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Posts Tagged ‘Debt Ceiling’

History repeats itself, but always in combinations of past events.

What today’s debt-ceiling/government shutdown dual crisis represents is a telescoping, within a time period of two months, of similar events that rolled out over an extended two year period in 2011-2012. What took two years to conclude previously, between 2011-2012, in a prior debt ceiling + deficit cutting settlement is now happening in the course of two months, September-October 2013, in today’s repeat of debt ceiling + government budget fight.

Today’s debt-ceiling 2.0 + refusal to approve a government budget October 2013 is similar to events of 2011-2012—i.e. the debt ceiling fiasco of August 2011 and the Fiscal Cliff ‘crisis’ of December 2012, consisting of trillions of dollars of sequestered spending cuts and Bush tax cut extensions.

The prediction here is that, in the settlement to the current crisis coming in the next few days, or week or so at the most, the final terms and details will likely prove remarkably similar to that concluded in August 2011 and December 2012: Massive social spending cuts combined with tax cuts for the few, in exchange for an extension of the debt ceiling and a political ‘armistice’ for Obama and Democrats until after the next Congressional elections.

The differences between the 2011-2012 and today’s 2013 settlement will be the particular focus of tax cuts and spending cuts in exchange for extending the debt ceiling.

In August 2011 the settlement was debt ceiling extension in exchange for an immediate $1 trillion in social program only spending cuts, plus another $1.2 trillion in the so-called ‘sequestered’ spending taking effect January 1, 2013. That was more than $2.2 trillion—or more than twice Obama’s original 2009 stimulus spending of $787 billion. Overlaid upon the August 2011 deal was the permanent extension of $4 trillion of the $4.6 trillion Bush tax cuts that also took effect January 1, 2013. Together the two—sequestered cuts and Bush tax cuts extension—were referred to as the ‘fiscal cliff’.

What the Republicans and its House Teaparty faction together got out of the 2011-2012 debt ceiling plus fiscal cliff settlements was a total of $6.2 trillion in spending cuts and Bush tax cuts (80% of which benefited wealthy households and investors)—$2.2 trillion in spending and another $4 trillion in tax cuts.

What Obama and the Democrats got out of the 2011-2012 deal was a politically convenient agreement in August 2011 from the Republicans not to raise the debt ceiling issue again until after the November 2012 national elections. What Obama and Democrats didn’t get was any tax hikes on the rich in August 2011 they had said was a deal breaker.

What Obama got from the December 2012 fiscal cliff part of the settlement was mere $60 billion a year in tax hikes on wealthy investors. (Actually, it was not even $60 billion, as the fiscal cliff deal included a generous liberalization of the inheritance tax for multimillionaire households, a liberalization of the Alternative Minimum Tax for them, and the ‘super-sweetener’ of the remaining $4 trillion in tax cuts now made permanent forever). Obama and democrats also failed to achieve any reduction in the $1.2 trillion sequestered spending cuts that they had expected, not believing the Republicans would allow those cuts, involving defense spending as well as social programs, to take effect. But those sequestered cuts began taking effect in March 2013. Now, post-October 2013, they are beginning to have their full negative impact on the economy.

No wonder the Teapublican faction in the Republican party eventually went along with both the 2011 debt ceiling and 2012 fiscal cliff deals. They got a big bite of the apple, and a chance for another down the road today. The Obama-Democrat ‘cave-ins’ on both the August 2011 debt ceiling agreement and subsequent fiscal cliff no doubt emboldened the faction to take the even more aggressive stance they have recently assumed in today’s crisis.

Notice in the foregoing remarks there is no reference to cutting Obamacare as key to the settlement deal today. It never was part of any deal. Last August 2013 the Republican strategy was to use the debt ceiling extension as a hammer to further pound out social spending, especially entitlements like social security and medicare, cuts that were left out of the 2011-2012 spending reductions deal of $2.2 trillion. Another difference in today’s repeat of the debt-ceiling debacle will be that the corresponding tax cuts eventually agreed to probably will focus on corporate taxes instead of individual wealthy taxes—the latter now being set up in the tax code overhaul bill moving rapidly through Congress. That tax cut part of today’s deal may also not be made public in an eventual deal, but will be agreed to in principle by the parties for when the legislation on corporate tax cuts (keyword: Tax Code Overhaul) reaches the House and Senate for a vote.

