Austerity American Style (Part 1)

Jack Rasmus

This is the first of a two-part essay. Jack Rasmus is the author of Obama’s Economy: Recovery for the Few (2012), which provides a history of deficit cutting in the United States 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 www.kyklosproductions.com/videos.html. His radio show “Alternative Visions” airs every Wednesday at 2pm on the Progressive Radio Network.

ATC is printing Austerity American Style by Jack Rasmus in two parts, in the July/August and September/October 2013 issues. However it is available as a pamphlet in this PDF.

ON APRIL 10, 2013, president Obama released his formal budget, ushering in what this writer predicts will be the final stage of recent negotiations involving deficit cuts — Austerity American Style — a process that began with Obama’s creation of a Deficit Cutting Commission in the summer of 2009.

Chaired by arch-conservative retired Senator Alan Simpson and Bill Clinton’s former chief of staff, now investment banker, Erskine Bowles, the Simpson-Bowles Commission issued its report and recommendations for deficit cutting in November 2010 immediately after the midterm Congressional elections, calling for cutting approximately $4.4 trillion from the U.S. deficit over the coming decade in a ‘mix’ of 25% tax hikes and 75% spending cuts. That report has served as the “template” for deficit cutting negotiations from 2010 to the present.

With Obama’s publication of his 2014 budget proposals, the current round of deficit cutting set in motion by Simpson-Bowles may be coming to a conclusion of sorts by this coming September. What might this final negotiations farce actually produce? The ultimate deal will be an agreement that is less a “grand bargain” and more accurately the result of a “grand collusion” between the Obama administration and House Republicans.

The key events driving a convergence of the two corporate parties included: Obama’s signing a token “Fiscal Cliff” tax agreement on January 1, 2013 raising taxes on only the wealthiest 0.7% households while effectively removing the Bush tax cuts from the deficit debate; the Obama administration and Republican radicals in the House jointly allowing the $1.2 trillion in ‘sequestered’ spending cuts to take effect on March 1; and then Obama’s unilateral offer to the Republicans, within days of the sequestered cuts taking effect, to cut an additional $630 billion from Social Security and Medicare.

Both sides cozily agreed not to confront each other in negotiations on March 27 and May 18, first when the government required additional funding and then when the debt ceiling deadline loomed once again. Not least is the event yet to occur: a major revision of the entire U.S. tax code — of a magnitude and scope not witnessed since 1969 or 1981 — now working its way on a fast track through the Tea Party-controlled House Ways and Means Committee.

The convergence of these five developments, all occurring since the November 2012 national election, signal a final deal on deficit reduction that’s virtually assured between Obama and House Republicans before year end 2013 — a deal likely mapped out initially in close collusion in the closing months of 2012.

“Let’s Do the Numbers”

As of May 2013, $2.8 trillion of the Simpson-Bowles originally recommended $4.4 trillion in deficit reductions had been achieved, including $1 trillion in social program spending cuts enacted as part of the August 2011 debt ceiling deal. Another $600 billion in “Fiscal Cliff” measures were implemented January 1, 2013, plus another $1.2 trillion in sequester cuts that went into effect March 1.

Obama’s unilateral offer to cut Social Security-Medicare by another $630 billion — now on the negotiating table as a minimum offer to the Republican radicals — brings the total deficit cuts to $3.43 trillion. That’s three-fourths of the way to the Simpson-Bowles initial target of $4.4 trillion, and represents a path to a 87%-13% “mix” in spending cuts vs. tax hikes — a “mix” even more extreme than the original Simpson-Bowles 75-25% blueprint.

Given that Obama and the House radicals are less than $1 trillion apart, it was not surprising that House Republicans reconsidered their brinksmanship strategy in recent months and agreed to continue to fund the federal government on March 27. It was equally unsurprising Republicans then further decided to avoid another “debt ceiling” showdown on May 18, 2013, when the federal government was supposed to reach its legal debt ceiling limit once again.

You could almost hear the House Tea Party radicals debate in their caucus last March 2013: “Why fight over a goal almost reached, and on terms already extremely generous to the wealthiest households? Millionaires and billionaires got to keep the lion’s share of their $4.6 trillion Bush tax cuts with the January 2013 fiscal cliff deal. Obama has already unilaterally offered to cut $630 billion from Social Security and Medicare. We can extract even more entitlement and spending cuts from the Obama administration in a final deal.

“Now that the individual income tax issue is resolved (Bush tax cuts made permanent), let’s focus on getting big tax cuts for our corporate and business friends. We’ll get him to reduce corporate tax rates from 35% to 28% or less, which he already promised publicly. We can lower taxes on multinational companies too, make other business tax cuts permanent, plus other measures — which will more than offset the loophole changes.”

Austerity as Multi-Act Farce

If the “grand bargain” has already been largely agreed to, why haven’t Obama and the House Republicans already agreed to the final deal? They’re waiting on the massive tax code change proposals to work their way through the House by late summer. At the center of those changes will be historic cuts in corporate taxes and a “broadening of the tax base” — a code phrase meaning more taxes on the middle class. That’s when the real horse trading will begin: big cuts in Social Security, Medicare, education and other social programs in exchange for a restoration of defense spending and an overhaul of the tax code.

