posted December 1, 2011
The Real Causes of Deficits and the Debt

For the past year ruling circles in the U.S. are in agreement that a minimum of $4 trillion must be cut from the federal debt. Their main differences are over how to distribute that $4+ trillion in cuts—i.e. between taxes and spending; between tax hikes for the middle class and tax cuts for corporations and wealthiest households, and between defense spending vs. social security, Medicare, and Medicaid.

The $4 trillion minimum target was initially established as the primary target amount by President Obama’s deficit commission, co-chaired by the two conservatives, Alan Simpson and Erskine Bowles, more than a year ago, November 2010. That’s when the Deficit Commission released its report that has served ever since as a template for all deficit cutting proposals from that point, up to the recent Supercommittee. Simpson is the ex-arch conservative senator from Wyoming, who called social security “a milk-tit for 300 million? and Erskine Bowles is a political retread staff advisor from the Clinton administration who is now a senior manager at Citigroup. That should provide some idea where that committee was coming from at the outset.

Their $4 trillion recommendation a year ago was quickly adopted and pushed by just about every political wing of the ruling class in Congress and the federal government over the past year: it was the number proposed by President Obama last February 2011 in his budget; it was the number proposed by Teapublican radical, Paul Ryan, in April; the number suggested by Vice President, Joe Biden, in his secret negotiations with House speaker, John Boehner, last June before their discussions imploded; it was again the number suggested by the ‘gang of six’ senators last July 2011; and it was the number suggested again by Obama as a ‘grand deal’ to the Teapublicans and Boehner again last July just before the infamous debt ceiling deal between Obama and the Republicans on August 2, 2011.

The August 2 deal required an immediate $1 trillion cut—all in social spending programs. The deal also provided for another $1.2 trillion in spending cuts, at minimum, scheduled to go into effect by this year’s end if Congress’s so-called ‘Supercommittee’ of 12—also established by the August 2 deal—cannot come up with cuts exceeding the $1.2 trillion. By the time this article appears in print, we will know if the cuts are the $1.2 trillion minimum, or much more. This writer predicts the latter. Why? Because the political pressure from various wings of Capital in the U.S. has been intensifying in the weeks preceding the Supercommittee release of its recommendations, so far scheduled for November 23.

If the Supercommittee recommends more than $1.2 trillion, the amount of cuts will likely be more, in fact much more than the automatic $1.2 trillion. The Supercommittee consensus will probably range between $2 and $3 trillion more. There’s that ‘magic number’ of $4 trillion again that the different wings of the ruling class have always been advocating. Once the recommendations are made, per the August 2 debt deal, Congress will have only until December 23 to vote on them. And the voting can only take place as a ‘vote up or vote down’ of the recommendations. No discussion or further debate by the remaining 523 members of Congress. So much for democracy, even among the elite. When the really big issues come to a head—and $4 trillion is a really big issue—it’s time to put democracy on the back burner and even suspend it in part or even in total at some point.

The August 2 deal was drafted in such a manner as to make it unlikely the Supercommittee will fail to come to a recommendation of cuts in excess of $1.2 trillion. The August 2 deal required that the $1.2 trillion be divided between roughly equal cuts in defense spending and social program spending. As a result, the defense corporations and their political friends have been lobbying frantically since October to push the Supercommittee to come up with more cuts than $1.2 trillion. That way they can lobby for less cuts in defense spending at the expense of a greater reduction in entitlements and other social programs, especially Medicare and Medicaid. If the Supercommittee does recommend more than $1.2 trillion, it’s almost certain that the cuts in Medicare-Medicaid and other elements of the social safety net left will be greater than the $600 billion mandated in the $1.2 trillion deal of August 2.

Medicare and Medicaid are thus the real targets of the Supercommittee this time around. Proposals to cut social security retirement benefits will likely come next round. Moreover, this writer predicts, the cuts will be ‘backloaded’, as they say, taking effect mostly after the November 2012 elections to minimize the immediate effects of the draconian cuts forthcoming in social programs on voters before the 2012 elections.

