Reading the Debt Ceiling Tea Leaves to Predict the Future

The Worst is Yet to Come

Z Net , July 14, 2011

A few weeks ago in late June it leaked out that Vice-President Biden had secretly agreed with Republicans to $1 trillion in spending cuts in an effort to get them to agree to raise the debt ceiling. That was soon upgraded in rumors to Biden agreeing to $2 trillion. And there was no agreement by Biden from Republicans in exchange for equal tax hikes on the rich and corporations. It raised political eyebrows. It disconcerted the Democrat political base. Most did not believe it. It must not be correct. President Obama will straighten this out by taking over negotiations.

President Obama did step in and take over negotiations with the Republicans directly. Many assumed when he did so that he did not agree with Biden’s massive concessions. There would be no agreement on cuts in social security and medicare, the Party faithful argued.

However, this assumption proved incorrect. Obama met Boehner on the golf course, and then over a weekend. It leaked a second time that Obama had himself in fact agreed with Boehner, not to $1 or $2 trillion but to a $4 trillion dollar ‘grand deal’. $3 trillion of that total was spending cuts, with at minimum $400 billion in cuts in social security and medicare frontloaded in the first few years. Apparently, House Republican leader Boehner agreed in exchange for the $3 trillion cuts to $1 trillion in tax hikes in the form of closing the most egregious tax loopholes for corporations, investors, and corporate CEOs.

The ‘grand deal’ blew up in both Boehner’s and Obama’s faces. Both bases rose up. First the Republican and then progressively the Democrat, when the latter began to discover their $3 trillion was predominantly social security and medicare cuts. It set off a firestorm within the Democratic party base and even lit some campfires within the moderates in the party in the House. Representing the Democratic mainstream within the House, Nancy Pelosi came out publicly rejecting any cuts in social security and medicare, adding she and her colleagues were not even in the loop as to the Obama-Boehner negotiations.

The Obama team then began back-tracking off its position, hurrying to find formulations that denied its $3 trillion, social security-medicare cuts position in the negotiations.

Enter now the past weekend and the real power behind the Republican Party—the moneybag campaign contributors—i.e. the powerful big bankers, Chamber of Commerce, Business Roundtable, big corporations and institutional investors. They had the most to lose should the debt ceiling not be raised. We’re talking real money here if bond prices collapsed and the stock market, already in decline, accelerated. Or if the banks in Europe collapse due to deepening debt problems in Greece, Spain, and now Italy. Pressure on Republican Senate, and to some extent House Republican leadership, intensified this past weekend. House leader Boehner and Senate leader McConnell blinked. In so many words, they agreed to allow the debt ceiling to be raised and will no longer hold the raising as a tactic to extract ‘no tax hike’ concessions from Obama.

Democratic Party ‘spin-doctors’ also went into action. The explanation over the cable shows and talk radio on Tuesday, July 12–now that the Republicans de facto had backed off their ‘no debt ceiling increase’ position–was: “See, this was all a clever tactic by the President, a real bargaining ploy, a maneuver all the time. President Obama never really meant or proposed to cut spending, social security and medicare in particular, by $3 trillion. The president knew all along the Republicans would not agree to any tax hike as part of the deal. That’s why he offered to cut $3 trillion in spending cuts. Now the Republicans gave up. The President won. Hooray!”

As ex-Democratic Senate operative, Larry O’Donnell, now TV political talk show host, declared on his show Tuesday night: “Nothing was ever agreed to by Obama”. O’Donnell’s explanation intended to absolve the President’s offering draconian cuts in social security and medicare in exchange for a debt agreement. As O’Donnell repeated the spin-message: “Nothing’s agreed to unless everything is agreed”. And since everything was not agreed to by the Republicans, ipso facto O’Donnell’s contorted logic meant Obama never agreed to sacrifice social security and medicare to get a deal.

But the gutting of social security and medicare is not over. The negotiations have just begun anew. All that’s changed is that big money bag corporate campaign contributors arm-twisted their Republican politicians to drop the debt ceiling as hostage factor in the debt debate and negotiations.

The day after the ceiling is raised, and it soon will be, the real negotiations will begin. Those real negotiations will pick up where Obama-Biden left off. On the table once again will be the President’s proposals to cut $3 trillion in entitlements. That will be the start point for negotiations, not the end point.

Once that $3 trillion in cuts and the evisceration of social security and medicare is back on the table, that will conclusively disprove O’Donnell’s and Obama administration’s ‘spin’ message that Obama’s proposals to cut social security and medicare was only tactical, a maneuver, and that he really never meant to propose to cut social security and medicare. But, yes, he did mean it. Yes, he did propose it. And yes he will propose it again. And once it’s back on the table, that means it was never a mere maneuver, that it was fully intended.

The next act in the cut the deficit follies will begin the day after the debt ceiling is passed. The new deadline will be the deadline for passing the federal budget for 2012, which begins October 1.

This writer predicts the coming ‘cuts’ in social security and medicare will take the form of raising the retirement age to 70 and sharply reducing social security disability benefit payments as well. For medicare, it will mean retirees will have to absorb all future medicare cost increases for Part B (doctors costs) and pay substantially more deductibles for Part D (prescription drugs). The current monthly fee for Part B will initially double, from the current $95-$115 to more than $200-$250 a month per person. That way Obama can say he never ‘cut’ medicare benefits and yet get massive reductions in medicare and social security spending ranging from $200 to 400 billion a year for the next decade.

In exchange for these cuts in medicare-social security, this writer predicts the Republicans will eventually agree in the 2012 budget to some token tax loophole closing for the rich and corporations. But the loophole closing will be more than offset in an agreement post-budget to a major overhaul of the general tax code. Tax code revisions are what Corporate America really wants, and they and Republican politicians have been calling for since 2010 as a priority. The tax code revisions, I further predict, will include reducing the corporate tax rate from 35% to 20%, lowering rates for foreign profits tax to placate the multinational corporations, and institutionalizing most of the Bush era tax cuts for investors for the next decade. What the politicians ‘take’ from corporate interests with one hand, they will give back twice with the other.

This ‘trading tax loopholes for tax rates’ and vice-versa has been the decades long tax ‘shell game’. Eliminate loopholes when they become bad public PR and thereby raise some tax revenue. Then give the tax revenue back to corporations, and then some, by lowering the corporate tax rate. Conversely, when public discontent grows with corporations not paying their fair share in tax rates, raise the rates but open up more tax loopholes. That’s how the net federal revenue from the corporate income tax has been reduced over recent decades from 20% of total revenue to barely 10%.

All these maneuvers are unfortunate and deceitful by both parties. For all it takes to resolve social security’s issue for the next 75 years is to raise the cap on the 12.4% payroll tax rate to cover all forms of income, capital forms and earned wages. That will not only cover all shortfalls but enable the lowering of the retirement eligibility age. And as for Medicare, all it takes to cover its shortfall is a mere 0.25% increase in the Medicare share of the payroll tax for the next ten years and another 0.25% starting in the eleventh year. But you won’t hear that discussed in the upcoming negotiations to make seniors and retirees pay for the deficits they did not create.

Jack Rasmus is the author of Epic Recession: Prelude to Global Depression, Pluto Press and Palgrave-Macmillan, May 2010; and the forthcoming ‘Obama’s Economy: Recovery for the Few’, same publishers, late 2011. His blog is and website:

Source: Z Net

Share This