Fauxbama Strikes Again

As everyone not out fishing has heard, the debt ceiling negotiations between President Obama and the Republican leadership have run into a wall. The posturing in Washington is so intense that politicians will need a batallion of chiropractors to realign their spines.

The long and short of the matter is very simple. The current budget deficit and the accumulated public debt arises from two primary causes: (1) a decrease in revenue due to tax cuts for the rich and (2) an increase in expenditures on warfare. The debt is owed to private investors, foreign governments and (due to some fancy fiscal fiddling) by the Government to itself. Obama’s solution for paying down the debt has been to entice Republican support for taxing the rich by offering (3) cut backs to Social Security and medical care. It’s as simple and crude as that. But just in case you didn’t catch the shell game shuffle, we will play it out again in slow motion.

The Posturing

Since April 2011, the President has been pushing for a four trillion dollar “Grand Plan” that will, he says, provide a “balanced deficit reduction framework” and a “pro-growth economic strategy” which “lays the foundation for strong private-sector job growth and ensures that shared prosperity will keep the American dream alive for generations to come.” (White House Fact Sheet, 13 April 2011)[1]

The Republican leadership, on the other hand, is adamantly opposed to any plan that will involve “progressivity” in tax rates no matter what. The “no matter what” includes stabbing the nation’s credit rating in the back.

In response to this stand-off, credit rating agencies have warned that they might cut the government's top-rung debt rating. [2] This past week, an evidently panicked China, which holds one trillion dollars of U.S. government bonds, repeated its June warning not to “play with fire” and urged the United States to adopt “responsible policies... to guarantee the interests of investors.” [3] China was joined by Republican Senator Mitch McConnell who coyly opposes his own party’s brinkmanship stating that default “destroys your brand and would give the president an opportunity to blame Republicans for a bad economy.” [4]

From the sidelines, Senator Bernie Sanders (Ind-Vt) issued a call not to balance the budget “on the backs of the most vulnerable people in this country” with “horrendous cuts” to programs which “working people desperately need [and] that are utilized every day by the elderly, by the sick, by our children.” Deficit reduction, he said, “should be about shared sacrifice” and needed to include cuts in run away military spending and taxes on large corporations. Senator Sanders urged the public to join in and sign his letter to Obama. [5]

In this past weekend’s radio address (16 July), Obama urged an end political posturing, stating that the deficit problem could not be solved “without asking the wealthiest Americans to pay their fair share.” Obama said that he was “willing to compromise” and “willing to do what it takes to solve this problem, even if it’s not politically popular” but “if we’re going to ask seniors, or students, or middle-class Americans to sacrifice, then we have to ask corporations and the wealthiest Americans to share in that sacrifice.” [6]

So, did Sanders’ call for “shared sacrifice” finally get through to the President? No. He is still "going to ask" seniors and students to sacrifice. The “shared sacrifice” theme was in fact Obama’s, laid out in his April 2011 “Fact Sheet” entitled “The President’s Framework for Shared Prosperity and Shared Fiscal Responsibility.” [1] But whereas Senator Sanders’ puts the sharing where it belongs, in Obamaspeak the words “share,” “consensus” and “compromise” mean screwing the middle class -- “middle class” being America’s euphemism for the working stiff or, as is now more likely the case, the stiff out-of-work.

The Accounting

In principle, calculating a budget deficit and the resulting debt is a simple matter of measuring incomes versus outflows. The projected debt (or surplus) is the same calculation drawn out over a period years and based on assumptions about incomes and outflows in the future. The devil is in whose peas are counted, and it is here that the shell game is played.

There is no question but that the U.S. government over the past decade has overshot its revenues and is currently 14 trillion dollars in the hole. However, neither social security nor medicare are the cause of this deficit which, as we have said, is almost entirely the result of tax breaks for the wealthy and military spending.

Back in 2001, the Bush administration projected a budget surplus of 1.2 trillion dollars through FY 2004. However, at the end of that period the Administration revised its figures so as to show a “deficit estimate of $445 billion for 2004.” ([7] “Mid-Session Review” 30 July 2004, pg. 5.)

