United States: The deficit deal -- We got taken

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By Martin Hart-Landsberg

August 2, 2011 -- Reports from the Economic Front, posted at Links International Journal of Socialist Renewal with Martin Hart-Landsberg's permission -- The US Congress has finally agreed on a deficit reduction plan that President Barack Obama supports.As a result, the debt ceiling is being lifted, which means that the Treasury can once again borrow to meet its financial obligations.

Avoiding a debt default is a good thing.However, the agreement is bad and even more importantly the debate itself has reinforced understandings of the US economy that are destructive of majority interests.

The media presented the deficit reduction negotiations as a battle between two opposing sides.President Obama, who wanted to achieve deficit reduction through a combination of public spending cuts and tax increases, anchored one side.The House of Representatives Republicans, who would only accept spending cuts, anchored the other.We were encouraged to cheer for the side that we thought best represented our interests.

Unfortunately, there was actually little difference between the two sides in terms of the way they engaged and debated the relevant issues. Both sides agreed that we face a major debt crisis.Both sides agreed that out-of-control social programs are the main driver of our deficit and debt problems. And both sides agreed that the less government involvement in the economy the better.

The unanimity is especially striking since all three positions are wrong.We do not face a major debt crisis, social spending is not driving our deficits and debt, and we need more active government intervention in the economy not less to solve our economic problems.

Before discussing these issues it is important to highlight the broad terms of the deficit reduction agreement. The first step is limited to spending cuts. More specifically, discretionary spending is to be reduced by US$900 billion over the next 10 years.Approximately 35% of the reduction will come from security related budgets (military and homeland security), with the rest coming from non-security discretionary budgets (infrastructure, clean energy, research, education, as well as programs that help low income people with child care, housing, community service etc.).In exchange for these budget cuts Congress has agreed to raise the debt ceiling by $1 trillion.

The agreement also established a 12-person committee (with six Democrats and six Republicans) to recommend ways to reduce future deficits by another $1.2-1.5 trillion. Its recommendations must be made by November 23, 2011, and they can include cuts to every social program (including social security, Medicare and Medicaid), as well as tax increases.

Congress has to vote on the committee’s package of recommendations by December 23, 2011, up or down.If Congress approves them they will be implemented. If Congress does not approve them, automatic cuts of $1.2 trillion will be made; 50% of the cuts must come from security budgets and the other 50% must come from non-security discretionary budgets and Medicare.Regardless of how Congress votes on the recommendations, it must also vote on whether to approve a Balanced Budget Amendment to the constitution. Once this vote is taken, the debt ceiling will be raised again by an amount slightly smaller than the deficit reduction.

Check out the following flowchart from the New York Times if you want a more complete picture of the process. If you are content with the above summary skip to the text below the flowchart for some analysis.

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Many commentators, trying to explain why President Obama embraced an agreement so heavily weighted towards spending cuts (potentially including cuts in social security benefits), claim that he was outmaneuvred by the Republicans. In reality, President Obama has long supported deficit reduction along the lines of this agreement.

As early as March 2009, his staff told David Brooks, a columnist for the New York Times, that the president was “extremely committed to entitlement reform and is plotting politically feasible ways to reduce Social Security as well as health spending”.In fact, according to Brooks:

The White House has produced a chart showing nondefense discretionary spending as a share of GDP.That’s spending for education, welfare, and all the stuff that Democrats love.Since 1985, this spending as hovered around 3.7% of GDP ... The White House claims that it is going to reduce this spending to 3.1%, lower than at any time in any recent Republican administration. I was invited to hang this chart on my wall and judge them by how well they meet these targets.

The White House facts heet issued to explain why the president supports the recently negotiated deficit reduction agreement reveals the consistency in Obama’s position.It notes favourably that this agreement “puts us on track to reduce non-defense discretionary spending to its lowest level since Dwight Eisenhower was President”.

Those who favour reducing spending on government programs generally argue that we have no choice because our public spending and national debt are out of control, threatening our economic future.But, the data says otherwise.

The chart below, from the economist Menzie Chinn at Econbrowser, shows the movement in the ratio of publically held debt to GDP over the period 1970 to 2011; the area in yellow marks the Obama administration. While this ratio has indeed grown rapidly, it remains well below the 100% level that most economists take to be the warning level. In fact, according to Congressional Budget Office predictions, we are unlikely to reach such a level for decades even if we maintain our current spending and revenue patterns.

