From ‘Grand Bargain’ to ‘Grand Collusion’

by Jack Rasmus

April 26, 2013

ON APRIL 10, PRESIDENT Obama released his formal budget for Fiscal 2014 beginning this October. Liberals should not act shocked and surprised: Obama’s repeated offers to cut
Social Security cost-of-living adjustments, and other yet undefined Medicare measures, are a continuation of his practice and approach for the past two years.

The budget will usher in the final stage of negotiations over the proposed deficit cuts —
Austerity American Style — that began with the recommendations of Obama’s Deficit Cutting
Commission, referred to as the Simpson-Bowles report, that was made public in November
2010.

The Simpson-Bowles Commission — chaired by arch-conservative retired Senator Alan
Simpson, and Bill Clinton’s chief of staff, now investment banker Erskine Bowles — proposed an
approximate $4 trillion cut in U.S. deficits and debt for the subsequent decade. Their report has
been the ‘template’ for deficit cutting negotiations ever since.

Issued around the time the Teapublicans took over the U.S. House of Representatives in late
2010, the report was offered by the Obama administration as the basis for negotiating a “grand
bargain” of $4 trillion in deficit cuts in summer of 2011. The $4 trillion target was agreed by
virtually all parties in Congress and the administration at that time — and ever since. The only
difference was, and remains, “the mix:” 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. 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 John 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.

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 $4 trillion Grand Bargain from the very beginning.

Boehner and the Teapublicans did not bite on Obama’s grand bargain offer in July 2011,
however. 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 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 — the “sequester cuts” — that would take effect on January 1, 2013.

As part of that 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,” shelvingf all deficit cutting during the
2012 election year.

Instead, in 2012 both parties and their candidates talked about economic programs neither had
any intention of introducing. Regardless of 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 just what happened: Within days following the election, Obama immediately offered
$340 billion in “entitlement” program cuts in his attempt once again to resurrect the grand
bargain negotiations.

Phony Fiscal Cliff: It’s the Tax Cuts, Stupid!

But the Teapublicans and big corporate interests, in the form of the Business Roundtable
in particular — the biggest and most influence U.S. corporate lobbying group, composed of
CEOs of the largest corporations — were neither interested in a “grand bargain” at that time.
The Business Roundtable preferred to focus initially only on the Bush tax cuts that were also
scheduled to expire January 1 — not the “sequestered” $1.2 trillion in spending cuts also
scheduled to take effect on January 1, 2013l.

The Bush tax cuts — more than 80% accruing to wealthy households and investors — were far
more important to them than the spending cuts. Their primary goal has always been to protect
and extend the Bush tax cuts; cutting spending and deficits has always been secondary, and the
cuts should be at the expense of social programs.

The Bush tax cuts amounted to $4.6 trillion for the coming decade, according to the
Congressional Budget Office. The CBO’s projected deficits for the coming decade, should the
Bush tax cuts be totally repealed, amounted to only $2.5 trillion. Extending the tax cuts meant
the projected deficit would amount to around $7 trillion. To borrow the popular phrase: It’s not
about deficits; it’s the Bush tax cuts, stupid!

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 resolved 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 on board, the media spin given to the Bush tax cuts
extension was labeled the “Fiscal Cliff.” Although the media included the sequestered spending
cuts as part of the “Fiscal Cliff,” that issue 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 striking a neutral pose to protect their ultra-conservative credentials. But no doubt in the
end, 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.

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 deal — billed as “avoiding the Fiscal
Cliff” — 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 deal, the sequestered additional $1.2 trillion in spending cuts were
postponed for two more months, until March 1, 2013. In signing the deal on January 2, Obama
declared that 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 going 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. Obama undoubtedly believed that 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 his
increasingly desperate re-offering of big Social Security and Medicare cuts in recent weeks,
some of which appear in part in his April 10 budget. That will serve as a base from which he will
then agree to even further cuts in subsequent negotiations with Teapublicans in the House (and
Roundtable CEOs in the background).

Some Key Strategic Questions

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 wqhat
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 that they got a tax deal they simply couldn’t refuse on
January 1, and one 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 shifted gears and adopted in total the Teapublicans’ position on subsequent spending
cuts.

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 (cost
of living 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!

