posted July 8, 2013
Austerity American Style

(This article appears in two parts in the July-August issues of ‘Against the Current’ magazine, n. 165-166, and is available for downloading as well at the author’s website: www.kyklosproductions.com).

On April 10, 2013, Obama released his formal budget, ushering in what this writer predicts will be the final stage of recent negotiations involving deficit cuts—aka Austerity American Style—a process that began with Obama’s creation of a Deficit Cutting Commission in the summer of 2009. Chaired by arch-conservative retired Senator, Alan Simpson, and Bill Clinton’s former chief of staff, now investment banker, Erskine Bowles, the ‘Simpson-Bowles’ Commission issued its report and recommendations for deficit cutting in November 2010 immediately after the midterm Congressional elections at the time, calling for cutting approximately $4.4 trillion from the US deficit over the coming decade in a ‘mix’ of 25% tax hikes and 75% spending cuts. That report has served as the ‘template’ and benchmark for deficit cutting negotiations from 2010 to the present.

With Obama’s publication of his 2014 budget proposals this past April 2013, the current round of deficit cutting set in motion by Obama’s Simpson-Bowles Commission four years ago may be coming to a conclusion of sorts by this September 2013. The important question is: why now a conclusion after four years of deficit cutting negotiations by Obama and Congress? And what might this last act—the final phase in what has been a negotiations farce aimed at creating the appearance of major differences between the two sides—actually produce in terms of federal government spending and tax changes?

The explanation of ‘why now’ and ‘what next’ is to be found in a convergence of events that have been taking shape the past six months, i.e. events which strongly suggest a major agreement forthcoming between the Obama administration and the Teaparty Republican dominated U.S. House of Representatives. However, the deal will be an agreement that is less a ‘grand bargain’ and more accurately the result of a ‘grand collusion’ between the Obama administration and House Republicans.

The key events driving the convergence include: Obama’s signing of a token ‘Fiscal Cliff’ tax agreement on January 1, 2013 that raised taxes on only the wealthiest 0.7% households but effectively removed the item of personal income taxes in general, and Bush tax cuts extension specifically, from the deficit debate in 2013; the Obama administration and the Republican radicals in the House jointly allowing the $1.2 trillion in ‘sequestered’ spending-only cuts to take effect on March 1, 2013; Obama’s immediate thereafter unilateral offer to the Republicans, within days of the sequestered cuts taking effect, to cut an additional $630 billion from Social Security and Medicare; both sides cozily agreeing not to confront each other in negotiations on March 27 and May 18, when the government required additional funding and when the debt ceiling deadline arose once again, respectively; and, not least, the event yet to occur: a major revision of the entire US tax code—the magnitude and scope of which has not been witnessed since 1969 or 1981—that is now working its way on a fast track through the Teaparty controlled US House Ways and Means Committee.

The convergence of these five developments, all having occurred since the November 2012 national election, mean a final deal on deficit reduction is in the works and virtually assured between Obama and House Republicans before year end 2013—a deal that was likely initially worked out in close collusion between the two in the closing months of 2012.

As They Say: ‘Let’s Do the Numbers’

As of May 2013, $2.8 trillion of the Simpson-Bowles originally recommended $4.4 trillion in deficit reduction had been achieved: $1 trillion in social program spending cuts enacted as part of the August 2011 debt ceiling deal between Obama and Congress. Another $600 billion in ‘Fiscal Cliff’ measures implemented January 1, 2013. Plus another $1.2 trillion in sequestered further spending-only cuts that went into effect March 1, 2013.

Obama’s post March 1 unilateral offer to cut Social Security-Medicare by another $630 billion—which is now ‘on the negotiating table’ as a minimum offer to the Republican radicals in the House—brings the total deficit cuts to $3.43 trillion. That’s three fourths of the way to the Simpson-Bowles initially recommended target of $4.4 trillion, and represents a path to a 87% to 13% ‘mix’ in spending cuts vs. tax hikes—a ‘mix’ that is even more generous than the original Simpson-Bowles proposed 75% v. 25%.

Given that Obama and the House radicals are less than $1 trillion apart, it was not surprising that House Republicans reconsidered their brinksmanship strategy in recent months and agreed to continue to fund the federal government on March 27, 2013 when the government was to run out of money. It was no less not surprising Republicans then further decided to avoid another ‘debt ceiling’ showdown on May 18, 2013, when the federal government was supposed to reach its legal debt ceiling limit once again.

You can almost hear the US House Teaparty radicals debate in their caucus last March 2013:

‘Why fight over a goal almost reached, and on terms already extremely generous to the wealthiest households? After all, millionaires and billionaires got to keep the ‘lion’s share’ of their $4.6 trillion Bush tax cuts with the January 2013 fiscal cliff deal, giving up only $.6 of the $4.6 trillion. Obama has already unilaterally offered to cut $630 billion from Social Security and Medicare. That’s obviously just a starting point. We can extract even more entitlement and spending cuts from the Obama administration in a final deal. Now that the individual income tax issue (aka Bush tax cuts) has been resolved, let’s focus on getting big tax cuts (via tax code changes) for our corporate and business friends as part of the final deal. We’ll give Obama some of the token tax loophole closings he wants. That will give him political cover. They don’t amount to much. In exchange, we’ll get him to reduce corporate tax rates from 35% to 28% or less, which he already promised publicly to do. We can lower taxes on multinational companies too, make other business tax cuts permanent, plus other measures—all of which will more than offset the loophole changes. We can even raise taxes on the middle class and extract even more spending cuts from Obama as part of a final deal.’

