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Beware of 'sticker shock' Obama needs to watch those big round numbers

President Obama made history by running a mistake-free campaign while always making the right move at crucial moments. He certainly doesn't need any advice from an obscure California political operative, but desperate times call for desperate measures, so here goes anyway.

My one counsel to him is this: Be very careful about proposing too big and too expensive budget items. The danger for Obama is that, despite the current popularity of his initiatives, his goals could fall victim to voters' "sticker shock" at program costs. The historical record shows the danger of advocating too many "big-ticket" items, especially for Democrats, as sticker shock is just as real for government costs as for buying homes or cars.

I write as Obama's economic advisers are advocating a roughly $850 billion stimulus package on top of the Bush administration's $700 billion Wall Street bailout in the fall of 2008. These are truly historic figures, as we'll see below. As Dan Morgan wrote in an essay titled "The Big Deal" in the Washington Post, "the sums are truly staggering. But the real stunner is the ambition."

Not only will the new administration seek to revive the economy, it will also be attempting to reform social policy by investing billions in infrastructure, schools, hospitals, environmental programs and anti-poverty efforts. It's a breathtaking gamble.

The Wall Street crash and housing bust helped drive Obama's election. The federal deficit under the last budget of President George W. Bush will set a record of more than $600 billion and may even exceed $900 billion. There are serious estimates that the deficit in 2009 or 2010 could hit the trillion-dollar mark. (The 2009 budget actually will be from the Bush administration).

But a caution should be issued here: "Too much, too soon" in terms of spending has derailed many Democratic presidents in the last century. Every Democratic president since 1932 has faced a bit of this problem.

In 1936, Franklin D. Roosevelt won the broadest Democratic landslide in history with 60.8 percent of the national popular vote and all but two states (Maine and Vermont), pulling in on his coattails a nearly 4-to-1 Democratic majority in the House of Representatives and a stunning 76-to-16 majority in the Senate. Both remain all-time Democratic records.

In FDR's second term, the federal budget passed the $5 billion mark for the first time ever. Combined with public dismay over increasing unemployment and a controversial plan to "pack" the Supreme Court with new Roosevelt appointees, Republicans won their first congressional election since 1928. The GOP gained 75 House and 7 Senate seats in 1938. FDR never passed another significant piece of "New Deal" legislation and a "Conservative Coalition" of Southern Democrats and Republicans blocked liberal legislation for a quarter of a century until the passage of the Civil Rights Act in 1964.

In the early 1950s, under Roosevelt's successor Harry S. Truman, the budget passed another milestone, exceeding $50 billion for the first time. Capitalizing on public anger over the stalemated Korean War, high taxes, inflation and the various Democratic scandals, Dwight D. Eisenhower led the Republicans to their first national victory since 1928 while carrying in GOP majorities in both Houses of Congress. (The anti-Communist campaigning of Richard Nixon and Joe McCarthy also contributed to the Republican win).

A decade later, the budget passed $100 billion under the Kennedy administration. The voters responded by staging a mini "tax revolt" and turning out Democratic governors in major industrial states such as Pennsylvania, Ohio and Michigan in 1962. And four years later, after the budget went up another 30 percent, California elected Gov. Ronald Reagan, possibly the most famous fiscal conservative of the last generation, and Republicans posted huge gains in congressional elections.

In 1978, President Jimmy Carter's budget tripped over the $500 billion mark. California passed Proposition 13 to limit property taxes that year and the real "tax revolt" was on, culminating in Reagan's big victory in 1980 that included a Republican Senate for the first time since 1954.

Then in 1994, President Bill Clinton's second budget exceeded $1.5 trillion for the first time. Never mind that Clinton was reducing the deficit; all angry voters talked about was "the largest tax increase in history," and they gave the GOP their widest victory in 40 years with majorities in both Houses, thus making Newt Gingrich the first Republican speaker since 1954.

So the pattern is clear: When Democratic administrations are seen as spending too much money too fast, the voters turn to the Republicans.

Why? I had an economics professor in college who emphasized that consumers had a "psychological breaking point" in making purchases. When assessing any item, consumers had a definite maximum price in mind: even the slightest increase would cause them to balk.

There's a good reason why restaurants advertise a $9.99 chicken dinner special. Charging customers $10.01 may be just a few pennies more, but the "breaking point" is they won't pay more than $10 for fried chicken and mashed potatoes.

The same principles apply to voters, who are also consumers. When voters see too big an increase in the budget -- and, sooner or later, taxes -- they rebel and send some more fiscally conservative Republicans to Washington to hold the line on new spending.

What does all this mean for Obama's first term? The good news for him is that the economic shock of September 2008 had renewed the public's appetite for government activism.

Exit polls used to ask voters if they preferred "larger government providing more services or smaller government providing fewer services." This year's version of the question read: "should government do more or is it already doing too much?" Some 51 percent of voters said that "government should do more," while 43 percent said it was already doing too much. The average of early polls shows that the public approves of Obama's economic approach by roughly the same 53 percent he won the election with.

Today's Republican leaders, who helped turn a record surplus in 2001 into a record deficit by 2003, aren't likely to have much credibility on economic issues for a while. So the Democrat-dominated Congress will pass Obama's program. But a few ultra-expensive projects, especially if waste or fraud is involved, could easily turn that narrow 51 percent majority into a minority by 2010 or 2012.

But the bad news is that we've never faced deficits and budget numbers this big before. Clinton's experience in the early '90s should serve as a warning: Despite his six-point victory in 1992, exit polls showed that voters preferred smaller, less expensive government by a 5-to-4 margin. The tax increases in Clinton's first year ignited the resentments of the small government majority and voters elected a GOP Congress in reaction.

While the Obama administration has more of a mandate, this example should not be forgotten. There could easily be another tax revolt leading to another Republican win. (Which is why Obama may want to include a payroll tax cut in his next budget).

Another bit of bad news is the massive unpopularity of Congress, which happens to have been controlled by Democrats since 2006. The Election Day exit poll showed a 73 percent disapproval rating for Congress. If Obama is the new public face of Democrats, he will get a honeymoon. But if Congress dominates, the GOP could make major gains in 2010 or 2012.

In the 1930s, British economist John Maynard Keynes promoted the theory that increased government spending, especially deficit spending, could be used to stimulate the national economy out of recession. In 1938, Keynes wrote to Roosevelt, advising him to spend his way out of the Great Depression.

His advice was ignored and the economy didn't recover then. However, the massive defense spending of World War II provided the ultimate "Keynesian" stimulus -- economics historian Stephen Cummings called it "the New Deal on steroids" -- and permanently pulled the economy out of the Depression. Only once since 1945 has the national unemployment rate exceeded 10 percent.

The Obama administration appears to be proposing a stimulus program of "Keynes turbocharged," with a total budget that could top $4 billion and a deficit exceeding a trillion dollars. There will be something for everyone here: tax cuts for Republicans and lots of spending programs for Democrats. It's certainly big and bold, but will voters think it's too much?

The best advice for Obama would be to make sure the annual deficits in his administration never exceed the $1 trillion mark. In fact, he may want to make sure that the limit is $700 billion, because that was the cost of the Wall Street bailout and can always be tied to his predecessor.

History shows that too big a deficit is always a gamble for Democrats. When dealing with the public's money, there is a fine line between being bold and visionary and being reckless. And when Democrats cross that fine line, the usual result is a Republican victory.

Patrick Reddy is a Democratic consultant in California.

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