Praise for Obama’s Budget • Tolerating North Korea

A political document — and a pragmatic way forward

Budgets are part practical blueprint and part political manifesto. Too often, they sacrifice the former for the latter. The Senate’s 2014 budget — its first in five years — won approval only from Democrats because it raised taxes and failed to offer Republicans any cuts to Social Security or Medicare. Meanwhile, only Republicans voted for the more austere plan in the House, which would reach balance by 2023 by whacking domestic programs that Democrats cherish. President Barack Obama’s $3.8 trillion spending plan recognizes the stasis in Washington and presents a way around it. For that alone, he deserves credit.

Obama offers entitlement cuts in exchange for tax increases on the wealthy. This was always going to be the general outline of the compromise, and his quid pro quo is admittedly small beer: He proposes $1.8 trillion in deficit reduction for the next decade, yet much of that would replace the $1.2 trillion in automatic spending cuts that took effect last month. And his entitlement cuts would reduce spending by only $830 billion over 10 years, a piddling amount considering that entitlements are now 60 percent of the federal budget and by 2023 will reach 64 percent — even with Obama’s trims.

For tax increases, Obama builds on the January fiscal cliff deal, which added $600 billion in new revenue over 10 years mostly by raising rates on families earning more than $450,000 a year. He’d increase taxes an additional $600 billion by limiting most itemized deductions for households in upper tax brackets. He’d impose a minimum 30 percent rate on households with annual earnings above $1 million, invoking the so-called Buffett Rule.

To conservatives, this is apostasy. Yet it will undoubtedly be helpful in winning over Democrats who are chafing at the entitlement changes the president suggests. And that’s where Obama was bold. Seniors would see a less generous inflation adjustment to their Social Security checks — in other words, a benefit cut. (Obama, who privately offered the concession before, formalized it.) To some liberal lawmakers, this makes him a traitor to the cause. That’s a useful credential as Obama tries to convince rank-and-file Republicans he’s willing to compromise.

Add it all up, and the fiscal 2014 deficit would shrink slightly to $744 billion, from $845 billion this year. The shortfall would be 4.4 percent of gross domestic product, down from 6 percent this year.

It’s worthwhile to review what Obama and Congress have accomplished. Since 2011 they’ve agreed to $2.5 trillion in spending cuts and new taxes over 10 years. The $1.8 trillion in deficit reduction in the 2014 plan would push total deficit reduction above the $4 trillion-in-10-years mark most economists say the U.S. must reach to make total debt sustainable.

The amount of new spending, entitlement cuts, and fresh revenue in Obama’s plan are almost beside the point. If this blueprint wins over enough Republicans — and doesn’t lose too many Democrats — it could be a major part of his legacy.

The upside of giving in to North Korea’s blackmail

Here’s some news from North Korea you may not have heard: In recent meetings, the ruling Korean Workers’ Party elected Pak Pong Ju, an economic reformer, to its Political Bureau, which steers political, policy, and personnel decisions, and downgraded the role of the military by reducing its representation. Pak was made Cabinet premier. On April 5, even as North Korea warned foreign diplomats it couldn’t guarantee their safety, the front page of Rodong Sinmun, the country’s newspaper of record, was dominated by headlines urging faster economic development. News outlets that rely on clandestine reports from inside North Korea suggest that preparing for war has given way to preparing for spring planting.

Just because Kim Jong Un has no interest in starting a war doesn’t mean he can’t stage a dangerous incident. The first task of the U.S. is to respond to any military provocation in a firm but measured way. Some proponents of a “get tough” approach dream that isolating the North Korean regime will force its sudden collapse. They should be careful what they wish for. The result would be humanitarian chaos and huge economic costs. Before reunification, West Germany was two to three times richer than the East. South Koreans are somewhere from 15 to 40 times wealthier than their counterparts to the north, and estimates of the cost of reunification range as high as $5 trillion — almost five times South Korea’s GDP. Most South Koreans are in no hurry to pay that price.

Making North Korea’s nuclear disarmament a precondition for talks with the U.S. about a permanent peace treaty is unrealistic. Kim has no incentive to give up the one thing that seemingly keeps the U.S. at bay. At this stage, it’s wiser to pursue the “three noes” advocated by Siegfried Hecker, a former director of the Los Alamos National Laboratory who has visited the North many times: “No more bombs, no better bombs, and no export.”

Fortunately, the North Koreans have created an opening for just such a tack in diplomacy. The decision at the country’s top political meetings to focus simultaneously on economic reform and a bigger nuclear program amounts to what Korea watcher Stephan Haggard of the University of California at San Diego calls “fundamental illogic”: Foreign investors won’t put money into a country that’s hurling nuclear threats and fighting sanctions.

The task ahead is to convince North Korea it can realize its hopes for economic growth only by putting its nukes back in the box. In the short term, this may mean giving in to the Kim family’s latest round of blackmail. Set against the hundreds of thousands of deaths a conflict could bring, that’s a small price to pay for the regime’s eventual, orderly demise.

To read Jonathan Alter on Mitch McConnell’s miscalculation and Pankaj Mishra on Japan, go to Bloomberg.com/view

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