posted November 24, 2012
Complimentary Chapter 7 from book, ‘Obama’s Economy’ by Jack Rasmus

Prior to his official swearing-in as President, in early January 2009 Obama had made it perfectly clear he was intent on cutting the federal deficit, and that this would include reductions in entitlement (Medicare, Medicaid, Social Security) spending. As the Wall St. Journal noted on January 8, 2009, “President elect Barack Obama said Wednesday that overhauling social security and medicare would be a central part of his administration’s efforts to contain federal spending.?

Obama’s Deficit Commission

On February 18, 2010 Obama issued Executive Order 13531 establishing a ‘National Commission on Fiscal Responsibility and Reform’ (hereafter called the Deficit Commission). The Commission was composed of 18 members. Six appointed by the President, six by the House and six by the Senate. Eight were Republicans and the majority of the eight from the extreme right Teaparty-leaning wing of the House and like-minded Senators. On the Democratic side, at least five were conservative leaning Democrats—like Baucus and Conrad in the Senate, Spratt in the House, as well as Erskine Bowles, a former chief of staff for Bill Clinton and now a board director for the Investment Bank, Morgan-Stanley. Completing the Obama appointees was former corporate CEO, Ann Fudge.

The administration also appointed ultra-conservative, ex-Senator Alan Simpson as co-chair with co-chair Erskine Bowles. In short, the Deficit Commission from the beginning had a strong conservative-leaning composition, especially with regard to its two co-chairs, Simpson and Bowles. New York Times columnist, and Nobel winner in Economics, Paul Krugman, questioned the appointment of Bowles and Simpson as co-chairs, noting that “Erskine Bowles, the Democratic co-chairman, had a very Republican sounding small-government agenda. Meanwhile, Alan Simpson, the Republican co-chairman…described social security as being ‘like a milk cow with 310 million tits’.? Why the President would appoint such a pair to chair the Commission has often been queried. But it was no accident or oversight.

The Commission created three internal committees: tax policy, mandatory (entitlements) spending, and discretionary spending. The core battle ground within the Commission was clearly going to be entitlement spending. While 9 of the 18 Commission members sat on the tax and discretionary spending subcommittees, 15 of the 18 members ensured they were all on the mandatory-entitlements spending subcommittee. The Commission in general was tasked with recommending tax hikes and spending cuts that would result in a balanced budget by 2015. Both within the Commission and outside it, the battle over the next two years would be over how much deficits might be reduced via raising taxes—especially the Bush Tax cuts of 2001-04—and how much reduced as a result of spending cuts—especially entitlements. The composition of spending cuts would become another major contentious issue—whether deficit reduction via cuts in entitlement programs such as Medicare and Social Security or in Defense and other discretionary programs spending.

An early indication of the main focus of the Simpson-Bowles Deficit Commission was revealed in June 2010, six months before the Commission was to complete its work. While the Republican appointees refused to consider any tax hikes whatsoever, the Democrats on the “panel suggested spending cuts would likely have to outweigh tax increases?, as one business press source reported. In particular, the Obama appointed co-chair, Erskine Bowles, “also emphasized the need to find significant savings in federal health spending and entitlement programs?. In short, the consensus focus of the Commission from the outset was on spending cuts and, in particular, cutting Medicare and Medicaid programs. That consensus on cutting entitlements was perhaps best indicated by the attitude at the time expressed by Republican Teaparty radical on the Commission, Paul Ryan. As Ryan commented, in agreement with Bowles, “I was encouraged by the growing consensus around this obvious reality?. That reality was the agreed upon need to especially target Medicare-Medicaid.

The 2010 Health Care Act, Deficits & the Debt

Not long after the establishment of the Deficit Commission, the President’s major Health Care legislation, called the ‘Patient Protection and Affordability Care Act’ (PPACA), was passed. The greatest shortcoming of the Obama Health Affordability Care Act was its failure to fundamentally check rising health care costs, even after the Health Care Act becomes fully effective in 2014. A national health care system—i.e. Medicare for all—would save the U.S. 7% of GDP, or more than $1 trillion a year. That’s $10 trillion over a decade! However, that proposal was not even discussed during the consideration of the 2010 Obama ACA. Nor was its distant cousin, the so-called ‘public option’ that would have reduced costs within the ACA significantly (though not as much as Medicare for all), seriously considered during the Congressional deliberations. The public option would have enabled at least some degree of healthcare cost control, but it was prematurely pulled off the bargaining table by Obama personally at the beginning of critical Congressional debate and consideration of the Act. That unilateral removal of the public option was done without any concession in return.

Between 2006 and 2010 the prescription drug program—termed the ‘Medicare Modernization Act’ of ‘Part D’ of Medicare—passed during the Bush administration in 2003 (implemented in 2006) added between $385 and $552 billion (average estimate of $450 billion) to the federal budget deficit. None of Part D coverage for prescription drugs was paid for by a tax increase. It was all financed out of general budget of the U.S. by means of borrowing. Its total cost of somewhere between $385 to $552 billion from 2006-10 was therefore all added to the growing federal debt.

Budget deficits due escalating health care costs also increasingly impacted Medicare’s Part A and Part B programs, hospital and doctor coverage, respectively. Part A and B Medicare costs surged over the decade, 2001-2010, well above the normal rate of inflation. Medicare Part A and B costs more than doubled over the past decade, from $244 billion in 2001 to $522 billion, or by 114%. That’s a simple average of 11% per year, well above the normal annual consumer inflation rate of about 2% per year for the decade. Assuming just half of that 114% was due to excessive health care price hikes by healthcare providers—doctors, hospitals, drug companies, etc.—then at minimum uncontrolled healthcare cost inflation added $120 billion to overall Medicare costs and in turn to the US budget deficit. Medicaid excessive cost increases added another $80 billion perhaps.

The Real Causes of Deficits and the Debt

The total US federal government debt between 2000 and 2010 rose by approximately $9 trillion, from $5.5 trillion to $14.5 trillion, according to the Federal Reserve’s ‘Flow of Funds’ reports.

