The Debt Alarm Sham

Democrats and Republicans alike depicted a hellscape if the federal budget “sequester” was allowed to take effect on March 1. The only difference is that Republicans were looking forward to blaming the apocalypse on President Obama.

That is, until House Speaker John Boehner was reminded that in July 2011 he told House Republicans the sequestration process was included in the Budget Control Act of 2011 to force $1.2 trillion in cuts across the board over 10 years if a joint committee couldn’t agree to more targeted cuts and/or revenue increases.

Boehner thought that, as the sequester deadline approached, the House would be able to force the Senate and President Obama to accept a substitute bill that would keep the military budget largely intact but force the cuts disproportionately on domestic programs. (But Republicans didn’t bother to pass that bill in the current Congress. Instead, they left town.)

When the President insisted that any sequester deal include tax reforms that limit tax breaks for the wealthy, Republicans balked, saying they would not go beyond the restoration of the pre-Bush tax rates for the wealthiest Americans that was approved in January. The Republican intransigence on taxes is proof that their alarms over the federal budget deficit are a sham. Rational Republicans know that budget cutting during a recession doesn’t close a deficit; it merely puts more people out of work — an estimated 750,000 jobs could be lost from the sequester — and those lost jobs reduce tax revenue, further increasing the deficit.

We know that tax rates must generate about 20% of the gross domestic product during normal economic times to balance the federal budget. That’s what Bill Clinton and the Democrats set up in 1993 when they raised tax rates modestly without a single Republican vote in favor. Instead, Republican leaders denounced the Clinton tax-raising budget as an economy killer that would certainly bring on a recession. Of course, the economy boomed. Through the ’90s we saw low unemployment rates, the Treasury reaped the benefits and, when he left the White House, Clinton turned over to new President George W. Bush a balanced budget that was on course to pay off the national debt by 2010.

But Bush denounced the surplus as proof that the government was collecting too much money. Then-Fed Chairman Alan Greenspan warned that paying off the national debt too fast could be bad for the nation. So instead Bush cut taxes on the wealthy, even as he ramped up two wars. The problem of retiring the national debt was solved!

Republicans did not discover the problems of the ballooning debt until Jan. 20, 2009. While Barack and Michelle Obama were making the rounds of Inaugural balls, GOP leaders met secretly to vow to do everything they could to make sure Obama did not succeed in pulling the economy out of the tailspin Bush had put it in.

Revenue as a percentage of the GDP bottomed out at 15.1% in the depth of the Great Recession in 2009 and 2010, according to the White House Office of Management and Budget. Deficits of $1.4 trillion in 2009 and $1.3 trillion in 2010, when measured as a share of GDP, were the largest since the end of World War II — representing 10% and 8.9% of the nation’s output, respectively. But with the economy in recovery and the slightly higher tax rates on the wealthy that were approved in January, tax revenue this year is expected to increase to 17.8% of GDP and 19.2% by 2017 under current laws.

If those laws do not change, the Congressional Budget Office reported Feb. 5, the budget deficit will shrink this year to $845 billion, or 5.3% of the GDP, its smallest size since 2008. But the CBO also reported that the economy shrank by a tenth of 1% in the last quarter of 2012, largely because of a reduction in federal spending, and the fiscal contraction would shrink the growth rate to 1.4% this fiscal year.

The nonpartisan CBO expects deficits to continue to shrink over the next few year to 2.4% of GDP by 2015. But a poll conducted for Bloomberg News (Feb. 15-18) found that 94% of Americans did not know the budget deficit was shrinking. The survey found 62% thought the deficit was growing, while 28% said it was about the same and 4% were not sure. Only 6% correctly said the deficit was smaller.

So there is no emergency and Democrats in Congress must reject any deals President Obama might reach with Republicans that would cut Social Security, Medicare or Medicaid and put the burden of deficit reduction on the poor and/or the elderly.

In the first place, Social Security has nothing to do with the federal deficit — the Social Security Trust Fund is self-sustaining through the payroll tax and promised benefits are secure at least for the next 20 years. The “problem” is that Congress borrowed $2.5 trillion from the Trust Fund to keep income taxes low while Bush was fighting the wars in Afghanistan and Iraq, and now Congress doesn’t want to pay the money back to Social Security.

Assuming Congress honors its obligations to seniors and pays its debt to the Trust Fund, if there is a longer-term problem in paying promised Social Security benefits — and that is only indicated under pessimistic economic projections — the shortfall could be closed by removing the cap on income subject to the payroll tax, which is now $113,700. But you wouldn’t know about that solution from listening to the pundits, most of whom don’t want to pay more payroll tax.

In the second place, the Affordable Care Act is projected to reduce the deficit by billions over the next 10 years, and it already has played a role in reducing the growth of Medicare costs. Since the health care reform was passed in 2010, the projections of the growth of health care costs has dropped by $511 billion, according to the Congressional Budget Office. At least some of that slowdown in health costs may be due to the the passage of Obamacare, which is phasing in new incentives and reforms to make health care delivery more efficient.

In the third place, Medicaid expansion will help to reduce costs to insurance companies, healthcare providers and local taxpayers because they will no longer have to subsidize health coverage of uninsured working-class families whose employers cannot or will not provide health coverage.

Simply put, any Democratic member of Congress, in the House or Senate, who supports cuts in benefits to Social Security, Medicare and Medicaid in an attempt to resolve the latest Republican-imposed budget crisis should get a challenger in next year’s Democratic primary. Labor unions should make it clear that officeholders who agree to cut Social Security — even the “minor” cuts envisioned in the proposed “Chained CPI” changes — will find themselves banished from labor’s push cards.

As Dean Baker has written, the Chained CPI, which reduces benefits compared with the current schedule by 0.3% annually, adds up to a 3% cut in annual benefits after 10 years. Since Social Security provides more than half of the income for almost 70% of retirees, a 3% cut in Social Security benefits amounts to a reduction in their total income of more than 1.5%. “By contrast, if a wealthy couple has an income of $500,000 a year, as a result of President Obama’s tax increases, they would be paying an addition 3 percentage points in taxes, or $3,000, on the income above $400,000. That comes to just 0.6% of their income,” he noted.

If the Chained CPI cut is not a big deal for Social Security retirees then the tax increases on the wealthy are even less of a big deal. And the One Percenters can better afford them.

Yet even if progressives keep Congress from raiding Social Security, Medicare and Medicaid to settle the sequestration, the Republicans will come back after them at the next self-imposed crisis, when funding for the current fiscal year expires on March 27, and again in mid-May, when the Treasury is expected to run up against its borrowing limit again. The economic terrorists won’t quit, and neither can the rest of us. — JMC

From The Progressive Populist, March 15, 2013



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