That 2011-2012 Republican-Teapublican strategy resurrected again by the Republican leadership this past August 2013 was essentially the same as its prior 2011-2012 strategy. What happened was the Teapublican faction of the party intervened in September 2013 and injected its pet provision of defunding Obamacare into the mix, thereby upsetting the timetable and the process for another second debt-ceiling/spending reduction deal this second time around. Negotiations since September may therefore be viewed as attempts by the Republican, Obama and Democrat leadership—with massive corporate lobbying and pressure in the background—trying to get the negotiations back on track with the original process and objective of debt ceiling extension for entitlement cuts plus corporate tax reduction.

The recent Teaparty grandstanding on Obamacare has been for the media and public, with the goal of enhancing their 2014 midterm election results within the Republican party as well as in general. They have now accomplished this. The Obamacare issue was never a serious possibility. They will now retreat.

In the past week a shift back to the original strategy and process—of trading off debt ceiling extension for spending (entitlement) cuts and taxes (cuts for corporate America) has begun to emerge. A weekend ago Boehner signaled such in his round of TV press show appearances. Teapublican presidential candidate, Paul Ryan, trying to keep a foot in both Teapublican and Republican leadership camps, followed Boehner with a similar focus of ‘lets focus more on general spending and entitlement cuts’ in a lengthy Wall St. Journal editorial. Even Corporate radicals like the billionaire Koch brothers, supporters and funders of various radical right causes, published a widespread commentary that Obamacare was not the real issue—that spending and tax cuts for corporations were the key issue.

And today, Senators of both parties are trotting out to give press interviews to the same effect. As conservative Republican Senator, Bob Corker of Tennessee, declared today to a Bloomberg interview: “for the past two months we’ve been focused on the wrong subject”. That correct focus “is spending cuts”.

On Monday, October 14, the real bargaining and ‘end-game’ to the current crisis began. Obama held closed door meetings with Boehner and Senate Republican leader, Mitch McConnell, and with Senate-House Democrat leaders, Harry Reid and Nancy Pelosi. Now the real deal details and terms will be hammered out. It will, this writer predicts, result in more spending cuts, especially social security, medicare and Medicaid, as well as an understanding and consensus to cut corporate taxes when the tax code overhaul bill comes to votes in Congress and for Obama’s signature.

One should not forget that Obama has been, and continues to be, a strong advocate of cutting the corporate tax rate from 35% to 28% and providing ‘relief’ for multinational corporations’ tax rates. Obama has also already indicated cuts of $630 billion in social security and medicare in his 2014 budget. This is the starting point for the ‘original process’ negotiations that have been temporarily derailed by Teapublican grandstanding, now coming to an end.

The deal may include some token concessions to Teapublicans in the House as well. Perhaps the already offered repeal of the medical device tax. Perhaps some further exemptions to Obamacare for business and wealthy individuals. A long list of such concessions to exempting and postponing parts of Obamacare have already been unilaterally made by Obama since the beginning of this year. Difficulties in the rollout of Obamacare may encourage him to agree to more. There may even be a short delay of a few months in the implementation deadline for the Obamacare act.

But the final deal to be struck in 2013 will appear more like the prior 2011-2012 deal of spending cuts and tax largesse for the wealthy. This time seniors and retirees will be the primary target of the spending cuts, while corporations get the tax cuts instead of wealthy individuals.

As this writer wrote in late 2012 when the fiscal cliff fears were being whipped up by both parties and the press, what was going on at the time was a ‘Well Orchestrated Dance’ between Obama and the Republicans. (see ‘Fiscal Cliff: A Well-Orchestrated Dance’, December 18, 2012, at the blog jackrasmus.com). A deal was inevitable by year end 2012, it was predicted.

Today the leadership of the two wings of the single corporate party have entered into final negotiations again, after a brief interruption by the Teapublicans ‘cutting into’ their cozy dance. The latter are about to leave the dance floor, however, and the well orchestrated dance now begins anew.