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 inflation rate—contributed approximately $630 billion to that $9 trillion US debt run-up from 2000 to 2011. Where then did the remaining $8.35 trillion in the federal debt come from? In addition to the $630 billion excess inflation in health care costs, there are basically six additional areas that explain the rise of $9 trillion 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 select large corporations following the banking crash of 2008 (which does not include the separate Federal Reserve bank bailout measures); Bush and Obama’s four successive fiscal (tax cuts and spending) stimulus packages of 2008-11; plus simple interest on the debt for all the above. The amounts and calculations for each are summarized in Table 14 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 2001-11 $2,925 billion 31.9%
& Extensions

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

4. Nonfunding of Part ‘D’ $450 billion 4.9%
Prescription Drugs Plan

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

6. Bush-Obama Stimulus $2,343 billion 25.5%
Packages, 2008-2011
(Spending & Tax cuts)

7. Interest on the $9 Trillion $270 billion 2.9%
$9,168 billion ($9.1 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.

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 rise of about 2%. War and Defense spending rose annual on average 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. The figure is also probably 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 estimate in Table 14 includes the $1.7 trillion estimate for the Bush era 2001-2003 tax cuts’ impact on the debt from 2001 to 2008, and the Center for Budget and Policy Priorities’ estimate of another more than $1 trillion for 2009 and the two year extensions of the Bush tax cuts agreed to by Congress for 2010 and 2011, plus an estimate for interest on the total. These are also conservative estimates, since they don’t include major 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 offshore subsidiaries today to avoid paying the normal 35% tax rate in the U.S. If included, the tax cuts for corporations and investors would add another $400 billion or so to the Bush tax cuts of $2.9 trillion.

The Direct Bank and other bailouts refers only to the $700 billion TARP (Troubled Asset Relief Program) based by Congress and administered by the US Treasury. This is taxpayer sourced bailout funding. It also includes the roughly $200 billion separately passed by Congress to bailout the government agencies, Fannie Mae and Freddie Mac, that are required to buy the bad mortgage assets of private banks and financial institutions. They too ‘went broke’ as a result of the financial collapse of the housing sector in 2007-08 and were bailed out in summer 2008. It is important to note that this $900 billion ‘direct’ bailout does not include the $ trillions of dollars injected into the banks by the Federal Reserve, which was the true source of the bailout of the banks—albeit a temporary one at great cost. The Federal Reserve has a separate set of books that do not add to the US deficit and total debt of the federal government, as has been pointed out in more detail in a previous chapter three of this book.

The Bush and Obama stimulus (other tax cuts and spending) amount of $2.34 trillion is the summing of the Bush 2008 stimulus of $168 billion; Obama’s 2009 stimulus of $787 billion and subsequent $84 billion in supplement spending and tax cuts in 2009-10; and the December 2010 package of another $857 billion. It does not include the Obama proposed $447 billion stimulus of September 2011 or subsequent spending or tax cuts passed by Congress.

Why Social Security Is Not A Cause of Deficits

It should be noted that Social Security has not been, nor is today, a fundamental cause of deficits or the debt. Similarly, the fundamental Medicare-Medicaid program is the smallest of the six contributing factors to deficit and debt and, to the extent it is a contributing factor, that contribution has been due to the government refusing to fund the prescription drug program by providing a tax base as well as due to the chronic, excessive health care price inflation of the past decade that still continues.

In fact, contrary to conventional impression by the public, Social Security has been subsidizing the US general budget for more than a quarter century, since 1986. The Social Security Trust Fund that pays for old age retirement, disability and spousal benefits has run a surplus for that quarter century in excess of $2.4 trillion dollars. However, that surplus has been ‘borrowed’ by the federal government every year and spent as part of the general budget, replaced by the government in the fund with IOUs in the form of special Treasury Bonds that cannot be redeemed. In the last decade alone, the annual surplus—i.e. the amount left after payroll taxes are collected and retirement benefits are paid to all eligible recipients—has averaged more than $150 billion a year. That means the past decade $1.4 trillion has been ‘borrowed’ from the Social Security Trust Fund to cover annual general budget deficits of the US government. Another way to say the same thing, those deficits would have been $1.4 trillion more than they in fact were, had there been no $1.4 trillion Social Security surplus over the decade. Social Security has thus been subsidizing the federal deficits, not in fact causing them—as the general misconception maintains and as certain business press sources are fond to report in order to create the false impression social security is somehow a major cause of deficits and the debt.

According to Peter Orszag, ex-Director of the Management and Budget, “Social Security is not the key fiscal problem facing the nation. Payments to its beneficiaries amount to 5% of the economy now; by 2050 they’re projected to rise to about 6 percent.?

Simpson-Bowles & Final Commission Report

The Commission was scheduled to release its final report on December 1, 2010. In an unprecedented move, the co-chairs, Simpson-Bowles, released their own 50 page ‘interim report’ summarizing the details on November 10, in an attempt to inject the Commission’s proposals early in the deficit cutting debates that were escalating now that the Teaparty Republicans had taken over the House of Representatives a week earlier.

One might expect such a set of deficit reduction targeting proposals to include all tax increases in addition to spending cuts. But no such logic prevailed in Simpson and Bowles interim report or the final Commission report. The Commission Report included additional, major new tax cuts in top income tax rates and top corporate tax rate. It proposed a top rate income tax cut from 35% to 23% and a similar corporate income tax rate cut from 35% to 26%. In addition, the Alternative Minimum Tax benefiting mostly individuals in the $150,000 a year and above income bracket was repealed altogether. These tax cuts for high income wealthiest households, investors and corporations were to be offset by corresponding big tax hikes on the middle and working class. The Commission proposed to cut the mortgage interest deduction, replacing it with a flat 12% tax credit, as well as a 15% gasoline tax and limits on the child tax credit. Workers and their employers would have also henceforth have to pay taxes on their employer provided health insurance. Even the lowest income segment of the working class would have their taxes raised significantly. The earned income tax credit for the working poor was reduced and for some even ended.

The tax hikes were projected to raise $995 billion—or about one fourth of the nearly $4 trillion original deficit reduction goal. $3 trillion was therefore all spending cuts. Moreover, as noted, the ‘net’ $995 billion included hundreds of billions in tax cuts for the wealthiest and for corporations, so the tax hikes on everyone else was well over the $995 billion. Therefore one way to calculate the total is that middle and working classes would be hit with $3 trillion in spending cuts plus around $1.5 to $2 trillion in tax hikes. The Commission report was a decidedly class-based set of proposals, benefiting the wealthy and corporations while making the middle and working classes pay well over 80% of the total cost of deficit reduction.

