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comment: THE FOLLOWING ARTICLE WAS WRITTEN TWO DAYS PRIOR TO PRESIDENT OBAMA’S ANNOUNCEMENT OF HIS 2014 BUDGET, AND PREDICTED MOSTLY WHAT HE PROPOSED RE. CUTS IN SOCIAL SECURITY-MEDICARE AND RESTORATION OF CUTS IN DEFENSE SPENDING. THE ARTICLE SUMMARIZES THE HISTORY OF DEFICIT CUTTING FROM OBAMA’S ORIGINAL PROPOSAL OF A ‘GRAND BARGAIN’ IN SUMMER 2011 TO HIS CURRENT ‘COLLUSION’ WITH HOUSE REPUBLICATIONS TO CUT SOCIAL SECURITY AND RESTORE SEQUESTERED DEFENSE SPENDING CUTS.

ON APRIL 10, PRESIDENT Obama released his formal budget for Fiscal 2014 beginning this October. Liberals should not act shocked and surprised: Obama’s repeated offers to cut Social Security cost-of-living adjustments, and other yet undefined Medicare measures, are a continuation of his practice and approach for the past two years.

The budget will usher in the final stage of negotiations over the proposed deficit cuts — Austerity American Style — that began with the recommendations of Obama’s Deficit Cutting Commission, referred to as the Simpson-Bowles report, that was made public in November 2010.

The Simpson-Bowles Commission — chaired by arch-conservative retired Senator Alan Simpson, and Bill Clinton’s chief of staff, now investment banker Erskine Bowles — proposed an approximate $4 trillion cut in U.S. deficits and debt for the subsequent decade. Their report has been the ‘template’ for deficit cutting negotiations ever since.

Issued around the time the Teapublicans took over the U.S. House of Representatives in late 2010, the report was offered by the Obama administration as the basis for negotiating a “grand bargain” of $4 trillion in deficit cuts in summer of 2011. The $4 trillion target was agreed by virtually all parties in Congress and the administration at that time — and ever since. The only difference was, and remains, “the mix:” how much in spending cuts vs. how much tax revenue hikes; how much to cut defense spending vs. how much social programs; and how much to tax the wealthiest 2% vs. the middle class.

In June 2011, Vice-President Biden was assigned by Obama to begin negotiating the basis for the “grand bargain.” He and House Speaker John Boehner attempted and failed to do so, even though Biden had offered a package of 87% spending cuts to only 13% tax hikes — even more onerous than Simpson-Bowles’ recommended 75%-25% mix.

Obama then took over negotiations with Boehner directly in July 2011. He unilaterally — i.e. with no counter concession from Boehner — offered to cut Social Security and Medicare by $700 billion to entice Boehner and House Teapublicans into a deal. Offering big cuts in Social Security-Medicare has thus been a bargaining tactic by Obama, the “carrot” dangled to the Teapublicans to entice them to agree to a $4 trillion Grand Bargain from the very beginning.

Boehner and the Teapublicans did not bite on Obama’s grand bargain offer in July 2011, however. They held firm and demanded an “all spending cuts” agreement in exchange for raising the federal government the debt ceiling in August 2011. They got their way. Obama and the Democrats caved in on all his demands by August for some tax revenue hikes. All they got from the August 2011 debt ceiling deal was agreement from the Teapublicans not to raise the debt ceiling issue again until after the November 2012 elections. Very convenient for the president and the Democrats; not so for the rest of us since the August deal involved $1 trillion in immediate social spending only cuts, mostly in public education, with another $1.2 trillion in spending only cuts — the “sequester cuts” — that would take effect on January 1, 2013.
As part of that August 2011 $2.2 trillion deal, Congress was given the option to cut even more than the $1.2 trillion ‘sequester’ part of the total. A special committee of Congress (the so- called Supercommittee of House and Senate leaders) was established and given the option to cut more than the $1.2 trillion by year end 2011. The Supercommittee, however, not surprisingly decided to “kick the can down the road,” shelvingf all deficit cutting during the 2012 election year.
Instead, in 2012 both parties and their candidates talked about economic programs neither had any intention of introducing. Regardless of who won the November 2012 election, the Simpson- Bowles “template” was waiting in the desk top drawer, to be resurrected after November 2012. And that’s just what happened: Within days following the election, Obama immediately offered $340 billion in “entitlement” program cuts in his attempt once again to resurrect the grand bargain negotiations.

