The Real Causes of Deficits and the Debt


For the past year ruling circles in the U.S. are in agreement that a minimum of $4 trillion must be cut from the federal debt. Their main differences are over how to distribute that $4 plus trillion in cuts—i.e., between taxes and spending; between tax hikes for the middle class and tax cuts for corporations and wealthiest households; and between defense spending vs. Social Security, Medicare, and Medicaid.

The $4 trillion minimum target was initially established by President Obama’s deficit commission, co-chaired by two conservatives, Alan Simpson and Erskine Bowles, more than a year ago, November 2010. That’s when the Deficit Commission released its report that has served ever since as a template for all deficit cutting proposals from that point, up to the recent Supercommittee. Simpson is the ex-arch conservative senator from Wyoming. Erskine Bowles is a political retread staff advisor from the Clinton administration who is now a senior manager at Citigroup. That should provide some idea where that committee was coming from at the outset.

Their $4 trillion recommendation was quickly adopted and pushed by just about every political wing of the ruling class in Congress and the federal government over the past year: it was the number proposed by President Obama last February 2011 in his budget; Teapublican radical, Paul Ryan, in April; Vice President  Joe Biden, in his secret negotiations with House Speaker John Boehner, last June before their discussions imploded; the gang of six senators last July 2011; and again by Obama as a grand deal to the Teapublicans and Boehner last July just before the infamous debt ceiling deal between Obama and the Republicans on August 2, 2011.

The August 2 deal required an immediate $1 trillion cut—all in social spending programs. The deal also provided for another $1.2 trillion in spending cuts, at minimum, scheduled to go into effect by this year’s end if Congress’s so-called Supercommittee of 12—also established by the August 2 deal—cannot come up with cuts exceeding the $1.2 trillion. By the time this article appears, we will know if the cuts are the $1.2 trillion minimum, or much more. This writer predicts the latter. Why? Because the political pressure from various wings of Capital in the U.S. has been intensifying in the weeks preceding the Supercommittee release of its recommendations, so far scheduled for November 23.

If the Supercommittee recommends more than $1.2 trillion, the amount of cuts will likely be more, in fact, much more than the automatic $1.2 trillion. The Supercommittee consensus will probably range between $2 and $3 trillion more. There’s that magic number of $4 trillion again that the different wings of the ruling class have always been advocating. Once the recommendations are made, per the August 2 debt deal, Congress will have only until December 23 to vote on them. And the voting can only take place as a vote up or vote down of the recommendations. No discussion or further debate by the remaining 523 members of Congress. So much for democracy, even among the elite. When the really big issues come to a head—and $4 trillion is a really big issue—it’s time to put democracy on the back burner and even suspend it.

The August 2 deal was drafted in such a manner as to make it unlikely the Supercommittee will fail to come to a recommendation of cuts in excess of $1.2 trillion. The August 2 deal required that the $1.2 trillion be divided between roughly equal cuts in defense spending and social program spending. As a result, the defense corporations and their political friends have been lobbying frantically since October to push the Supercommittee to come up with more cuts than $1.2 trillion. That way they can lobby for less cuts in defense spending at the expense of a greater reduction in entitlements and other social programs, especially Medicare and Medicaid. If the Supercommittee does recommend more than $1.2 trillion, it’s almost certain that the cuts in Medicare-Medicaid and other elements of the social safety net left will be greater than the $600 billion mandated in the $1.2 trillion deal of August 2.

Medicare and Medicaid are thus the real targets of the Supercommittee this time around. Proposals to cut Social Security retirement benefits will likely come next round. Moreover, this writer predicts, the cuts will be “backloaded,” as they say, taking effect mostly after the November 2012 elections to minimize the immediate effects of the draconian cuts forthcoming in social programs on voters before the 2012 elections.