According to the Review, 49% of this swing was due to "economic and technical re-estimates," 29% was due to "tax relief," and the remaining 22% was due to "war, homeland security and other enacted legislation." (Mid-Session Review, p. 5.) Although it might take several passes to decipher the burble, the 49% “economic and technical re-estimates” translated into the fact that projected receipts based on the late 90’s dot com bubble failed to materialize. (Ibid., pg. 5.) This could be called the Greenspan Hole.

In other words, in the Administration’s own words, the Bush Deficit was caused by a downturn in the economy (which drove down tax revenues), tax breaks to corporations, investors, speculators and “High Net Worth Individuals” (which drove revenues down even further) and an 85% increase in spending for war.

The Bush Administration’s budget philosophy was trenchantly summarized by its own chart on page eight of the report entitled, “ENHANCED SECURITY -- RESTRAINT ELSEWHERE.”

“Restraint Elsewhere” meant “controlling entitlement spending” coupled with “restraint” on corporate taxes. The report concluded that “by continuing a policy course that promotes economic growth and job creation [through tax breaks] and by restraining [entitlement] spending ... we can maintain the deficit’s downward path and return the budget to economic growth and job creation, and by stronger footing in the years ahead. (Mid-Session Review, pg. 9.)

Nothing could be clearer. Bush’s wars were to be paid for by the elderly, the disabled and the sick.

Around the same time, the Congressional Budget Office published a fiscal analysis and ten-year budget projection which, give or take 10 billion here or there, arrived at the same general results. (CBO-Budget & Economic Outlook (August 2003) [8])

The CBO report noted that defense was the “fastest growing component of discretionary spending” (Ibid, pg. 5.) and that the so-called Bush Tax Breaks (the Jobs and Growth Tax Relief Reconciliation Act of 2003) had resulted in corporate income taxes which were at “their lowest level since 1959 [sic].” (Ibid, pp. 2-3.)

In November 2010, the New York Times published an interactive [9] which challenged readers to balance the budget through 2015 and 2030. The challenge was a cake-walk. The budget was easily balanced by taxing the wealthiest elements of society and reducing military spending from monstrously stratospheric heights to merely "over-the-top" levels.

More particularly, on the revenue side, the budget could be balanced through 2030 by: (1) restoring the estate tax to pre Clinton (i.e. Reagan) levels; (2) raising investment taxes to Clinton era levels; (3) allowing the Bush Tax Breaks to expire; (4) charging social security taxes on incomes over $106,000 and (5) imposing a special sur-tax on incomes over 1 million. On the outlay side, the budget was balanced primarily by: (1) reducing military spending to pre-Iraq and Clinton levels and by withdrawing down Afghanistan and Iraq troop levels to a total of 30,000. Not a penny of entitlements needed to be cut.

This weekend, Bloomberg News broke out the figures of the accumulated public debt. [10] Of the 14.3 trillion the Government owes, 4.6 trillion is owed by itself to the raided Social Security Trust Fund. The remaining 9.7 trillion is owed to holders of U.S. Treasuries; that is, to investors and foreign governments that have loaned the United States money. What was this money borrowed for? Since 2001, the U.S. has gone into debt for the following:

1.----Bush Tax Cuts for the Rich...............................1.6 trillion
2.----Interest Costs ...................................................1.4 trillion
3.----Wars in Iraq & Afghanistan..............................1.3 trillion
4.----Obama “Stimulus” Program...........................800 billion
5.----Obama “compromise” Tax Cuts for Rich........400 billion
6.----Medicare Drug Prescription Plan.................. 300 billion
7.----Financial Industry Bailout..............................200 billion

Those are the figures; and yet, from listening to noise emitted by the Fiscal Commission’s Alan Simpson -- the so called “Gang of Six” created by Obama to come up with solutions to the “debt problem” -- one would think that Medicare and Social Security were bankrupting the county. They are not.