Republicans will extract big cuts in exchange for the token loophole closings and a peace deal on debt ceiling brinksmanship at least beyond the 2014 midterms. Much of this tradeoff has already been agreed upon in principle between the two parties. But the final numbers must wait on the final “glue” of the deal — the tax code revisions.

The August 2011 debt ceiling deal was the first act in the farce. Both political parties then mutually agreed to table their ‘deficit dance’ during the 2012 election year, and talked about economic programs and proposals they had absolutely no intention of introducing once the elections were over. Just days after the November 2012 election, both sides immediately restarted the deficit cutting process under the catchphrase of the phony “fiscal cliff,” the second act in the farce.

Having cost the U.S. Treasury $3.4 trillion in the preceding decade, extending the Bush tax cuts from 2012 to 2022 would cost another $4.6 trillion, according to the Congressional Budget Office’s 2012 estimates. So the “fiscal cliff” deal agreed to by Obama sliced off a mere $0.6 trillion, allowing $4 trillion in tax cuts to continue (80% of which go to the wealthy and corporations).

Had all the Bush tax cuts been allowed to expire at year end 2012, the U.S. deficit for the next 10 years would have been only $2.3 trillion, or $230 billion a year — about a trillion dollars less each year than during 2009-2012 under Obama.

Require multinational corporations to pay taxes on their offshore cash hoard of $1.9 trillion, and place a 1% financial tax on common stock trades of more than 100 shares, and you have balanced budgets for the next decade and no need for any spending cuts. However, allowing the extension of $4 trillion of the $4.6 trillion Bush tax cuts in the “fiscal cliff” deal raises the deficit by more than $4 trillion more over the coming decade, to a total of around $7 trillion — just about what two decades of Bush tax cuts, from 2001 to 2022, will have cost.

A Review of Deficit Cutting, 2010-2012

To better understand how the past four years of deficit cutting negotiations between Obama and House Republicans represents a grand collusion, it is useful to recap briefly the milestones in the history of deficit (aka austerity) cutting. Within days after the Teapublicans took over the House of Representatives following the 2010 midterm elections, the Obama administration fully embraced the Simpson-Bowles Commission’s recommendations as the basis for negotiating a “grand bargain” in deficit reduction.

The Commission’s approximate $4.4 trillion total target was agreed to, moreover, by virtually all parties in Congress, including Tea Party radicals — and has been ever since. That includes House Tea Party annual budget proposals in 2011-12 by Paul Ryan, by the Gang of Six in the Senate, and by outsiders like ex Senators Domenici and former budget director Alice Rivlin, and all others.

It’s always been $4 trillion and change as the total deficit reduction target. The difference between Obama and Democrats on the one hand and Tea Party radicals on the other was the ‘mix’ between spending cuts and tax revenue hikes, between defense spending and social program costs; and between taxing the wealthiest 2% and 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 Boehner attempted and failed, even though Biden had offered a package of 87% spending cuts to only 13% tax hikes. The following month, Obama took over the negotiations with Boehner. With no counter concession from Boehner, the president offered to cut Social Security and Medicare by $700 billion. Indeed, from the very beginning offering big cuts in Social Security-Medicare has been the Obama bargaining tactic by Obama to entice the Teapublicans to a Grand Bargain.

But Boehner and the Teapublicans did not bite on Obama’s offer. Instead they demanded an “all spending cuts” agreement in exchange for raising the federal government debt ceiling in August 2011. They got their way: Obama and the Democrats caved in on all his demands for some tax revenue hikes. All they got from the August 2011 “debt ceiling deal” was an agreement from the Teapublicans not to raise the debt ceiling issue again until after the November 2012 elections.

This was 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 the “sequestered cuts” initially scheduled to take effect on January 1, 2013.

Regardless of who won the November 2012 election, the Simpson-Bowles template was waiting in the desk top drawer, to be resurfaced afterward. And that’s exactly what happened. Within days being re-elected, Obama immediately again offered $340 billion in “entitlement” program cuts in his attempt once again to resurrect the grand bargain negotiations.

 But the Teapublicans and big corporate interests, in the form of the Business Roundtable in particular (the biggest and most influence corporate lobbying group composed of CEOs of the largest U.S. corporations), were really interested in “decoupling” the tax extension issue from the sequestered spending cuts issue. The primary goal was always to protect and extend the Bush tax cuts; cutting spending and deficits has always been secondary, and spending cuts should be at the expense of social programs.

The Teapublicans initially wanted all the Bush cuts extended permanently, but the Business Roundtable wanted some kind of settlement on the tax issue first. Otherwise 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 scheduled sequester.

Following the November elections, the Roundtable therefore blocked with Obama against the House Teapublicans. To get the public onboard, the media spin given to the Bush tax cuts extension was the need to prevent the artificial “Fiscal Cliff.” Although the media included the sequester spending cuts as part of the “Fiscal Cliff,” the sequester was separated tactically by both the Roundtable and Obama weeks before January 1, postponing those cuts until March 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 taking a neutral stand to protect their ultra-conservative credentials. But in the end, no doubt 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 cut even more generously than under Bush, and all the other Bush tax cuts made permanent — no need ever to extend them again.

Now the attack on spending could begin in earnest once again, focusing on entitlements — most importantly Social Security, Medicare and Medicaid — in particular.

[Part 2 of this essay will appear in our next issue. The entire article will appear in our online edition of the current issue, ATC 165.]

July/August 2013, ATC 165