Obama suffers political setback in deal

President Barack Obama suffered a defeat in the battle over raising the U.S. debt limit that may have repercussions for his efforts to restore growth to the U.S. economy and win re-election in 2012.

The outcome of the debt battle dismayed Obama's liberal base just when he needs them for 2012 fundraising and support, and emboldened his Republican adversaries who forced him to accept more spending cuts than he wanted.

The debate also did nothing to help Obama clear his biggest hurdle to re-election -- the country's 9.2 percent jobless rate. In fact, it ratcheted up the bar by generating so much uncertainty that businesses sharply cut back investing and hiring.

"While Washington has been absorbed in this debate about deficits, people across the country are asking what we can do to help the father looking for work," Obama said on Tuesday.

Now Obama will likely turn his attention to a big push on measures to help the economy and keep it from dipping back into recession. That could include an extension of a payroll tax cut and approval of stalled trade deals with Panama, Colombia and South Korea.

That, and time, could help him overcome the damage from the debt debate. It could, in fact, be a blip on the screen as voters consider Obama against a field of Republican candidates that many analysts see as weak.

"I think he gets credit for being the reasonable guy in the room," said Democratic strategist Bob Shrum. "I think he has to take a temporary hit looking like he wasn't able to command the whole process."

Passing Blame

Americans seem to blame Republicans more for the crisis that almost drove the United States to an unprecedented default, and that will help Obama. A Reuters/Ipsos poll last week found 31 percent of Americans blamed Republicans for the debt impasse while 21 percent blamed Obama.

"Certainly he's exposed in this," said Ipsos pollster Julia Clark. "That all said, Americans do put more of the blame for the prolonged failure of these talks at the feet of Republican lawmakers, so they may bear the most brunt."

Still, Obama was bruised in the debt struggle, forced to accept deep spending cuts without tax increases as he had wanted. Looking to 2012, that leaves him exposed on the left.

"I don't think he looks great," said Jennifer Duffy, a political analyst at the non-partisan Cook Political Report. "One, obviously a lot of the progressive groups are unhappy. They think that he caved, that he gave Republicans whatever they wanted."

Ace in His Hand -- Taxes

He is not giving up on taxes and it may serve as a key issue of the 2012 campaign -- whether Americans are willing to put at risk funding for popular but expensive social programs in order to preserve Bush-era tax cuts.

His goal in coming months is to convince Americans of the need for more tax revenue, believing voters will side with him that it would be better to raise taxes on wealthier Americans to preserve the social safety net.

"Everyone is going to have to chip in. It's only fair. That's the principle I'll be fighting for during the next phase of this process," Obama said.

Obama has argued in the past for ending the Bush tax cuts for the wealthy to no avail, but now he could have a vehicle to do so -- a bipartisan congressional committee created under the debt deal to recommend ways to cut the deficit by the end of the year.

White House officials say increased tax revenues will inevitably emerge from the recommendations of the committee. They point to some proposals for raising taxes that have already been floated by a bipartisan group of senators.

And even House of Representatives Speaker John Boehner, the top Republican, had agreed to $800 billion of new revenue increase in a version of a deficit-cutting package with Obama, a deal that fell apart.

Obama thinks he has an ace in his hand to play. If the committee does not produce tax reform ideas, he will veto any legislation that would extend Bush-era tax cuts for high earners beyond 2012.

"I think he's got to run a Trumanesque campaign, that he's out there fighting for ordinary people, and draw distinctions on tax cuts for the wealthy," said Shrum.

[Source: By Steve Holland, Reuters, Washington, 03Aug11]

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