That Medicare and Medicaid are the prime targets for cuts in this particular round of deficit cutting has been evident for some months now. Last June, in his secret negotiations with Boehner, Vice-President Joe Biden proposed between $400-$500 billion in Medicare-Medicaid cuts—without any concessions from Boehner or the Republicans in return. Biden proposed a $3-$4 trillion total deficit cut package to Boehner, with 87 percent in spending cuts and only 13 percent in tax hikes. Boehner refused even that and walked out. Obama then offered the same, including a 75 percent-25 percent spending cut-tax hike mix in his grand deal last July. Again no deal. Obama then followed up with a proposal last September to cut $320 billion in just Medicare-Medicaid, once more an offer without any concession in return. Clearly, the Democrats’ number is the $500 billion they’ve been offering for a year now. The Republicans responded in October, calling for $780 billion in Medicare-Medicaid cuts as part of a $2.2 trillion total deal with no defense spending cuts and no tax increases on the wealthy or corporations. In fact, they want to cut the top bracket for the wealthiest 1 percent from the current 35 percent to 23 to 28 percent, and similarly for corporations from 35 percent to 23 to 28 percent. We can expect cuts in Medicare-Medicaid alone in the area of $600 billion or so in a total package of around $3 trillion and maybe even more.

Even if the Supercommittee does not come to an agreement to recommend more cuts than the automatic $1.2 trillion, the politicians of both parties will accept the mandated automatic $1.2 trillion cuts only temporarily. Defense corporations will then force politicians to reopen the $1.2 trillion to reduce their $600 billion share and add, delete and change the spending-tax mix once again after the new year. Congress will no doubt oblige that request. In other words, the Supercommittee is not the end of the spending cut process; it is only the beginning of the severe austerity program focus agreed to by both Democrats and Republicans in Congress and the administration. 

An early indication that the deficit cutting frenzy will not stop is evident in a recent statement by the Teapublicans number one hatchet man going after Medicare: Congressman Paul Ryan. It was Ryan, last April 2011, who’s budget proposed to totally privatize Medicare, turning it into a voucher program. That program would allow health prices to continue to rise while adjusting the voucher amount slowly. The result within a few years would mean seniors on Medicare would only have half their medical expenses covered, forcing them to buy private health insurance or go bankrupt. Ryan’s attack on Medicare-Social Security makes George W. Bush’s effort to privatize Social Security in 2005 appear amateurish.

As Ryan replied to an interview with the Financial Times earlier in November about his plans to dramatically change Medicare by privatizing it, “I am looking forward to doing it next year.” How do politicians of both parties, Republican and Democrat, justify such massive cuts in the social safety net, one might reasonably ask?

Their arguments are basically twofold: first, that Social Security-Medicare and Medicaid are the cause of the exploding annual budget deficits and the federal debt. But that argument is a gross lie, for reasons explained shortly. Their second, fallback argument is that Social Security and Medicare must be cut because they are going broke and won’t be around by the end of the decade unless their benefits are radically reduced. That, too, is a lie.

Social Security-Medicare-Medicaid

To refute and explain those false arguments, it is necessary to identify the major causes of U.S. federal debt. Let’s start with actual numbers. The total U.S. federal government debt rose between 2000 and 2010 by approximately $9.2 trillion, according to the Federal Reserve’s Flow of Funds reports.

There are many causes of the $9.2 trillion rise in the U.S. federal debt over the past decade. They include:

·        excess inflationary defense-war spending

·        the Bush tax cuts from 2001-2011

·        the direct Congressional funded bailouts of banks and corporations following the banking crash of 2008

·        Bush and Obama’s successive fiscal (tax cuts and spending) stimulus packages of 2008-11

·        price gouging by health insurance companies and health services providers

·        simple interest on the debt for all the above


Considering each of these causes in turn: the $2.1 trillion in Pentagon and War spending as a contributing factor to the $9 trillion debt run-up over the decade represents just the excessive inflation in Defense and Contingency Operations (CO=direct spending on Iraq and Afghanistan) above the normal average consumer price index (CPI) rise of about 2 percent. War and Defense spending rose annually, on average, by 8.2 percent over the decade. The $2.1 trillion thus represents just that increase in War and Defense spending in excess of the 2 percent average CPI. The $2.1 figure is actually very conservative, since it does not include additional long-term indirect war costs associated with military construction, department of energy, veterans benefits, and the like. It also excludes arguable defense costs in the military and counterinsurgency elements of spending by the CIA, FBI, NASA, State Department, Foreign Aid, and Homeland Security. Also excluded are black or off budget secret project military weapons development spending that doesn’t show up in public budget data—estimated at around $50 billion a year. Homeland Security is another $40 billion a year. In total, the U.S. spending is around $900 billion to $1 trillion a year on Defense and War. The inflation in these costs over the decade would easily increase the $2.1 trillion allocated to the $9 trillion debt run-up by another $300 billion or so.