That Medicare and Medicaid are the prime targets for cuts in this particular round of deficit cutting has been evident for some months now. Last June, in his secret negotiations with Boehner, Vice-President Joe Biden proposed between $400-$500 billion in Medicare-Medicaid cuts—without any concessions from Boehner or the Republicans in return. Biden proposed a $3-$4 trillion total deficit cut package to Boehner, with 87% in spending cuts and only 13% in tax hikes. Boehner refused even that and walked out. Obama then offered the same, including a 75%-25% spending cut-tax hike mix in his ‘grand deal’ last July. Again no deal. Obama then followed up with a proposal last September to cut $320 billion in just Medicare-Medicaid, once more an offer without any concession in return. Clearly the Democrats’ ‘number’ is the $500 billion they’ve been offering for a year now. The Republicans responded in October, calling for $780 billion in Medicare-Medicaid cuts as part of a $2.2 trillion total deal with no defense spending cuts and no tax increases on the wealthy or corporations. In fact, they want to cut the top bracket for the wealthiest 1% from the current 35% to 23%-28%, and similarly for corporations from 35% to 23%-28%. Readers can expect cuts in Medicare-Medicaid alone in the area of $600 billion or so in a total package of around $3 trillion, and maybe even more.

Even if the Supercommittee does not come to an agreement to recommend more cuts than the automatic $1.2 trillion, the politicians of both parties will accept the mandated automatic $1.2 trillion cuts only temporarily. Defense corporations will then force politicians to reopen the $1.2 trillion to reduce their $600 billion share and add, delete and change the spending-tax mix once again after the new year. Congress will no doubt oblige that request. In other words, the Supercommittee is not the end of the spending cut process; they are only the beginning of the severe austerity program focus agreed to by both Democrats and Republicans in Congress and the administration. Regardless of whether the Supercommittee does come out with recommendations or not, the process of further cuts will continue to go forward. Only the form will change. The $4 trillion target or larger will remain.

An early indication that the deficit cutting frenzy will not stop with either the Supercommittee or the mandated $1.2 trillion, whichever is the case, is evident in a recent statement by the Teapublicans’ number one hatchet man going after Medicare: Congressman Paul Ryan. It was Ryan last April 2011 who’s budget proposed to totally privatize Medicare, turning it into a voucher program. That program would allow health prices to continue to rise while adjusting the voucher amount slowly. The result within a few y ears would mean seniors on Medicare would only have half their medical expenses covered, forcing them to buy private health insurance or go bankrupt. Ryan’s attack on Medicare-Social Security makes George W. Bush’s effort to privatize social security in 2005 appear amateurish.

As Ryan replied to an interview with the Financial Times daily earlier in November about his plans to dramatically change Medicare by privatizing it, “I am looking forward to doing it next year?. That means the attacks on Medicare, Social Security and Medicaid will keep coming and likely intensify next year, regardless of the Supercommittee outcome this November 2011.

How do politicians of both parties, Republican and Democrat, justify such massive cuts in the social safety net—specifically in Medicare, Medicaid, and Social Security—one might reasonably ask?

Their arguments are basically twofold: first, that Social Security-Medicare and Medicaid are the cause of the exploding annual budget deficits and the federal debt. But that argument is a gross lie, for reasons explained shortly. Their second, fall back argument is that social security and Medicare must be cut because they are going broke and won’t be around by the end of the decade unless their benefits are radically reduced. That too is of course another lie. Here’s the explanation and refutation to both those false arguments.

Are Social Security-Medicare-Medicaid the Cause of Deficits and Debt?

To begin to answer this question it is necessary to identify the major causes of the US federal debt. Let’s start with some actual numbers.

The total US federal government debt rose between 2000 and 2010 by approximately $9.2 trillion, from $5.6 trillion in 2000 to $14.8 trillion today, according to the Federal Reserve’s ‘Flow of Funds’ reports.