What it all boils down to is that Obama is asking working families, the sick and the elderly to pay “their fair share” of benefits given entirely to others. That is simply not fair.

Obama Plays Abraham - The Slaying of Social Security

By law, social security revenues (“the payroll tax”) are deposited into an “off balance” trust fund. The idea is that government merely manages the monies that we the employers and employees of America have together paid into a fund for our own future benefit. Of course, all “public debt” (whether for roads, wars or parties on the Mall) is a debt we owe to ourselves; but social security is really, really the specially kitty of “we the people” in our old age.

In reality, nothing economic exists in isolation. Social Security funds are not stored under the mattress but are invested. In addition, payments to retirees during any current year are not drawn from a big jar of saved up cookies but from a cookie jar that is being paid into constantly by those who are working -- generation 1 being maintained by generation 2 which will be maintained by generation 3.

Given how the Social Security Trust Fund works, any “projection” can create a “deficit” by making negative assumptions about the future. One could assume that a Black Plague will occur and cut the number contributing payees in half. Alternatively, one could assume that the number of paying workers will be cut in half by a future depression or by the fact that U.S. corporations will have shipped massive numbers of jobs overseas, thereby increasing massive “structural unemployment.”

Further complicating matters is the fact that, against a howl of protest, the Government has been “borrowing” from the Social Security cookie jar in order to pay for other things. It then turns around and speaks with studied ambiguity of the need to “close the deficit” and “make social security solvent.” This sound-good, sound-bite is then used to “justify” cuts to social security.

The core fact is that Social Security is a stable pay-as you-go system. As Senator Sanders has pointed out, Social Security is solvent through 2030, at which time demographic changes might begin to slowly alter the balance. Obviously other economic problems can and do affect the system, but the solution lies in fixing those problems not “cutting back” on social security.

President Obama actually admits that Social Security itself has nothing to do with the deficit. Obama’s April 2011 budget Fact Sheet stated, “The President does not believe that Social Security is in crisis nor is [sic] a driver of our near-term deficit problems.” Well, if it is not part of the problem why should it be part of the “shared” solution? How “fair” is that?

Obama’s reply is that there are “long-term” challenges which are better solved now by “improving retirement security” while “not slashing benefits.” (Ibid) The so-called long term challenges are simply conjured up nightmare scenarios projected out to 2075. As for improving retirement security, the Administration achieves this wonderful goal, not by touching the benefits, per se, but by “adjusting” the cost of living allowances. [11]

The double-talk is exquisite. Social Security needs to be made secure. At the same time it is part of the shared sacrifice -- sacrifice which will miraculously not involve “slashing” benefits. How does this fiscal fantasia work?

At present, Social Security payments are adjusted upwards to keep pace with inflation, so that they remain constant in real terms. Obama’s fidgeting with the math in effect adjusts the payments so as that they decrease with each step up in the cost of living. For example, instead of rising to $15,525 in ten years, the average benefit would fall to $14,572. Benefits haven’t been “slashed.” In fact, technically, they haven’t been “cut” - they just stagnate downwards.

What is particularly cruel about Obama’s proposed cost of living index (CGI) is that understates the expected inflation in medical costs -- an expenditure that obviously hits retirees harder than others. In reality, Obama’s “securitization” of Social Security is a recipe for old age destitution.

And yet, in this weekend’s Weekly Address, Obama disengenuously stated, “I wouldn’t agree to some of these cuts if we were in a better fiscal situation, but we’re not. That’s why I’m willing to compromise. ... even if it’s not politically popular.”

This is the kind of talk that precedes slaying the first born. We are not in this “fiscal situation” on account of Social Security. Period. What Obama is saying is that, in order to get the Republicans to agree to taxing the rich, he is willing to take it out of the hide of the poor.

Just as the polls showed overwhelming support for a public option, they now show overwhelming support for progressive taxation of corporations and HinWis. But Obama is simply a Profile in Cowardice; and to say as much gives him the benefit of the doubt as to whose side he is on in the first place.