Government workers were to take an especially large hit under Simpson-Bowles, their jobs reduced by 10% (more than 200,000 layoffs) and the rest hit with a wage freeze for three years. For social security, proposals included raising the minimum age to 69 and lowering annual cost of living adjustments for benefits. On the other hand, the top 15% of wage earners whose wage income exceeded the $106,800 ceiling on which social security payroll taxes are paid today, would be reduced only by 5%. That meant the top 10% highest paid salary and wages would continue to get a break and not pay payroll tax on more than the $106,800. Federal and military pensions were also reduced, as were subsidization of student loan interest.

Medicare and Medicaid payments to doctors would to be reduced. The savings from Medicare-Medicaid cuts were estimated at around $400 billion–$110 billion of which came from higher costs paid directly out of pocket by individuals for Medicare-Medicaid services, even though half of all Medicare recipients have annual incomes of less than $28,000.

A reduction of $100 billion in defense spending, which today constitutes more than half of all discretionary government spending, was part of the Commission’s recommendations as well. It included health benefits of military families as well as base closings and weapons procurement. Head of the Pentagon, Robert Gates, declared the Commission proposed $100 billion cuts would have a ‘catastrophic’ impact on national security. He instead proposed to redirect all $100 billion cuts in Defense toward future, so-called ‘force modernization’.

Two other interesting features of the Simpson-Bowles summary of the proposals was the ‘mix’ of spending cuts vs. tax revenue increases. It was not the $2 for $1 mix that Simpson-Bowles had indicated early in the Commission’s work. It was 75% to 25%. But even that was a 10 year average. In the first two years spending would bear the brunt of the deficit reduction and tax hikes hardly at all. Between 2012-2014, for example, the proposal called for $384 in spending cuts and only $60 billion in tax revenue increases. That was a ‘mix’ of 87% spending cuts to only 13% tax hikes. The spending cuts were thus ‘front-loaded’, as they say.

The Deficit Commission plan was never voted on as a document or package of proposals by Congress. However, it served as an important ‘template’ for future deficit cuts throughout 2011, including its target total of $4 trillion in reduction. That $4 trillion would appear in various proposals, from the Teaparty ‘right wing’ proposals of Congressman Paul Ryan (April 2011) to Vice President Joe Biden (June 2011), to groupings of Senators (‘gang of six’-July 2011), to the later ‘supercommittee’ of 12 in Congress, and from Obama himself (July 2011 and after). There was thus general consensus among the ruling elites in the U.S. as to how much to reduce the deficit–$4 trillion. The only difference among them was what would be the ‘mix’ percentage-wise between tax hikes and spending cuts to get to the $4 trillion.

Public opinion polls released after the Simpson-Bowles preliminary report, showed a lack of public opinion concurrence with their proposals in several important areas. For one, 70% of respondents disagreed with cutting Medicare and Social Security. Another 60% opposed raising taxes by means of a gas tax or limiting mortgage deductions or lowering corporate taxes.

Once the co-chairs, Simpson-Bowles, decided to break ranks and issue a report before the final release of the Commission’s findings on December 1, that move prompted others to release their own budget cutting proposals.

Sharply contrasting with Simpson-Bowles, an alternate proposal was announced the next day by Representative Jan Schakowsky, Democrat from Illinois, which called for most reduction in cutting defense spending and raising revenue by means of closing tax loopholes for companies that ship jobs offshore. Another proposal was quickly put forward by the ‘Bipartisan Policy Center’, sometimes referred to as the ‘Rivlin-Domenici’ group. Domenici was an ex-senator while Alice Rivlin was a former Budget Director under Bill Clinton and also a member of the Commission. Most of Rivlin-Domenici proposals were ignored by Congress, except for the payroll tax cut that was soon included in the final December 2010 $857 billion stimulus package discussed in chapter five. Their idea of the government providing Medicare vouchers would also appear later in 2011 in full form in radical Teaparty Representative Paul Ryan’s proposal to convert Medicare to a total voucher system.

Obama met with Simpson and Bowles immediately after the release of the official Commission Report in early December. The Report garnered only 11 of the 18 members’ endorsement, so it was not formally sent on to Congress for legislative consideration or vote. In their meeting, the co-chairs urged Obama to move quickly to adopt their proposals. New Teapublicans in Congress were making it perfectly clear, as early as December 2010, they would shut down the government if necessary and refuse to approve a debt ceiling increase if Obama and Democrats did not agree to their proposed deep spending-budget cuts. They also made it clear that the budget agreed to earlier in 2010 was ‘fair game’ for retroactive cuts. Meanwhile, they opposed any form of tax increase, including closing tax loopholes or letting any prior tax cut lapse from law. The deficit-cutting ball was now in Obama’s corner at the year end.

The next confrontation over deficit reduction was anticipated to begin with the President’s announcement of his 2012 Budget in February 2011. However, the real test of wills would come on March 4, 2011 when a stop-gap special funding law to continue to pay the government’s bills was set to expire. Releasing details of his budget so close to the March 4 date in retrospect was a tactical error. It allowed Teapublicans to use the March 4 date as a means for demanding retroactive cuts in the previous year’s budget to offset the future 2012 budget year scheduled to begin October 2011.

Prior to his January State of the Union speech, Obama publicly announced he was considering major changes in social security in his 2012 Budget proposal. Insiders noted this meant slowing benefits and cost of living increases and/or raising the ceiling on the annual income for the payroll tax. Over the preceding decades, wage and salary income for the top 15% households had risen beyond the $106,800 annual ceiling, so that only 84% of all wage-salary earners were covered by the ceiling. Raising the ceiling to $180,000 would cover 90% of all wage-salary earned income, still leaving 10% of the wealthiest wage-salary earners a de facto partial payroll tax avoidance. A third suggestion from the administration floated to the press was to fold state and local government workers into the social security system. The hope was to get Republicans to discuss these options. But the latter did not ‘bite’ at the suggestion. Meanwhile, Obama’s Congressional Democratic base reacted negatively to the idea of throwing these concessions on the negotiating table unilaterally. And a coalition of unions, women’s and other groups lobbied the White House aggressively to postpone making these offers. Obama backed off and didn’t formally propose the items in his February 2012 budget. But the items were now ‘on the table’ and well-known by the opposition. They would thus become a ‘starting point’ for negotiations, a minimum level from which further concessions and social security cuts would no doubt be demanded.

