Jack Rasmus

COMMENTARY:

Since submitting to this blog last week the first version of this piece, fast developing events over this past weekend have confirmed some of the speculative points made in the original submission. Obama has reverted back to the original ‘Biden Proposal’ of last June, in which the Vice President agreed with the Teapublicans (new name for the now Teaparty-driven Republican party)to cut $2 trillion in spending–with no accompanying tax increases on the wealthy. Several respected news sources last weekend, like Reuters, report the discussions now underway between McConnell and Reid in the Senate involve a deal to cut spending only, perhaps equal to the size of this year’s budget deficit of about $1.6 trillion. Other spending only cuts may occur over the next year as the debt ceiling may need to be raised further. This represents the complete congruence of Obama and Democrat (now called the ‘Timidcrat’ party)on the budget question. The Teapublican position has always been spending cuts only and no tax hikes. The debt ceiling will be raised no doubt. Never was any that it would. What’s next? Obama thereafter will resurrect his $4 trillion ‘grand deal’, the next front on the budget wars. By the way, did anyone notice the $4 trillion is the same amount as Ryan’s proposed budget-deficit cutting plan last April? Now that Obama will cave in on the debt ceiling issue, the next crisis will be the passage of the 2012 budget due October 1. Meanwhile, the Teapublicans up the ante further, with Coburn proposing a $9 trillion spending only cuts package today.

Reading the Debt Ceiling Debate Tealeaves REVISITED
by Jack Rasmus, copyright 2011

This past June it leaked out that Vice-President Biden had secretly agreed with Republicans to $1 trillion in spending cuts in an effort to get them to agree to raise the debt ceiling. That was soon upgraded in rumors to Biden agreeing to $2 trillion. And there was no agreement by Biden from Republicans in exchange for equal tax hikes on the rich and corporations. It raised political eyebrows. It disconcerted the Democrat political base. Most did not believe it. It must not be correct, many mused. President Obama will straighten this out by taking over negotiations, the presidents supporters retorted.

President Obama did step in and take over negotiations with the Republicans directly. Many assumed when he did so that he did not agree with Biden’s massive concessions. There would be no agreement on cuts in social security and medicare, the Party faithful argued.

However, this assumption proved incorrect. Obama met Boehner on the golf course, and then over a weekend. It leaked a second time that Obama had himself in fact agreed with Boehner, not to $1 or $2 trillion but to a $4 trillion dollar grand deal. $3 trillion of that total was spending cuts, with at minimum $400 billion in cuts in social security and medicare front-loaded. Apparently, House Republican leader Boehner agreed in exchange for the $3 trillion cuts to $1 trillion in tax hikes in the form of closing the most egregious tax loopholes for corporations, investors, and corporate CEOs.

The $4 trillion grand deal blew up in both Boehners and Obamas faces. Both bases rose up. First the Republican and then more slowly the Democrat when the latter began to discover their $3 trillion was heavily social security and medicare cuts. It set off a firestorm within the Democratic party base and even lit some campfires within the moderates in the party in the House. Representing the Democratic mainstream within the House, Nancy Pelosi came out publicly rejecting any cuts in social security and medicare, adding she and her colleagues were not even in the loop as to the Obama-Boehner negotiations.

The Obama team then began back-tracking off its position, hurrying to find formulations that denied its $3 trillion, social security-medicare cuts position in the negotiations.

Enter the weekend of July 9-10 the real power behind the Republican Party–the moneybag campaign contributors–i.e. the powerful big bankers, Chamber of Commerce, Business Roundtable, big corporations and institutional investors. They had most to lose should the debt ceiling not be raised. We re talking real money here if bond prices collapsed and the stock market, already in decline, accelerated. Or if the banks in Europe collapse due to deepening debt problems in Greece, Spain, and now Italy. Pressure on Republican Senate, and to some extent House Republican leadership, intensified this past weekend. House leader Boehner and Senate leader McConnell blinked. In so many words, they today agreed to allow the debt ceiling to be raised and will no longer hold the raising as a tactic to extract no tax hike concessions from Obama.

Over the weekend of July 9-10 Democratic Party spin-doctors also went into action. The explanation over the cable shows and talk radio on Tuesday, July 12–now that the Republicans de facto had backed off their no debt ceiling increase position–was: See, this was all a clever tactic by the President, a real bargaining ploy, a maneuver all the time. President Obama never really meant or proposed to cut spending, social security and medicare in particular, by $3 trillion. The president knew all along the Republicans would not agree to any tax hike as part of the deal. That’s why he offered to cut $3 trillion in spending cuts. Now the Republicans gave up. The President won. Hooray!

As ex-Democratic Senate operative, Larry O’Donnell, now TV political talk show host, declared on his show Tuesday, July 12: Nothing was ever agreed to by Obama. O’Donnells explanation intended to absolve the Presidents offering draconian cuts in social security and medicare in exchange for a debt agreement. As O’Donnell repeated the spin-message: Nothings agreed to unless everything is agreed. And since everything was not agreed to by the Republicans, ipso facto O’Donnell’s contorted logic meant Obama never agreed to sacrifice social security and medicare to get a deal.

Following the collapse of the grand deal over the weekend of July 9-10, McConnell proposed a new solution–i.e. an escape window out of which Obama and the Republicans might scramble to avoid a debt default. McConnell proposed Congress authorize Obama to raise the debt ceiling and then take responsibility unilaterally for doing so. According to the McConnell proposal of last week, if Obama raised the debt ceiling unilaterally, the Republicans would vote against it knowing they could not over-ride a veto by Obama to sustain the ceiling increase. That way, the debt ceiling is raised and the Republicans can campaign they opposed it. Both parties jockeyed back and forth for the remainder of last week over this proposal, with point negotations now undertaken by Reid and McConnell in the Senate.