There are basically eight causes of the $9.2 trillion rise in the US federal debt over the past decade: excess inflationary defense-war spending; the Bush tax cuts from 2001-2011; the direct Congressional funded bailouts of banks and corporations following the banking crash of 2008; Bush and Obama’s successive fiscal (tax cuts and spending) stimulus packages of 2008-11; price gouging by health insurance companies and health services providers; and simple interest on the debt for all the above. The amounts and calculations for each are summarized in Table 1 as follows:

Seven Major Causes of $9 Trillion U.S. Debt Increase

Debt Contributing Factor Addition to Debt Percent of $9 Trillion Debt

1. Defense-War Spending $2,100 billion 22.9%

2. Bush Tax Cuts 2001-12 $3,150 billion 34.2 %
& Extensions

3. Direct Bank & Other $900 billion 9.8%
Bailouts(TARP, GSEs)

4. Bush-Obama Stimulus $1,896 billion 20.6%
Packages, 2008-2011
(Spending & Tax cuts)

5. Nonfunding of Part ‘D’ $450 billion 4.8%
Prescription Drugs Plan

6. Excess Inflation Costs for
Medicare-Medicare $180 billion 1.9%

7. Lost Tax Revenue from $255 billion 2.7%
18 million unemployed

8. Interest on the $9 Trillion $270 billion 2.9%
$9,201 billion ($9.2 trillion)

Sources: (1)Office of Management & Budget historical tables & BLS for CPI change; (2) Center for Budget and Policy Priorities, June 28, 2010, based on Congressional Budget Office and Joint Tax Committee of Congress data; (3) U.S. Treasury, TARP Report; (4) (5), Medicare Trustees Report for 2011, (6) Wall St. Journal, New York Times, Economic Policy Institute, Center for Budget and Policy Priorities articles and analyses; (7) Federal Reserve Bank, ‘Flow of Funds’ Report, July 2011 and author’s calculations.

Considering each of these eight causes in turn:

The $2.1 trillion in Pentagon and War spending as a contributing factor to the $9 trillion debt run-up over the decade represents just the excessive inflation in Defense and ‘Contingency Operations’ (‘CO’=direct spending on Iraq and Afghanistan) above the normal average consumer price index (CPI) rise of about 2%. War and Defense spending rose annually on average by 8.2% over the decade. The $2.1 trillion thus represents just that increase in War and Defense spending in excess of the 2% average CPI. The $2.1 figure is actually very conservative, since it does not include additional long-term indirect war costs associated with military construction, department of energy, veterans benefits, and the like. It also excludes arguable defense costs in the military and counterinsurgency elements of spending by the CIA, FBI, NASA, State Department, Foreign Aid, and Homeland Security. Also excluded are ‘black’ or ‘off budget’ secret project military weapons development spending that doesn’t show up in public budget data. The latter are estimated at around $50 billion a year. Homeland Security another $40 billion a year. In total, the US spending around $900 billion to $1 trillion a year on Defense and War. The inflation in these costs over the decade would easily increase the $2.1 trillion allocated to the $9 trillion debt run-up by another $300 billion or so.

The Bush Tax cuts contribution to the total debt includes a basic $1.7 trillion estimate for the Bush era 2001-2003 tax cuts from 2001 to 2008, and the Center for Budget and Policy Priorities’ estimate of another more than $1 trillion for 2009-10, plus the two year extensions of the Bush tax cuts agreed to by Congress for 2011 and 2012 costing about $450 billion more. These are also conservative estimates, since they don’t include major oil and energy industry corporate tax cuts enacted in 2004-05 by the Bush administration. Nor do they account for the $1.2 to $1.4 trillion that multinational corporations are hoarding in cash in their offshore subsidiaries today to avoid paying the normal 35% tax rate in the U.S. If the latter were included, the total tax cuts for corporations and investors would add another $400 billion or so to the Bush tax cuts of $2.9 trillion.