Phony Fiscal Cliff: It’s the Tax Cuts, Stupid!

But the Teapublicans and big corporate interests, in the form of the Business Roundtable in particular — the biggest and most influence U.S. corporate lobbying group, composed of CEOs of the largest corporations — were neither interested in a “grand bargain” at that time. The Business Roundtable preferred to focus initially only on the Bush tax cuts that were also scheduled to expire January 1 — not the “sequestered” $1.2 trillion in spending cuts also scheduled to take effect on January 1, 2013.

The Bush tax cuts — more than 80% accruing to wealthy households and investors — were far more important to them than the spending cuts. Their primary goal has always been to protect and extend the Bush tax cuts; cutting spending and deficits has always been secondary, and the cuts should be at the expense of social programs.

The Bush tax cuts amounted to $4.6 trillion for the coming decade, according to the Congressional Budget Office. The CBO’s projected deficits for the coming decade, should the Bush tax cuts be totally repealed, amounted to only $2.5 trillion. Extending the tax cuts meant the projected deficit would amount to around $7 trillion. To borrow the popular phrase: It’s not about deficits; it’s the Bush tax cuts, stupid!

Following last November 2012’s elections, the Teapublicans initially wanted all the Bush cuts extended permanently, but the Business Roundtable wanted some kind of a settlement on the tax issue first. Without that happening, the Roundtable’s even bigger objective of a major revision of the entire tax code, including cuts in the top rate of corporate taxes from 35% to 26%, already working its way through Congress, could not proceed. To preserve as much of the Bush tax cuts as possible the issue had to be decoupled from the sequester. Furthermore, the Bush tax cuts had to be resolved before the tax code could be revised and corporate tax rates reduced.
Following the November elections, the Roundtable therefore blocked with Obama and against the House Teapublicans. To get the public on board, the media spin given to the Bush tax cuts extension was labeled the “Fiscal Cliff.” Although the media included the sequestered spending cuts as part of the “Fiscal Cliff,” that issue was separated tactically by both the Roundtable and Obama weeks before January 1, 2013.

With the assistance of House Speaker Boehner, Obama plus the Roundtable prevailed over the Teapublicans. It was touch and go, with Teapublican leaders like Ryan and Cantor wavering and striking a neutral pose to protect their ultra-conservative credentials. But no doubt in the end, campaign finance spending by the Roundtable big corporations prevailed and the Obama- Roundtable-Boehner nexus were able to swing a sufficient number of House Republicans to get a “tax deal” on January 1, 2013.

And how sweet a deal it was. Only $60 billion a year of the deficit was reduced, impacting less than 0.7% of the wealthiest households — far fewer than Obama’s promised 2%. Moreover, as part of the deal, the Alternative Minimum Tax was permanently repealed (amounting to about $100 billion a year tax cut benefit to the wealthy), the Inheritance Tax was cut even more generously than under Bush, and all the other Bush tax cuts were made permanent. No need to extend them ever again.

The total cost in revenue loss and therefore deficit increase that remained was $4 trillion over the coming decade. Ironically, that’s just about what the Simpson-Bowles commission recommended in deficit reduction. The deficit for the coming decade was thus raised from $2.5 trillion to now about $7 trillion as result of the Bush tax cut deal — billed as “avoiding the Fiscal Cliff” — of January 1, 2013. Now the attack on spending could begin in earnest once again, and focusing on entitlements in particular.

As part of the January 1 deal, the sequestered additional $1.2 trillion in spending cuts were postponed for two more months, until March 1, 2013. In signing the deal on January 2, Obama declared that more tax revenue hikes would have to be negotiated in future deals. No doubt he and Democrats believed that the March 1 date would put pressure on the Teapublicans to compromise on more tax hikes in exchange for avoiding the approximate $500 billion in defense spending cuts that were part of the sequestered $1.2 trillion going into effect on March 1.

