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‘Incomes, Jobs, and Obama’s 2013 State of the Union Address’

Posted in Uncategorized, tagged , , , , , on February 11, 2013| 1 Comment »

On Tuesday, February 12, 2013, President Obama will give his State of the Union address. Previews from the media in recent days indicate he will talk about job creation and the problem of income stagnation for the middle class. Neither of these issues—jobs and income—have been seriously addressed for more than five years since the start of the recent recession in December 2007. More than 20 million workers remain jobless and real income for middle class families has fallen, and continues to fall, for the past five years according various measures.

It is rumored Obama will call for a massive increase in Free Trade, specifically for a pacific-wide free trade agreement, the ‘Trans Pacific Partnership’ agreement that his representatives have been working on already for more than a year. Also in the works is a parallel Free Trade agreement with the entire European Union. If passed, these agreements will result in millions more lost jobs—not new jobs—and will make the more than 5 million jobs already lost to NAFTA free trade and China preferred trade pale in comparison. But it will be passed off as a ‘job creator’.

With regard to domestic job creation, it is rumored he will call for business to invest more in the US in order to create jobs here. It is not likely, however, the President will bother to mention the more than $2 trillion in cash US corporations are sitting on—or distributing to their stockholders to the tune of $500 billion last year—instead of creating jobs. Nor is it likely the President will mention that, according to latest Wall St. Journal surveys, big businesses plan to increase investment in 2013 by a mere 2%, down from 8% in 2012 and 20% in 2011. He will exhort them to do something more about investing and job creation, without saying what he himself will do if Business continues to sit on its massive cash hoard and lower investment still further.

The reason most frequently given by CEOs for not investing more in the US is that US consumers aren’t buying enough. True enough. Except for the wealthiest 10% households, median family consumer spending is lagging badly. Most of median household spending that is occurring is spending on credit—credit cards, installment loans, student loans—or spending from depletion of savings to cover escalating healthcare costs. Consumer spending based on real income gains is just not happening for the middle class. And that picture is about to get seriously worse very quickly in coming weeks, given the recent run-up in gas prices that will almost certainly exceed $5 a gallon this spring.
But Obama will talk about the need for income gains for the middle class, while remaining short on the specifics how that will occur; he’ll talk about the need for more jobs without offering specific programs except for more job-destroying free trade agreements. And while he’ll reference the key problem of falling real middle class incomes, specific solutions he plans will be conspicuously absent.

How important is the fact of stagnating and/or declining middle class incomes? The following are some of the more salient facts about income inequality trends in the US in recent decades and years; why those trends are growing worse; and why that inequality is a major factor in the now stagnating once again US economy and recovery.

The Wealthiest 1% Households Historic Income Gains

The dominant characteristic of the US economy today—and a fundamental cause of the faltering, stop-go economic recovery in the U.S. since 2009—is the long term and continuing growth of income inequality in America.
That inequality is most dramatically represented by the growth in the share of national income by the wealthiest 1% of households, on the one hand, and the decline in the share of national income for the bottom 80% and remaining 110 million plus US households, on the other—i.e. between those earning an average of $593,000 a year (top 1%) and those earning less than $118,000 a year (bottom 80%) with a median annual income of around $50,000.

With average annual incomes of $593,000 a year today, the wealthiest 1% of households in the U.S.—approximately 750,000 out of a total of more than 150 million families in the U.S.—receive about 24% of all income generated in the US every year, according to Nobel Prize winning economist, Joseph Stiglitz. That’s up from only 8% of total income in 1979. That’s a tripling of the wealthiest 1%’s annual share of total income over the last three decades since Ronald Reagan took office. Not since 1928, when the wealthiest 1% share of income reached 22%, has income inequality been as extreme as today. And income inequality continues to grow worse at an accelerating rate.

According to studies of IRS data by University of California economist, Emmanuel Saez, and others, during the Clinton years, 1993-2000, the wealthiest 1% households captured 45% of all the increase in US income growth. During the George W. Bush years, 2000-2008, they captured 65%. And in the latest year of available data, 2010, they captured 93%. So the top 1% recovered quickly from the recession. So did their corporations, from which the same 1% households obtain more than 90% of all their income in the form of capital gains, dividends, interest, rents, and other forms of ‘capital incomes’.

Corporate Profits and the 1%

Profits are the major conduit through which the wealthiest 1% incomes grow, redistributed to stockowners, bondholders, and senior executive managers in the form of capital incomes like capital gains, dividends, interest, rents, etc. And Corporate Profits have done extremely well the past three decades, since 2001 in particular, and especially since the Great Recession of 2007-09.

After three years of recession, by 2011 corporate profits in the US were higher than even in 2007 just before the Great Recession began, rising at the fastest rate in 31 years during the recession and immediately after in 2010-11.
Averaging an annual rate of increase of about 10% from 1948-2007, Pre-Tax Corporate profits virtually doubled from their recession 2008 low-point of $971 billion to $1.876 trillion by March 2011 less than a year and a half later—i.e. a level 28% higher than even their 2007 pre-recession record high of $1.460 trillion.

A subset of the $1.876 trillion, i.e. profits of the 500 largest US corporations, rose 243% in 2009-10 according to the Wall St. Journal. That’s 243% after averaging 10% a year during 1998-2007. Moreover, that 243% does not include profits of multinational US corporations hidden and sheltered in their offshore subsidiaries, which in 2012 were estimated at more than $1.4 trillion.

This record gain in pre-tax corporate profits since the onset of the economic crisis in 2007-08 was achieved not from the increased sale of goods and services, but from record profit margins from cost-cutting operations—i.e. by cutting jobs, by reducing wages, benefits, and hours of work, and by productivity gains pocketed by management and not shared with their workers. Profit margins since 2008, i.e. profits as a percent of operating costs, by 2011 thus attained the highest levels in more than 80 years.

Just as cost-cutting at the direct expense of workers has been the main factor in generating record pre-tax corporate profits, so too have Corporate After-Tax profits surged as a consequence of massive corporate tax cutting by governments at all levels, Federal as well as State and Local.

Major corporate tax cut legislation in 2004-05, new rules allowing faster depreciation write-offs (a form of tax cut), and disregard of enforcing the foreign profits tax under George W. Bush all resulted in a further surge in corporate after-tax profits in Bush’s second term, 2004-08. That was followed by hundreds of billions more in business tax cuts at the Federal level under Bush and Obama from 2008 through 2012.

State and local government taxes on business since 2008 have been falling especially fast, as a December 1, 2012 feature article by Louis Story in the New York Times abundantly pointed out. That article estimated the cost of business tax cuts to by State and Local governments at no less than an additional $70 billion a year not represented in the above profits figures.

As a result of the continuing corporate tax cuts since 2008 at all levels of government, Corporate After-Tax profits recovered even faster during the recent recession than did pre-tax corporate profits. From a 2008 low-point of $746 billion, in less than 18 months from the recession low, after tax profits rose to $1.454 trillion—i.e. a level of 47% higher than even their 2007 pre-recession record of $989 billion. In other words, after tax profits recovered twice as fast as pre-tax profits as a direct consequence of government business tax cutting during the recent recession.