A Basket of (Rotten) Fiscal Fruits

When it comes to Medicare and Medicaid the situation is more complicated -- but only because the United States has opted for the most depraved and corrupted method of delivering health care. Politicians disguise the depravity with cunning confusion. When they talk about “Medicare/Medicaid and Social Security” they are simply mixing apples, nectarines and oranges hoping that no one will notice the difference.

Like Social Security, Medicare funded through beneficiary contributions. The difference between Medicare and Social Security is that only part of Medicare is funded on the basis of payroll taxes. The other parts are paid for by ongoing beneficiary premiums in what is, in effect, a government run insurance scheme.

Thus, if you paid into Social Security, your hospital costs (“Part A”) are automatically paid for. They do not count toward the deficit. However, physician fees (“Part B”) and the so-called drug benefit (“Part D”) are paid from the general fund and do count toward the general fund deficit. These expenditures are offset by additional premiums charged to retirees. Ideally, this component of Medicare should be “revenue” neutral; i.e. a kind of shared-risk budgetary pass-through. But because medical costs are soaring, the Government will have to charge higher premiums or control costs or make up the difference out of general funds.

Already for 2011 medicare premiums applicable to anyone will increase 20% from $94.60 to $113.80 per month. Since this premium is automatically deducted from social security benefits, the result is to wipe out the cost of living increase in social security payments.

Medicaid is an entirely different fruit altogether. Medicaid is a program for people who are handicapped or destitute and who, by category and definition, have not paid into any special fund. People on Medicaid may be morally entitled to assistance, but that does not mean that as a budgetary matter they have contributed to kitty. In a word, Medicaid is charity. Lumping Medicaid together with Social Security simply tilts the accounting toward alleged “insolvency” by counting a charitable pay-out program on the same sheet as a pay-as-you-go trust fund like Social Security.

Adding to the obfuscation, government reports habitually state that “non-discretionary” or “entitlement” spending is expected to soar “as” baby boomers retire. To say as much steps lightly over the fact that “entitlements” such as Medicaid and unemployment insurance have nothing to do with aging boomers.

It is true that, as baby boomers hit the intensive care units and as the cost of drugs and fees continue to sky rocket, the costs of Medicare (and Medicaid) will also sky-rocket. But to say as much is merely to look for a difference in repetition. Medicare pays for medical care. As the cost of medical care rises, Medicare has to pay more. Duh. The problem is not with “Medicare” but with “medical costs.” The solution is not to blame boomers for getting sick but to do away with price-gouging monopolies given to Big Pharma, Big Sure, and for profit hospitals.

The obvious solution was and remains a single payer system. Short of that, the next best solution is one that returns medical care to the regulated and non-profit basis it operated under for decades. Germany uses private insurance companies as a delivery mechanism for health care but it does so on a tightly regulated basis that puts the primary goal of care (not profit) first.

Putting aside the very small minority which passes itself off as the American Medical Association, most doctors and nurses in the United States are in favor of a single payer type overhaul of the entire medical care system. But the refusal to push for that overhaul was Obama’s first and foremost betrayal.

Continuing on that path, Obama’s “shared solutions” for Medicare consist in a befuddling maze of cost containments and rate changes, the centerpiece of which is to reduce IPAB’s allowances from 1.5% to .5% in 2018. This is GovSpeak for “deflect and duck.”

As part of Obama’s Affordable Health Care Act (ACA), Congress enacted an Independent Patient Advisory Board. The purpose of the Board was to take decisions about how much the Government would pay for health care services out of Congress’ hands. [12]

Historically, Congress has simply “thrown money” at doctors, hospitals and drug companies by paying whatever their going rate for services was. By creating IPAB, Congress admitted, as a matter of law, that it was helplessly subservient to special interests and could not be counted on to make a disinterested decision in the public’s interest.