There was also the March 27, 2013 date when the Federal government would run out of money to pay its bills. Surely, the Teapublicans didn’t want to get blamed again for that fiasco, as they had been in the past? And thereafter there was the May 18, 2013 revisiting of the debt ceiling extension. Obama undoubtedly believed that somewhere along this line the Republicans would give him the token tax hikes he needed as cover to agree to his massive cuts in Social Security, Medicare and Medicaid he was always willing to make as part of a Grand Bargain.

But the Teapublicans again called his bluff. They let the sequestered spending cuts, including the defense cuts, go into effect on March 1, 2013. They then agreed to fund the government past March 27 and suggested as well the debt ceiling would not be an issue. This left Obama with no bargaining leverage for insisting on tax revenue hikes. His answer has been his increasingly desperate re-offering of big Social Security and Medicare cuts in recent weeks, some of which appear in part in his April 10 budget. That will serve as a base from which he will then agree to even further cuts in subsequent negotiations with Teapublicans in the House (and Roundtable CEOs in the background).

Some Key Strategic Questions

The question is why have the Teapublicans agreed to the token January 1 tax hikes? Why did they agree to allow the $1.2 trillion sequestered cuts, including defense spending, go into effect? Why did they not engage in brinksmanship again on March 1 or March 27, unlike wqhat they did in August 2011? And why will they not go to the brink again on the debt ceiling issue when it arises once more in May?

The answer to the first question is that they got a tax deal they simply couldn’t refuse on January 1, and one which their big corporate campaign benefactors, the Business Roundtable, wanted. After having blocked with Obama prior to the January 1 deal, however, the Roundtable has since shifted gears and adopted in total the Teapublicans’ position on subsequent spending cuts.
In February 2013, the Roundtable came out with its position paper on the matter of sequestered cuts and entitlement spending. It proposed to cut the Social Security COLA (cost of living adjustment), introduce a means test for Medicare, raise the eligibility age for both Medicare AND social security to 70, and convert Medicare into a voucher system in 2022. That’s exactly the Teapublican-Paul Ryan program.

With big corporate interests now in their corner firmly with regard to entitlement cuts as the primary focus of deficit cutting, why should the Teapublicans agree to any further tax hikes on the rich? And with the Roundtable and CEOs now firmly on their side, and the tax cuts successfully decoupled from the spending cuts, why should the Teapublicans go to the brink over shutting down the government on March 27? By March 1 they were already almost three- fourths of the way to the $4 trillion deficit target, with a total of $2.8 trillion in spending cuts and token tax hikes!
By letting the March 1 sequestered cuts take effect, the Teapublicans in effect did to Obama on the topic of defense spending what Obama had the opportunity – but didn‘t take — to do to them on the topic of Bush tax cuts on January 1. Obama could have let all the Bush tax cuts expire January 1, and then reintroduced middle class tax cuts only on January 2. That would have put the Teapublicans in the position of having to vote down middle class tax cuts. But he didn’t, and settled for the paltry 0.7% hike on taxes on the wealthy, some of which will undoubtedly be reversed again, buried deep in the legislation, when the major tax code negotiations conclude later this year.

The Teapublicans, by allowing the sequestered defense cuts to take effect on March 1, can also always reintroduce legislation piecemeal later this year to restore many of the defense cuts.
It’s not surprising that Republican Senator, Lindsey Graham, and others in Congress, in recent weeks have offered “deals” amounting to another $1.2 trillion in deficit reduction. That number is not coincidental, as $1.2 trillion is now the remaining “target” number . Graham’s proposal is for $600 billion in Social Security and Medicare cuts and another $600 billion in unspecified tax revenues.

So why should Teapublicans precipitate a political crisis over the March 1 or March 27 deadlines? Why should they repeat the debt ceiling crisis on May 18? They’re winning hands down.

What Obama May Propose

Having agreed to decouple tax cuts on January 1 and having been outmaneuvered on March 1 and March 27, and with Teapublicans signaling there will be no debt ceiling crisis in May, Obama has been stripped of all his leverage points in bargaining. Obama has left only the option to offer even more Social security, Medicare and Medicaid cuts. And throughout March he continued to do so, once again unilaterally — not just offering again to cut COLA adjustments for Social Security but suggesting his willingness to confront big cuts in the $600-$700 billion range for Medicare and Social Security and more for Medicaid.