US Austerity As Multi-Act Farce

In case anyone has missed it, in other words, the ‘grand bargain’ has already been largely agreed to, except for the final phase that is about to unfold. So why haven’t Obama and the House Republicans already agreed to the final deal, if they are both in fact already so close with less than $1 trillion between them? Because they are waiting on the massive tax code change proposals to work their way through the House by late summer. At the center of those changes will be historic cuts in corporate taxes and a ‘broadening of the tax base’—a code phrase meaning more taxes on the middle class.

That’s when the real horse trading will begin: big cuts in social security, medicare, education and other social programs in exchange for a restoration of defense spending and an overhaul of the tax code. Whereas the personal income tax issue was resolved with the phony ‘fiscal cliff’ last January and taken ‘off the bargaining table’ going forward, now the corporate tax and middle class tax deductions, exemptions and credits will be addressed. Token corporate tax loophole closings will be traded for massive reductions in corporate tax rates, from current 35% to at least 28% and other reduced tax rates for multinational corporations and other businesses. Republicans will extract from Obama big cuts in social security and medicare in exchange for the token loophole closings and a peace deal on debt ceiling brinksmanship at least beyond the 2016 midterms. Much of these trade off issues have already been agreed upon in principle between the two parties. All that remains is the precise numbers. But it all must wait on the final ‘glue’ of the deal—the tax code revisions.

‘Grand bargain’, ‘fiscal cliff’, ‘sequestration’ were the ideological catch-phrases used to cover up the negotiations in the past and sell the past agreements to the public. The new sales message justifying the final phase will be: ‘let’s save social security’ (by gutting it) and ‘let’s enact tax fairness’ (by cutting corporate taxes). It all represents a multi-act farce to sell ‘Austerity American Style’ to the US public.
The August 2011 debt ceiling deal—in which Obama and Democrats agreed to an immediate $1 trillion in spending cuts only—was the first act in the farce. Both political parties then mutually agreed to table their ‘deficit dance’ during the 2012 election year, and talked about economic programs and proposals they had absolutely no intention of introducing once the elections were over. Thereafter, within days of the November 2012 election, both sides immediately restarted the deficit cutting process under the catchphrase of the ‘fiscal cliff’, a much hyped and phony argument that the economic sky would fall in if a settlement was not reached on the Bush tax cuts expiring at the end of 2012 and sequestered spending cuts taking effect.

The phony ‘fiscal cliff’ was thus the second act in the farce, peddled to the public as precipitating a second economic crisis and recession if the Bush Tax Cuts (which is what the fiscal cliff was all about) were not extended. Having cost the US Treasury $3.4 trillion in the preceding decade, extending the Bush tax cuts from 2012 to 2022 would cost another $4.6 trillion, according to the Congressional Budget Office’s 2012 estimates. So the ‘fiscal cliff’ deal agreed to by Obama sliced off a mere .6 and allowed $4 trillion in tax cuts to continue (80% of which go to the wealthy and corporations).

Had all the Bush tax cuts been allowed to expire at year end 2012, the US deficit and debt for the next ten years would have been only $2.3 trillion, or $230 billion a year—about a trillion dollars less each year compared to the $1 to $1.4 trillion in each of the years 2009-2012 under Obama. Require multinational corporations to pay taxes on their offshore cash hoard of $1.9 trillion today and place a 1% financial tax on common stock trades of more than 100 shares and ‘voila’, balanced budget for the next decade and no need for any spending cuts. However, by Obama allowing the extension of $4 trillion of the $4.6 trillion Bush tax cuts as part of the ‘fiscal cliff’ deal this past January 1, 2013, the deficit rose by more than $4 trillion more over the coming decade, or around $7 trillion. That $7 trillion in deficits, by the way, is just about what two decades of Bush tax cuts, from 2001 to 2022, will have cost in terms of tax cuts for the rich.

With the fiscal cliff tax cuts for the rich out of the way, and the $2.2 trillion in spending-only cuts (August 2011 and March 2013 sequestered) enacted, the stage is now set for a final act of the deficit cutting charade begun with Simpson-Bowles back in 2010. With $2.8 trillion already ‘in the bag’, and Obama offering to cut another $630 billion in social security-medicare, both the Obama administration and House Republicans are about to play the final scene. That scene involves the massive change in the US tax code favoring Corporate America that will occur before Obama’s 2014 budget takes effect this coming October 2013. Currently moving rapidly through the US House Ways and Means committee, the tax code bill is expected to come up for a vote sometime in the August-September 2013 timeframe in Congress.

To better understand how the past four years of deficit cutting negotiations between Obama and House Republicans represents more accurately a ‘grand collusion’ rather than a ‘grand bargain’, it is useful to recap briefly the milestones in the history of deficit (aka austerity) cutting in the U.S. Following that brief historical review, this article will conclude with a look at Obama’s 2014 budget proposal and how it ‘sets up’ the stage for the final act in the process that will be performed before the end of this year 2013.