Corporate cost cutting at the direct expense of labor resulted in record corporate pre-tax profits during the last decade and especially since 2008. Three decades of corporate tax cutting—intensifying since 2001 and continuing through the recent recession—resulted in even greater after-tax profit gains. But as corporate tax cutting has intensified so too has the cutting of taxes on recipients of capital incomes—i.e. capital gains, dividends, interest, rents, etc.

The Personal Income Tax has concurrently been reduced for the wealthiest 1% households, enabling the ‘pass through’ of ever larger magnitudes of corporate after-tax profits to the wealthiest 1% and permitting that 1% to retain ever greater amounts of those distributed corporate profits as a result of accompanying reductions in the personal income tax.

The reductions in the Personal Income Tax have occurred in various forms: the lowering of the top marginal tax rates, the raising of the income threshold at which the top marginal rates would apply, the reducing of capital gains and dividends tax rates even faster than for other forms of income of the wealthiest 1%, introduction of new forms of interest income taxed at lowest rates (e.g. carried interest), the IRS benign neglect of offshore tax sheltering by the wealthy, the proliferation of countless income tax loopholes benefiting the wealthy too numerous to recount.

The outcome has been the shift in income to the top 1%, from 8% in 1979 to the estimated 24% share of national income in 2012, and the accelerating accrual of all income gains by the top 1% noted previously in the opening paragraphs of this essay.

Income Decline for the Bottom 80%

But income inequality is a consequence not only of income shifting to the wealthiest households and their corporations. Income inequality is a ‘double edged’ sword. It is also the consequence of conditions and policies which have simultaneously reduced the real incomes of the bottom 80% households—i.e. those 110 million earning less than $118,000 annual income and most of whom earn less than $50,000—while simultaneously raising the incomes of the wealthiest and their corporations. Once again the nexus is Corporate America.

The heaviest impact has been on working class households earning annual income from $39,000 to $118,000 a year—virtually all of which is wage income—sometimes called the middle class.

According to the PEW Institute’s 2012 study, the share of total income for those households in that annual income range declined from 58% in 1983 to 45% in 2011. So what the top 1% households gained (16% share increase, from 8% to 24%), the middle class largely lost (13% share decline from 58% to 45%). In terms of wealth estimates, the middle class has lost 28% of its wealth in just the last two decades, whereas the top1% share of wealth has risen from 27% to 40%. The size of the middle class itself has declined, shrinking from 61% of adults in the US population at its peak to only 51% today.

The decline in income and wealth has been long term, increasing noticeably since 1980, accelerating since 2001, and continuing through the recent recession to the present day. Since 2008, households without a 4 year college education have been especially hard hit, with a significant -9.3% income decline at the median in less than four years. Older workers, age 55-64, and younger workers, age 25-34, have been similarly hard hit in terms of income decline; the former a -9.7% drop and latter a -8.9% drop. Even college degree workers’ income has fallen by -5.9% since the so-called end of the recent recession in June 2009.

While some of the income decline is due to wage and benefit reductions by those who did not lose their jobs during the recent recession, much more of the relative income decline has been due to massive loss of jobs since 2007, which reached a level of 27 million at one point and still remain at 22 million after four years of so-called recovery. While more than 15 million jobs were lost, no more than 5 million have been ‘recovered’ since the recession began. Moreover, the jobs added during the recession have paid significantly less than the jobs lost, thus lowering income accordingly. According to a National Employment Law Project survey published in August 2012, 60% of the jobs lost during the recession were higher paying construction, manufacturing, and tech jobs, ranging between $13.84-$21.13 per hour. But only 22% of the jobs added since 2008 were in this range. In contrast, 21% of the jobs lost after 2008 were low paying, $7.69-$13.84, but the latter have been 58% of the jobs added during the recession. And the problem is not only short term and recession related. Since 2001, low wage jobs have grown 8.7% while higher wage jobs have decline -7.3%.

In summary, while corporate profits have continued to grow so too has the income of the top 1 wealthiest households. This has been made possible in large part at the expense of the middle and working classes, as rising corporate profits gained at workers’ expense are passed through to forms of capital incomes—the latter process accelerated by the reduction in both corporate taxation and personal income taxation for the wealthiest 1% households. The process began in earnest more than three decades ago under Reagan, continued under Clinton, accelerated under George W. Bush, and has remained under Obama during his first term. The consequence has been the growing—and accelerating—income inequality in America which is a major characteristic of the US economy in the 21st century.

But don’t expect to hear anything specific or concrete from the President how he proposes to reverse the continuing deterioration in middle class income. What he’ll likely say is you don’t have enough income because you don’t have enough education, so go out and get more and take on even more student debt. And he’ll say the way to stimulate investment and jobs is to pass more Free Trade treaties that will destroy millions more jobs. Or pass the Immigration bill, much of which is being drafted right now by big tech companies to ensure they can hire hundreds of thousands more H-1B visa workers from their offshore subsidiaries. Or propose to create ‘green’ jobs by giving the ‘greenlight’ to natural gas fracking and pipeline construction throughout the US. But none of that will solve the problem of more than 20 million still jobless, or the fact that jobs that have been created are low pay, part time, temp, non-union service jobs with little or no benefits—that is, jobs that do little to resolve the even deeper problem of stagnating middle class incomes.

Jack Rasmus
February 11, 2013

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Defense Cuts and the March 1 Sequester Deadline

Posted in Uncategorized, tagged on February 10, 2013| Leave a Comment »

Tune into my upcoming Wednesday, February 13 radio show, ‘Alternative Visions’, on the Progressive Radio Network, 2pm eastern time, at http://prn.fm/shows/political-shows/alternative-visions/#axzz2KZKa7AQX.

I and my guests (Mike Eisenscher of US Labor Against War & Mike Prokasch of the New Priorities Movement) will be discussing the current maneuvers in Washington by Teapublicans and Timidcrats to delay and decrease the scheduled Defense Spending cuts due March 1 as part of the 2011 $1.2 trillion sequestered deficit cuts. Hear what others are doing to oppose the emerging deals by politicians in DC to reduce or even eliminate the Defense cuts, and what you can do to help as well. Fewer defense spending cuts now mean more non-defense (medicare, education, etc.) spending cuts later.

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US GDP–2012 and 2013

Posted in Uncategorized, tagged , , on February 6, 2013| Leave a Comment »

Tune in to my weekly radio show, Alternative Visions, today (wed. 2pm est and archived) for my discussion of US GDP numbers for 4th quarter 2012 showing a negative -0.1% drop, and my analysis of prospects for GDP in the 1st and 2nd Quarter 2013 in the US. Is a double dip recession in the works? The show is available on the progressive radio network, PRN.FM, called Alternative Visions, at this url: http://prn.fm/shows/political-shows/alternative-visions/#axzz2K5w5xy34

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US GDP–On the Road to Double Dip?

Posted in Uncategorized, tagged , , , , , , , on January 30, 2013| 3 Comments »

US GDP data released on January 30, 2013 for the fourth quarter 2012 showed a decline in GDP of -0.1% for the last three months of 2012, thus raising the specter of the US economy, facing still further deficit spending cuts in 2013 amidst declining consumer confidence, may be on track for a possible double dip recession in 2013 or 2014 along with other economies in Europe, the UK, and Japan.