But Obama has planned all along to cut Social Security and Medicare. He made that clear in his signing of the Bush tax cuts deal on January 2, 2013, during which he stated: “Medicare is the main cause of deficits.” Again in his February State of the Union address, the president publicly noted he “liked the Simpson-Bowles” recommendations concerning Medicare cuts.

And what are those recommendations? Instituting a new $550 a year deductible for Parts A and B of Medicare, and providing only 80% coverage for Part A instead of the current 100% (which would require another $150-$300 a month in private insurance to cover the remaining 20%, much like Part B now). That together amounts to another $195-$350 taken out of monthly Social Security checks, when the average for social security benefit payments is only $1100 a month today.

In other words, Medicare benefits will not be cut – but if seniors want to maintain current levels of benefits they’ll have to pay even more for them. Alternatively, they can choose to have fewer benefits and not pay more. It’s all about rationing health care, just as Obamacare for those under 65 is essentially about rationing — as were Bush’s proposals to expand health savings accounts (HSAs) and Bill Clinton’s health maintenance organization (HMOs) solution.

With only $1.2 more to cut in deficit spending to reach the Simpson-Bowles $4 trillion target, and Obama offering again his $600-$700 billion enticement in entitlement spending cuts, a deal is closer than ever before. Watch therefore for the full $600 billion in Social security, Medicare and Medicaid to take effect, the effective date of the changes to be backloaded in later years of the decade and certainly not before the 2014 midterm elections.

Expect defense spending cuts of no more than half the $500 billion proposed in the sequester, and nearly all of which will be from withdrawals from Afghanistan and Iraq operations, not from equipment spending. After 2014, most will be recouped as defense spending on naval and air force equipment and operations will ramp up for the shift of U.S. military focus to the Pacific. They Army brass haqs had its land wars in Asia; now it’s the turn of Navy and Air Force.

That leaves only a “token” tax revenue increase of about $200 billion over the coming decade, or a paltry $20 billion a year, which will come in difficult to estimate phony “loophole” closings. Major cuts in corporate taxes later in 2013 will not be factored into the Grand Bargain $4 trillion official calculations. In addition to big cuts in the top corporate tax rate, look as well for multinational corporations’ tax breaks and tax forgiveness on the $1.4 trillion they are presently sheltering in offshore subsidiaries. Of course, small-to-medium business will be thrown yet another tax cut bone to buy into the deal. In exchange, the middle class will pay more in terms of limits on deductions and exemptions.

Grand Collusion

In retrospect over the past three years, and especially since November 2012, the Grand Bargain looks less like a bargain and more like a “grand collusion” among the various parties — Teapublican, Big Corporate, Obama, and the pro-corporate wing of Democrats in Congress that have had a stranglehold on the Democratic party since the late 1980s.

This is not the Democratic Party of your grandfather that agreed to introduce Social Security in the 1930s and that proposed Medicare in the 1960s. This is the Democratic Party, and the Democratic President, that has agreed with Republicans and Corporate America to begin the repealing in stages of these very same programs — programs that are not “entitlements” but are in fact deferred wages earned by Americans over the decades, are now being “concession bargained” away.

Not content with concessions from those workers still in the labor force, capitalist policymakers are intent on concessions on social wages now coming due in the form of Social Security and Medicare benefits. It’s a charade from Simpson-Bowles to the present.

What should be done? Writing letters to Congress won’t change anything. What is now necessary is to begin the formation nationwide of Social Security-Medicare Defense Clubs. After all, that’s how Social Security started in the first place. Neither party proposed it in the 1930s initially.

In fact, Roosevelt initially publicly advocated that Social Security should not be part of the New Deal. A grassroots protest organized by the clubs forced him and the Democrats to reverse this position just before the midterm 1934 elections and support the proposal for Social Security. Now it’s time to reform the clubs to defend Social Security — and the first action should be to call for a million person march on Washington to reverse whatever cuts are surely ahead.

Jack is the author of Obama’s Economy: Recovery for the Few (2012), which provides a history of deficit cutting in the US and predictions of its impact. His blog is jackrasmus.com. For a video presentation on Social Security and Medicare given recently to the Progressive Democrats of America, see his website at http://kyklosproductions.com/video/130228_PDA-forum_rasmus/.