Dr. Jack Rasmus
Monday, October 14, 2013

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

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The economic ignorance of the Teapublican faction of the Republican party in the US House and Senate is perhaps exceeded only by the similar ignorance of its economic advisers.

Appearing in the public press in recent days is the latest ‘brilliant’ Teapublican view that a default by the US government on paying interest on its debt would not have a negative impact on the US or global economy.

Both the US and global economies are already slowing noticeably, with the Federal Reserve in the US continuing to downgrade and lower its estimates of future US growth, and the IMF doing the same for growth rates in China and the rest of the world. The Teapublicans claim a US debt default would not impact these already negative trends.

While it is true that the US government will not completely run out of money with which to pay its debts on October 17, 2013, as Treasury Secretary, Jack Lew, has publicly stated, it is equally true that it will definitely do so sometime between October 24 and early November. Thereafter, some funds will continue to come into the government, but not nearly enough to pay all its bills. That will force the Obama administration to choose between what it will pay: either bondholders who own US debt or grandma and grandpa on social security. Teapublicans no doubt want to force Obama to make that ‘Hobsons’ Choice’ (i.e. damned if you do and damned if you don’t). Teapublicans will argue he should pay the bondholders first, and forego paying social security. It’s their way to start cutting social security before they even negotiate an official reduction in it with Obama.

To quote one Teapartyer’s statement today, Republican Representative, Joe Barton, of Texas: “We have more than enough cash flow to pay interest on the public debt, so there is no way we’re gong to default on the public debt unless the president of the United States intentionally does so”.

Such statements by lesser known Teapublicans were followed up today in the business press with an article by Teapublican notable, Paul Ryan. Ryan made it clear that the focus of the debt ceiling discussion was to provoke further concessions by Obama on Social Security-Medicare cuts. US House radicals thus are attempting to put Obama in a negotiating box: either he agree to cut Obamacare or to cut Social Security-Medicare.
What the Teapublican faction in all their economic ignorance don’t understand, however, is that the psychological effects of a default—or even a near default—on the US and global economy will prove significant. One does not have to wait for a complete default for that to happen.

What then are some of the possible impacts?

First is the prospect of rising interest rates. Interest rates have already begun to rise, starting on a base that has already risen since the US Federal Reserve’s bungled attempt to signal over the past summer its intent to begin reducing (tapering) its Quantitative Easing (QE) $85 billion a month liquidity injections. That Fed ‘faux pas’ has already driven up long term rates by more than 1%, thereby causing an abrupt halt to a very timid US housing recovery earlier this year. In the past month banks and mortgage servicing companies have already announced thousands of layoffs in their mortgage departments, signaling the virtual end of that housing recovery. Further interest rate hikes, short and long term, on top of the Fed’s recent bungling—which will now certainly occur as the default approaches—will all but ensure the end of any housing recovery in the US.

Short term rate increases will most likely accelerate further throughout the month of October. That includes, in particular, Treasury bill rates which will in turn impact other rates. ‘Other rates’ include the critically important ‘Repo Market’ rates. Destabilizing the repo market is a dangerous game. It is likely the locus for the next financial crash, the analog to the subprime market that was the center of the last financial crash. Teapublicans are thus playing a dangerous game, one that may well in a worst case scenario precipitate another financial instability event on the scale of 2008.

Rising interest rates also mean the end of the latest stock price and junk bond booms. In itself, that doesn’t affect average folks much. But the psychological impact of a rapid decline in asset prices can, and does, spill over to consumer and business spending. That leads to layoffs, in a US job market that is, at best, producing only part time, temp, and low paid jobs as it is.

Rising rates and an even weaker job market in November-December will translate into slowing consumption, which is already showing signs of weakness in August-September. Retail sales in general will weaken still further as a consequence of the debt ceiling default, as will an already ‘long in the tooth’ auto sales cycle.

The negative impact of debt default on consumption is already becoming evident in recent weeks. A Gallup Poll in recent days showed consumer confidence dropping precipitously. While some argue confidence surveys are typically volatile and unreliable as indicators of consumer spending, that is not as true for abrupt and significant movements in confidence indicators. That may now be happening, as the public begins to focus on the dual crises events.