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The sharp growth in the ratio over the last few years strongly suggests that our current high deficits are largely due to recent developments, in particular the 2001 and 2003 Bush administration tax cuts, the wars in Iraq and Afghanistan, and the Great Recession. Their contribution can be seen in the chart below from the New York Times.

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The effects of the tax cuts and economic crisis on our deficits (and by extension debt) are especially visible in the following chart (again from Menzie Chinn), which plots yearly changes in federal spending and federal revenue as a percentage of GDP (the shaded areas mark periods of recession). As we can see, the recent deficit explosion was initially driven more by declining revenues than out of control spending. Attempts to close the budget gap solely or even primarily through spending cuts, especially of social programs, is bound to fail.

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Tragically, the debate over how best to reduce the deficit has encouraged people to blame social spending for our large deficits and those large deficits for our current economic problems.As a result, demands for real structural change in the way the US economy operates are largely dismissed as irrelevant.

Recent economic data should be focusing our attention on the dangers of a new recession. According to the Commerce Department the US economy grew at an annual rate of just 1.3% in second quarter of this year, following a first quarter in which the economy grew by only 0.3%. These are incredibly slow rates of growth for an economy recovering from a major recession. To put these numbers in perspective, Dean Baker notes that the US needs growth of over 2.5% to keep its already high unemployment rate from growing.

Cutting spending during a period of economic stagnation, especially on infrastructure, research and social programs, is a recipe for greater hardship.In fact, such a policy will likely further weaken the US economy, leading to greater deficits.This is what happened in the UK, Ireland and Greece—countries with weak economies that tried to solve their deficit problems by slashing public spending.

We need more active government intervention, which means more spending to redirect and restructure the economy; a new, more progressive tax structure; and a major change in our foreign policy, if we are going to solve our economic problems. Unfortunately for now we don’t have a movement powerful enough to ensure our side has a player in the struggles that set our political agenda.

[Martin Hart-Landsberg is professor of economics and director of the Political Economy Program at Lewis and Clark College, Portland, Oregon; and adjunct researcher at the Institute for Social Sciences, Gyeongsang National University, South Korea. His areas of teaching and research include political economy, economic development, international economics and the political economy of East Asia. He is also a member of the Workers’ Rights Board (Portland, Oregon).]

Submitted by Terry Townsend on Thu, 08/04/2011 - 16:35


A "progressive" president has given his political blessing to one of the greatest attacks on working people in U.S. history.

NOW WE know why Barack Obama heaped such praise on Ronald Reagan during the 2008 presidential campaign.

Having hailed the right-wing Republican known for axing social programs as a "transformative president," Obama has now far outdone Reagan by pushing cuts in social spending on a scale that the Republicans have only dreamed of.

If your eyes are glazing over at the large numbers and the complicated mechanics of the deal to cut $2.1 trillion from the budget over the next decade, here's a short summary of the agreement: Screw the sick, poor and the elderly while imposing a permanently lower standard of living for working people, all while helping bankers and the rich grab a greater share of society's wealth. But wait, there's more: The cuts could add up to as much as 10 percent of U.S. economic output. That's a body blow to an economy that's still rife with mass unemployment and hardly growing more than two years after the recession.

Many liberals were aghast at Obama's deal with the Republicans. Some 95 House Democrats, half the total who voted, rejected the deal in an August 1 vote because it went too far, joining 66 Republicans who were opposed because they thought it didn't cut deeply enough. But with big business twisting arms, the measure went through on a 269 to 161 vote.

The debt ceiling limits how much the U.S. government can borrow to fund its operations. That amount--currently $14.3 trillion--must be raised periodically as the U.S. economy grows and the government's financial obligations increase.

With Obama already agreeing to implement previously unimaginable cuts, the Tea Party gang in the House tried to up the ante, insisting that a balanced budget amendment to the U.S. Constitution be part of the legislation to allow any increase in the federal debt ceiling.

But the hyperventilating debate among House Republicans was what football coaches call a "misdirection play"--an effort to get people to look one way while the real action is taking place someplace else.