Obama’s 2012 Budget and Deficit Proposals

Where Obama was going was further indicated by his State of the Union address in January 2011. The two main themes were reducing budgets while increasing spending on ‘competitiveness’. The ‘competitiveness’ theme was a cover phrase for tax cuts for exporting companies, lower tax rates on multinational corporations’ offshore earnings, expanding free trade deals and other pro-big business preferences. In addition, Obama put forth the idea of trading tax loopholes in exchange for a major reduction in the corporate tax rate, as part of a major overhaul of the tax code itself. Another major announcement in his state of the union speech was a freeze on ‘non-security, discretionary’ federal spending for the next five years. That represented an increase from his 2010 state of the union address where he called for a three year freeze. ‘Non-security, discretionary’ spending also meant defense spending cuts were not on the table. The 5 year freeze would reduce the deficit by $400 billion, according to the White House. Business interests were reported as only ‘lukewarm’ toward the president’s state of the union address ideas—in contrast to their overwhelming support for his recent December 2010 $857 billion stimulus that provided $802 billion in tax cuts.

Obama’s budget released on February 14, 2011 included a deficit reduction proposal of $1.1 trillion over the next decade. The cut in defense spending amounted to only $78 billion of the total, about 7% and less than $8 billion a year over the decade, even though defense spending represented half of all discretionary spending. Spending on nuclear weapons development, contained in the Energy Department budget instead of Defense Department, was in contrast increased by $2 billion, as were other ‘off Defense budget’ defense related spending for veterans, homeland security, military construction projects, and the like. Oil and energy tax loopholes would be closed, raising $46 billion over the decade, and another $33 billion in cuts in 200 various programs. Modest spending increases were proposed in education, clean energy, R&D, and other ‘long term’ impact items. However, health services spending—i.e. Medicare and Medicaid—cuts were about $20 billion for the coming year, the first such cuts in thirty years. No cuts in social security were proposed in the budget, reflecting the sensitivity of both the Democratic forces in Congress and the grass roots base to such cuts. Indeed, it was more than just the base that was opposed to cutting social security and Medicare. According to the latest PEW research poll at the time, only 12% of the public favored cuts in spending on Medicare or Social Security.

Republicans in the House and Senate immediately attacked Obama’s 2012 budget, and officially put forth their own $61 billion retroactive cuts for the 2011 current year budget. Democrats in Congress countered with $10 billion. Despite the public differences between the administration and its Republican opponents, reportedly both sides quietly initiated joint exploratory efforts behind the scenes to find some common ground on how to get to the consensus $4 trillion in cuts. As one prescient press commentator remarked, “The White House has already opened back-channel conversations to test Republican’s willingness to negotiate about the soaring costs of medicare and Medicaid, Social Security’s long-range solvency and an income tax code riddled with more than $1 trillion a year worth of loopholes and tax breaks. The Senate Republican leader, Mitch McConnell, all but invited Mr. Obama on Tuesday to start huddling about the issues, and a bipartisan group of senators held a third meeting to write debt-reduction legislation?… The latter ‘group of senators’ refers to the formation of the so-called ‘gang of six’.

The Dress Rehearsal: Cutting $38.5 Billion From 2011

As the March 4 initial showdown date approached, Obama requested and received an extension until March 18. That prevented a federal government shutdown—the first of what would prove in 2011 to be several such shutdown threats by Teapublicans. But to get the House Teapublicans to agree to the extension, the administration had to agree to an immediate $4 billion in spending cuts. That easy concession from the Democrats reportedly surprised and encouraged the Republican opposition. It would not be the last of such concessions extracted in exchange for spending cuts. Obama then assigned Vice-President, Joe Biden, as his chief negotiator to represent him in discussions with both House and Senate Republicans and Democrats, accompanied by Obama’s new ex-corporate chief of staff, William Daley.

March 18 came and went and Obama requested another extension to April 8. In exchange, House Republican leaders once again extracted another $6 billion in immediate, unilateral spending cuts in exchange for agreeing to the extension. However, they barely did so. This time fifty four of the Teapublicans in the House voted against the extension, almost up-ending the deal. In the March 18 first extension vote only six Teapublicans voted against granting the extension. The radical, Teaparty right was clearly growing in influence within the House Republican majority.

The April 8 extension, the 7th such extension since the previous October 2010, also meant that a decision on cutting spending retroactively from the 2011 budget was growing close to a second, separate voting to extend the debt ceiling. The deadline for voting to raise the debt ceiling was April 15, at the earliest, and possibly as late as May 3. The two votes were now close to converging—the vote on the 2011 budget cuts and the vote on a debt ceiling increase. This convergence represented a major strategic error by the Democrats. Failing to pass a final 2011 budget on time by October 1, 2010—when they then still controlled both houses of Congress—was about to come home to haunt them as both the budget extension and debt ceiling voting were about to converge. And the closer the convergence, the more House Republican radicals were willing to engage in brinksmanship.

By the end of March the Democrats had moved closer to the Republican position on the 2011 budget retro cuts, agreeing to $20 billion more in spending cuts. The Democrat offer was now $30 billion, reportedly raised in response to the proposal by Obama chief of staff, ex-corporate CEO, William Daley. Daley would later propose another $3 trillion concession.

Realizing their growing political leverage, and the soft response by Obama and Democrats, House leader, John Boehner, now upped his demand for the spending cuts from his original $35 to $40 billion. Democrats were at $33 billion, only $2 billion short of Boehner’s original position of $35 billion. The compromise deal at this point likely would have been $34 billion. But Vice President Biden, lead negotiator for the Democrats, in an interview with the press revealed there were ‘confidential discussions’ underway between himself and Boehner and a deal was close. Once that fact was publicized, the Teaparty based reacted negatively to Boehner’s $35 billion target. They thought it was $61 billion and that was the minimum they’d accept. Boehner went back to Biden and demanded more, increasing his minimal acceptable spending cuts from his prior $35 billion now to $40 billion. Once more inept negotiations on the Democratic side resulted in having to concede more.