A Review of Deficit Cutting, 2010-2012

Issued within days after the Teapublicans took over the US House of Representatives following the 2010 midterm Congressional elections, the Obama administration fully embraced the Simpson-Bowles Commission’s recommendations as its own and promoted it as the basis for negotiating a ‘grand bargain’ in deficit reduction. The Commission’s approximate $4.4 trillion total target was agreed to, moreover, by virtually all parties in Congress at the time, including Teaparty radicals in the House—and has been ever since. That includes House Teaparty annual budget proposals in 2011-12 by Paul Ryan, by the ‘Gang of Six’ in the Senate, by outsiders like ex-Senators Domenici-Rivlin, and all others. It’s always been $4 trillion and change as the total deficit reduction target. The only difference between the parties—Obama and Democrats on the one hand and Teaparty radicals in the U.S. House of Representatives and Republicans—was the ‘mix’ of the $4.4 trillion: i.e. how much in spending cuts vs. how much tax revenue hikes; how much to cut defense spending vs. how much social programs; and how much to tax the wealthiest 2% vs. taxing the middle class.
In June 2011, Vice-President Biden was assigned by Obama to begin negotiating the basis for the ‘grand bargain’. He and House Speaker, Boehner, attempted and failed to do so, even though Biden had offered a package of 87% spending cuts to only 13% tax hikes—even more onerous than Simpson-Bowles’ recommended 75%-25% mix. (As noted above, currently the mix is the former, 87% v 13% proposed by Biden).

Obama then took over negotiations with Boehner directly in July 2011. He unilaterally—i.e. with no counter concession from Boehner—offered to cut Social Security and Medicare by $700 billion to entice Boehner and House Teapublicans into a deal. Offering big cuts in Social Security-Medicare has thus been a bargaining tactic by Obama, the ‘carrot’ dangled to the Teapublicans to entice them to agree to a Grand Bargain, from the very beginning.

Boehner and the Teapublicans did not ‘bite’ on Obama’s grand bargain offer in July 2011, however. Instead they held firm and demanded an ‘all spending cuts’ agreement in exchange for raising the federal government the debt ceiling in August 2011. They got their way. Obama and the Democrats caved in on all his demands by August for some tax revenue hikes. All they got from the August 2011 ‘debt ceiling deal’ was an agreement from the Teapublicans not to raise the debt ceiling issue again until after the November 2012 elections. Very convenient for the president and the Democrats; not so for the rest of us since the August deal involved $1 trillion in immediate social spending only cuts, mostly in public education, with another $1.2 trillion in spending only cuts—called the ‘sequestered cuts’—that would take effect on January 1, 2013.

As part of the August 2011 $2.2 trillion deal Congress was given the option to cut even more than the $1.2 trillion ‘sequester’ part of the total. A special committee of Congress (the so-called ‘Supercommittee’ of House and Senate leaders) was established and given the option to cut more than the $1.2 trillion by year end 2011. The Supercommittee, however, not surprisingly decided to ‘kick the can down the road’, and put off all deficit cutting during the 2012 election year. Deficit cutting was conveniently shelved for the politicians for another year.

In 2012 both parties and their candidates instead talked about economic programs neither had any intention of introducing. Regardless who won the November 2012 election, the Simpson-Bowles ‘template’ was waiting in the desk top drawer, to be resurrected after November 2012. And that’s exactly what happened within days of the election. Once re-elected, Obama immediately again offered $340 billion in ‘entitlement’ program cuts in his attempt once again to resurrect the grand bargain negotiations.
But the Teapublicans and big corporate interests, in the form of the Business Roundtable in particular (the biggest and most influence corporate lobbying group in the US composed of CEOs of the largest corporations), were neither interested in a ‘grand bargain’ in 2011 or anytime prior to the 2012 November elections. The Business Roundtable preferred to focus on the Bush tax cuts that were scheduled to expire January 1—not the ‘sequestered’ $1.2 trillion in spending cuts also scheduled to take effect on January 1, 2013 as well.
The Roundtable and other Corporate interests were interested in ‘decoupling’ the tax extension issue from the sequestered spending cuts issue. That would prevent a potentially larger ‘trade off’ between the tax cuts and the spending cuts. The Bush tax cuts—more than 80% accruing to wealthy households and investors—were far more important than the spending cuts. The primary goal has always been to protect and extend the Bush tax cuts; cutting spending and deficits has always been secondary and the spending cuts should be at the expense of social programs.

Following last November 2012’s elections, the Teapublicans initially wanted all the Bush cuts extended permanently, but the Business Roundtable wanted some kind of a settlement on the tax issue first. Without that happening, the Roundtable’s even bigger objective of a major revision of the entire tax code, including cuts in the top rate of corporate taxes from 35% to 26%, already working its way through Congress, could not proceed. To preserve as much of the Bush tax cuts as possible the issue had to be decoupled from the sequester. Furthermore, the Bush tax cuts had to be ‘taken off the table’ before the tax code could be revised and corporate tax rates reduced. Following the November elections, the Roundtable therefore blocked with Obama and against the House Teapublicans. To get the public onboard, the media ‘spin’ given to the Bush tax cuts extension was the ‘Fiscal Cliff’. Although the media included the sequestered spending cuts as part of the ‘Fiscal Cliff’, that was separated tactically by both the Roundtable and Obama weeks before January 1, 2013.

With the assistance of House Speaker, Boehner, Obama plus the Roundtable prevailed over the Teapublicans. It was touch and go, with Teapublican leaders like Ryan and Cantor wavering and taking a neutral stand to protect their ultra-conservative credentials. But in the end no doubt campaign finance spending by the Roundtable big corporations prevailed and the Obama-Roundtable-Boehner nexus were able to swing a sufficient number of House Republicans to get a ‘tax deal’ on January 1, 2013.