In the fourth quarter GDP numbers, government and business inventory spending led the decline. To the extent consumer spending played a positive role at all in the 4th quarter, it was largely driven by auto sales—stimulated by auto dealers offering buyers deep price discounts, virtually free credit with near 0% auto loan interest rates, as well new auto purchases in the northeast as a result of Hurricane Sandy’s destruction of existing auto stock. 2012 Holiday season retail sales data, in contrast, were otherwise not particularly notable and would have been much worse without the auto sales exception. How much longer auto companies can continue the deep price discounts and free credit remains a question going forward. Net export sales continued to sag in the last quarter, as the slowdown in world manufacturing and trade continued. And, as others have noted, an important source of past consumer spending and GDP growth—i.e. health care services—began to slow ominously at the end of 2012 as well, promising to continue that trend into 2013.

This weak scenario in the fourth quarter 2012, and the virtual absolute stop to US economic growth, was predicted on this writer’s and other public blogs in a piece entitled “US 3rd Quarter GDP: Short Term Myopia vs. Long Term Realities” last October 2012 (see jackrasmus.com, as well as in this writer’s April 2012 book, ‘Obama’s Economy: Recovery for the Few’).

Last October 2012, it was noted that the 3% growth rate in the preceding 3rd quarter, July-September 2012, period was artificially produced by record levels of one-quarter federal defense spending accounting for more than one third of total GDP growth in the quarter. That government spending surge was preceded by more than two years of federal government spending reductions, and thus the third quarter defense-government spending acceleration represented previously held back government spending, to be released right before the November 2012 elections. It was predicted in the above blog commentary on GDP 3rd quarter results that government spending therefore would decline sharply in the following fourth quarter—which it did. It was further noted business inventory spending was on a track to decline as well in the fourth quarter, and that US net exports, having turned negative in the third quarter, would continue to decline in the fourth quarter—all of which also occurred in the latest GDP report. The true US GDP growth trend for July-September was therefore not the 3% reported, but only around 1-1.5% for the third quarter when the appropriate adjustments are made. And that 1.5% or so been the average GDP rate for more than two years. Then the bottomed dropped out in the fourth quarter, as GDP collapsed to -0.1%.

So what’s going on? Is the fourth quarter GDP an aberration? A temporary one time event? Or a harbinger of a still further slowing US economy, moving more in line with global economic trends indicating a slow but steady further slowdown?

In the first quarter 2013, a number of negative developments in the fourth quarter will likely continue, along with new negative developments, together suggesting the first quarter 2013 GDP will at best look much like the fourth quarter—and could even prove worse.

First, more than $100 billion has been taken out of the economy with the end of the payroll tax cut last January 1. Second, consumer sentiment and spending is showing a definite sharp decline in the early months of 2013. Deficit cutting will intensify with a deal on the ‘sequestered’ $1.2 trillion agreement that will occur in March in Congress. Defense spending cuts projected will be reduced, but non-defense spending will occur and perhaps even rise. Consumer spending on autos, which has been a plus in 2012, cannot continue at the prior pace. Health care spending will likely continue to slow, as health insurance premiums of 10-20% continue to be imposed in the new year by price gouging health insurance companies looking to maximize their returns in 2013 in anticipation of Obamacare taking effect in 2014. Business spending that occurred in the fourth quarter to take advantage of tax laws will almost certainly slow in the first quarter. Industrial production and manufacturing will add little, if anything, to the economy and housing will contribute to growth through apartment construction. In short, the scenario is one of continued very slow growth.
It is not the deficit that faces a ‘cliff’; it is the US economy. As this writer has repeatedly written since last November, the ‘fiscal cliff’ was mostly an economic farce. Real forces were further slowing the real US economy. Those real forces are once again reasserting themselves. However, should Congress proceed with continued deep spending cuts in 2013, should the Euro economies, UK, and Japan continue to weaken, and should China-India-Brazil not succeed in reversing their economic slowdowns significantly—then the odds of a double dip in the US will rise still further in 2013-14, as this writer has repeatedly predicted.

The strategic question is ‘Why is the US economy so fragile and weak? Why has it been unable to generate a sustained economic recovery from ‘Epic’ recession since 2009? Why now, after five years since the onset of recession in late 2007, has the US economy stagnating and collapsed to virtually zero growth, once again? ‘
The answers to this are not all that difficult to understand. First, despite $13 trillion in free, no interest money given to banks, investors, and speculators by the US federal reserve for five years now, the banks still continue to dribble out lending to small-medium US businesses. No loans mean no investment mean no hiring mean no income growth for consumption, which is 70% of the economy. Similarly, large non-bank corporations continue to sit on more than $2 trillion in cash. Like the banks, they too refuse largely to invest in the US to create jobs, preferring hold the cash, or use it to buyback stock and pay shareholders more dividends, to invest it offshore, or to invest it in speculating with financial instruments like derivatives, foreign exchange, commodities futures, and the like.

At the same time, the bottom 80% of households, more than 110 million, are confronted with 5 years now of continuing real disposable income stagnation or decline. This income stagnation and decline translates into insufficient income to stimulate consumption spending, which makes up 71% of the US economy. What spending exists is fundamentally credit driven, not income driven. Thus car loans, student loans, credit cards, and installment loans rise and with it household ‘debt’.

The problem with the US economy therefore is fundamentally twofold: not only insufficient income but growing household debt. Together they result in consumption becoming increasingly ‘fragile’ (an income to debt ratio term), and therefore unable to play its historic role of generating a sustained economic recovery. Together, fiscal-monetary policies are rendered increasingly ‘inelastic’ in generating recovery as ‘multipliers’ collapse—to use economic jargon. The outcome of all this is ‘stop go’ recoveries, bumping along the bottom, or what this writer has called an ‘epic’ recession.

by Dr. Jack Rasmus, copyright 2013

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The Collapse of the Retirement System in America

Posted in Uncategorized, tagged , on January 30, 2013| 1 Comment »

Readers of this blog are invited to listen to the archive of my radio show, ALTERNATIVE VISIONS, today, Wednesday, January 30, on the progressive radio network, online at http://prn.fm/shows/political-shows/alternative-visions/#axzz2JUEKrJbp.

The show addresses the deteriorating condition of the 6 elements of income for retirement: defined benefit pensions, 401ks, personal savings, retiree health benefits, social security and medicare. Here’s the announcement of the show with more detail:

The discussion will look at the 6 elements of the retirement system in the US: Private defined benefit pensions, 401k plans, personal savings, retiree health benefits, social security, and medicare. The retirement system in America set up in the late 1940s-early 1950s originally called for a ‘3-legged stool’ of incomes, composed of one-third retirement income from defined benefit pensions, one third from personal savings, and one third from social security. The first two of those legs have already collapsed. And now Congress is about to begin breaking the last leg, social security and medicare, with its upcoming deficit cuts. This will intensify as Congress restores defense spending cuts previously scheduled, and enacts big corporate tax cuts later in the year. The consequences of collapsing retirement incomes affecting 70 million people will be significant, Dr. Rasmus argues, and will hold back anyk sustained economic recovery in the US in 2013-14 and beyond, as GDP data for the fourth quarter 2012 just issued today show the US economy may have already entered the ‘double dip’ recession Dr. Rasmus has been predicting for more than a year.”

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From Fiscal Cliff to Debt Ceiling Debacle 2.0′

Posted in Uncategorized, tagged , , , , on December 31, 2012| 2 Comments »

COMMENTARY: THE FOLLOWING IS THE LATEST DECEMBER 31 UPDATE TO THE TERMS OF THE FISCAL CLIFF PENDING DEAL IN CONGRESS.