The recent Gallup poll in question fell to -35 from a prior -15. This compares to -56 during the August 2011 worst period of that prior debt ceiling debacle. During the worst period of October 2008 the index was -66. Already falling significantly early in the current crisis, one can estimate where the -35 current poll will be by October 17-24 should the crisis not be resolved by then. We will almost certainly be in the August 2011 territory, when the third quarter US GDP nearly went negative (and did so if the GDP deflator was substituted with the CPI index for that quarter).

Globally, the approaching debt ceiling crisis has already provoked widespread public responses by foreign governments, warning a potential default by the US would have dire consequences for US debt holdings and future purchases. China, Japan, and the IMF have all raised warnings in recent days. If default occurs, then US bond rates will rise even further and faster than at present, raising a real question whether they will continue to purchase US Treasury debt when the price of their holdings are declining significantly in the wake of a default.

There are also important implications of a default (or even near default) for the Eurozone’s own current economic recovery and its still very fragile banking system.

Yet another negative impact globally will be a decline in Euro exports. A default situation would result in the US currency losing value, causing a further rise in the already fast appreciating Euro currency. That trend would challenge German and Euro export growth and therefore that region’s tepid 0.3% last quarter’s recovery.

Another problem potentially to grow worse is the Euro banking system. The Eurozone’s version of QE-the LTRO liquidity injection policy of the past year amounting to more than $1.5 trillion-will soon need another LTRO II injection by the European Central Bank in a matter of months. In addition, more than $1 trillion of the LTRO I will need to be refinanced soon. Nearly all the major banks in Italy, for example, have yet to repay anything of their share of the LTRO $1.5 trillion and will need further liquidity in coming months. Rising interest rates from a debt default in the US will spill over to Europe, thus raising the costs of LTRO II, as well as the financing of much of LTRO I. That will cause further fragility in the Euro banking system and economic recovery there, especially for the highly fragile Italian banks.

For Japan, its recent export gains would also slow, at a time when it has decided to raise taxes while suspending structural economic reforms.
Currency volatility in emerging markets would also intensify from a debt default in the US, likely causing a retreat once again in real growth in those markets, just a few months after their recent ‘stop-go’ provoked by US Fed QE policy uncertainties this past summer.

Throughout the past 18 months, this writer has forewarned that a fragile US economic and global recovery-not nearly as robust as some maintain-is susceptible to a ‘double dip’ recession in 2013-14 should one or more of the following negative ‘tail events’ occur: first, a renewed banking crisis in the Eurozone or elsewhere; second, significant further deficit cutting in the US; and thirdly a continued drift upward in US long term interest rates as a consequence of QE tapering or other events. While it appears the Euro banking crisis has temporarily stabilized—except for Italian banks perhaps—the deficit cutting and interest rate trajectory in the US are very real and serious trends that may yet precipitate a descent into a double dip condition in the US economy.

And if the Teapublican faction in the US House of Representatives managers to prevent a resolution of the debt ceiling issue into the latter part of October, then the economic consequences for both the US and global economies will be severe, and may even prove sufficient to precipitate a double dip recession in the US.

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RADIO SHOW RECORDING

Alternative Visions – The US Fiscal-Monetary Crisis Intensifies – 10/02/13

Oct 2nd, 2013 by progressiveradionetwork

Dr. Jack Rasmus provides his analysis on the current government shutdown and the repeat of the debt ceiling crisis coming by mid-October and their possible negative impacts on the economy. Rasmus then considers the ‘other policy crisis’–i.e. the US Federal Reserve’s QE and zero interest rate monetary policies. He explains why US monetary policy has also entered a crisis stage in recent months–i.e. proving increasingly ineffective at stimulating the real economy while simultaneously generating financial bubbles. QE and austerity policies elsewhere in the world are discussed, with similar counterproductive effects on the real economy. Rasmus concludes the US and global economy is now entering a period of growing ineffectiveness of traditional fiscal-monetary policies generating a sustained economic recovery, at a time during which the US and global economies continue to slow or stagnate long term.

LISTEN TO THE FULL 56MIN. SHOW ON THE ‘ALTERNATIVE VISIONS’ WEBSITE AT:

http://prn.fm/category/archives/alternative-visions/

OR ALSO AT:

http://alternativevisions.podbean.com/

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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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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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