2013: From ‘Fiscal Cliff’ to Obama’s 2014 Budget

And how sweet a deal it was. Only $60 billion a year of the deficit was reduced, impacting less than 0.7% of the wealthiest households—far fewer than Obama’s promised 2%. Moreover, as part of the deal, the Alternative Minimum Tax was permanently repealed (amounting to about $100 billion a year tax cut benefit to the wealthy), the Inheritance Tax was cut even more generously than under Bush, and all the other Bush tax cuts were made permanent. No need to extend them ever again. The total cost in revenue loss and therefore deficit increase that remained was $4 trillion over the coming decade. Ironically, that’s just about what the Simpson-Bowles commission recommended in deficit reduction. The deficit for the coming decade was thus raised from $2.5 trillion to now about $7 trillion as result of the Bush tax cut—aka ‘Fiscal Cliff’ deal—of January 1, 2013. Now the attack on spending could begin in earnest once again, and focusing on entitlements in particular.

As part of the January 1 Fiscal Cliff ‘deal’ as well, the sequestered additional $1.2 trillion in spending only cuts were postponed for two more months, until March 1, 2013. In signing the deal on January 2, 2013 Obama declared more tax revenue hikes would have to be negotiated in future deals. No doubt he and Democrats believed that the March 1 date would put pressure on the Teapublicans to compromise on more tax hikes in exchange for avoiding the approximate $500 billion in defense spending cuts that were part of the sequestered $1.2 trillion that would go into effect on March 1. There was also the March 27, 2013 date when the Federal government would run out of money to pay its bills. Surely, the Teapublicans didn’t want to get blamed again for that fiasco, as they had been in the past? And thereafter there was the May 18, 2013 revisiting of the debt ceiling extension again. Obama undoubtedly believed somewhere along this line the Republicans would give him the token tax hikes he needed as cover to agree to his massive cuts in social security, medicare and Medicaid he was always willing to make as part of a ‘grand bargain’.

But the Teapublicans again called his bluff. They let the sequestered spending cuts, including the defense cuts, go into effect on March 1, 2013. They then agreed to fund the government past March 27 and suggested as well the debt ceiling would not be an issue. This left Obama with no bargaining leverage for insisting on tax revenue hikes. His answer has been once again, for a third time in less than two years, to offer big social security and medicare cuts. Obama’s repeated offering of hundreds of billions in social security and medicare spending cuts represents one of two things: either Obama is an incredibly inept and incompetent negotiator, offering unilaterally such a generous concession without anything in return; or he truly believes cutting such entitlements (which are really deferred social wages) is a desirable objective for the US economy and for 60 million American seniors and retirees, disabled, single women heads of households with children, and others who are the primary recipients of social security and medicare. It is likely both reasons, unfortunately.

The question is why have the Teapublicans agreed to the token January 1 tax hikes? Why did they agree to allow the $1.2 trillion sequestered cuts, including defense spending, go into effect? Why did they not engage in brinksmanship again on March 1 or March 27, unlike they did in August 2011? And why will they not go to the brink again on the debt ceiling issue when it arises once more in May?
The answer to the first question is they got a tax deal they simply couldn’t refuse on January 1, and a deal which their big corporate campaign benefactors, the Business Roundtable, wanted. After having blocked with Obama prior to the January 1 deal, however, the Roundtable has since ‘switched sides’ and adopted the Teapublicans position on subsequent spending cuts in total.

In February 2013, the Roundtable came out with its position paper on the matter of sequestered cuts and entitlement spending. It proposed to cut the social security COLA adjustment, introduce a means test for Medicare, raise the eligibility age for both Medicare AND social security to 70, and convert Medicare into a voucher system in 2022. That’s exactly the Teapublican-Paul Ryan program. With big corporate interests now in their corner firmly with regard to entitlement cuts as the primary focus of deficit cutting, why should the Teapublicans agree to any further tax hikes on the rich? And with the Roundtable and CEOs now firmly on their side, and the tax cuts successfully decoupled from the spending cuts, why should the Teapublicans go to the brink over shutting down the government on March 27? By March 1 they were already almost three-fourths of the way to the $4 trillion deficit target, with a total of $2.8 trillion in spending cuts and token tax hikes. That leaves only $1.2 trillion to go!

By letting the March 1 sequestered cuts take effect, the Teapublicans in effect did to Obama on the topic of defense spending what Obama had the opportunity to do to them on the topic of Bush tax cuts on January 1 but didn’t take. Obama could have let all the Bush tax cuts expire on January 1, and then reintroduced middle class tax cuts only on January 2. That would have put the Teapublicans in the position of having to vote down middle class tax cuts. But he didn’t, and settled for the paltry 0.7% hike on taxes on the wealthy, some of which will undoubtedly be reversed again, buried deep in the legislation, when the major tax code negotiations conclude later this year. The Teapublicans, by allowing the sequestered defense cuts to take effect on March 1, can also always reintroduce legislation piecemeal later this year to restore many of the defense cuts.