After raising his number to $40 billion, Boehner proposed another extension in exchange for yet another $12 billion in immediate cuts in exchange for the delay. This time, however, Obama refused. By April 7 it appeared as if the government might be shut down over a difference of $2 or $7 billion between the parties. But this $2 to $7 billion didn’t count the already $10 billion agreed by Democrats in exchange for the two extensions of time limits. Had the Democrats agreed to another $12 offer by Boehner for a third extension, it would have amounted to $22 billion in spending cuts just to get extensions. That $22 billion, plus Boehner’s $40 billion position, would have just about added up to the $61 billion total demanded by the House Teaparty-driven Republican camp. Boehner would have been the overwhelming winner in the eyes of his Teaparty caucus, in effect getting all they demanded.

At the final hour of negotiations and at the insistence of the Teapartyers, Boehner and Republicans had attached further onerous provisions to their $40 billion cuts proposal, including cutting Environmental Protection Agency rules preventing the EPA from enforcing the Clean Air Act and virtually ending spending on planned parenthood and abortions. Trying to appear previously not directly involved in the negotiations, now Obama called in Biden and Senator Reid to consider. Less than a day remained befor the government shutdown and layoffs of more than 800,000 government workers. Obama blinked. Democrats increased their offer to $34.5 billion on April 7. Boehner reduced his to $39 billion. A final agreement hours before the shutdown was reached at $38.5 billion for the remaining six months of the 2011 fiscal year—a mere $1.5 billion from Boehner’s position and $3.5 billion more than he had originally proposed at the start of negotiations. 59 House Teapublicans nonetheless voted against the compromise. The cuts focused primarily on education grants for poor students, family planning, job training, environment, Medicaid, high speed rail projects, local transportation spending and similar Democratic programs.

Having won this round so easily and convincingly, it was not surprising that Boehner and Teapublicans in the House would re-enact the same strategy on an increasingly grander scale throughout the remainder of 2011. There was the debt ceiling limit milestone to come, the 2012 budget due October 1, 2011 and still further opportunities to come with the ‘Supercommittee’ recommendations by year end.

The even more significant strategic significance of the April 8 budget cut agreement was it now essentially changed the agenda. No more stimulus spending to rescue the economy, which was now slowing rapidly. From this point the debates would center around how much to cut, how fast, what would be the ‘mix’ of tax increases vs. spending cuts to reduce the deficit, and how much would tax cuts for wealthy investors, households and corporations offset the tax hikes for the middle class. That shift would in turn have disastrous consequences for the economic recovery, now about to enter a second ‘relapse’ phase in the second half of 2011.

The Ryan-Teapublican 2012 Budget Plan

As negotiations intensified in the days immediately leading up to April 8, Republicans led by Teapartyer Paul Ryan, chair of the Budget Commitee in the House, issued their proposals for draconian cuts in future deficits and budgets over the next decade. The Republican Budget proposals, officially entitled ‘Path to Prosperity’ and referred to thereafter as the ‘Ryan Budget’, called for $5.8 trillion in budget spending cuts over the next decade. The true ‘net’ budget reduction figure, however, was $4.4 trillion, since the Ryan budget proposed $1.4 trillion in tax cuts, most of which accrued to the wealthy and corporations.

Those tax cuts included making the Bush tax cuts permanent over the next decade until 2021. The Ryan budget also called for reducing the top marginal tax rates for both wealthy individuals and corporations, from current 35% to 25%, as well as further cuts n the estate tax. It also proposed permanent indexing for inflation for the Alternative Minimum Tax, AMT, benefiting households earning $150,000 a year and above—i.e. about the top 10% of all households in the U.S. The top marginal tax cuts for individuals would raise the budget deficit by $700 billion alone. Millionaires would receive yearly tax cuts of $125,000. The Ryan plan proposed no closing of tax loopholes for big oil companies or Wall St. speculators or Hedge Fund owners. In this regard it was even more draconian than the Simpson-Bowles Deficit Commission’s recommendations (which was to become in the months ahead more congruent in many respects with Obama’s counter-proposals to the Ryan plan). To help pay for the new tax breaks for the wealthy and corporations, the Ryan plan proposed to ‘broaden the tax base’—a phrase which effectively meant making middle and working class tax payers pay a total like amount. Since the plan was touted as ‘revenue neutral’, this in effect meant that tax hikes on the ‘broader base’ were actually more than $1.4 trillion.

The Ryan plan called for a total $5.8 trillion in spending cuts: $1.4 trillion from repeal of the 2010 Obama health care law, another $800 billion extracted from Medicaid cuts, and a record $1.8 trillion in cuts in non-defense discretionary programs like food stamps, low income housing, education and other social programs. About $1 trillion more in savings from ending wars in the middle east, but with an offsetting $200 billion increase in all other Pentagon spending from current levels. The remaining $1.1 trillion in cuts would come from other mandatory spending and savings from interest on the debt.

The Ryan plan conspicuously left out reference to social security, as did the Obama 2012 budget. Ryan’s long term goal was to reduce all discretionary non-defense spending to a mere 2% of GDP, which was less than it was in 1929. But the plan’s main target was healthcare entitlements included an eventual total dismantling of the Medicare system. By 2022 Medicare was to transform into a ‘voucher program’ in which government, according to Ryan’s proposals. In place of Medicare, it would provide a flat $8000 a year to each eligible senior to buy health insurance. The voucher amount after 2022 would increase at less than half the rate of medical cost insurance inflation. In 2022 seniors would pay at least 25% of insurance premiums and more in copays, deductibles and other out of pocket expenses. That share of a senior’s cost of total health would rise thereafter to 68% of all health care costs.

The Ryan plan was thus a program designed to massively subsidize the health insurance companies even more generously than Obama’s plan to subsidize private health insurance companies by providing cash subsidies to the 35 million uninsured to buy health insurance coverage. Another difference between Obama’s and Ryan’s plan was the latter aimed at also attacking Medicaid even more aggressively than did Obama’s plan and at repealing the 2010 Health care act, which of course the Obama plan did not. Ryan’s plan proposed therefore to cut more than $2.2 trillion out of Medicaid and the Obama ACA and later more than $1 trillion more out of Medicare. That meant more than half of his goal of $5.8 trillion in spending cuts would come from health care for seniors, the poor, the disabled, and children of the working poor.

Meanwhile, as both Obama and Ryan debated over how to cut health care for seniors (Medicare)and the poor (Medicaid), health insurance companies were heading “into a third year of record profits?. Neither focused their concern on the root cause of rising health costs busting the budget: namely, price and profit gouging by the health insurance industry and other health care providers.