The purpose of IPAB was to keep the rate of medical inflation to within 1.5% of GDP. If medical care charges exceeded that rate, IPAB could impose the necessary cuts in reimbursements to providers. These cuts would go into effect unless Congress rose to the challenge of coming up with a better way of skinning the cat.

Obama’s Grand Plan budget proposes setting the GDP benchmark lower, at GDP plus .5% in 2018 so that IPAB’s recommendations would kick in at lower levels of spending.

Furthermore, by law, IPAB cannot ration health care, raise revenues, increase Medicare premiums, deductibles, coinsurance, or co-payments, or otherwise restrict benefits or modify eligibility criteria. Thus, in theory, the Government’s medical expenditures will be controlled by controlling the costs of services rendered and not by rationing or by imposing higher premiums on retirees. In other words, the sacrifice here is supposed to be shared between doctors, hospitals and drug companies. So far so good.

However, the fact is that no one knows for sure if that will be the case. The Kaiser Foundation’s evaluation of IPAB’s operation states that it simply impossible to rule out an indirect impact on the quality or availability of care rendered. [13] Put bluntly, no one knows how many care providers will simply refuse to take Medicare patients thus putting added stress on an increasingly crowded system.

Late last week, Obama muddied matters further by stating that he was open to using Medicare’s purchasing power to negotiate drug prices. At the same time, he stated that he was “not adverse” to the idea of charging higher Medicare premiums to so-called “high income” retirees. The difficulty here is that the way the government defines “high income” usually ends up including a large segment of the middle class -- i.e. paying beneficiaries not on Medicaid in the first place.

The hidden potential effects of ObamaShare are simply the result of the policy disaster of ObamaCare. The patchwork of pseudo-automatic mechanisms for indirect control of costs is simply insanity. The foreseeable end result is that quality health care will be reserved for the uber rich either through providers “opting out” of the Medicare system or through beneficiaries “dropping out” because they cannot afford higher premiums. That risk, if it materializes, is an unacceptable sacrifice.

For all that, the basic budgetary facts remain the same. Medicare and Medicaid spending are not currently significant budget busters. Using IPAB to control anticipated future costs is unobjectionable in theory but when coupled to noises about premium increases it becomes yet another instance of unfair sharing.

Sound Bites versus Tax Bites

Lastly, there is the matter of “economic and technical re estimates.” Thus far, we have analyzed the budget mainly in terms of expenditures. But the balance of any budget depends as well on revenues and these are a function of overall economic activity. It is a truism that the more the economy hums, the more government coffers jingle; and this truism gives birth to the neo-liberal mantra that economic growth is stimulated by tax breaks.

The truism is true if but only if it can be assumed that the persons given the tax breaks will (or are required to) invest the gain in the national economy. Otherwise, investors (being investors) follow the yields wherever they may be; and if they go elsewhere they do not generate tax revenues here.

And yet, at least since Clinton, every administration has promoted the disastrous policy of incentivizing American corporations to export jobs and invest overseas. Because these corporations are registered in the United States their profits are included in the country’s GDP. But in fact their profits have nothing to do with the health of the American economy. The money is invested overseas; wages are paid overseas; profits are made overseas; the money is kept overseas.

“Globanomics” creates structural unemployment at home, diminishes consumer demand and, since overseas earnings are not taxed at all, diminish government revenues.

This in turn puts stress on entitlement programs such as unemployment benefits and Medicaid. It also creates a trade deficit. Put simply, the more the United States buys overseas, the more it spends dollars overseas. These dollars are then used by foreign governments to buy treasury bonds. While this “repatriates” the money it does so at a cost because every bond purchased must be repaid in full and with interest. This in turn increases the budget deficit.

Notwithstanding these evident facts, both Bush and Obama adhere to the same basic trickle-down philosophy. Thus, as the Bush 2005 budget spoke of a “policy course that promotes economic growth and job creation” through tax breaks, Obama’s 2011 “Fact Sheet” speaks of a “pro-growth economic strategy” which “lays the foundation for strong private-sector job growth.” This is the same quack and the same duck which requires the same feed.