It’s not surprising that Republican Senator, Lindsey Graham, and others in Congress, in recent weeks have offered ‘deals’ amounting to another $1.2 trillion in deficit reduction. That number is not coincidental. Graham’s proposal is for $600 billion in social security and medicare cuts and another $600 billion in unspecified tax revenues. A close look at Obama’s 2014 budget reveals almost the same ‘mix’.
What the past three years of deficit cutting show clearly is that Obama has planned all along to cut social security and medicare. He made that clear in his signing of the Bush tax cuts deal on January 2, 2013, during which he stated: “Medicare is the Main Cause of Deficits?. And again, in his February State of the Union address, Obama publicly noted he ‘liked the Simpson-Bowles’ recommendations concerning Medicare cuts.

And what are the Simpson-Bowles recommendations for Medicare cuts?

A new $550 a year deductible for Parts A and B of Medicare and provide only 80% coverage for Part A instead of the current 100% (which would require another $150-$300 a month in private insurance to cover the remaining 20%, much like Part B now). That together amounts to another $195-$350 taken out of monthly social security checks to cover, when the average for social security benefit payments is only $1100 a month today. In other words, Medicare benefits will not be cut. Its just that if seniors want to maintain current levels of benefits they’ll have to pay even more for them. Alternatively, they can choose to have fewer benefits and not pay more. It’s all about rationing health care, just as Obamacare, the Affordability Care Act of 2010, for those under 65 is essentially about rationing—as were Bush’s proposals to expand health savings accounts (HSAs) and Bill Clinton’s health maintenance organization (HMOs) solution. The ACA, Obamacare, is a direct extension of Clinton’s ‘Managed Care’ and Bush’s ‘HSAs’, and represents one step further in the 20 year strategy to start rationing health care services in America based on income.

In the weeks just prior to releasing his 2014 budget, Obama once again unilaterally offered to reduce social security COLA increases, suggest an increase in age eligibility for retirement benefits, cut disability eligibility, and to introduce other measures to cut Medicare. The proposals were kept general and without specific details or numbers, however. In contrast, he indirectly suggested that the roughly $500 billion in defense spending cuts included in the sequestered $1.2 trillion in spending reduction, might have to be largely restored.
More detail concerning both entitlement and defense spending cuts, as well as Obama’s view on taxation changes (and thus tax code revisions moving through the House) are revealed in his April 13, 2013 released Budget for Fiscal Year 2014 that starts October 1, 2013.

Obama’s 2014 Budget

To understand the proposals in Obama’s budget it is useful to compare those proposals, and their economic impact on the deficit, with the Congressional Budget Office’s ‘baseline’ budget estimates. The CBO’s baseline represents estimates of the spending and tax revenue levels for the coming decade prior to Obama’s 2014 budget. The differences thus reveal how much Obama is proposing in his 2014 budget to cut (or increase) spending on programs andto raise (or cut) in taxes, as well as when (in what years).
Since Obama himself has been quoted as indicating Medicare is the main cause of future deficits, we can begin with that program.

Medicare in the 2014 Budget

The Medicare program has five basic spending categories: hospitals (Part A), doctors (Part B), nursing homes, prescription drugs (Part D), and government payments to private insurance group plans including the private insurance subsidy to ‘Medicare Advantage’.
The CBO baseline costs for Medicare for 2012-2023 shows Medicare costs for Part A (Hospitals & Nursing homes) and Part B (Doctors fees) rising by an increment of $195 billion from 2012 to 2023. However, receipts and revenues will rise by $227 billion. In other words, the two main programs will continue to show a net surplus of receipts over expenditures by 2023. So where’s the cost crisis?
The answer to that lies with the Prescription Drug program (Part D) and the Medicare program’s subsidies to Group Plans including Medicare Advantage private insurance supplement.

The Prescription Drug program (Part D) was introduced by George Bush in 2005. The legislation provided for no payroll tax to cover the cost of the program. From the very beginning of the program and continuing today, it has been totally paid for out of the general US budget—i.e. out of deficits. It has cost more than $500 billion since its initial passage, and is still rising in costs terms as pharmaceutical companies continue to inflate prices for their products at double digits every year. The Bush law specifically prevents any limits on drug company cost increases. States and cities cannot even negotiate drug price reductions. Nor can they legally purchase the same drugs from outside the US, often produced by the same company. Nor can individuals buy drugs legally from Canada. Free trade is ok for businesses, but not for government or consumers, in other words!

Part D cost increases in the CBO baseline are projected to rise by an additional $114 billion over the coming decade. But there are no receipts or revenues whatsoever to pay for the program for the next decade. That results in a negative incremental cost of $114 billion for the program through 2023. Similarly, Medicare program subsidies for group plans are projected to rise by an additional $127 billion by 2023. That’s a combined total of$241 billion in increased costs for the Medicare program overall through 2023. Subtract the $32 billion in excess receipts over cost for Hospital and Doctors fees (Part A and B), and the shortfall declines to $209 billion. Subtract further the $90 billion in cost cutting for Medicare called for in the March ‘sequestered’ spending cuts, and the result is a net shortfall in Medicare of $119 billion.

In other words, the total additional cost for the Medicare program in general over the coming decade is approximately equal to the cost for prescription drugs. The Medicare cost problem is therefore essentially the refusal to enact a payroll tax for prescription drugs and to allow drug companies to price gouge the public and government. So why not finally pass a tax to pay for Part D? Why not introduce some price cost limits on prescription drugs?