In a press conference concluded today, December 31, 2012, just hours ago, President Obama reported a partial agreement on the Fiscal Cliff was very near.  To hold a conference and report such at this stage, means the major sticking points have been settled and just the details are now being worked out.

The agreement, as this writer has been predicting, will be only a partial one. Fiscal cliff (aka ‘Austerity American Style’) negotiations on unresolved matters will continue for the next several months.

According to today’s press conference by the President, the agreement about to happen today will reportedly include the following main elements: first, an extension of the tax cuts for roughly 98% of households. Tax rates on the 2% will apparently rise. So too apparently will payroll taxes rise back to their 6.2% rate. In a concession to Republicans, the tax cuts will now be made permanent instead of having an expiration date, as has been the case since 2001, and the cutoff for the top 2% will be raised from $250k income per year to $450k, thus making the increase on the top 2% in effect a tax hike on the top roughly 1.5% instead of top 2%. Second, the partial deal will include an unspecified extension of unemployment insurance benefits. Not part of the deal, however, are cuts involving the approximate $1.2 trillion in sequestered defense and non-defense spending, agreed to last August 2011, which are scheduled to start taking effect this January 1, 2013. However, there is also talk that the sequestration will be postponed for two months as part of the deal. Nor is there a settlement of the debt ceiling issue as part of the pending deal.

The agreed upon deficit reduction target of $4 trillion over the coming decade is not resolved by the pending agreement. The tax hikes on the 1.5% will provide only $600 billion in additional tax revenue for the coming decade. That amount, by the way, is well below Obama’s previously offer a few weeks ago of tax revenue generation of $1.2 trillion, and Boehner’s earlier December counteroffer of $1 trillion. To get some kind of partial agreement, Obama in effect reduced his tax revenue demand in half, from $1.2 trillion to $.6 trillion, raised the cutoff from $250k to $450k, and agreed to make the tax cuts permanent. Republicans thus get a reduction of $400 billion below their last $1.0 trillion position plus a $200k increase in the cutoff to $450k. Both those points amount to major ‘wins’ for the Republicans. Nonetheless, there is consequently still a long way to go in deficit cutting negotiations, which will occur over the next two months. In short, deficit cutting has not concluded; it has only just begun. And Republicans will be in an even stronger bargaining position going forward.

The focus from this point will be even more heavily on spending cuts and the Republicans will have the upper hand in spending cut negotiations for the following two reasons: the tax issue is largely out of the way and the debt ceiling coming up allows them, the Republicans in the House, to once again engineer a repeat of the debt ceiling debacle of August 2011. We are now headed toward a ‘Debt Ceiling Crisis Redux’, which will peak sometime in late February-early March 2013. The original debt ceiling debacle of August 2011, to recall, resulted in all spending cuts of $1.2 trillion. Version 2.0 will almost certainly result in something similar, with perhaps a couple hundred billion more in token revenue generation, if even that. Expect spending cut proposals approaching twice that $1.2 trillion agreed upon in August 2011.

The August 2011 debt ceiling deal amounted to a ‘trade off’ by Obama and the Democrats of $1.2 trillion in spending only reduction in exchange for an agreement from the House radical Republicans not to play the debt ceiling card until after the November 2012 negotiations. It’s likely another such deal will occur—i.e. Democrats trading spending cuts for a halt to debt ceiling brinkmanship by the Republicans until after the 2014 midterm elections.

In terms of bargaining strategy, Obama and the Democrats are cutting a deal today, December 31, that will prove disastrous for them over the coming months. They have conceded on several major points just to try to get an agreement today—i.e. $600 billion in total revenue, $450k cut off increase, and making cuts permanent.  Republicans will get several more ‘bites at the tax apple’ in coming months to offset the tax hikes on their 1.5% richest friends.  In addition, Democrats are passing their bargaining leverage to the Republicans. Democrats should have allowed the fiscal cliff to happen, then later this week proposed a 98% tax cut for the middle class and tied that to a proposal for no debt ceiling brinksmanship for the next two years. Republicans would have been put in the position of having to vote AGAINST a middle class tax cut to keep their debt ceiling leverage. They no doubt realized this and, as this writer has previously predicted. Republicans conceded little in order to retain their debt ceiling leverage for future negotiations.

To sum up, in today’s pending deal, the House Republicans get a $600 billion concession by Obama in total tax revenue generation, a bigger hammer in the debt ceiling, an increase in the threshold for the top 2%, from $250 to now $450k a year (reducing the top 2% to in effect 1.5%), making the tax cuts permanent, and greater future control of the debate agenda. Obama and the Democrats get a continuation of middle class tax cuts, some kind of unemployment insurance, and a loss of bargaining leverage for the next phase of continuing deficit reduction negotiations.

The second phase of fiscal cliff negotiations will focus on reducing sequestered defense cuts, more emphasis on cutting social security, Medicare, Medicaid and the like, and a return to playing chicken and brinksmanship once again on the debt ceiling. Republicans now have the bargaining agenda where they want it: almost totally focused on spending cuts. And they have their big stick again to whip the Democrats with—i.e. the debt ceiling.

Jack Rasmus

Jack is the author of the April 2012 book, “Obama’s Economy: Recovery for the Few”. Chapter 7 of that book, ‘Deficit Cutting on the Road to Double Dip Recession’, is available for free on his website, http://www.kyklosproductions.com. Visit the website also for Jack’s 7 recent radio interviews on the fiscal cliff negotations, at http://www.kyklosproductions.com/interviews. For updates daily on the fiscal cliff negotiations, follow Jack at twitter, #drjackrasmus.

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Fiscal Cliff: Obama & Senate vs. House Radicals–Another Step Closer to Deal

Posted in Uncategorized, tagged on December 29, 2012| 2 Comments »

Late Friday afternoon, December 28, President Obama held a press conference reporting on the status of negotiations on the so-called ‘Fiscal Cliff’. Having met with House and Senate Democrat and Republican leaders earlier the same day, in his press conference Obama reported both sides had made progress during the day toward an eventual deal. Senate leaders Reid and McConnell were in fact working on an agreement as he spoke, Obama noted.

Whatever Senate leaders Reid and McConnell may work out will almost certainly come to a Senate vote by December 31st. Less certain is whether the House of Representatives will allow a vote on the same Senate package to be taken by then as well. An ominous indication of what the details of the Senate version might be were hinted by Obama during his press conference, as he indicated the deal would require “the wealthiest to pay a little more” and that spending would be cut “in a responsible way”. Watch for an emphasis on ‘little’ with regard to taxes, and on ‘responsible’ meaning major spending cuts.