The $900 billion in bank and corporate bailouts refers only to the $700 billion TARP (Troubled Asset Relief Program) passed by Congress in October. It also includes the roughly $200 billion separately passed by Congress to bailout the government mortgage agencies, Fannie Mae and Freddie Mac. They too ‘went broke’ as a result of the financial collapse of the housing sector in 2007-08 and were bailed out in July 2008. It is important to note that this $900 billion ‘direct’ bailout does not include the roughly $9 trillions of dollars injected into the banks by the Federal Reserve, which was the true source of the bailout of the banks since 2008. The Federal Reserve has a separate set of books that do not add to the US deficit and total debt of the federal government.

Then there is the three main Bush and Obama fiscal stimulus packages in 2008, 2009 and 2010, which together amount to $1.89 trillion in tax cuts and spending that have failed to date to bring about economic recovery. They include the Bush April 2008 stimulus of $168 billion; Obama’s February 2009 stimulus of $787 billion and subsequent $84 billion in supplement spending and tax cuts in 2009-10; and Obama’s December 2010 package worth another $857 billion, of which a massive $802 was tax cuts.

The escalating health care cost—consisting mainly of unfunded Part D of Medicare and the excessive inflation in health care services well above the average national inflation rate—contributed approximately $630 billion to that $9 trillion US debt run-up from 2000 to 2011. Most of that $630 billion was the $450 billion in Congress’s failure to fund the Part D prescription drug program, requiring the program be paid totally out of deficit spending. The remainder cost is attributable to the excess inflation for health insurance and services directly impacting Medicare and Medicaid costs.

Another $255 billion is from lost tax revenue due to chronic unemployment for the past three years. Before the recession began in December 2007, there were 7.1 million unemployed. For the past three years that number has been 25-26 million without change, or about 18 million. Assuming a median annual earnings of $47,000 for the 18 million, an unemployment period of 6 months on average, and an average income tax rate for the group of 20%, the total lost for the past three years in federal income tax revenue is $255 billion. And that does not count lost payroll tax or corporate income tax revenue associated with the layoffs.

The final item, interest on the debt is calculated based on a simple assumption of non-compounded interest over the decade, which comes to $270 billion for the $9.2 trillion.

In summary, notice these numbers do not include costs of social security, nor even costs of Medicare and Medicaid except with excess inflationary costs. It was not because of significant benefit increases that health care costs rose exceptionally over the decade, contributing to the deficit. It was price gouging. The only exception to this conclusion is the Part D prescription drug program which does represent a benefit improvement.
In other words, the argument for targeting Medicare-Medicaid-Social Security as the causes of the debt escalation the past decade is just outright false. In fact, social security retirement and other non-medical funds have run a surplus over the past decade that has been ‘counted’ by politicians to offset the actual annual deficits and therefore debt. The reported deficits every year would have been even higher, were it not for the social security surpluses every year (except the most recent due to payroll tax cuts).

The clear causes of the deficits and therefore debt are wars and runaway Pentagon equipment spending, the Bush tax cuts, the bailouts of banks and corporations, the fiscal stimulus packages of Bush-Obama that didn’t result in economic recovery, the chronic three year long 25 million jobless situation, and price gouging by health insurance and health services providers.

And what about the second argument for justifying cutting social security-medicare-medicaid? The argument that they are going broke, and if major cuts are not made now in benefit levels the programs will collapse before the end of the next decade? That too is blatantly false, for the following reasons:

Are Social Security-Medicare Going Broke?

Concerning Social Security retirement benefits, that particular trust fund has produced a surplus over the past quarter century, since 1986, in the amount of more than $2.4 trillion. That surplus was generated as a result of a major hike in the payroll tax at that time and its indexing to inflation. The payroll tax as a share of total federal tax revenues thereafter leaped from less than 30% to about 44% on average for the next several decades. (At the same time the corporation income tax’s share of total federal tax revenues fell by half, to less than 10% today). The huge and growing social security retirement trust surplus enabled presidents from Clinton to Bush Jr. to borrow hundreds of billions every year, spent on wars, pentagon and tax cuts for the rich. So social security has subsidized the federal budget and the deficits for a quarter century.