In short, if Prescription Drugs were properly funded by a payroll tax, as Hospital and Doctors have been from the beginning of the Medicare program, there would be no net cost increase in Medicare through 2023. Fund part D and there’s no Medicare cost crisis whatsoever. Even if not funded, the $209 billion shortfall hardly constitutes the ‘primary cause’ of the $7 trillion projected deficits through 2023, that Obama and others are claiming is the root problem with the deficits.

The root cause of the $7 trillion projected deficit is not Medicare; it’s not even prescription drugs. The root cause of the $7 trillion in projected deficits is the $4 trillion extension of the Bush tax cuts, plus the continued trillion dollar a year U.S. defense spending program.

Another simple solution to the $119 billion total incremental cost for Medicare over the decade is that proposed by the Trustees of the Social Security program themselves in their 2011 annual report. According to their own calculations, a mere 0.25% increase in the payroll tax for Medicare (now at only 1.45%) would solve all Medicare cost issues through 2022. Another 0.25% after 2022 would solve all shortfalls for a further second decade. But you won’t hear that mentioned in the press or media.

To summarize, even according to government estimates (CBO and Trustees), there is no Medicare cost crisis. There is a problem with escalating prices for prescription drugs. With no price controls, as is presently the case, Part D costs are projected in the CBO baseline to rise by 17% a year for the next four years and by 19% a year on average over the coming decade. And there is a problem with no tax to fund the Part D program. A simple addition to the payroll tax to cover Part D and some reasonable price controls on drugs would resolve the problem.

Up to now, the Obama administration’s solution to the ‘problem’ of runaway drug costs and escalating subsidies to Medicare Advantage and other group plans—which together are the true source of Medicare cost problems—has been to cut payments to Doctors and to draw down the surplus in the Part A hospital fund. Unlike the projected 17% a year increase in payments to drug companies, payments to doctors in the CBO baseline are to decline from current $68 billion in 2012 to $61 billion in 2016 when Obama leaves office. Cutting payments to doctors will mean more leaving the Medicare system and refusing to take medicare patients. That will accelerate the creation of a two tier health care system in the US already well underway.

But even cutting doctors payments and drawing down the surplus in the medicare trust funds are not long term solutions. Drawing down the trust fund surplus to pay for prescription drugs and group plans will exhaust the remaining trust funds by the end of this decade. Obama and Republicans know this and are therefore preparing to implement major cuts in medicare coverage and to raise Medicare recipients ‘out of pocket’ costs for reduced Medicare coverage. That comes next in the Medicare cost cutting plan that neither Republicans or Obama are ready to make public. Recall the Simpson-Bowles solution: make medicare recipients pay 20% more of Part A hospital coverage, pay more deductibles, and raise the eligibility age beyond 65. Or, as the Business Roundtable and Teaparty radical, Paul Ryan, have proposed: privatize medicare starting in 2022 and provide vouchers. Obama prefers the former; Republicans in the House prefer the latter. But whichever the case, it all amounts to rationing of health care services for all but the wealthy who can afford to pay out of pocket.

That further rationing of health care services for seniors is implied in Obama’s 2014 budget. In his Budget Obama has proposed to cut Medicare by $364 billion over the decade. Not included in that is a second proposal to freeze payments to doctors over the decade at 2013 payment rates, starting with an immediate 24% reduction in doctors payments in 2014 followed by a slow adjustment to the 24% cut thereafter. Unfortunately, the Obama 2014 budget does not indicate the total ‘savings’ from this reduction and freeze. But one can probably assume the total is somewhere around $100-$150 billion cumulative over the decade. The total cuts to Medicare alone are thus at least $500 billion in Obama’s 2014 budget.

Social Security in the 2014 Budget

To begin with, it is essential for readers to understand that the Social Security retirement trust fund (OAS) currently has a $2.77 trillion surplus, whose arguing social security is going to go broke soon conveniently ignore. Nor does the press and media bother to note that fact much. Like Medicare, the truth about the condition of Social Security lies in understanding the financial condition of its separate programs.

Like Medicare, Social Security is composed of several programs. There’s the retirement program (OAS) and there’s the disability insurance program (DI). The OAS has the massive $2.77 trillion surplus and, in addition, remains virtually fully funded from payroll taxes through 2023 without having to draw down the surplus. It is the DI program, on the other hand, has a funding trouble. Since the economic crisis erupted in 2007-08, approximately 2 million more workers went on disability. The lack of real job recovery has meant fewer payroll tax contributions to the DI fund. The result has been a shortfall in the DI fund of about $30 billion every year.

But the shortfall in the DI fund is used by opponents of social security to argue the entire program is in trouble. They then also use a base year of the recession and poor job recovery and extrapolate out for decades to create the false impression that social security revenues are insufficient while costs rise. That dishonest approach to calculating costs and revenues creates a false picture of tens of trillions of false liabilities for social security in general, requiring the major cuts to benefits that both Republicans and Obama now propose.

But here are the facts: For the OAS program, benefit payments are projected to rise at a rate of 11% a year from 2012 to 2023, from $773 billion in 2012 to $1.422 trillion in 2023. But revenues from the payroll tax are projected to rise at nearly the same annual rate, of 10.5%, from $570 billion to $1.125 trillion. Other revenues (interest, taxes on benefits, etc.) increase the revenue total by 2023 to $1.320 trillion. So we’re talking about a $100 billion shortfall at most by 2023, which is not bad considering 77 million babyboomers are expected to retire starting 2013.