Should the House balk at voting on the forthcoming Senate proposal, Obama noted he was prepared to have Senate Democrat leader, Harry Reid, introduce a second bill, the outlines of which he, Obama, suggested before the Xmas holidays. That alternative bill would reintroduce the tax cuts for the 98% earning less than $250k a year, pass an extension of unemployment insurance, as well as other unspecified economic growth measures.
The first package being developed this weekend in the Senate by Reid-McConnell will not come up for a vote in the Senate until Monday, December 31. The House will then either vote it up as well or refuse to vote. If the latter, then the Obama-Reid backup proposal will likely come up for a vote on it on January 2 or 3. At that point, the Bush tax cuts will have expired officially. That means the vote on the tax cuts for the 98% will be a vote to reintroduce and pass the 98% tax cuts. House radicals who might refuse to vote on the Senate’s initial December 31 proposal—in which tax cuts for the wealthiest 2% aren’t extended—might then find themselves in the difficult position of NOT voting for reintroducing tax cuts for the 98%. This possibility will almost certainly force the House radicals to vote for the Senate’s first version on the 31st, especially if that Senate version includes major cuts in spending for social security, Medicare, Medicaid and the like, and ‘smoke and mirrors’ tax revenue hikes on the 2%. In short, the House radicals now find themselves ‘boxed in’, as Obama doubles down on them.

Metaphorically, they have jumped out of Boehner’s ‘Plan B’ frying pan proposal of last week, onto the hot stove of Obama’s double down proposal announced today. Watching them ‘hot step it’ to an eventual deal may prove entertaining.
As this writer has predicted since November, a deal will be concluded between the two wings of the ruling party of Corporate America. That deal will come in three stages: the first a partial settlement to get through the January 1, 2013 artificial deadline to show the ‘markets’ (e.g. Investors, speculators and corporate America) that a deal is being hammered out, albeit in stages. The second stage negotiations will commence immediately after next week on additional items, continuing through February to March 2013. And a final third stage will come later this year, involving a major revision of the US tax code that will result in big corporate tax rate cuts.

AN ALTERNATIVE ‘ONE TAX’ SOLUTION

While this ‘dance’ of negotiations plays out over the next week, readers should consider that the entire ‘Fiscal Cliff’ charade could be resolved with one program, one proposal involving taxation on the wealthiest 1% of US households—i.e. those whose average annual income is about $1.5 million and whose effective and actual income tax rate today is not the nominal 35% but in fact only about 22.5%.

The very wealthy 1% actual income tax rate has never been the 35% top rate. In 1980 that top rate was 70% but the actual effective rate they paid was only 45%. Similarly, today the reported top rate is 35% but the actual rate on average 22.5%. Some hedge fund managers making billions a year actually pay less than 10%.

University of California professor, Emmanual Saez, and his colleagues, Thomas Picketty and Stefanie Stantcheva, a few months in the third quarter 2012 issue of ‘Tax Justice Focus’, estimated that by simply making the wealthiest 1% pay the same effective, actual tax rate they paid in 1980 (45%) it would raise an additional $405 billion a year in tax revenue. Over a decade, that’s more than $4 trillion—which is coincidentally the amount identified as necessary to reduce the deficit over the coming decade by all the parties, Democrat and Republican, as the deficit cutting target amount. Since the Simpson-Bowles report of November 2010, the target has always been $4 trillion.

Thus, one simply tax measure would solve the entire fiscal cliff issue, generate the $4 trillion in deficit reduction, allow all the other tax cuts in question to continue, and require no cuts whatsoever in social security, Medicare, Medicaid or anything else.

Professors Saez and others estimated this $405 billion on an assumption of a GDP of $15 trillion in 2011. Today’s $16.5 trillion GDP means this one tax measure would now raise more than $450 billion a year. The 45% tax on the richest 1% amounts to a 2.7% increase in government tax revenue as a percent of GDP. If you think that is too much, consider that federal tax revenues as a percent of GDP was 20.6% in 2000 before George W. Bush began his investor-corporate tax cuts in 2001. That 20% had been the average for a number of years. But after Bush’s two recessions, his $3.4 trillion in tax cuts, his wars, runaway health care costs, and the historic weak recovery of the US economy under Obama since 2008, federal tax revenue as a percent of GDP had fallen to 14.4% from the 20.6% of only a decade or so ago. So taxing the 1% at the 1980 effective rate raises tax revenue as a share of GDP by 2.7%, to about 17%. Taxes can and should be raised on Corporate America as well, to get back to the 20%.

But don’t count on the latter, since Obama has promised throughout the election campaign to cut corporate tax rates from the current 35% to 28%. And don’t be surprised by the major spending reductions that will come out of current fiscal cliff negotiations, in the next few days and continuing throughout this year. Fiscal Cliff is only a cover phrase for what amounts to ‘Austerity American Style’.

The problem with the US deficit and debt is not a spending program problem. It has always been overwhelmingly a tax cut for the rich and corporations problem. And it can be resolved with one program and proposal to ‘make the millionaires pay 45%’. It’s that simple.

Jack Rasmus

Jack is the author of the 2012 book, “Obama’s Economy: Recovery for the Few” , and host of the weekly radio show, Alternative Visions, on the Progressive Radio Network, PRN.FM. His website is http://www.kyklosproductions.com, his blog, jackrasmus.com, and twitter handle #drjackrasmus.

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BOEHNER’S BUNGLED ‘PLAN B’ BARGAIN: WHY IT BLEW UP

Posted in Uncategorized, tagged on December 26, 2012| Leave a Comment »

COMMENTARY: WITH THE FIRST PHASE OF ‘FISCAL CLIFF’ BARGAINING HAVING ENDED WITH THE IMPLOSION OF HOUSE SPEAKER, BOEHNER’S, SO-CALLED ‘PLAN B’, THE NEXT IS ABOUT TO BEGIN ON THE THREE-STAGE APPROACH TO FISCAL CLIFF THAT I HAD PREDICTED WOULD OCCUR LAST NOVEMBER 20. THE FOLLOWING IS AN APPRAISAL OF WHY BOEHN’ERS PLAN B BLEW UP IN HIS FACE.

Yours truly having negotiated scores of contracts in various venues over the years, it is easy to recognize that House Speaker, John Boehner, really bungled as a bargainer in his recent failed attempt to push his ‘Plan B’ in the fiscal cliff negotiations a few days ago.

As Washington Post political commentator, Charlie Cook, observed in the aftermath of the collapse of Plan B, in Washington DC, it appears “the art of negotiation has been lost…these people don’t know how to negotiate”. How true.
There are at least three major axioms of negotiation that Boehner violated in his recent attempt to push Plan B and leave Obama on the defensive over the Xmas holidays.

First axiom: Never tackle the toughest or biggest (i.e. costliest) issue first in negotiations. Settle the smaller issues first and leave the big item to last; then settle the big stuff by horse-trading the most important thing you want for the most important thing your opponent wants. Boehner did the opposite. He addressed the big tax hike issue—the Bush tax cut for the top 2% from the outset. In Plan B, he in effect asked his base to agree to a tax hike in mid-stream of negotiations and when doing so would not have concluded the negotiations.

Second axiom: Never negotiate in one direction. Boehner focused on Obama and not on his base. Bargaining is always dual in nature. There’s your opponent and there’s your own supporters. Boehner lost sight of his base. From what is now leaking out in the press, it appears he somewhat desperately pushed forward with his Plan B even though he didn’t have the votes among other House Republican leaders or his base. Never call for a vote guessing on the outcome. Call for a vote you either want to fail or know will pass. Never ‘test’ your base with a vote the outcome of which you are uncertain. That’s an approach that will often lead to an ‘egg pie in the face’, and a significant loss of negotiating authority with your own base thereafter, making it even more difficult subsequently to get an agreement. If there’s a cliff here, it’s not fiscal, but the one Boehner leaped off of with his push for Plan B.