It is thus hardly surprising that the President’s “Fact Sheet” section on taxes is a marvel of double-talk. In it, Obama calls on Congress “to undertake comprehensive tax reform that produces a system which is fairer, has fewer loopholes, less complexity, and is not rigged in favor of those who can afford lawyers and accountants to game it.” The goal of this loophole reform is "to lower the corporate tax rate for the first time in 25 years without adding to the deficit.”

Yes, “lower.” And there is absolutely no mention of what corporations owe to the country in return for this Grand Plan lowering.

The Fact Sheet section on taxes goes on to state that Obama “believes” we should not extend the Bush tax cuts for the wealthiest and then concludes by stating that “he also supports efforts to build on the Fiscal Commission’s goal of reducing tax expenditures ....” In other words, Obama’s revenue reform consists in lowering the corporate tax rate and reducing social security and medicare expenditures.

Aside from the stunning shell game, what is remarkable is the lack of detail. Whereas Obama’s “Fact Sheet” went into fairly complex detail about “securing” Social Security and “reforming” Medicare/Medicaid, it is astonishingly short on detail with respect to tax reform or reductions in military spending, choosing instead to serve up general blabber about cutting waste and closing loopholes.

Warped Mirror

As with individuals, a country’s budget is a reflection of society’s character. The image of American under the Bush-Obama budgets is that of a country that spends trillions on killing while feeding the rich and impoverishing the poor. This is the Sin of Sodom whose privileged revelled in a “prosperous ease, which did not aid the poor and needy.” (Ezekiel 16:49).

Apologists for the Administration may argue that Obama is simply trying to “tease out” some concession from Republicans on taxing the rich while offering “vague and technical” sacrifices to entitlements.

The problem with the apology is that neither the numbers nor anything Obama has said bears out that view. If anything is vague it is the alleged reform of the Bush's tax "relief" for the rich. The core fact remains that when all is said and done Obama does propose to cut back on social security benefits while, at the same time, retirees will have to co-pay more for medical care. As for the unemployed and disabled, they are already so “triaged-out” that they are only noticed when tripped over on the sidewalk.

The fundamental problem is that no one in Washington (except Bernie Sanders) is being honest. The way to balance the budget is to balance the social compact. This cannot be done with mathematical rhetoric which papers over the failure of trickle-down economics.

Millennia ago, on the eve of Athens’ demise, Thucydides wrote that the Athenians had “lost the habit of simple speech which is the mark of a noble man.” It will be said of Americans that, as they descended into the economic abyss, they had lost the habit of simple counting.

©Woodchipgazette, 2011

References

[1]http://www.whitehouse.gov/the-press office/2011/04/13/fact-sheet-presidents-framework-shared prosperity-and-shared-fiscal-resp

[2] http://www.latimes.com/business/la-fi-0716-petruno debt-20110716,0,1614179.column

[3]http://www.voanews.com/english/news/asia/east pacific/China-Urges-US-to-Protect-Investors-as-Debt Ceiling-Looms-125556978.html

[4]http://www.politico.com/news/stories/0711/58942.html

[5]http://sanders.senate.gov/newsroom/news/?id=aa0f5904 c400-415e-aaff-86ca62fa2b3b

[6]http://www.whitehouse.gov/the-press office/2011/07/16/weekly-address-unique-opportunity secure-our-fiscal-future

[7]http://www.gpoaccess.gov/usbudget/fy05/pdf/05msr.pdf

[8]http://www.cbo.gov/ftpdocs/44xx/doc4493/08-26 Report.pdf

[9]http://www.nytimes.com/interactive/2010/11/13/weekinreview/deficits-graphic.html

[10]http://www.businessweek.com/ap/financialnews/D9OHLRBG0.htm

[11]http://www.huffingtonpost.com/rj-eskow/how-much-would a-white-ho_b_891655.html

[12]http://healthpolicyandreform.nejm.org/?p=3478

[13]http://www.kaiserhealthnews.org/Stories/2011/May/09/ipab-faq.aspx

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