Reading the Debt Ceiling Tea Leaves to Predict the Future

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. The rumors were soon upgraded 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 Democrats' political base. Most did not believe it. Some thought: it must not be correct and that President Obama would 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 rumored 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 again over a weekend. It leaked a second time that Obama had himself, in fact, agreed with Boehner, not to $1 trillion or $2 trillion, but to a $4 trillion dollar “grand deal.” Three trillion dollars of that total was spending cuts with, at minimum, $400 billion in cuts to 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 Republicans' base and then progressively, the Democrats' base, when the latter began to discover their $3 trillion were 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 from its position, hurrying to find formulations that denied its $3 trillion, Social Security and Medicare cuts position in the negotiations.

Enter now, during the past weekend, 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's present decline accelerated, or if banks in Europe collapse due to deepening debt problems in Greece, Spain and now Italy. Pressure on the Republican Senate and to some extent the House leadership intensified this past weekend. House Leader Boehner and Senate Leader Larry McConnell blinked. In so many words, they today 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 on July 12. The explanation aired on the cable shows and talk radio on Tuesday, July 12 – now that the Republicans had de facto 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 give up. The president has won. Hooray!”

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As ex-Democratic Senate operative, now TV political talk show host, O'Donnell, 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. 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.

Following the collapse of the “grand deal” over the weekend of July 9-10, McConnell proposed a new solution – i.e. an “escape window” out of which Obama and the Republicans might scramble to avoid a debt default. McConnell proposed Congress authorize Obama to raise the debt ceiling and then take responsibility unilaterally for doing so. According to the McConnell proposal of last week, if Obama raised the debt ceiling unilaterally, the Republicans would vote against it knowing they could not override a veto by Obama to sustain the ceiling increase. That way, the debt ceiling is raised and the Republicans can campaign they opposed it. Both parties jockeyed back and forth for the remainder of last week over this proposal, with “point negotiations” now undertaken by Reid and McConnell in the Senate.

This weekend, July 16-17, it is becoming clear that a deal along the lines of the McConnell proposal is now being crafted by Reid and McConnell. But the deal will have a historic twist, this writer predicts. Obama will try to “one up” the Republicans by appearing “more Republican than the Republicans.” He will unilaterally agree to cut the deficit by cutting spending by an amount roughly equal to the debt ceiling increase. The likely range of the spending cuts are $1 trillion to $2 trillion. That's just about what Vice President Biden had agreed to back in June. Biden's June deal also proposed all spending cuts and no tax hikes.

Notice that's all spending cuts with no closing of tax loopholes. This possible scenario – i.e. trillions in spending cuts with no tax hikes in exchange for Republicans allowing the debt ceiling increase – is in the process of confirmation. Sunday, July 17, a report by the Reuters news agency stated, “Reid wants up to $1.5 trillion in mandatory spending cuts, along the lines of those identified by a deficit-reduction group headed by Vice President Joe Biden.”

By abandoning tax hikes, Obama in effect positions himself politically as a bigger spending cutter than the Republicans, that is more Republican than Republicans themselves. If this occurs, his policy will have thus shifted so far right that it would become virtually indistinguishable from traditional Republican policy – i.e. no tax hikes and all spending cuts to reduce the deficit.

This will undoubtedly appeal to center-right Republicans and conservative-leaning independent voters, as Obama's current stable of corporate advisers are, no doubt, recommending. It would also likely result in more corporate campaign contributions. But it would further demoralize his Democratic voter base, who already showed signs of sitting home in the 2010 midterm elections.

Obama will undoubtedly justify this Republican fiscal policy by arguing if he hadn't done this, a default would mean the economic sky would fall in and send the US into renewed recession. But we've heard the “sky will fall in” scare tactic before – in 2008, when then Treasury Secretary Paulson warned economic Armageddon if he didn't get a $700 billion blank check from Congress to bail out the banks. Paulson got his check, and then didn't spend it since the banks would not sell him their bad assets at their collapsed market values. Now, the amount is at least double the $700 billion.

Obama's pending deal to cut spending only by trillions of dollars is only the beginning. It is but the first “tranche” of more cuts to come between August 2 and the October 1 deadline date for concluding next year's 2012 budget. 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 a 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, including entitlements. That will be the starting point for negotiations, not the end point.

Moreover, the Obama-Biden deal now in development to cut spending by $1 trillion to $2 trillion in exchange for Republicans not opposing the debt ceiling increase conclusively disproves the O'Donnell and Obama apologists “spin” last week that Obama's $4 trillion “grand deal” proposal – including $3 trillion spending cuts including Social Security, Medicare and Medicaid – 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 billion to $400 billion a year for the next decade.

In exchange for these cuts in Medicare and 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 a post-budget agreement 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 percent to 20 percent, 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 percent of total revenue to barely 10 percent.

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 percent payroll tax rate to cover all forms of income, capital gains 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 percent increase in the Medicare share of the payroll tax for the next ten years and another 0.25 percent starting in the 11th 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.

To conclude, after agreeing to cut $38 billion from the 2011 budget mid-way in the fiscal year last April, cutting another $1 trillion to $2 trillion all but ensure there will be a double-dip recession in the US in the next 12 to 24 months. We are witnessing the almost total morphing and congruence of Obama's fiscal policies with that of the Republican opposition. This shift to classic Republican policy positions is similar to what another Democrat president undertook when facing an earlier economic crisis. I'm talking about Jimmy Carter in 1978. And we know what happened to him.