Third axiom: Never tell your bargaining committee you’re going to do what you want regardless of what they want. Never take a stand 180 degrees opposite to them. Never tell your ‘chief steward’ and bargaining committee you’re going to make an offer whether they like it or not. Who’s Boehner’s ‘bargaining committee’? For certain it includes House budget chairman, Paul Ryan, and House Ways and Means chair, David Camp. According to the Wall St. Journal lead page one story today, December 22, Boehner decided to go ahead and offer Plan B without them signing on to it. No doubt those two simply went back to the Republican base and organized a revolt against Boehner before he could even offer Plan B.
Another faux-pas by Boehner was to try to desperately put Obama on the defensive over the holidays with Plan B so he, Boehner, could look tough for his upcoming election in the house on January 3. Lesson: never play chicken in bargaining on the eve of your own election. Boehner should have delayed the negotiations big trade-offs until February, agreeing to minor stuff along the way just to keep up the appearance progress was being made. A February closure to the negotiations would have given him more bargaining leverage, with the federal government due to run out of money in March.

No wonder Boehner, after his bungled bargaining, has passed the task on to McConnell in the Senate and to the Obama team. He’s finished as a negotiator, showing his opponents he can’t get a deal and simultaneously losing all authority with his own bargaining committee and his base. His plan may have been ‘B’, but his bargaining skills grade is a generous D-.

Jack Rasmus

Jack is the author of the book, “Obama’s Economy: Recovery for the Few”, Pluto Press, 2012; host of the weekly radio show, ‘Alternative Visions’, on the progressive radio network, PRN.FM. His website is http://www.kyklosproductions.com, his blog, jackrasmus.com, and twitter handle, #drjackrasmus.

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Fiscal Cliff or Just Bush Tax Cut ‘Speed Bump’?

Posted in Uncategorized, tagged , , , on December 20, 2012| 2 Comments »

MY ANALYSIS OF THURSDAY’S US HOUSE (Boehner’s Boys) NO VOTE ON ‘PLAN B’–AS WELL AS AN ECONOMIC EXPLANATION WHY THE ‘FISCAL CLIFF’, SHOULD IT EVEN HAPPEN, IS JUST AN ECONOMIC ‘SPEED BUMP’, THE IMPACT OF WHICH IS GROSSLY OVERESTIMATED

Today, December 20, 2012 the US House of Representatives—aka ‘Boehner’s Boy’s—decided to not vote on the House Speaker’s ‘Plan B’ to continue all the Bush tax cuts except for token reductions on the millionaires and billionaires. The move is being hyped by the press as bringing the US economy to the edge of the so-called Fiscal Cliff. Should the Teaparty radicals who have been running the U.S. House since 2010 continue with their once-again brinkmanship through January 1, 2013, the US economy will descend over the cliff into recession once again. According to the Congressional Budget Office, the result will be an immediate 4% decline in GDP. However, this view is wrong for two reasons:

First, the House refusal to vote Plan B today, December 20, does not represent a breakdown of negotiations. It is just a tactical move designed to pass the hot potato to Obama and the Senate while they, Boehner’s Boys, break for the Xmas holiday. Why vote on Plan B now when they can do so later, after Xmas, and before the January 1 (non) deadline date? The Teapublicans need to look tough during negotiations, and appear as if they were forced into an agreement at the last moment; and this is not the last moment. Nor is January 1.

But it is increasingly clear that Corporate CEOs and public opinion is not willing to go along with a repeat of Teapublican tactics of 2011. As this writer has noted previously, CEOs want an agreement, with top income tax rates and/or revenue raised, in order to later get the big corporate tax cut Obama has promised them, reducing the top corporate tax rate from 35% to 28% later this year. They can’t get it without an agreement on the ‘fiscal cliff’, and that includes tax hikes on the personal income tax. Similarly, public opinion is overwhelmingly identifying the House Republicans as the main problem preventing a settlement. So the Boehner-Teapublican tactic to postpone a Plan B vote is likely to backfire.

Watch for a major decline in the US stock market on Friday, December 21, perhaps as much as 500 points at the market opening, with global markets to follow similarly. Watch for Corporate CEOs to up the pressure in coming week as well. The Capitalists will be sending the House ideologues a message, and Boehner will eventually bring them to heel. What postponing Plan B represents is the House radicals are refusing to appear as if they are willing to negotiate a deal; they prefer to be ‘forced’ into having to accept one. They must have a crisis before they can agree to anything.

But the economic side of the fiscal cliff is also not what it seems. Should no agreement be reached by January 1—or anytime after for that matter—there will be no economic Armageddon. There will be no renewed recession in the first quarter of 2013—at least due to the fiscal cliff. The ‘fiscal cliff’ is no cliff at all, and in reality better described as an economic speed bump derived from the Bush tax cuts. Here’s why:

The Congressional Budget Office (CBO) in its recent November 2012 report on the economic consequences if the tax cuts are allowed to expire, and spending cuts go into effect, on January 1, 2013 estimates that $503 billion will be taken out of the economy starting January 1. Another $682 billion will follow in 2014. Of the $503 billion, about $420 billion represents the expiration of tax cuts—about $80 billion in the payroll tax increase and the rest representing Bush tax cuts. Of the $85 billion or so in spending cuts, a mere $24 billion is defense spending. The rest is social program spending.

The $85 billion in spending cuts won’t hit the economy all at once in the first three months. So let’s say $25 billion will in the first quarter? The US gross domestic product, GDP, in 2013 will exceed $16.5 trillion next year easily. Conservatively estimating $4 trillion GDP in the first quarter, the spending cuts will mean a 0.6 of 1% decline in GDP. Hardly a recession due to the spending cuts.

OK. That still leaves $420 billion in tax increases that will take effect, about $80 billion in payroll hikes and the rest Bush tax cuts expiring. But as nearly all economists will admit, taxes have less an effect on the economy and GDP than spending does. In terms of an attempt to stimulate GDP, a $100 billion in tax cuts has less impact than does a $100 billion in spending increase. The opposite is also true: a $100 billion tax hike will slow the economy less than a $100 billion spending cut. It’s what economists call the ‘multiplier effect’.

Since 2008 the ‘multiplier effect’ has had significantly less impact on stimulating the economy, whether tax or spending multiplier. This has been due to the deep and rapid contraction of the economy in 2008-09, the historic weak recovery ever since, the massive unemployment, the record remaining debt overhang levels, and stagnant disposable income growth for more than 100 million households. Tax multipliers have been especially weak. Some estimates are that in recent years a tax cut of $1 has generated only a spending of that tax cut amounting to 35 cents. The multipliers are thus a fraction, not even a true multiple.

What that means in turn is raising taxes will have an equivalent weak, fractional impact on slowing the economy in 2013 just as cutting taxes has had very little effect on stimulating the economy from 2008 to 2012. The tax cuts of 2008-12, and especially the tax cuts for businesses and investors, have been mostly ‘hoarded’ and not invested. That’s why Corporate America still sits on $2 trillion in cash today and is not investing it. Business investment has been declining for months throughout 2012. Instead, corporations and investors have been, and now are increasingly, using the Bush and other tax cuts to buyback stock, pay special dividends to shareholders, invest offshore or in financial securities, etc. Stock buyback volumes this year alone will set a record of more than $400 billion in the US.