So why not start drawing on the $2.77 trillion surplus, instead of making retirees pay the difference? After all, the payroll tax rate was increased in 1986, justified at the time as necessary to create the surplus in anticipation of the boomers retiring.

Another simple solution is to raise the annual income ‘cap’ to cover the 15% of wage earners whose income has risen faster than the income base since 1986. Currently, the payroll tax covers only 85% of wage earners, when the law intended 100%. Raising the cap would generate revenue by 2023 well in excess of the $100 billion shortfall, and do so for several additional decades to come with money left over.

But none of these, or other simple solutions, are being considered by Obama or House Republicans. Instead, both sides are in agreement to cut retirees annual cost of living adjustments to retirement benefits by changing the cost of living adjustment formula. And both continue to agree to raise the eligibility age for social security retirement benefits.

The first of these two alternatives—reducing the cost of living adjustment—is already baked into Obama’s 2014 budget. The second—raising the retirement eligibility age to 68 or higher—will likely come as part of the deal later in 2013 deal on the deficit.

The device by which Obama in his budget proposes to reduce annual cost of living adjustments for retirees is by changing the price index by which the adjustments are calculated. Instead of using the Consumer Price Index, he has proposed to substitute it with a ‘Chained CPI’ index. The latter will reduce the deficit by $232 billion, bringing the total deficit reduction from Medicare and Social Security retirement to more than $700 billion. (The amount Obama offered to cut the programs initially back in the summer of 2011). But this $700 billion is just the beginning offer to cut social security spending. Additional DI program spending cuts are being worked out administratively and through court action as well—all off budget. Eligibility for DI is being raised and benefits are being reduced in parallel. That will add at least another $100 billion in benefit reductions over the coming decade. So Obama is offering and presiding over no less than $800 billion in social security-medicare cuts. And that’s before further cuts are part of the final deficit cutting deal later this year, integrated with corporate tax cuts and the tax code revision.

It is clear, in other words, that both Republicans and Obama are targeting about $1 trillion in social security-medicare spending cuts over the decade. That $1 trillion, plus the $2.8 trillion already obtained in deficit reduction from the Fiscal Cliff and Sequestration, means only another $500-$600 billion in deficit cutting remains for a final deficit deal later this year.

But that is not quite accurate either. The tax code revisions will result in hundreds of billions more in corporate tax cuts that will have to be offset by further tax hikes and/or additional spending cuts. There is also the restoration of defense spending cuts of $500 billion required by the March 1, 2013 ‘sequestered’ spending provisions. Another $1 to $1.5 trillion will have to be extracted in tax hikes and/or spending reductions. Which raises the question of what does Obama’s 2014 budget suggest in terms of tax changes and additional spending cuts?

Tax Proposals in the 2014 Budget

Throughout the 2012 election period Obama was explicit in advocating a major reduction in the corporate tax rate, from current 35% to 28%. In that regard, his position was essentially that of Republican candidate, Mitt Romney. Obama also favored publicly working some compromise for Multinational Corporations, reducing their offshore tax liability to entice them to pay some part of the current $1.9 trillion they are hoarding in offshore subsidiaries without paying taxes. (Actually, the ‘offshore’ accounts are located in New York). His budget proposes taxing ‘international income’ only at the rate of $15 billion a year. At that rate it will take more than 50 years to tax the current $1.9 trillion.

Obama has also been an advocate of even more generous tax cuts for smaller businesses and for Research & Development. His budget proposes raising the business R&D credit to 17%, resulting in a tax cut of $118 billion, and allowing small businesses to write off equipment investment immediately, resulting in another $69 billion in revenue loss. Just these two items, plus the corporate tax rate reduction and letting multinational companies off the tax hook, will cost the US budget at least $700 billion to $1 trillion, and likely much more.

To pay for the tax cuts for corporate America coming later this year, Obama’s budget proposes to limit tax deductions and exclusions for businesses, especially for employer health insurance and pension contributions. That is projected to raise $493 billion. It will also mean the acceleration of employers abandoning their health insurance and pension plans for their workers and further exacerbate those crises and costs to workers. Minimal added taxes on tobacco would raise another $83 billion. An increase in the Estate Tax would only take place after Obama leaves office, which politically means not at all. A token ‘financial responsibility’ tax on banks is also another proposal likely ‘dead on arrival’ given the Republican dominated US House, as will prove similar for the proposal for a token ‘fair share’ tax on millionaires.

Netting out the tax cuts and the tax hikes, it means a net gain for businesses in terms of tax cuts of about $400-$500 billion, for which other tax hikes on the middle class and spending cuts will have to occur. That’s $500 billion plus the roughly $600 billion gap ($4.4 trillion minus $3.8 trillion). In short, another minimal $1 trillion in tax hikes and spending cuts—apart from and in addition to the social security-medicare cuts already proposed—will become part of a final deal later this year when the tax code revisions are integrated with the deficit cutting.

The additional, final $1 trillion will likely come from two general sources: eliminating deductions, credits, and exemptions for middle class tax payers and cutting further discretionary spending programs like education, transportation, and other non-defense discretionary programs.

Defense Spending in the 2014 Budget

Almost $500 billion in defense related spending was cut in the March 1 ‘sequestered’ provisions that went into effect. Obama has vowed to restore at least $400 billion of that. For 2013, the sequestered discretionary spending cuts amount to $64 billion. Obama has proposed restoring $40 billion of that $64 billion in defense spending.

