Obama's agenda and the conservative response (posted by Keith) by Keith

This was in todays Financial Times.

An epic battle looms over Obama's big push

By Roger Altman

Published: March 4 2009 02:00 | Last updated: March 4 2009 02:00

If leadership is measured by seizing big opportunities that others do not see, then Barack Obama is already proving himself a leader. His 2007 decision to run for president was audacious but shrewd. He saw the opening. Now, he has judged that the severe economic crisis, his own soaring popularity and Republican disarray provide a rare chance to revolutionise US domestic policy. And he is going for it right now.

His new budget calls for breathtaking change in one big step. In the modern era, only Lyndon Johnson in 1965 and Ronald Reagan in 1981 have sought and achieved comparable change. Johnson's Great Society sharply expanded the government's role. Reagan rolled that back. Now, Mr Obama is proposing a new era of progressive government, centred on expanded federal roles in energy, health and education.

This level of federal activism is anathema to Republicans. It attacks their core principles of lower taxes and limited government. If implemented, the new progressivism may rule indefinitely. The era of Reagan conservatism lasted nearly 30 years. Republicans, as Newt Gingrich, former House speaker, and Rush Limbaugh, the radio host, have urged, have no choice but to wage all-out war against it. We are about to witness an epic congressional fight - the political equivalent of the Battle of Antietam in the American Civil War.

The key fight will not occur over the spending amounts in the budget. Republicans cannot defeat those. Congressional roles require only a simple majority to approve budgets, and the ample Democratic majorities will prevail. Budgets also just allocate amounts and sources of financing for programmes. The latter must be voted on separately and later. This is where the battle will focus - on the expansion of the government role in energy, healthcare and education.

First, on energy conservation, Mr Obama's cap-and-trade proposal represents a sharp expansion of regulation and an indirect and large tax increase on industry. Caps on permissible emissions would apply to all polluting industries and tighten gradually. Those unable to comply would buy emissions credits and incur the associated costs. These credits would be auctioned by the government, raising $65bn a year. Some would finance alternative energy but most would pay for tax cuts on middle-income Americans. In other words, industry would underwrite the shift to a more progressive tax system.

Second, on healthcare the goal is universal health insurance for all Americans. The methods are likely to involve a federal requirement that all adults receive coverage from their employers or buy it for themselves. The budget projects $1,000bn of additional federal costs over 10 years to deliver universal coverage. To finance this partially, it will begin raising a $630bn "reserve fund" from tax rises on higher earners and limiting Medicare reimbursements to healthcare providers.

Finally, responsibility for financing education has always resided at the state and local level in the US. Mr Obama has proposed to double the federal role in early childhood education. Further, he has proposed expanding the grant for low-income college tuition assistance and converting it into an entitlement - the first in decades.

These proposals would dramatically expand the federal role. Moreover, the financing for this would create a substantially more progressive tax system. This is why Republican and conservative opposition will be so fierce.

The risk for Mr Obama does not lie in these proposals, but in the growing possibility that the recovery is much weaker than envisioned in his budget. It forecasts real gross domestic product growth rebounding 3.2 per cent in 2010 and over 4 per cent for the subsequent three years. On that basis, the deficit still approximates $1,000bn through 2011. But this is a rare balance-sheet recession. The asset bubble collapse caused US households to lose 25 per cent of their net worth and financial sector balance sheets to collapse. It is practically impossible for these damaged balance sheets to support a return to normal consumer spending (72 per cent of GDP) and financial lending for three to four years. The recovery, therefore, will be subnormal. This not only means even bigger deficits than the scary ones projected, but it also could weaken public support for these sweeping policy changes.

Can Mr Obama implement this audacious agenda? His current momentum and extraordinary gifts suggest that he can. We may see a generation of change telescoped into one year.

The writer is chairman of Evercore Partners and was deputy Treasury secretary under President Bill Clinton