The Bush Tax cuts contribution to the total debt includes a basic $1.7 trillion estimate for the Bush era 2001-2003 tax cuts from 2001 to 2008, and the Center for Budget and Policy Priorities estimate of another more than $1 trillion for 2009-10, plus the two-year extensions of the Bush tax cuts agreed to by Congress for 2011 and 2012 costing about $450 billion more. These are also conservative estimates, since they don’t include major oil and energy industry corporate tax cuts enacted in 2004-05 by the Bush administration. Nor do they account for the $1.2 to $1.4 trillion that multinational corporations are hoarding in cash in their offshore subsidiaries to avoid paying the normal 35 percent tax rate in the U.S. If the latter were included, the total tax cuts for corporations and investors would add another $400 billion or so to the Bush tax cuts of $2.9 trillion.

The $900 billion in bank and corporate bailouts refers only to the $700 billion TARP (Troubled Asset Relief Program) passed by Congress in October. It also includes roughly $200 billion separately passed by Congress to bailout the government mortgage agencies, Fannie Mae and Freddie Mac. They, too, went broke as a result of the financial collapse of the housing sector in 2007-08 and were bailed out in July 2008. It is important to note that this $900 billion direct bailout does not include the roughly $9 trillions injected into the banks by the Federal Reserve, which has been the true source of the bailout since 2008. The Federal Reserve has a separate set of books that do not add to the U.S. deficit and total debt of the federal government.

Then there is the three main Bush and Obama fiscal stimulus packages in 2008, 2009 and 2010, which together amount to $1.89 trillion in tax cuts and spending that have failed to date to bring about economic recovery. They include:

·        the Bush April 2008 stimulus of $168 billion

·        Obama’s February 2009 stimulus of $787 billion and subsequent $84 billion in supplement spending and tax cuts in 2009-10

·        Obama’s December 2010 package worth another $857 billion, of which a massive $802 billion was tax cuts
 

The escalating health care cost—consisting mainly of unfunded Part D of Medicare and the excessive inflation in health care services well above the average national inflation rate—contributed approximately $630 billion to that $9 trillion U.S. debt run-up from 2000 to 2011. Most of that $630 billion was the $450 billion in Congress’s failure to fund the Part D prescription drug program, requiring the program be paid totally out of deficit spending. The remaining cost is attributable to the excess inflation for health insurance and services directly impacting Medicare and Medicaid costs.

Another $255 billion is from lost tax revenue due to chronic unemployment for the past three years. Before the recession began in December 2007, there were 7.1 million unemployed. For the past three years that number has been 25-26 million without change, or about 18 million. Assuming a median annual earnings of $47,000 for the 18 million, an unemployment period of 6 months on average, and an average income tax rate for the group of 20 percent, the total lost for the past 3 years in federal income tax revenue is $255 billion. That does not count lost payroll tax or corporate income tax revenue associated with the layoffs.

The final item, interest on the debt, is calculated based on a simple assumption of non-compounded interest over the decade, which comes to $270 billion of the $9.2 trillion.

Notice these numbers do not include costs of Social Security or of Medicare and Medicaid, except with excess inflationary costs. It was not because of significant benefit increases that health care costs rose over the decade, contributing to the deficit. It was price gouging. The only exception to this conclusion is the Part D prescription drug program which does represent a benefit improvement.

So the argument for targeting Medicare-Medicaid-Social Security as the cause of the debt escalation is outright false. In fact, Social Security retirement and other non-medical funds have run a surplus over the past decade that has been counted by politicians to offset the actual annual deficits and, therefore, debt. The reported deficits would have been even higher, were it not for the Social Security surpluses every year (except the most recent, due to payroll tax cuts).

The clear causes of the deficits/debt are wars and runaway Pentagon equipment spending, the Bush tax cuts, the bailouts of banks and corporations, the fiscal stimulus packages of Bush-Obama that didn’t result in economic recovery, the three-year 25 million jobless situation, and price gouging by health insurance and service providers. And what about the second argument for justifying cutting Social Security-Medicare-medicaid? The argument that they are going broke? That, too, is blatantly false.