The tax cuts since 2008 did not produce much in the way of investment or jobs in the US; so ending them will not likely have all that much impact on the downside as well. If $340 billion of the $420 billion in tax hikes take effect after January 1, 2013, and if the .35 multiplier continues today, then we’re talking about $110 billion hit to the economy in the tax hikes. Over four quarters, remember. So that means about $30 billion taken out of the economy in the first quarter—or about roughly the same impact as the above $25 billion spending cut in the first quarter 2013.

That leaves only the $85 billion or so reduction from the payroll tax returning to its prior 6.2%. That impact is on the working-middle classes, who have not been ‘hoarding’ their tax cuts to the extent corporations and investors have. So one can assume the ‘multiplier’ is higher than .35 cents on the dollar. But it’s still a tax multiplier and not a spending multiplier, so it is not as if spending were cut one dollar. Generously, one can assume the payroll tax multiplier is $1 dollar for every $1 dollar tax hike. For the first three months of 2013, the impact will therefore be a $21 billion negative hit to GDP in the first quarter.

What this all means is that the true negative impact on the US economy during the first quarter from a ‘fiscal cliff’ taking effect, is no more than $75 billion on an economy that will be more than $4 trillion! A more accurate consideration of multiplier effects means the total impact on GDP is about a third of what the CBO has estimated for the first quarter of 2013. Moreover, once a deal is reached by March 27, 2013 at latest in the ‘fiscal cliff’ negotiations, most of that could be restored retroactively. What might be lost in the first quarter would mostly be restored in the second.

Even discounting an eventual deal and restoration of income to GDP in the first quarter, a $75 billion negative impact on GDP from going over a ‘fiscal cliff’ is negligible. There is no such thing as the ‘fiscal cliff’, in other words. There is a ‘Tax Cut Speed Bump’ at most.

It is far more likely that whatever deal is eventually negotiated between Obama and the House of Representatives’ ‘Boehner Boys’ will have a far more negative impact on the economy than the fiscal cliff of mostly Bush tax cuts expiration could ever have.

Not to mention the even more fundamental forces that constitute a drag on the US economy itself, from the rapid slowing of global manufacturing, trade and exports now continuing, to the refusal by big corporations to invest in the US, to the US banks refusing to lend to small businesses, to the steady decline in household consumption income for the 100 million households that constitute the middle and working class, to the growing likelihood of banking crises in Europe, growing problems in Japan’s economy, and so forth. The latter are the real threat to the US economy, not the fiscal cliff. What’s coming as a solution to the ‘fiscal cliff’, or what is best described as ‘Austerity American Style’ in 2013, is also (ironically) more a threat to the economy than the fiscal cliff. That is, the solution will prove decidedly worse than the problem itself.

In conclusion, there is no ‘fiscal cliff’ in reality—just a third derivative negative bump to the US economy in the worst case scenario.

So why all the media and political hype about the fiscal cliff? That’s how you get everyone to buy ‘Austerity American Style’ and convince them—as bad as it is—Austerity is better than the fiscal cliff that might have happened. That’s the only way they can cut social security, medicare, Medicaid, education, and all the rest $4 for every $1 they hike taxes on the wealthy and their corporations. That’s the only way they can clear the deck for historic cuts in corporate income taxes and a total pro-business revision of the entire tax code that is planned for later in 2013.

So politically there will eventually be no ‘fiscal cliff’. A deal will happen, after all the tough posturing is concluded. Economically there really is no ‘cliff’ just an economic speed bump, even should we go over it. But we won’t do that either. So watch the game play out, and then hold onto your wallets middle class and working class America.

Jack Rasmus
copyright December 2012

Jack is the author of the book, “Obama’s Economy: Recovery for the Few”, April 2012, and host of the weekly radio show, ‘Alternative Visions’, on the progressive radio network (PRN.FM). His blog is jackrasmus.com, website: http://www.kyklosproductions.com, and twitter handle #drjackrasmus where daily updates on the fiscal cliff negotiations are available.

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‘Fiscal Cliff–A Well Orchestrated Dance’

Posted in Uncategorized, tagged , , , , on December 18, 2012| 3 Comments »

FOLLOWING IS MY LATEST UPDATE AND ANALYSIS ON THE FISCAL CLIFF NEGOTIATIONS IN WASHINGTON. MOST RECENT EVENTS CONFIRM ONCE AGAIN MY PREDICTION OF NOVEMBER 20 (‘FISCAL CLIFF’-WHY A DEAL WILL HAPPEN THIS TIME’). OBAMA-BOEHNER ARE IN AGREEMENT ON TAXES, JUST GOING THROUGH THE PUBLIC MOTIONS TRYING TO LOOK TOUGH FOR THEIR AUDIENCES. ONCE TAX ISSUE IS RESOLVED, WATCH FOR BIG CUTS IN SOCIAL PROGRAMS TO SEAL THE DEAL. (Follow me daily on twitter for my updates, #drjackrasmus)

‘Fiscal Cliff–A Well Orchestrated Dance’ by Jack Rasmus, December 18, 2012

As the Democrats and Republicans continued their political theater this past week, coming closer step by step to an agreement on the so-called Fiscal Cliff (aka ‘Austerity American Style’), it has become increasingly clear that the key to a final agreement is how much and how to raise taxes. Given the offers and latest positions of Obama-Boehner in recent days, both are one, possibly two, steps at most away from a final agreement in principle on the tax issue. And once the tax side of the fiscal cliff debate is resolved, the spending cuts issue will quickly fall into place.

Since November 2010 and the publication of the Simpson-Bowles report, both sides have been always in agreement on the target of $4 trillion in deficit cuts. That number was confirmed in Obama’s budgets of the past two years, in Paul Ryan’s House budget proposals, in the aborted ‘grand bargain’ in the summer of 2011 between Boehner and Obama, and is the target once again, in the abrupt return to deficit cutting after the hiatus from deficit cutting during the 2012 election year. The contention has always been, given the $4 trillion target,  over how much tax increases vs. how much spending cuts; and,within the tax side of the equation, how much will the wealthiest 2% pay vs. how much the middle class will have to pay in a ‘broadened tax base’; while on the spending side, how much to cut military spending vs. how much to cut social programs, and social security-medicare-medicaid, in particular.

In a well orchestrated political dance, yesterday, Monday, December 17, Obama took the lead in the fiscal waltz and agreed to reduce the tax revenue mix a second time. After an initial offer of $1.6 trillion in tax revenue generation (tax hikes) two weeks ago, he reduced it to $1.4 trillion last week, and again, most recently, to $1.2 trillion. Boehner raised his offers for tax revenue, from an initial $800 billion to $1 trillion. A compromise at $1.1 trillion is just about what Simpson-Bowles recommended two years ago.

Boehner has also agreed in principle to some kind of increase in the top tax rate, while Obama has signaled he’s willing to give up on his $250,000 threshold, suggesting a $400,000, but indicating even this was not his last offer. Boehner offered $1 million. It’s not unlikely they’ll settle at around $600,000, which is approximately the average annual income of the wealthiest 1% households in the US.

So the parties, Boehner and Obama, are virtually agreed on the tax question. The only issue is how much tax revenue will be realized from tax rate increases vs. tax bracket manipulation. With just one or two offers from an understanding on the tax issue, the parties are already moving on to determining how much spending cuts will accompany the revenue hikes. If the final deficit reduction target is $4-$4.4 trillion over the coming decade, that means another roughly $3 trillion in spending cuts and/or tax hikes on the middle class will be necessary.