By proposing to privatize the Medicare program, the Ryan plan was the descendant of the George W. Bush effort to privatize social security in 2004-5. Republicans had learned a lesson not to attack social security head on; the new strategy was to come ‘through the back door’ by attacking the more vulnerable Medicare program. Medicare was composed of three trust funds. Only the Part A trust, the hospital program, was financed from payroll taxes. It was sound, returning a surplus every year. Part B, the doctors fund, was less sound but still carried a surplus for another decade. On the other hand, Part D which covered the prescription drug plan was financed out of general government revenues and all of its costs added to the deficit and debt. This was the vulnerable ‘achilles heel’ of the Medicare system. So attacking Medicare through Part D was the anteroom and dress rehearsal to a subsequent broader attack later on Social Security per se. If Medicare could be successfully privatized, a strong example might extend thereafter to thereafter try to privatize social security retirement benefits once again.

A direct response to the Ryan plan was offered by the Congressional Progressive Caucus, called ‘The People’s Budget’. Citing numerous public polls showing overwhelming public opinion in favor of raising taxes on corporations and the rich, and corresponding scant support for cutting Medicare and Social Security, the People’s Budget proposed a total deficit reduction package of $5.6 trillion—almost exactly equal to that of the Ryan Republican Budget. However, it proposed $3.9 trillion in tax revenue increase and spending cuts of $1.7 trillion. It also called for public investment in the amount of $1.7 trillion to create jobs. The People’s Budget was largely ignored by both the administration and the Congress, not to mention the public media and press that gave it little if any coverage. None of its alternative approaches or proposals were adopted or integrated into either the Obama budget, the ‘gang of six’ Senators attempts to push the Simpson-Bowles proposals, or the Ryan-Teapublican counter-budget.

With the introduction of the Ryan plan the gauntlet was now thrown down by the Teapublicans. The 2011 budget revision fight may have ended on April 8, 2011. But that event was merely the dress rehearsal for much larger similar confrontations to come: the pending debt ceiling deadline in August and the final deficit cutting proposals due out in November. Moreover, a pattern was now emerging: Republicans would take it to the brink so long as Obama and the Democrats continued to back off their positions and unilaterally concede. It was the ABCs of hardball negotiations, a game that Republicans and Teapublicans knew well and Democrats either refused to play or, in the case of Obama, had yet to learn.

To the Brink: Debt Ceiling Deal of August 2011

The Ryan budget announced April 5 flushed out President Obama. Heretofore he attempted to operate behind the scenes allowing his ‘front men’, Vice President Obama and Senator majority leader, Harry Reid, handle negotiations directly with the Republican leaders and their ever-assertive and dominating Teapublican base. Obama invited the opposition leaders to the White House on April 14 to his speech on the matter and to discuss the deficits and 2012 budget. The Teapublicans expected to hear major concessions from an apparent concession-ready president. This time they didn’t. Obama concluded offering Vice-President Biden once again to lead the negotiations. The Republicans, and Teapartyers in particular, left the speech furious, calling the Obama speech ‘highly partisan’, a strange phrase given their own even more partisan positions of recent weeks. At first even refused to meet with Biden. They knew well the strength of their bargaining position given that they were willing to push negotiations to the brink once again, now using the debt ceiling as the lever. As of mid-April that debt ceiling was $14.294 and the debt level was $14.216. It was getting close.

The April 14 speech that infuriated Teapublicans appealed conversely to Obama’s party base. Simpson-Bowles thought it was ‘unfortunate’. A so-called ‘gang of six’ senators, close adherents to Simpson-Bowles, composed of three Republican conservatives, two Democrat conservatives, and one Democrat recently turned conservative (Dick Durbin), re-activated their discussions as a possible means to stack out a more center-role between Ryan-Boehner and Obama. On the other hand, AFL-CIO leadership loved the rhetoric, declaring “the rhetoric of the speech was fabulous?. Obama then toured the country, speaking and attempting to drum up public support for his plan. In early May Biden began his negotiations, with the administration announcing it wanted a $4 trillion minimum deficit reduction deal with Republicans, including cuts in Medicare and Medicaid.

Pressure on a May 31 debt ceiling deadline was relieved by an April tax revenue flow larger than expected. At the same time, Treasury Secretary, Tim Geithner, indicated the Treasury could borrow another $299 billion and extend the debt ceiling limit to early August. Urgency to come to an agreement was consequently delayed, as the Democrat controlled Senate put off development of its own budget proposal for 2012, in order to allow the Biden negotiations to continue. So long as those negotiations were not finalized, a Senate version incorporating them was not possible.

The ‘gang of six’ in May intensified their efforts in the interim. Their effort stalled by month’s end, however, as one of its Republican conservatives, Tom Coburn of Oklahoma, withdrew from the group after demanding $130 billion more in Medicare cuts as a condition for his continuing to work with the group. By June the only remaining game in town was Biden’s negotiations.

Prior to resuming discussions with Biden, House budget chair, Paul Ryan, declared it would take $2 trillion in spending cuts to permit the debt ceiling increase through the November 2012 elections. $2 trillion in spending cuts was now the Republican minimum start point for negotiations. A symbolic House vote rejecting a debt limit increase resulted in Obama inviting House Republicans as a group to the White House on June 2. Republican leadership thereafter pressed Obama to get directly involved in the negotiations, but the president still deferred to his VP, Biden. An anonymous aid to the Biden negotiating group of six Congressman and Senators noted that the first $1 trillion in cuts was easy, the second $1 trillion hard, and anything beyond that required tax increases and more Medicare cuts—thus confirming the target once again was $4 trillion. By the end of June the Biden negotiations broke down over the issue of including tax increases in the total deficit package. The Republicans—House majority leader, Eric Cantor, and Republican Senator, Jon Kyl—walked out. It would be later reported that Biden had offered $2 trillion in spending cuts in exchange for less than $1 trillion in tax loophole closings. Obama quickly entered negotiations at the end of June, holding private meetings with Boehner and Senate Republic leader, Mitch McConnell.

That Obama was clearly prepared if necessary to trade more Medicare-Medicaid cuts for some tax loophole closings was indicated by his public statement at the end of June, in which he said, “Before we ask seniors to pay more for healthcare…I think it is only fair to ask an oil company or a private jet owner that has done so well to give up that tax break. He then indicated that July 22 was the de facto deadline debt to avoid a risk of defaulting if the debt ceiling were not raised by August 2.