As the media focused on the spectacle of a handful of right-wing Republicans who threatened to hold the U.S. economy hostage, the real deal was quietly being cut between Obama, Senate Majority Leader Harry Reid and the Republican House Speaker John Boehner and Senate Minority Leader Mitch McConnell. The agreement stipulates a $2.1 trillion cut in spending over the next decade--$900 billion now through an immediate cap in domestic and defense spending, and between $1.2 and $1.5 trillion over the next decade, to be decided upon later this year. Those cuts would be made by a bipartisan commission of Congress with the authority to make cuts that the House and Senate must approve or reject, with no amendments.

So much for democracy. Members of Congress, supposedly elected to carry out our interests are about to pass a law that will specifically bar them from reflecting the majority opinion on key questions--taxing the rich, for example, or protecting Medicare and Social Security from cuts. If the commission fails to act, the cuts go through anyway.

In fact, the stage-managed debt ceiling "debate" was intended to negate democracy. Both sides agreed at the outset that social spending must be slashed. The difference was that the Obama administration sought tax increases on the rich that would have, at most, restored the top tax brackets to the already-low 1990s levels. But Obama enthusiastically joined Republicans in tying an increase in the debt ceiling to deep cuts in social spending--and he was ready to give up on tax increases to get a deal.

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U.S. POLITICIANS are borrowing the austerity script from Europe, where unelected central bankers and bureaucrats are dictating the terms of devastating cuts in social spending in Greece, Portugal, Ireland, Spain, Italy and beyond. At least the government of a small country like Greece can blame the European Union and the International Monetary Fund for demanding crushing budget cuts in exchange for a financial bailout. What's Barack Obama's excuse? He is, presumably, the world's most powerful person. But he's apparently at the mercy of a few dozen Republican ideologues in the House of Representatives.

Thus after the White House caved to the Republicans, New York Times columnist Paul Krugman called Obama's decision an "abject surrender."

In fact, Obama didn't capitulate to Republican right-wingers. Instead, he greeted them as liberators. They freed him from the high expectations of voters who elected him to bring "change" amid the worst economic crisis since the 1930s. That's why Obama was willing to up the ante in negotiations with Boehner for a "grand bargain" that would have cut Social Security benefits for future retirees and raised the age of Medicare eligibility. As Salon.com commentator Glenn Greenwald noted, Obama boasted about alienating the Democratic base as he moves to the right in order to capture independent voters in the 2012 election. "It's not merely that he lacks a fear of liberal dissatisfaction; it's that he affirmatively craves it," Greenwald wrote.

That explains why Obama ruled out a number of legal maneuvers that could have sidestepped the debt ceiling limit and blocked Republicans from pushing their budget-cutting agenda. Instead, he chose to negotiate with the Republicans entirely on their own terms, helping to manufacture a crisis that he used not only to adopt Republican policies, but also to one-up them by putting Social Security and Medicare cuts on the table as a "grand bargain."

Liberal apologists claimed that Obama's "grand bargain" offer was a ploy by the president to expose the Republicans as intransigent. Yet even a cursory look at the record shows otherwise. In a column published four days before Obama took office in January 2009, Wall Street Journal columnist Gerald Seib wrote a column headlined, "Obama Targets a 'Grand Bargain' to Fix Budget Mess." He noted that even as the new administration prepared an economic stimulus program that would increase the budget deficit in the near term, it was already preparing the ground politically to cut social spending:

Here's where the Grand Bargain could come in. Like Humpty Dumpty, the budget is going to be broken anyway. In putting it back together, would retirees be willing to accept that idea of having more prosperous seniors pay a monthly premium to receive their Medicare health coverage? Would liberals accept cuts in their favorite social programs? Would conservatives accept the idea of a carbon tax, to both raise big money for entitlements and prod the nation to move more quickly away from fossil fuels?

In the end, Republican right-wingers gave up practically nothing. Even so, they blocked the Obama-Boehner grand bargain because it would have modestly increased taxes on the wealthy. So the president gave the Republicans what they wanted: an all-cuts solution. Even that wasn't enough for the hardcore Tea Partiers in the House, who wanted to rewrite the Constitution to suit their aims. Finally, the CEOs stepped in. Acting like the referee in a fixed professional wrestling match, Wall Street called an end to the staged contest and prepared to dole out prize money in the form of campaign contributions in the 2012 elections.