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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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While both candidates in the recent election period were busy telling voters about their fictional economic programs, the real economic program that would emerge post-election was being formulated and debated by the elites of both parties and their corporate benefactors. Behind the scenes for months before the election, heads and CEOs of multinational and other large corporations were developing their recommendations. As the election day approached, their voice became louder and then was carried across the media in the week following the national election. Wall St. Journal, New York Times, Barron’s, and all the other pro-corporate media outlets gave preferred coverage, as the real policymakers took increasing control of the policy agenda post election.

Two years ago almost to this date the Obama-appointed Simpson-Bowles Commission released its report calling for $4 trillion in deficit cuts. The midterm 2010 elections disrupted and delayed their implementation, as the right wing injected its ‘all or nothing’ proposals into the national political equation. The next year would bring incremental deficit cutting, culminating in the August 2011 ‘debt ceiling debacle’ deal, for which the House radicals got $2.2 trillion in all spending cuts and Obama and Democrats gave up all their primary proposals in exchange for merely an agreement of no more debt ceiling brinksmanship until after the 2012 elections. As part of the August debt ceiling deal, the notorious ‘Supercommittee’ was established and mandated to deliver its version of an additional $1.5 trillion of deficit cutting by year end 2011. All that was a year ago, November 2011. But like the ‘get me re-elected first’ politicians they are, the Supercommittee House and Senate politicians of both parties agreed to ‘kick the can down the road’ one more year. The US economy moved sideways in terms of recovery for yet another year, 2011-12. Then the recent national election. The election period fantasy economic proposals of both candidates. And now the re-emergence of the real economic program the media calls the ‘Fiscal Cliff’.

Prediction #1:
Unlike in November 2010 and again in November 2011, this time a deal will be concluded over the next 90 days between the Obama administration and the Republican dominated US House, teapublicans and all.

So why this time? The fundamental reason is that Corporate America has aligned itself firmly behind the Obama administration on the matter of the deficit. Together they will force the necessary votes from the US House to close a deal. But the even more fundamental question remains. Why are Corporate CEOs firmly on board this time, and on the side of Obama? As this writer wrote when the Supercommittee kicked the can down the road a year ago, “it’s the tax cuts, stupid”. Corporate CEOs are blocking with Obama because an integral part of the coming ‘fiscal cliff’ deal will include more major tax cuts for big corporations.
For some time now, Obama has been making it clear that he proposes to cut the top corporate tax rate from current 35% to 28%. His position on that issue was virtually the same as Romney’s during the election campaign. Obama’s positions on more largesse for corporate America also include major changes in the foreign profits tax. The media has not emphasized these long standing Obama positions, however, preferring to talk about token tax loophole closings like the oil company tax and use of jet aircraft. But that’s all diversion from the real issue of further big corporate tax cuts coming, especially for the Fortune 500 largest businesses and multinational corporations.

It should be noted that these further corporate tax breaks will come despite corporations now paying the lowest effective tax rates in more than a quarter century. Corporate taxes as a percent of corporate profits in the past two years have averaged about 12.4% of profits. That compares to the annual average of corporate taxes as a percent of profits from 1989 to 2007 of 24.7%. Moreover, large corporations are also currently sitting on more than $2.5 trillion in cash and multinationals more than $1 trillion. With all that excess cash, and record low taxation as a percent of profits, how are still more corporate tax cuts justified? They aren’t, but they will be part of the coming deal—and that’s the fundamental reason why Corporate America is blocking with Obama and they together will wring a deal from the now chastised US House radicals.
The following are additional predictions concerning the coming fiscal cliff deal—i.e. a term that will soon become clear really means ‘Austerity American Style’:

Prediction #2:
The coming deal will include deeper cuts in Medicare, Medicaid, Social Security, Education, Vets benefits, postal services, and social safety net programs like unemployment insurance and food stamps than have been publicly indicated so far.

In the summer of 2011, as Obama attempted to cut a ‘grand bargain’ with House leader Boehner, he offered to cut $700 billion in each, Medicare-Medicaid, and several hundred billion more in social security and other programs. When the deal fell through in July 2011, reference to the proposed cuts was quickly dropped by the press. On the Meet the Press NBC TV show this past November 2012, Washington Post editor Bob Woodward announced he had obtained a memo with the original offer by Obama to Boehner to make such cuts. Woodward was wrong in one aspect, though. It was no secret, even in 2011. Elements of the deal were revealed at the time in July 2011 piecemeal in the press, and were summarized in this writer’s April 2012 published book, “Obama’s Economy”, chapter 7, for those interested.