That surplus in the social security trust fund will continue for another decade producing another $1 trillion in extra funds—unless of course we continue to have 25 million jobless and Obama and Congress continue to give away the surplus in payroll tax cuts. Last year $112 billion was drained from the trust fund. This year Obama proposed to double it or more, allowing small businesses to discontinue paying from half to all their share of the payroll tax.

Those like Ryan intent on privatizing social security learned a lesson from George W. Bush’s failure in 2005. They learned that if the trust fund has a surplus it is hard to convince voters social security must be radically changed. So the new strategy is to go after the weaker link in the social security program—i.e. Medicare—and especially the weakest point in Medicare which is the Part D prescription drugs program. That program was created also in 2005, pushed by Bush. But Bush made is certain that it would not be funded by a payroll tax, like the Part A hospital fund of Medicare. That meant that every penny of the drug program would have to be financed out of deficit spending. Bush also made it certain that drug companies, and all health service insurers and providers, were allowed to continue to raise prices at double digit levels over the decade. That too would put pressure on the hospital and doctors’ trust funds, Part A and B, in Medicare. Make Medicare appear as if it was experiencing big losses. That was the new strategy. Then go after and privatize Medicare first, as Paul Ryan has proposed.

While Medicare was being privatized, prepare the groundwork for attacking social security retirement in the future. That too, like Medicare, would require creating a condition of deficits in social security trust funds. Cutting payroll taxes is a good start in causing a deficit shortfall in social security. The strategy for privatizing Medicare and Social Security is the same: create a funding crisis and deficit however possible, then claim they are broke or about to go broke, then use that excuse to privatize them. ‘Privatize’ in this case means turn it over to insurance companies and Wall St. to suck profits out of the 48 million seniors in the social security-Medicare system.

As shown in the preceding, Social Security retirement is not a cause of the current deficit and debt even remotely; in fact, it has paid for much of the deficit and debt. But that’s not the only argument employed by the Ryans to justify cutting it. The other, more subtle argument is that social security is destined to go broke in another decade or less.

But that’s not even remotely true if the federal government simply returns the $2.4 trillion it borrowed from 1986 to 2011. And there are other simple fixes even if the government refuses to return the $2.4 trillion that will mean social security retirement, disability and survivor trust funds will continue more than solvent for 75 more years.

For example, by simply raising the ‘annual cap’ of $108,600 on which the payroll tax is levied today to $180,000 any conceivable shortfalls in social security over the next 75 years disappear. Social security was intended to cover all earned incomes (wages, salaries), but over the past thirty years the top 15% of wage earners have been getting a free break. Raising the cap to $180,000 returns to the original intent of social security to have all wage earners pay.

A limitation of the original social security law however was its failure to levy a comparable tax on all ‘capital incomes’ (capital gains, interest, dividends, rents, etc.). Requiring earners of capital incomes, like earners of wages, to pay an equivalent 6.2% into the funds not only wipes out any shortfall imaginable in social security for the rest of the century but also leaves an excess of hundreds of billions a year for other uses. That could be used to cover any shortfalls in Part A and B Medicare and fully fund Part D prescription drugs as well.

And if those two approaches are not acceptable, simply raising the payroll tax for social security from its current 6.2% for both employees and employers by only 0.5% also eliminates any conceivable shortfall in social security for the next century.

In other words, even after the federal government dragging $2.4 trillion from the fund for the past quarter century, even with the current attack on social security in the form of payroll tax cuts under Obama, the ‘fixes’ for social security long term are quite simple and doable. There is no crisis in social security in the longer run. It is not necessary to implement draconian cuts in social security benefits in order to ensure its continuation. All it simply needs is to restore the funds taken from it, stop draining it to enable tax cuts, and start making the wealthy and super-wealthy pay into it by raising the cap and/or making the super-wealthy millionaires pay into it.