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SO OBAMA'S embrace of Republican budget-cutting wasn't some tactic or pre-election posturing. It was his longstanding political goal. Even Obama's health care reform bill, derided by the right as "socialist," was a vehicle for "saving" $500 billion in Medicare over the following decade.

With federal tax revenues as a share of the economy at their lowest level in decades, raising taxes has all but been ruled out. New York Times blogger Nate Silver surveyed the polling data and concluded: "Much to the chagrin of many Democrats, the mix of spending cuts and tax increases that Mr. Obama is offering is quite close to, or perhaps even a little to the right of, what the average Republican voter wants, let alone the average American." And that was before Obama signed on to the cuts-only final deal.

Welcome to Austerity, USA, ruled by a single party of big money that goes by two names. Don't like Obama's cuts or the Democrats' swing to the right? Then how about any one of the top Republican presidential contenders, who promise even bigger cuts? If Obama is confident about maintaining his liberal base, it's because the hope of 2008 has been transformed into the great fear of 2012.

There was plenty of liberal outrage at the deal. "Added to the cuts already underway by state and local governments, the deal's spending cuts increase the odds of a double-dip recession," wrote former labor secretary and author Robert Reich. He added:

By embracing deficit reduction as their apparent goal--claiming only that they'd seek to do it differently than the GOP--Democrats and the White House now seemingly agree with the GOP that the budget deficit is the biggest obstacle to the nation's future prosperity.

The budget deficit is not the biggest obstacle to our prosperity. Lack of jobs and growth is. And the largest threat to our democracy is the emergence of a radical right capable of getting most of the ransom it demands.

The chair of the Congressional Black Caucus, Rep. Emanuel Cleaver, called the deal "a sugar-coated Satan sandwich."

Raúl M. Grijalva, co-chair of the Congressional Progressive Caucus, also denounced the deal because it "does not even attempt to strike a balance between more cuts for the working people of America and a fairer contribution from millionaires and corporations."

Labor leaders also decried the agreement. Rose Ann DeMoro, executive director of National Nurses United, also condemned the deal, calling on Congress and the White House to "create jobs and reduce the suffering for those millions of American families who can't pay their medical bills, are losing their retirement savings, and face the loss of their homes while more and more resources are transferred to big corporations and the wealthy who need it the least."

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OBAMA'S AUSTERITY deal is certainly a bitter pill for labor leaders and liberals. But if history is any guide, most will swallow that foul-tasting medicine by the time the 2012 election rolls around. Tellingly, a July 29 press release by the AFL-CIO quotes the labor federation president, Richard Trumka and several other labor leaders opposing the Republicans push for an all-cuts debt deal, but none mentioned Obama and the Democratic Party, despite the president's "grand bargain" offer several days earlier.

Obama's decisive swing to the right will be disorienting and demoralizing to millions of working people, including the activists who are central to social struggles, from trade union shop stewards to people who organizing around issues from housing rights to defense of public services. Right wingers like Republican Gov. Scott Walker of Wisconsin will be further emboldened in their attacks on unions and the poor. Democrats like Chicago Mayor Rahm Emanuel and Govs. Andrew Cuomo of New York, Jerry Brown of California and Pat Quinn of Illinois will have even greater political cover from the White House for their own labor-bashing, budget-slashing programs.

At the same time, those intensifying attacks will produce resistance of the sort that erupted in Wisconsin in February, where hundreds of thousands mobilized for weeks against Walker's attack on public-sector union bargaining rights. Countless other smaller, local struggles have continued since, from the fight against evictions in cities like Chicago and Boston to protests against school budget cuts and corporate-driven education "reform."

And there's a broader sentiment for social justice, particularly among young people. The recent SlutWalk protests around the U.S., for example, highlighted the growing anger among young women who are fed up with the rising tide of sexism. Racist police violence, a perennial issue in U.S. cities, has also been a focus of activism.

These fightbacks--and widespread fury at Obama's swing to the right--are creating new militants who have concluded that a political alternative to the left of the Democrats is necessary. The challenge now is to link that sentiment to practical struggles in an effort to rebuild an independent left that's prepared to fight back against the austerity agenda--whether it's pushed by the Democrats or Republicans.