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For Obama’s Budget, the Charm Offensive May Work After All

Yahoo! Finance
The Exchange

By Michael J. Johnson and Sean West

It’s easy to declare that President Obama’s dinner date with Republicans this evening won’t yield a fiscal grand bargain. But the president’s charm offensive could well produce other dividends, like immigration reform or smooth confirmation of a new chairperson for the Federal Reserve.

On its face, the president is redoubling efforts to strike a big budget deal by courting members of Congress, particularly in the Senate. Charm enough Senators, the thinking goes, and the House will have no choice but to come along. The problem is that the Tea Party is immune to charm on core issues of fiscal policy and they have a veto over policy in the House. So, unless the President’s outreach is backed up by brand-new positions on taxes and spending, it’s hard to be optimistic of any results.

Obama’s budget release has made it clear that that he is committed to going further than most Democrats on fiscal issues but not much further than he has offered in the past. So, the search for a fiscal grand bargain is unlikely to be successful—whether he dines with the GOP immediately after releasing the budget or not.

But is Obama’s new outreach strategy strictly about the fiscal grand bargain everyone in Washington says they want but no one can seem to agree upon? Not really.

It's time to play politics

As much as deficit reduction has been the myopic focus of a gridlocked legislature, it is not Obama’s only goal. This is the last year Obama can really push other elements of his agenda: There’s a midterm election next year, after which Obama will soon be left to focus on lame duck activities like pardons and foreign policy. If he’s going to prod Congress into action where consensus is within reach, he needs to do so now.

That’s where strong relationships with Republican senators come in. On immigration reform, for instance, the strength of Senate support for any bipartisan compromise will directly affect the momentum generated to get that issue through the House. Immigration is not fiscal policy: Some House conservatives may prefer not to pass reform, but they are acutely aware that national public opinion has turned and many in their own party have shifted with it. Each additional Senate Republican vote for that effort necessarily creates real momentum that increases the chance the bill gets over the finish line.

In fact, the biggest market relevant decision of the year could well hinge on how the charm offensive goes. The confirmation of a new Federal Reserve chairman in advance of Ben Bernanke’s likely January retirement is a Senate-only affair. A few friendly Senate Republicans could make all the difference in determining whether markets have to stomach months of uncertainty or whether a new chairperson gets a smooth ride.

Obama’s charm offensive is only likely to be a failure if it is measured against the strictest criteria: Whether it delivers the toughest of political feats, a broad deficit reduction deal. Instead, it may be yield other dividends—and any good news story amid Washington gridlock is no small feat.

Sean West is head of the United States practice at Eurasia Group, a global political risk advisory firm. Follow him on Twitter @seanpwest. Michael J. Johnson is a researcher at the firm. Follow him on Twitter @mjjohnson423.