. The gospel of the balanced budget is deeply ingrained in their political and economic psyche. Throughout all the Keynesian experiments of the Kennedy, Johnson and Nixon years, voters remained committed to a balanced budget. As the deficit mounted during the Reagan administration, they worried but were soothed by good economic news. When the news turned bad under Bush, they blamed the deficit. And when Bill Clinton finally balanced the budget, they watched the economy bloom, reinforcing their convictions about the dangers of deficits.

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In January, still in shock, voters tolerated the massive government stimulus package. But now, coming out of their stupor, they are beginning to turn on the deficit-makers. The Gallup Poll shows Obama's favorability still high (67 percent), as is his job approval (61 percent). But only 55 percent approve of his handling of the economy, 45 percent approve of his handling of federal spending, and 46 percent approve of his treatment of the budget deficit. In all, Rasmussen finds that the public now trusts Republicans over Democrats in managing the economy (for the first time in two years) by 42 to 36.


There lies his vulnerability.

As the consensus among economists and journalists grows that the deficit is pushing up interest rates and undermining confidence in the dollar, so Obama's weakest link comes under strain. When the falling dollar pushes up gasoline prices and rising interest rates kill off any revival of the construction industry, the deficit will cause a perfect economic storm for the president.

The United States has to borrow between 3 trillion and 4 trillion dollars over the next two years, far more than the 1 trillion per year average of the past three years. Obama can print more money (monetizing the debt), triggering a run on the dollar, or he can let interest rates rise and kill off the recovery.

Or he can raise taxes. Forced by his own deficit spending, he may have to raise revenues, particularly to fund his health care proposals. Even if he confines the increases to upper-income taxpayers, they will undermine his popularity. And their economic effect is bound to be perverse.

But voters will fear that the added government spending will just grow the deficit further. They won't believe Obama's claims that he can reduce medical costs, and they will worry that he is just on another big spending spree.


And it is this fear of adding to the deficit that may prove to be the telling argument against Obama's health care spending. While voters will be worried that Obama's proposals will damage the health care system and will oppose his tax increases, it is the growth in the deficit that may torpedo his proposal.

The one thing Obama should do is the one thing he won't do: cut spending. The public has begun to realize that the stimulus package is doing little to help the economy. Obama's answer, of course, is to ramp up the spending. But Rasmussen indicates that voters feel, by 45 to 36, that he should cancel the rest of the stimulus spending.

The resulting deficit, voters believe, will do more harm than the spending will do good. This firm conviction, stoked by ongoing bad economic news, will increasingly wear on Obama's popularity and bring him down.

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