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 – but didn‘t take — to do
to them on the topic of Bush tax cuts on January 1. Obama could have let all the Bush tax cuts expire 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, as $1.2 trillion is now the remaining “target” number . Graham’s proposal is
for $600 billion in Social Security and Medicare cuts and another $600 billion in unspecified tax
revenues.

So why should Teapublicans precipitate a political crisis over the March 1 or March 27
deadlines? Why should they repeat the debt ceiling crisis on May 18? They’re winning hands
down.

What Obama May Propose

Having agreed to decouple tax cuts on January 1 and having been outmaneuvered on March
1 and March 27, and with Teapublicans signaling there will be no debt ceiling crisis in May,
Obama has been stripped of all his leverage points in bargaining. Obama has left only the
option to offer even more Social security, Medicare and Medicaid cuts. And throughout March
he continued to do so, once again unilaterally — not just offering again to cut COLA adjustments
for Social Security but suggesting his willingness to confront big cuts in the $600-$700 billion
range for Medicare and Social Security and more for Medicaid.

But 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.” Again in his February State of the Union address, the president publicly
noted he “liked the Simpson-Bowles” recommendations concerning Medicare cuts.

And what are those recommendations? Instituting a new $550 a year deductible for Parts A
and B of Medicare, and providing 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, when the average for social security benefit payments is only $1100 a
month today.

In other words, Medicare benefits will not be cut – but 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 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.

With only $1.2 more to cut in deficit spending to reach the Simpson-Bowles $4 trillion target,
and Obama offering again his $600-$700 billion enticement in entitlement spending cuts, a deal
is closer than ever before. Watch therefore for the full $600 billion in Social security, Medicare
and Medicaid to take effect, the effective date of the changes to be backloaded in later years of
the decade and certainly not before the 2014 midterm elections.

Expect defense spending cuts of no more than half the $500 billion proposed in the sequester,
and nearly all of which will be from withdrawals from Afghanistan and Iraq operations, not from
equipment spending. After 2014, most will be recouped as defense spending on naval and air
force equipment and operations will ramp up for the shift of U.S. military focus to the Pacific.
They Army brass haqs had its land wars in Asia; now it’s the turn of Navy and Air Force.

That leaves only a “token” tax revenue increase of about $200 billion over the coming decade,
or a paltry $20 billion a year, which will come in difficult to estimate phony “loophole” closings.
Major cuts in corporate taxes later in 2013 will not be factored into the Grand Bargain $4
trillion official calculations. In addition to big cuts in the top corporate tax rate, look as well for
multinational corporations’ tax breaks and tax forgiveness on the $1.4 trillion they are presently
sheltering in offshore subsidiaries. Of course, small-to-medium business will be thrown yet
another tax cut bone to buy into the deal. In exchange, the middle class will pay more in terms
of limits on deductions and exemptions.

Grand Collusion

In retrospect over the past three years, and especially since November 2012, the Grand
Bargain looks less like a bargain and more like a “grand collusion” among the various parties —
Teapublican, Big Corporate, Obama, and the pro-corporate wing of Democrats in Congress that
have had a stranglehold on the Democratic party since the late 1980s.

This is not the Democratic Party of your grandfather that agreed to introduce Social Security
in the 1930s and that proposed Medicare in the 1960s. This is the Democratic Party, and the
Democratic President, that has agreed with Republicans and Corporate America to begin the
repealing in stages of these very same programs — programs that are not “entitlements” but
are in fact deferred wages earned by Americans over the decades, are now being “concession
bargained” away.

Not content with concessions from those workers still in the labor force, capitalist policymakers
are intent on concessions on social wages now coming due in the form of Social Security and
Medicare benefits. It’s a charade from Simpson-Bowles to the present.

What should be done? Writing letters to Congress won’t change anything. What is now necessary is 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 proposed it in the 1930s initially.

In fact, Roosevelt initially publicly advocated that Social Security should not be part of the New
Deal. A grassroots protest organized by the clubs forced him and the Democrats to reverse this
position just before the midterm 1934 elections and support the proposal for Social Security.
Now it’s time to reform the clubs to defend Social Security — and the first action should be to
call for a million person march on Washington to reverse whatever cuts are surely ahead.

(Copyright Jack Rasmus 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.