And what about Medicare and its three trust funds, Part A, B and D? It was previously explained that only Part D has contributed significantly to the deficit and debt and Parts A and B only due to health insurers and providers health price gouging. Therefore the first argument, that Medicare is a major cause of the current deficits and debt is mostly nonsense. But what about the argument that both are going to be broke in another decade?

Here’s some facts regarding ‘they’re going broke ‘ by Teapublican radicals like Ryan in Congress:

The Part A hospital fund in Medicare today has a surplus of $270 billion. It will still have a surplus in 2020 of $108 billion, despite tens of millions more boomer generation seniors accessing the program over the next decade. Does that sound like it’s going broke?. And those aren’t this writer’s estimations. They come directly from the Medicare trustees report of 2011.

The same applies to Medicare’s Part B doctors trust fund, which has a surplus today of $71 billion. That surplus will actually rise to $110 billion in 2020. Is that a crisis justifying slashing Medicare benefits for seniors? Or, as Ryan proposes, gutting Medicare and turning it into a privatized voucher program requiring seniors to pay up to half of all their medical costs?

As for Part C, the prescription drug fund, it is true it is in deficit. But it has been since it was legislated that way in 2005. So what’s so different today, six years later? However it too, like the hospital and doctors trust funds, can be easily addressed, according to the Medicare trustees. Simply introduce a 0.25% increase in the Medicare payroll tax today and another 0.25% a decade from now. That would raise the Medicare payroll tax from today’s 1.45% to a mere 1.7%, hardly perceptible in one’s weekly paycheck. That will cover the annual shortfall. After another decade the pressure on all the Medicare funds will ease, as a result of the surge in the baby boomers tapering off. Medicare will actually need less funding per capita by 2030, providing of course the real problem underlying it—providing the price gouging by health industry servicers is contained along the way.

Another way to address the matter of the financing of all the funds—i.e. the social security retirement, disability, survivors funds and the three Medicare funds—and ensure they all have sufficient surpluses for the next two decades is to do something about getting jobs for today’s 25 million unemployed. The U.S. has had 25 million jobless for three consecutive years now. Twenty more million with jobs means more payments into all the trust funds and even higher surpluses in all of them. Put people back to work and a major source of additional funding for social security and Medicare reappears.

Raising wages in the U.S. would have a similar effect. Raise the average weekly earnings of America’s 110 million non-supervisory production and service workers by stop sending jobs overseas, by stop destroying unions and collective bargaining, by stop shifting tens of millions of jobs from full time to part time and temporary, by raising the minimum wage, by ending free trade lowering wages, and by controlling escalating health care costs. Raising wages also translates into more payroll tax payments into the social security and Medicare funds, providing an ever greater surplus.

For the past three decades an attack on workers nominal wages has been underway on many fronts. The consequence has been a stagnation and now decline of wages and incomes for the 110 million in particular—the core of the US working class. Now that corporate America has successfully driven down their current (nominal) wages, they are intent, through their politicians in Congress and state houses, to attack workers’ deferred wages—i.e. those wages that workers agreed to forego and have paid into social security, medicare, and their pensions over the past quarter century. It’s their past wages that Teapublican radicals like Ryan are intent on taking back. Social Security and Medicare is not an ‘entitlement’. They are simply wages workers agreed to forego and collect when they retire. Not satisfied with driving down current wages, Ryan and his colleagues in the direct service of corporate interests and the interests of the wealthiest 1% are now intent on taking back the deferred wages of the working and middle class in America now as well.

Jack Rasmus

Jack is the author of the current pamphlet, ‘An Alternative Program for Economic Recovery’ which may be ordered from his website,, and the author of the forthcoming book, Obama’s Economy: Recovery for the Few, Pluto Press and Palgrave, February 2012; and Epic Recession: Prelude to Global Depression, same

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