With the July 22 deadline to avoid default less than two weeks away, on July 10-11 Obama engaged in direct negotiations with House Speaker, John Boehner, first just the two on the golf course and later at the White House. Although the talks between the two were considered confidential, reports nevertheless leaked out that Obama offered $200 billion in cuts to Medicare and Medicaid as an initial incentive to get Republicans to agree to $130 in tax increases, and then further indicated there could be even higher cuts he might agree to in exchange for tax hikes. Not only Medicare-Medicaid but now social security retirement were all put on the table by the president. However, in addition Obama wanted a ‘grand deal’ of $4 trillion total cuts in exchange for the big entitlement cuts, plus an agreement of no more debt ceiling brinksmanship up to the November 2012 elections.

With bigger Medicare-Medicaid, and now social security, cuts both on the table, House Speaker Boehner was reportedly amenable to considering a ‘grand deal’ of $4 trillion. But word leaked of the President’s eagerness to trade Medicare and now social security for a ‘grand deal’ plus an agreement to get the debt ceiling issue off the table until after the 2012 elections. This set off a firestorm of protest by both the president’s Congressional base in Congress as well as from traditional Democrat interest groups outside Washington.

The administration quickly back-tracked. Presidential Press Secretary, Jay Carney, publicly announced the president would not agree to any benefit cuts in social security. But he added further that this didn’t mean the president “would not place the subject off limits in negotiations to reduce the deficit?. Former Democratic Senate staffer, Larry O’Donnell, now MSNBC-TV political talk show host, offered the official administration ‘spin’ on his July 12 show on the leak about the President’s offer to cut social security as well as Medicare. O’Donnell argued “Nothing was ever agreed to by Obama?… ?Nothing’s agreed to unless everything is agreed to?. And since Boehner did not agree to the $4 trillion, there wasn’t really an offer by the administration to cut social security and medicare. It was a clever tactical move by the president, O’Donnell argued, to draw out the Republicans to see if they would ever agree to a ‘grand deal’ of any kind.

Following the collapse of the ‘grand deal’ proposal over the weekend of July 9-10, Senate Republican minority leader, Mitch McConnel proposed a new solution—i.e. an ‘escape window’ out of which Obama and Republicans might scamble to avoid a debt ceiling default. McConnell proposed Congress authorize Obama to raise the debt ceiling and then take responsibility unilaterally for doing so. According to the McConnell proposal, if Obama raised the debt ceiling unilaterally himself, the Republicans would vote against it knowing they could not override a veto by Obama to sustain the ceiling increase. The debt ceiling would be raised and the Republicans could claim they opposed it. Both sides jockeyed back and forth for the remainder of the second week of July over this proposal. The ‘escape window’ idea was soon pre-empted by other initiatives.

By mid-July the respective positions were: the Republicans would agree to $2 trillion in spending cuts but no tax loophole closing; the Democrats preferred $4 trillion with $1 trillion in loophole closing—for which they were prepared to up the amount of Medicare-Medicaid and even agree to social security cuts—but only so long as Republicans agreed to no more brinksmanship on debt ceiling issues until after November 2012. Between $2 and $2.4 trillion in spending cuts was conveniently about what was needed to get through 2012 without further debt ceiling extension votes. It’s just that the Republicans had to agree if the $2 trillion in spending cuts was agreed to, they in turn would agree not to raise the debt ceiling issue again. The $2 trillion was also approximately what Biden had offered back in June, but with $1 trillion in tax loopholes closings—the latter over which, to recall, Republicans had broken off negotiations at that time. The final issues were thus coming down to $2 trillion in cuts in exchange for loophole closings and/or no more debt ceiling brinksmanship up to the 2012 elections.

Over the weekend of July 16-17 McConnell and Democratic Senate leader, Harry Reid, held intensive negotiations between themselves. On Sunday, July 17, the Reuters new agency announced that “Reid wants up to $1.5 trillion in mandatory spending cuts?. This signaled that Obama and the administration were about to agree to a spending cuts only deal worth between $1.5 trillion and the $2 trillion minimum demanded by the Republican side. There was no mention of accompanying tax increases or loophole closings. The Democrats had caved in once again to the Republican position. The only unknown elements at this point was whether the Republicans would agree to not re-raising the debt ceiling extension issue until after 2012 and would defense be included in the spending cuts.

More Radical Proposals Emerge

While Reid and McConnell were slouching reluctantly toward some kind of $2 trillion spending cut deal, other forces were in motion and increasing the pressure to cut some kind of deal. The July 22 date and passed and only one weekend remained to come to an agreement before the August 2 true debt ceiling deadline. As McConnell and Reid were working out their deal, two sets of deficit cutting proposals even more draconian than the Ryan plan emerged in the public view. One from the House and another from the Senate.
Both made the pending $2 trillion spending cut deal appear benign and even generous.

The independent Senate package announced July 20 was the brainchild of the ‘Gang of Six’ Senators (i.e. Simpson-Bowles retread advocates), who had been quietly restructuring their proposals since June. It called for reducing deficits by $3.7 trillion over ten years. In terms of spending cuts, however, it was really $4.2 trillion, since it included $1.5 trillion in tax cuts and $1 trillion in offsetting additional middle class tax increases. The $1.5 trillion in tax cuts was composed of reductions in both the top tax rate for individuals and for corporations, from the current 35% to 23%-29%. It also abolished the Alternative Minimum Tax for upper income households altogether. The additional tax revenue derived mostly from reducing homeowners’ mortgage deductions, health insurance tax credits, and other consumer tax credits—i.e. mostly middle class tax measures. Another $500 billion over the decade would be taken out of Medicare and health care spending. Particularly serious was a proposal for the immediate reduction of $500 billion in spending—a major ‘front-loaded’ spending reduction. This was the Simpson-Bowles plan with a kick. In fact, the two co-chairs, a day before the gang of six’s release of the proposal, in a public statement urged “Pray for the Gang of Six?.

