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2012 campaigns and the downgrade effect

The downgrading of U.S. government bonds by Standard & Poor’s ensures that the 2012 election will be fought on the battlefield of debt, as Electoral College math begins mingling with dire economic figures.

The downgrading of U.S. government bonds by Standard & Poor’s has become a campaign-shaping event for President Barack Obama and whoever his Republican adversary turns out to be. In fact, it's ensured that the 2012 election will be fought on the battlefield of debt and unemployment.

The reverberation from that demotion means that Electoral College math (270 electoral votes needed to win) is now on a collision course with budget math (trillions of dollars in reduced spending and increased taxes), and labor market math (14 million unemployed).

Of the 10 states that now have the highest unemployment rates, Obama won six of them in 2008.

Four of them — Nevada, Florida, Michigan, and North Carolina — account for nearly a quarter of the electoral votes needed to win the presidency.

Obama targets states on high-unemployment list
The states which Obama campaign manager Jim Messina has identified as 2012 targets are the ones Obama won in 2008 but where Republicans won statewide races in 2010: that list overlaps in part with the high-unemployment roster: Nevada, North Carolina, Michigan, and Florida.

With the United States now in what S&P calls “an era of fiscal stringency and private-sector deleveraging,” that fiscal stringency is daunting for Obama’s re-election chances. Cuts in federal spending to reduce the government’s debt will likely slow economic growth in the short run, according to the Congressional Budget Office.

Fiscal stringency will be bad news for job-seeking voters in states such as North Carolina, Michigan, and Florida that Obama needs to win next November.

Deficit reduction vs. economic growth
But Obama contended Monday from the White House that “there are plenty of good ideas about how to achieve long-term deficit reduction that doesn’t hamper economic growth right now.”

And he said, “By coming together to deal with the long-term debt challenge, we would have more room to implement key proposals that can get the economy to grow faster,” such as extending the current reduction in the Social Security payroll tax and providing unemployment insurance to those on the brink of exhausting their benefits.

Together those two steps would supply a stimulus of about $170 billion for one year — compared to the $830 billion four-year stimulus which is now beginning to taper off.

The next significant political moment comes next week when the top four congressional leaders announce their appointees to the new joint committee that will in November recommend another $1.5 trillion in deficit reduction.

Obama acknowledged on Monday that there was skepticism that the members of the joint committee would accomplish anything. But in an allusion to the S&P downgrade he said, “My hope is that Friday’s news will give us a renewed sense of urgency.”

Who will serve on new 'super-committee'?
Might that committee produce the compromise that Obama seeks?

Here’s one test: Whether the committee includes at least one Republican who has supported increases in revenues — not necessarily achieved through higher income tax rates, but through a simpler, more efficient tax code — and at least one Democrat who has supported cuts in entitlement spending that go beyond those assumed in last year’s health care overhaul (which aims for about $500 billion in reduced Medicare outlays over the next ten years).

If the joint committee wants significant reductions in entitlements costs, it might need to rethink the Democrats’ landmark achievement of 2010: health care reform. For instance, starting in 2014, the health care overhaul expands Medicaid by 17 million beneficiaries (about a one-third increase), with $627 billion in new spending in the first ten years.

Former Wisconsin Sen. Russ Feingold, who flirted with running for the Democratic presidential nomination in 2008 and who now leads a group called Progressives United, told his supporters, “We must make sure the Democrats appointed by Harry Reid and Nancy Pelosi are willing to hold the line, insisting on new revenue and no cuts to Social Security or Medicare benefits.”

Obama didn’t use the word “cuts” Monday, instead offering the calming phrase, “modest adjustments to health care programs like Medicare.”

Loyal Democratic voters will be eyeing that committee to see if proposed Medicare and Medicaid cuts would indeed be “modest” or threatening to them.

Not just Obama on the ballot
It’s not just Obama on the ballot in 2012, it’s also Democrats in places such as Michigan and Florida. Both of those states have incumbent Democratic senators running for re-election, who need to turn out the Democratic base to win.

With Obama’s problems mounting on all fronts, the economic advisors and programs of the GOP presidential contenders might begin to become more relevant. After all, one of these people might be running the nation’s finance in January of 2013.

But for the moment, Republicans have the luxury of accusing Obama of not doing enough, despite their own rejection of Keynesian programs such as the $830 billion stimulus.

Slamming the president in Iowa Monday, former Minnesota Gov. Tim Pawlenty said, “Unfortunately he spent the first two and a half years of his presidency trying to pass an unconstitutional health care bill and doing things like trying to shut down the Guantanamo Bay ... and he should have been working on growing jobs and getting the economy moving and doing the types of things that Standard and Poor’s was wanting him to address.”