Over the decade it is clear that the budget strategy involving defense is to ‘move the money around’. Spending for what is called ‘overseas contingency operations’ (which means for wars in Iraq and Afghanistan) would be reduced. Much of the reduction would be in turn transferred to spending on new military equipment, earmarked largely for the US Navy and Air Force, as US military strategy ‘pivots’, as they say, to the western Pacific. The US Army had its land wars in the middle east; now the money goes to the Navy and Air Force. US military equipment suppliers simply get to change their ‘product mix’ sales to the US government and the military industrial complex continues virtually unaffected.

Some Conclusions

What the Obama Budget for 2014 shows is that a close collusion on deficit cutting now exists between his administration and the Republican House. The shift from bargaining to collusion began in early 2011, but developed more fully after the November 2012 elections. A final deal on deficit reduction is now on the fast track.

Following the fiscal cliff deal of January 1, 2013— that let the wealthiest 2% off the tax hook—and the sequestered spending cuts allowed to go through on March 1, Obama has signaled to the House Teaparty radicals he is willing to massively cut social security and medicare by offering a generous $700 billion plus in cuts—cuts that will certainly total more than $1 trillion once a final phase deal is reached with House Republicans later this year. Neither Obama nor Republicans are willing to spell out in detail at this stage what the additional cuts will be in medicare, but the Simpson-Bowles template is a good idea of where they’re jointly headed. Other discretionary spending programs will also get a further whack. Vice president Biden’s initial summer 2011 offer of a 87% v. 13% ‘mix’ in spending cuts-tax hikes thus appears well on track.

Also essentially agreed to between the administration and House Republicans is to pass massive corporate tax cuts that will come in the form of the tax code revisions. Those corporate tax cuts will be paid for with still more entitlement spending other discretionary spending reductions, and with middle class tax hikes in the coming ‘final’ deal. Obama will get his token tax loophole closings, in exchange for far more generous corporate tax reductions. The individual wealthy got their ‘sweet deal’ on January 1; their corporations are now about to get another.

Both sides, Republicans and Democrats, are agreed in principle to restore much of the defense spending cuts identified in the March 1 sequester. Obama has signaled he wants to restore $400 billion of the roughly $500 billion. House Republicans will no doubt want to restore it all, and then more in the final deal.

Specifically on Obama’s 2014 budget the conclusions are: Obama is engaging in what might be called a strategy of ‘moving the money around’. Defense spending on middle east wars are to be shifted to defense spending increases for the pacific region. Social Security retirement benefits are to be cut in order to offset the rising costs of disability benefits. Medicare benefits for hospital, and doctors fees, are reduced and costs shifted to retirees in order to offset continued runaway prices and costs for prescription drugs. Simple solutions like raising the cap on social security payroll tax, implementing a token percentage tax to cover prescription drugs, placing some kind of controls on runaway drug prices, addressing the reason why so many workers are now going on disability, etc., are totally ignored and boycotted in the press and media as alternatives for consideration. Instead, the focus is on reducing benefits and making retirees and workers pay more for less. What all these Obama-Republican measures represent is a shifting of the cost burden of social security, medicare, and other discretionary social program in the budget from one sector of the working and middle classes to another; from the wealthiest households to the remaining 95% rest. Meanwhile, the wealthiest households and their corporations continue to get still further tax reductions and the Pentagon and war corporations get to shift their profits from the middle east conflicts to the western pacific to address a ‘threat’ from China that doesn’t exist.

What Should Be Done

Clarifying the dimensions and details of the deficit cutting charade—aka Austerity American Style—that has occurred the past four years is necessary but not sufficient. It is no longer enough just to reveal and complain. It is time to do something about it. So what can be done?

The leadership of organized labor—the AFLCIO and Change to Win unions—appear content simply to ‘talk’ and not ‘walk’. They are more concerned about embarrassing their Democratic party friends, in the hope of receiving a few policy crumbs here and there, like appointments to the NLRB and such. They could easily make a major move to do something about the attacks on social security, medicare, education, and so forth and demand taxing the rich and their corporations by calling for a national march on Washington. But they won’t.

Writing letters to Congress or the president also won’t change anything. This is not the Democratic party of your grandfathers, who passed social security and medicare. This is the Democratic party that has agreed in principle with Republicans and Teaparty radicals to dismantle these programs slowly and in steps over the coming years and decades. Their only disagreement is how to do so and how fast.

What is now necessary is grass roots organizing to begin the formation nationwide of ‘Social Security-Medicare Defense Clubs’. After all, that’s how Social Security started in the first place. Neither party—Democrat or Reublican—proposed it in the 1930s initially. A grass roots protest, organized by the clubs forced President Roosevelt and the Democrats to reverse their initial opposition to socials security just before the midterm 1934 elections and to support the proposal for Social Security. Now it’s time to reform the clubs to defend social security. Now is the time to organize a million person march on Washington to reverse whatever cuts are surely forthcoming later this year. Now is the time to begin developing forms of independent political action.

Jack Rasmus
Copyright, May 25, 2013

Jack is the author of ‘Obama’s Economy: Recovery for the Few’, 2012, which provides a history of deficit cutting in the US and predictions of its impact. His blog is jackrasmus.com. For a video presentation on social security and medicare given recently to the Progressive Democrats of America, see his website at www.kyklosproductions.com/videos.html. His radio show, ‘Alternative Visions’, airs every Wednesday at 2pm on the Progressive Radio Network.

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