A second, far more draconian proposal announced on July 20 was offered by the House Teapublicans. It was a legislative proposal that was passed by the House and was called the ‘Cut, Cap and Balance Act’. It proposed to cut federal budget back to the level it was in 1966. That amounted to a 25% across the board cut in everything in the federal budget—including defense, social security, medicare, and all the rest. Now 24% of GDP, federal spending would be ‘capped’ thereafter at 18% of GDP and the budget balanced. That was an immediate 35% spending cut of about $1.2 trillion. Moreover, any future tax increases required a two-thirds vote in both the House and Senate.

If the ‘gang of six’ proposal meant returning the economy to the deep recession level of 2008-09, then the House Teapublican ‘Cut, Cap and Balance’ ensured the economy would be thrust far deeper into a depression. A 6% cut with capping at 18% of GDP represented a –$1.8 trillion reduction in GDP, or in percent terms an equivalent –12% drop in GDP. That was twice as severe as the ‘gang of six’ proposals and equal to depression level GDP declines not seen since the 1930s.

At this point business interests both in the US and abroad intensified their pressure on the parties to settle, in particular on the recalcitrant House radicals. Now that there were no proposed tax hikes, the latter’s position was decidedly weakened. The normally ultra-conservative U.S. Chamber of Commerce pushed for a settlement. The Federal Reserve chairman, Bernanke, warned of the consequences of no settlement. The rating agencies, Standard & Poor’s and Moody’s Inc., warned of consequences of default and a downgrade on government securities. Global capitalist institutions like the International Monetary Fund issued warnings, as did European central banks. On July 28 the stock markets gyrated globally, the US market experiencing its worst day in two months, its worst weekly run in a year, falling to a level not seen since 2008.

By July 27, less than a week before the August 2 deadline, Boehner and Reid had closed the gap. Both called for non-defense, discretionary spending cuts between $740-$751 billion and additional mandatory spending cuts of $20-$41 billion. Both were willing to increase the debt ceiling by $2.5-$2.7 trillion—thus putting off subsequent debt ceiling fights until after the November 2012 elections. A major difference remaining was Reid wanted to include cutting defense and war spending by another $1.0 trillion, whereas Boehner wanted an additional $1.2 trillion in spending cuts decided in a second vote and no cuts in defense whatsoever. Reid rejected another vote.

In the final compromise reached on July 31, Reid dropped all cuts in defense spending, as both agreed to approximately $840 billion in guaranteed spending cuts, with no cuts in defense. Boehner in turn dropped his prior demand for a second vote by both the House and Senate for an additional immediate $1.2 trillion deficit reduction. The additional $1.2 trillion was delayed until year end 2011. Thus, at minimum, a guaranteed $2 trillion in spending cuts only was agreed by the parties. And no tax increases included in the $2 trillion deficit reduction.

In addition, both Reid and he agreed to set up a separate Congressional group (thereafter called the ‘Supercommittee’ of 12) to decide on possibly as much as $1.5 trillion more in deficit reduction by November 2011. That $1.5 trillion could potentially supercede the $1.2 trillion. So total deficit reduction could be as high as $2.3 trillion—or even more if the Supercommittee wanted to raise its target beyond $1.5 trillion, which was a minimum. On the other hand, if the Supercommittee could not agree on the additional $1.5 trillion, or if it did but Congress rejected it, then the original $1.2 trillion in spending cuts agreed on Augusts 2 would automatically go into effect. If the automatic $1.2 trillion option occurred, the spending cuts were to be divided roughly equally between defense and non-defense spending and any tax hikes were prohibited. However, if the Supercommittee option prevailed and was passed by Congress—thus superceding the $1.2 trillion—then any percentage mix of defense vs. non-defense was possible. Furthermore, also possible were tax hikes as well as cuts in social security, Medicare, and Medicaid.

The ‘Supercommittee’ was scheduled to report out its recommendations to Congress on November 23 on how to reduce the deficit by the additional $1.5 trillion. Congress would have until December 23 to vote on the Supercommittee’s recommendations. Boehner and Reid agreed in the August 2 deal that there would be no amendments after the November 23 recommendations. It was ‘an up or down vote’ of the Supercommittee’s recommendations. Democracy was thus to be reduced from 535 to 12 individuals in Congress. Both Houses of Congress passed the bill on August 1, 2011, one day before the default deadline. Obama signed it into law on August 2.

Assessing the Debt Ceiling Deal

Summarizing the final deal of August 2 clearly Boehner and the Teapublicans had ‘won’ more from the deal than had Obama and the Democrats. First, there was the guaranteed approximate $2 trillion in all spending cuts, excluding any defense cuts, that had been the House radicals’ main demand for months. Second, their equally priority demand of no tax hikes, including tax loophole closings, was also obtained. Obama and Democrats caved in on both their positions to include tax loophole closings and some defense spending cuts. What the Democrats did trade in return for these concessions was the agreement to raise the debt ceiling by at least $2 trillion through the election period. Apparently, one way to prevent getting beat up by bullies is to pay them off in order not to punch you for another year!

There was still, moreover, the open ended possibility of $1.5 trillion—or more—in further deficit reduction if Congress agreed in December to vote to replace the $1.2 trillion automatic spending cuts with the Supercommittee’s recommendations offered on November 23, 2011. But for Congress to ‘vote up or down’ the Supercommittee recommendations meant the possibility of ‘tax hikes’ in the mix of recommendations, less in terms of defense spending cuts, and the very likely possibility of including cuts in social security and medicare that were not included in the automatic $1.2 trillion. Clearly, if Teapublicans wanted more cuts, no defense cuts, and cuts in social security and Medicare that they also demanded, they might have to accept tax hikes in some proportion of the $1.5 trillion. This reopened the door once more to proposals put forth in the original Simpson-Bowles Deficit Commission.

It also opened the door to new proposals by Obama as well, in which he resurrected once again his preference to trade tax loophole closings in exchange for cuts in Medicare-Medicaid and even social security. That trade-off would soon emerge Obama revealed yet another, 4th Economic Recovery Plan within weeks of closing the debt ceiling deal—as will be discussed in chapter 9 to follow. Before considering that 4th, and most recent, recovery program of the administration, it is first necessary to address the ‘Economic Relapse of 2011’ itself, which ultimately forced the administration to develop its fourth recovery program in an attempt to prevent an economy faltering badly once again from heading for a ‘double dip’ recession a mere two years after the ‘first dip’ had officially ended in June 2009.

Jack Rasmus, copyright November 2011, ‘Obama’s Economy: Recovery for the Few’, April 2012, Pluto Books, London, UK.

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