Evidence that Obama and the Democrats are about to make a significant offer in spending cuts is indicated by Obama’s meeting yesterday with Democratic House leader, Nancy Pelosi. They’re getting ready to up the ante in cuts in social programs in the next move or two. Since last week the parties’ respective positions, Republican and Democrat, spending cuts was an offer of $340 billion in Medicare-Medicaid cuts by Obama and a $600 billion proposal by Boehner. Watch for around $500 billion in Medicare spending reduction in a final deal—although not in the form of benefits cuts but in hikes in Part B and Part D deductibles and copays by retirees. So that’s a total of about $1.5 trillion in revenue from the wealthiest 1% plus Medicare over the coming decade.

Forget about the $500 billion in defense cuts called for in the sequestration deal of August 2011. That’s no longer an issue, and never was. If readers had listened close to Obama in the second presidential debate, when asked by the moderator what was his position on that issue, he briefly answered ‘that was Congress’ proposal, not mine’. The Congressional Budget Office estimates that even in the sequestration deal, only $24 billion in 2013 is scheduled in defense cuts. Look therefore for about half, or no more than $200 billion over ten years in military spending cuts. That will come from withdrawal from Afghanistan and Iraq and Army personnel downsizing. Military equipment expenditures will likely actually rise, however, after 2014 as the US military redeploys to the western pacific and Navy-Air Force spending takes precedence over Army expenditures. Defense equipment companies know the deal for them is already cut. They reportedly even have no ‘Plan B’, according to the Wall St. Journal, in the event that military spending is reduced per the sequestration agreement, which is now virtually out of the question. Unlike the reduction of the cuts in military spending by half in a Fiscal Cliff agreement, don’t expect the other $500 billion in the 2011 sequestered cuts social programs to be similarly reduced by half.

Adding up the likely amounts in a final Fiscal Cliff deal, there’s the $1 trillion in tax revenue generation, the $500 billion Medicare spending cuts, about $250 billion estimate in military spending reduction (mostly by attrition), and the roughly $500 billion in Education and other cuts scheduled since August 2011. The leaves $1.5-$2 trillion more in tax hikes and spending cuts to achieve the $4 trillion target.

That remaining amount will likely come from a ‘broadening the tax base’—i.e. the code word for cutting tax deductions, credits, exemptions, etc., now enjoyed by the middle class. That means those with annual family incomes ranging from $118,000 to the $400,000 recently offered by Obama. Expect limits on their mortgage deductions, state-local tax deductions, charitable and medical insurance deductions, education credits, etc. over the coming decade. If around $50 billion a year, ‘broadening the tax base’ will produce another $500 billion over the coming decade. Elimination of the 2% payroll tax cut will mean another $900 billion to a $1 trillion over the coming decade.

We’re now at a total of about $3.75 trillion in deficit reduction, and just a step away from the $4 trillion target. Apart from savings from interest on the federal debt as a result of the deficit reduction, and assumed tax revenue from economic recovery (which may not happen), the rest could easily come from social security, in the form of reducing the cost of living formula adjustments, raising the retirement age toward the end of the ten years, and reducing social security disability eligibility—all of which are proposals of the Republicans. If House Democrats won’t agree to the social security cuts, then additional cuts in Medicaid at about $10-20 billion a year closes much of the remaining $250 billion gap. And there’s the $4 trillion.

What we’re witnessing this past week, and the week to come, are the chief negotiators (Obama and Boehner) going through the motions publicly to appear as if they’re driving a hard bargain, in order to placate their respective bases in Congress. However, the deal is already done in principle. The dance is for the audience.

Four weeks ago, immediately following the November 6 elections, this writer publicly predicted a deal would happen. That was because major corporate CEOs were now aligning strongly behind Obama. Their joint pressure, it was predicted, would result in splitting the Republican ranks, with the Republican Senate and major corporate campaign donors putting pressure on the House radicals. All that was needed was a switch in 25 votes in the House to seal a deal. A threat of withholding future corporate campaign donations would likely sufficient to buy 25 votes in the House on the Republican side, it was argued. Obama has been meeting the past two weeks with groups of Corporate CEOs at minimum twice and three times a week. Key CEOs have been playing lobbying middlemen between the White House and the Congress—and especially the House of Representatives—now for several weeks. This Corporate CEO factor and direct involvement is a new element in the equation absent in 2011 deficit debates and reductions.

So why are Corporate CEOs so aligned with Obama this time around? Because a deficit reduction deal is a prerequisite for what they really want—a cut in the corporate tax rate, understandings on non-enforcement of the foreign profits tax, and further incentives—all of which Obama (and Romney) promised in the recent elections. Obama is on record during the elections, and well before, in favor of cutting the top corporate tax rate from 35% to 28%–i.e. where it was during the Reagan period. The idea, in other words, is to raise the rate on the personal income tax a couple percent, and later cut the corporate rate by 7% in the summer 2013 as part of a major revision of the tax code.

But major corporate tax cuts cannot happen in the current negotiations. It would look as if medicare-social security were being cut, and middle class taxes raised, in order to fund big corporate tax cuts. Moreover, cutting the corporate tax rate to 28% cannot be part of the current negotiations and still get the $4 trillion in total deficit reduction. So the corporate tax cuts will come in a subsequent phase later in 2013. And when that second phase happens, one can expect another round of cuts in Medicare and Social Security as part of that subsequent deal as well.

Whether taking place in phase one, between now and March 27, or in a subsequent phase two, in the coming Fiscal Cliff deal both the revenue hikes and spending cuts will be mostly ‘backloaded’. They will not take full effect in 2013 or even equally across the decade. Most will begin to have their greatest impact in 2014 or even in 2015 and beyond.
In terms of time lines, January 1 is not the real deadline date despite all the press hype. Cuts and tax hikes can occur after and made retroactive to January 1, 2013. The real deadline, if any, is March 27, 2013. That’s when the federal government runs out of money. A deal could be reached in key principles, if not in detail, before January 1 and more formally concluded after January 1. However, it will then be followed by a second phase deal later in 2013 in the form of a major tax code revision, which will include further spending cuts.

So sit back and watch Boehner and Obama stumble around the dance floor for another week. Most of the main elements of an agreement are already in place. Negotiations between Boehner and Obama are not the real problem. Not even Congress. The Senate has already agreed and is waiting in the wings to sign off on a deal quickly. Even Senate radicals like Coburn and Corker are fully on board.

Getting the Teapublicans in the House to buy entitlement cuts in exchange for token tax hikes on the wealthy, and getting Pelosi to corral liberal Democrats in the House to agree to Medicare-Medicaid-Social Security cuts are the real remaining negotiations.

The glue is CEOs promising some big election contributions in 2014—or the withdrawal of the same—or the withdrawal of the same. And it probably won’t take much to buy the necessary votes—from either side of the aisle in the House.
Jack Rasmus, December 17, 2012

Jack is the author of book “Obama’s Economy: Recovery for the Few”, 2012, and host of the weekly radio show, ‘Alternative Visions’, on the progressive radio network, PRN.FM. His website is http://www.kyklosproductions.com, his blog, jackrasmus.com, and twitter handle #drjackrasmus.

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