What form specifically then will the social spending cuts take in the coming ‘deal’? Medicare benefits won’t be reduced, but the out of pocket cost for parts B (doctor services) and D (drugs) will rise significantly. Obama will agree to partially let the states decide on Medicaid spending. Social security benefits will be cut by reducing the cost of living formula, raising the retirement age in steps to 69, and by slashing social security disability eligibility and thus benefit payments.

Prediction #3:
The Tax Base will be ‘broadened’. That coded phrase means cuts in provisions like the mortgage deduction and other exemptions and itemized deductions. The payroll tax cut will almost certainly be phased out. In short, the middle class will thus clearly pay more. The top personal income tax rate will be raised to 39.6% but so too will the threshold, from Obama’s pledge of $250k to $500,000 or even $1 million. Other personal income tax provisions on upper income groups will also be raised, but slowly in steps over decades to come.

Prediction #4:
Defense spending cuts indicated by the sequestered agreement of August 2011—some $500 billion scheduled to take effect starting January 2013—will be suspended. If readers listened closely to Obama during the debates, he clearly indicated the $500 billion in defense cuts was ‘Congress’s proposal, not mine’. So defense spending reduction will be less than half that previously projected, mostly realized by troop pullouts from Afghanistan, veterans benefits cuts, and attrition of old equipment purchase programs.

Prediction #5:
The ‘mix’ of spending cuts to tax hikes will be no less than 6 to 1—i.e. for every dollar in tax hikes there’ll be $6 in spending cuts. Once again, history is the best indication of the parties’ future positions. In June 2011, Vice-President Biden had offered Boehner a ‘mix’ of 87% in spending cuts and a token 13% in tax loophole closings. Obama reportedly offered Boehner the same. Simpson-Bowles called for 4 to 1. The end result will be somewhere between.

Prediction #6:
The deficit cuts will be largely ‘backloaded’, taking effect in 2014 or even starting 2015 and growing in magnitude annually thereafter. Politicians will thus avoid equal annual cuts out of fear the US economy remains fragile and chance of recession in 2013 remains a distinct possibility. The US economy has been growing at a 1.7% annual rate, slightly higher in the 3rd quarter of 2012, and will grow slightly less than the third in the current fourth quarter. Whatever the final ‘deal’ on the fiscal cliff, it will not be a stimulus program in any sense but an austerity program. At first ‘austerity-lite’, then an even more austere in out years. The only question is how austere, and how much austerity ‘up front’ as opposed to back loaded. The ‘loading’, will be in out years.

Prediction #7:
There are three scenarios: A partial deal before year end 2012 to accommodate the need to raise the debt ceiling limits again before year end, followed by another bigger deal within 90 days. It is possible a one-two year deal for 2013-14 will occur by February, followed by a bigger deal focusing on major changes in the US tax code in exchange for bigger cuts in social security, Medicare, Medicaid long term over the next two decades. Alternatively, scenarios 2 and 3 may be combined.

Whatever the case, a final deal will be concluded within 90 days. It will be marked by big corporate tax cuts, higher personal income taxes including middle class taxes, the end of the 2% payroll tax cut, bigger cuts than announced for Medicare-Medicaid-Social Security-Vets-Unemployment and Food Stamp benefits, and so on. The mix will be weighted heavily toward spending cuts, except for Defense spending, and most of the impact will be backloaded beyond 2013.

Whether front or backloaded, however, the impact on the US economy will not prove positive, at a time during which the economy will show further signs of weakening in 2013, and as the global economy continues to slow and the recessions in Europe, Japan, and elsewhere continue to deepen.

Jack Rasmus

Jack is the author of ‘Obama’s Economy: Recovery for the Few’, April 2012. He hosts the radio show, ‘Alternative Visions’, at PRN.FM. His blog is jackrasmus.com. Website: http://www.kyklosproductions.com, and twitters at #drjackrasmus.

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