Wednesday, January 26, 2011

Obama Calls for Partial Spending Freeze in State of the Union Address

By JONATHAN WEISMAN And JANET HOOK

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Mr. Obama said the U.S. couldn't afford to back away from new spending on programs to boost competitiveness, while also calling for a freeze on certain programs.

WASHINGTON—President Barack Obama used his State of the Union address Tuesday to ask the nation to meet the challenges of a global economy, framing what he called a competitiveness agenda that includes traditional Democratic proposals like increased education spending, alongside gestures to Republicans seeking deep budget cuts.

President Obama addressed the nation on the economy, innovation and healthcare during his State of the Union speech.

Mr. Obama said the nation needs to address its rising budget deficit but couldn't afford to back away from new spending on programs that he said would allow the U.S. to compete with rising powers like China and India—an approach Republicans were quick to reject as unaffordable. Mr. Obama also laid out areas of potential cooperation between the parties, such as a call to rewrite the corporate tax code.

The president answered Republican calls for steep budget cuts with a far more modest proposal to freeze a portion of government spending for five years. The bulk of his speech had larger aims: to recapture the policy initiative after his party's devastating losses in November and to inspire a nation worried about its place in a sometimes threatening global economy.

"We need to out-innovate, out-educate, and out-build the rest of the world," Mr. Obama said in tones that resembled a halftime pep talk. "We have to make America the best place on earth to do business."

More than two months after what he described as his party's "shellacking" in midterm elections, Mr. Obama didn't appear to be on the defense. His pivot to the political center has boosted his poll ratings and captured the nation's attention. Before a national television audience, he hoped to use that attention to recapture the momentum on policy—or at least share it with resurgent Republicans.

Among other proposals, Mr. Obama called on the nation to prepare 100,000 new math, science and engineering teachers. He used the Cold War imagery of the Soviet Union's launch of the Sputnik satellite more than half a century ago to exhort a new generation to counter a new challenge: global competition.

Obama Addresses the Nation

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President Obama was applauded by Vice President Joe Biden and House Speaker John Boehner prior to delivering his State of the Union address.

"After investing in better research and education, we didn't just surpass the Soviets; we unleashed a wave of innovation that created new industries and millions of new jobs,'' Mr. Obama said.

And he laid down a series of goals: By 2035, he said 80% of America's electricity should come from clean energy sources. Within 25 years, 80% of Americans should have access to high-speed rail. Within five years, communications businesses should be able to deploy high-speed wireless to 98% of all Americans. He did little to explain how those goals would be reached beyond pledges to boost federal spending on infrastructure and basic research.

Much of what the president called for to boost the nation's competitiveness are items he has pushed for two years. Many of them—such as investments in high-speed rail, expanded Internet access and more infrastructure spending—were central to his stimulus plan of 2009.

But in some cases, Mr. Obama pressed to move to a new level. For instance, he said he would launch a national wireless initiative to augment an earlier push for broadband Internet access in rural areas.

And he said he would use expanded tax rebates and competitive grant programs to get consumers to buy electric vehicles and help communities build the infrastructure for the next generation of clean cars. That piggybacks on the stimulus program's efforts to stimulate advanced battery production.

In the Republicans' formal response, House Budget Committee Chairman Paul Ryan (R., Wis.) said his party would take the lead in shrinking government and reducing spending.

President Barack Obama says "This is our generation's Sputnik moment" during Tuesday's State of the Union address.

"Our nation is approaching a tipping point,'' said Mr. Ryan. "We are at a moment, where if government's growth is left unchecked and unchallenged, America's best century will be considered our past century. This is a future in which we will transform our social safety net into a hammock, which lulls able-bodied people into lives of complacency and dependency."

He also derided Democrats' effort to describe new spending proposals as "investments."

"Whether sold as 'stimulus' or repackaged as 'investment,' their actions show they want a federal government that controls too much; taxes too much; and spends too much in order to do too much," Mr. Ryan said.

