Truesee's Daily Wonder

Obama's policy time bombs Chris Frates and Ben White   July 11, 2010 07:28 PM EDT

President Barack Obama has long boasted about the transformative change he’s bringing to the country.

But by the time those reforms finally arrive, he could be long gone from the White House.

Some of Obama’s biggest promises won’t go into effect until long after his first term — and in some cases, well past a second. In fact, buried deep within some of the Democrats’ most significant reform bills are dozens of policy time bombs set to blow at more politically convenient times.

The Democratic reform triumvirate — health care, Wall Street and energy — is filled with provisions designed to front-load policy benefits and delay political pain.

Health care reform cracks down on insurers right away but won’t force people to buy insurance until 2014. A new consumer financial protection agency kicks in almost immediately under the Wall Street reform bill, but banks won’t feel its full force for more than 10 years. And even Democrats’ nascent immigration reforms include at least an eight-year wait before illegal immigrants can apply for permanent residency — after Obama leaves office.

The delicate balance aims to gradually get a skittish public accustomed to the enormous changes, while insulating lawmakers from potential backlash.

“You always delay anything that might be disruptive or difficult,” said Frances Lee, professor of political science at the University of Maryland. “The goal is to do it in a way that no one feels it and no one writes news stories about it — minimize the blowback.”

Lawmakers and the White House justifiably, and almost reflexively, argue that it’s logical to phase in the sweeping changes over time. Forcing massive industries like Wall Street and health care to make drastic changes overnight would be virtually impossible and incredibly destabilizing.

That doesn’t mean politics aren’t a factor.

Perhaps most famously, House Democrats practically demanded that their leaders load the health care bill with goodies that take effect before November’s election, giving them something to sell on the campaign trail.

In the Wall Street reform bill, some of the toughest crackdowns on the financial sector were delayed. The bill offers long timetables for compliance and generous opportunities for extensions.

For instance, a new rule to drastically cut the amount banks can invest in hedge funds and private equity doesn’t sound as tough when banks could get more than a decade to do it, as some analysts believe.

The bill also calls for a six-month study of the so-called Volcker rule, which restricts banks’ ability to make the risky transactions. The actual rule-making, however, doesn’t take place until the fall of 2011. The new rules are supposed to take effect by mid-2012, with full compliance by 2014. 

But they are allowed to file up to three years of extensions — and can take an additional five years to ditch some of their most difficult-to-sell investments.

This period could give banks plenty of time to find other ways to make money — or figure out how to skirt the new rules.

“There is a long phase-in period in which the actual rules will be crafted by regulators,” Goldman Sachs analysts wrote in a note to clients last week. “While this may lead to further surprises down the line, we see this as important as financial institutions have time to adapt their business models.”

House Financial Services Committee Chairman Barney Frank said he didn’t know how long the Volcker rule gives banks to phase in the changes, but making sudden, sweeping changes could trigger an economic crisis.

“When you are forcing a whole group of institutions to sell the same thing, it’s crazy to make them all sell it at one time. That’s creating a fire sale. That’s very destabilizing, so we have tried to phase it in,” Frank told POLITICO on June 30, the same day the House passed the financial reform bill that bears his name.

Lawmakers also gave credit-rating agencies a stay of execution of sorts.

The Senate passed a tough provision that essentially banned banks from choosing their own rating agencies, a way to keep banks from shopping around for investment ratings they might not deserve. But in the bill’s final version, Congress allowed for a two-year study before enacting the provision — plenty of time for credit raters to lobby for a pardon, away from the harsh glare of major legislation.

Another major requirement, that banks wall off their most risky derivatives-trading businesses into separately capitalized subsidiaries, also delays the pain for banks. They will have until 2015 to move their equity, commodity and other riskier derivatives into spinoff ventures.

Goldman analysts estimated that banks will have to refinance $100 billion in securities under the bill. However, they don’t have to do it until 2013, which should make it fairly painless.

Democrats took a similar tack on health care reform, quickly activating the more popular bits, such as a ban on denying people insurance because of pre-existing conditions, while delaying the most unpopular ones.

For instance, the provisions requiring everyone to buy insurance and penalizing employers that don’t offer coverage won’t begin until 2014. A tax on high-end insurance plans isn’t effective until 2018. Not surprisingly, those three elements were viewed as the least favorable pieces of health reform in a recent Kaiser Health Tracking Poll.

But some Democrats say there are plenty of popular items in the health care bill that were delayed to keep from botching the law’s rollout. Many of the delayed provisions, according to Lee, were aimed at keeping costs under Obama’s $900 billion price tag. The later it starts, the cheaper it looks in the 10-year budget projections.

Obama certainly isn’t the first president to work the calendar to keep costs down, Lee noted. In 2001, President George W. Bush’s tax cuts front-loaded relief for poor and middle-class taxpayers and gradually phased in tax cuts for the wealthy. In fact, the full repeal of the estate tax just took effect this year, Lee said. 

And in 1983, when Congress raised the Social Security retirement age, the first people the change affected were those who turned 65 in 2003 — giving most lawmakers who voted for it plenty of time to retire, Lee said.

Democrats are continuing the pattern in their work on an energy bill.

If a carbon cap is passed this year, the first year emissions would have to be cut is 2012, but the immediate decreases aren’t drastic. In fact, because the recession has decreased economic activity, the country could probably meet the emissions targets without changing how it does business.

And lawmakers are hoping to further reduce the upfront pain by sending checks to consumers to help offset any increased energy costs.

An immigration reform plan by Senate Democrats also includes long time horizons. One of the most controversial proposals is likely to be the path to legal residence for the roughly 11 million people living in the country illegally.

It calls for screening, registering and fingerprinting illegal immigrants. Once registered, they would have to wait eight years after current visa backlogs have cleared before applying for permanent residency. The provision is based on the idea that people who entered the country illegally should have to wait at the back of the line for the opportunity to live here permanently.

Norm Ornstein, a congressional expert at the American Enterprise Institute, said part of the reason lawmakers would rather serve voters dessert before making them eat their vegetables is as old as politics itself.

“If half your political process has a strong interest in seeing you fail and is telling everybody that the sky is falling on them,” he said, “then you have a much stronger incentive to front-load the benefits and backload the cost.”

Darren Samuelsohn contributed to this report.

link to video

http://www.politico.com/singletitlevideo.html?bcpid=19407224001&bctid=111545286001