This weekend, July 16-17, it is becoming clear a deal along the lines of the McConnell proposal is now being crafted by Reid and McConnell. But the deal will have an historic twist, this writer predicts. Obama will try to one up the Republicans by appearing more Republican than the Republicans. He will unilaterally agree to cut the deficit by cutting spending by an amount roughly equal to the debt ceiling increase. The likely range of the spending cuts are $1 to $2 trillion. That’s just about what Vice President Biden had agreed to back in June. Biden’s June deal also proposed all spending cuts and no tax hikes.

Notice that’s all spending cuts with no closing of tax loopholes. This possible scenario–i.e. trillions in spending cuts with no tax hikes in exchange for Republicans allowing the debt ceiling increase–is in the process of confirmation just hours ago. Today, Sunday July 17, a report by the Reuters news agency stated that Reid wants up to $1.5 trillion in mandatory spending cuts, along the lines of those identified by a deficit-reduction group headed by Vice President Joe Biden.

By abandoning tax hikes, Obama in effect positions himself politically as a bigger spending cutter than the Republicans, that is more Republican than Republicans themselves. If this occurs, his policy will have thus shifted so far rightward that it becomes virtually indistinguishable from traditional Republican policy–i.e. no tax hikes and all spending cuts to reduce the deficit.

This will undoubtedly appeal to center-right Republicans and conservative leaning independent voters, as Obama’s current stable of corporate advisors are no doubt recommending. It will also likely result in more corporate campaign contributions. But it will further demoralize his Democratic voter base, who already showed signs of sitting home in the 2010 midterm elections.

Obama will undoubtedly justify this Republican fiscal policy by arguing if he hadn’t done this, a default would mean the economic sky would fall in and send the US into renewed recession. But we’ve heard the sky will fall in scare tactic before, in 2008 when then Treasury Secretary Paulson warned economic Armageddon if he didn’t get a $700 billion blank check from Congress to bail out the banks. Paulson got his check, and then didn’t spend it since the banks would not sell him their bad assets at their collapsed market values. Now the amount is at least double the $700 billion.

Obama’s pending deal to cut spending only by trillions of dollars is only the beginning. It is but the first tranche of more cuts to come between August 2 and the October 1 deadline date for concluding next years 2012 budget. The day after the debt ceiling is raised on August 2 the real negotiations will begin. Those real negotiations will pick up where Obama-Biden will have left off. On the table once again will be the Presidents proposals to cut $3 trillion more in spending.

Moreover, the Obama-Biden deal now in development to cut spending by $1-$2 trillion in exchange for Republicans not opposing the debt ceiling increase conclusively disproves the O’Donnell and Obama apologists spin last week that Obama’s $4 trillion grand deal proposal–including $3 trillion spending cuts including social security, medicare and Medicaid–was only tactical, a maneuver, and that he really never meant to propose to cut social security and medicare. But, yes, he did mean it. Yes, he did propose it. And yes he will propose it again once the debt ceiling is raised.

This writer predicts the coming cuts in social security and medicare between August 2 and October 1 will take the form of raising the retirement age to 70 and sharply reducing social security disability benefit payments as well. For medicare, it will mean retirees will have to absorb all future medicare cost increases for Part B (doctors costs) and pay substantially more deductibles for Part D (prescription drugs). The current monthly fee for Part B will initially double, from the current $95-$115 to more than $200-$250 a month per person. That way Obama can say he never cut medicare benefits and yet get massive reductions in medicare and social security spending ranging from $200 to 400 billion a year for the next decade.

In exchange for these cuts in medicare-social security, this writer predicts the Republicans will eventually agree in the 2012 budget to some token tax loophole closing for the rich and corporations. But the loophole closing will be more than offset in an agreement post-budget to a major overhaul of the general tax code. Tax code revisions are what Corporate America really wants, and they and Republican politicians have been calling for since 2010 as a priority. The tax code revisions, I further predict, will include reducing the corporate tax rate from 35% to 20%, lowering rates for foreign profits tax to placate the multinational corporations, and institutionalizing most of the Bush era tax cuts for investors for the next decade. What the politicians take from corporate interests with one hand, they will give back twice with the other.

This trading tax loopholes for tax rates and vice-versa has been the decades long tax shell game. Eliminate loopholes when they become bad public PR and thereby raise some tax revenue. Then give the tax revenue back to corporations, and then some, by lowering the corporate tax rate. Conversely, when public discontent grows with corporations not paying their fair share in tax rates, raise the rates but open up more tax loopholes. That’s how the net federal revenue from the corporate income tax has been reduced over recent decades from 20% of total revenue to barely 10%.

All these maneuvers are unfortunate and deceitful by both parties. For all it takes to resolve social security issue for the next 75 years is to raise the cap on the 12.4% payroll tax rate to cover all forms of income, capital forms and earned wages. That will not only cover all shortfalls but enable the lowering of the retirement eligibility age. And as for Medicare, all it takes to cover its shortfall is a mere 0.25% increase in the Medicare share of the payroll tax for the next ten years and another 0.25% starting in the eleventh year. But you wont hear that discussed in the upcoming negotiations to make seniors and retirees pay for the deficits they did not create.

To conclude, after agreeing to cut $38 billion from the 2011 budget mid-way in the fiscal year last April, cutting another $1-$2 trillion all but ensures there will be a double dip recession in the US in the next 12-24 months. We are witnessing the almost total morphing and congruence of Obama s fiscal policies with that of the Republican opposition. This shift to classic Republican policy positions is similar to what another Democrat president undertook when facing an earlier economic crisis. Im talking about Jimmy Carter. 1978. And we know what happened to him.

Jack Rasmus
July 17, 2011