Republicans were underwhelmed by the president's pledge to freeze spending for five years on nonsecurity, discretionary spending. Such spending is a relatively small portion of total outlays, accounting for roughly 15% of the $3.5 trillion spent by the federal government last year.

"It strikes me as too little, too late," said Rep. Jeb Hensarling (R., Texas), a member of the new Republican House leadership team. "After this huge inflation of spending, he's willing to level-fund it. If that's his idea of fiscal responsibility, this nation is in deep trouble."

Mr. Obama's freeze proposal in essence extends a plan for a three-year freeze that he laid out in his State of the Union speech a year ago. Even Democrats were calling for a more aggressive approach, at least in defense spending.

In urging lawmakers to rewrite corporate tax law, Mr. Obama said tax breaks should be eliminated in order to cover the cost of lowering the corporate tax rate. If Congress follows through, the process is sure to set off a lobbying scramble among businesses and could serve as a precursor to the more difficult task of rewriting tax law for individuals—an effort that Mr. Obama also said he was willing to undertake.

White House officials said the overhaul should be revenue-neutral: neither raise additional revenue nor add to the deficit.

The president called for $8 billion a year in research and development on clean-energy technologies, a one-third increase, toward a goal of putting one million clean cars on the road by 2015. He also called for eliminating $4 billion in tax deductions to oil companies to help cover the cost of the new spending, a proposal the oil industry said was unfair and would hurt jobs.

"It is difficult to understand why we need to discriminate against our single largest form of energy at a time the nation needs additional jobs and revenue," said Jack Gerard, chief executive of the American Petroleum Institute, a Washington, D.C., trade group that represents most major oil companies.

Mr. Obama proposed his programs to a Congress where much of the political momentum is flowing toward austerity. Before the president took to the podium, the House voted to give Mr. Ryan broad new powers to cut spending quickly.

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Sen. Chuck Schumer (D., NY), left, and Sen. Tom Coburn (R., Okla.) were one of the bipartisan pairs watching the State of the Union Tuesday.

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On Wednesday, a group of Senate Republicans planned to revive a push for a constitutional amendment mandating balanced budgets, an issue little heard of since the heyday of the Republican "revolution" of 1994.

Mr. Obama delivered only one veto threat in his State of the Union address. He said he will not sign spending bills that contain pet projects of lawmakers, known as earmarks.

Republicans have vowed to forgo earmarks, but Democrats have generally declined to join them. Banning earmarks "takes power away from the legislative branch of government, and I think it's the wrong thing to do," Senate Majority Leader Harry Reid said.

Some of Mr. Obama's proposals seemed aimed at pleasing business groups. The president promised to work with Republicans on "medical malpractice reform to rein in frivolous lawsuits." He called for quick action on free-trade agreements, especially the newly completed free-trade accord with South Korea.

The State of the Union Is...

Pick the words that you think best complete the president's sentences.

Speech Patterns

Review the main topics and words used in President Obama's address this year and compare with 2009 and 2010.

Mr. Obama extended an invitation to lawmakers to address Social Security's looming financial crunch, as the Baby Boom generation retires. But he made clear he would oppose dramatic changes unsuccessfully pushed by his predecessor, George W. Bush, who wanted to allow some Social Security taxes to be invested in the stock market.

Mr. Obama said he would oppose "slashing benefits" for future retirees, but that left open the possibility of benefit trims that budget experts in both parties believe is necessary.

The president pledged to offset his proposed spending increases with cuts elsewhere. His five-year freeze on nonsecurity domestic spending, while affecting a small part of the overall budget, would nonetheless shrink anticipated budget deficits by more than $400 billion over the next decade, said Gene Sperling, director of Mr. Obama's National Economic Council.

Mr. Obama didn't detail the kind of efforts that would shrink government as much as Republicans have demanded. But he promised a reorganization of the federal government, including merging and consolidating agencies, and vowed to submit such a plan to Congress for a vote.

—Russell Gold contributed to this article.

Write to Jonathan Weisman at jonathan.weisman@wsj.com

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