Are Social Security-Medicare Going Broke?

Since 1986, the Social Security retirement benefits trust fund has produced a surplus over the past quarter century of more than $2.4 trillion. That surplus was generated as a result of a major hike in the payroll tax at that time and its indexing to inflation. The payroll tax as a share of total federal tax revenues thereafter leaped from less than 30 percent to about 44 percent on average for the next several decades. (At the same time the corporation income tax’s share of total federal tax revenues fell by half, to less than 10 percent today). The huge and growing Social Security retirement trust surplus enabled presidents from Clinton to Bush Jr. to borrow hundreds of billions every year, spent on wars, pentagon and tax cuts for the rich. So Social Security has subsidized the federal budget and the deficits for a quarter century.

That surplus in the Social Security trust fund will continue for another decade producing another $1 trillion in extra funds—unless we continue to have 25 million jobless and Obama and Congress continue to give away that surplus in payroll tax cuts. Last year, $112 billion was drained from the trust fund. This year Obama proposed to double it or more, allowing small businesses to discontinue paying from half to all their share of the payroll tax.

Those like Ryan, intent on privatizing Social Security, learned a lesson from George W. Bush’s failure in 2005—if the trust fund has a surplus, it is hard to convince voters Social Security must be radically changed. So the new strategy is to go after the weaker link in the Social Security program—i.e. Medicare, especially the Part D prescription drugs program. That program was created in 2005 and pushed by Bush. But Bush made certain that it would not be funded by a payroll tax, like the Part A hospital fund of Medicare. That meant that every penny of the drug program would have to be financed out of deficit spending. Bush also made it certain that drug companies, and all health service insurers and providers, were allowed to continue to raise prices at double digit levels over the decade. That too would put pressure on the hospital and doctors’ trust funds, Part A and B, in Medicare. Make Medicare appear as if it was experiencing big losses was the new strategy, then go after and privatize Medicare first, as Paul Ryan has proposed.

While Medicare was being privatized, prepare the groundwork for attacking Social Security retirement in the future. That, too, like Medicare, would require creating a condition of deficits in Social Security trust funds. Cutting payroll taxes is a good start in causing a deficit shortfall in Social Security. The strategy for privatizing Medicare and Social Security is the same: create a funding crisis and deficit however possible, then claim they are broke or about to go broke, then use that excuse to privatize them. Privatize in this case means turn it over to insurance companies and Wall St. to suck profits out of the 48 million seniors in the Social Security-Medicare system.

As shown in the preceding, Social Security retirement is not a cause of the current deficit. In fact, it has paid for much of the deficit and debt. But that’s not the only argument used to justify cutting it. The other is that Social Security is “destined” to go broke in another decade or less.

But that’s not even remotely true if the federal government returns the $2.4 trillion it borrowed from 1986 to 2011. Even if the government refuses to return the $2.4 trillion, that still means Social Security retirement, disability, and survivor trust funds will continue to be more than solvent for another 75 years.

For example, by raising the annual cap of $108,600, on which the payroll tax is levied, to $180,000, any conceivable shortfalls in Social Security over the next 75 years disappear. Social security was intended to cover all earned incomes (wages, salaries), but over the past 30 years the top 15 percent of wage earners have been getting a free break. Raising the cap to $180,000 returns the original intent of Social Security to have all wage earners pay.

A limitation of the original Social Security law, however, was its failure to levy a comparable tax on capital incomes (capital gains, interest, dividends, rents, etc.). Requiring earners of capital incomes, like earners of wages, to pay an equivalent 6.2 percent into the funds, not only wipes out any shortfall in Social Security for the rest of the century, but leaves an excess of billions a year that could be used to cover any shortfalls in Part A and B Medicare and fully fund Part D prescription drugs.

If those two approaches are not acceptable, simply raising the payroll tax for Social Security from its current 6.2 percent for both employees and employers by only 0.5 percent also eliminates any conceivable shortfall in Social Security for the next century.

Even after the federal government dragged $2.4 trillion from the fund, and even with the current attack on Social Security in the form of payroll tax cuts under Obama, the fixes for Social Security, long term, are quite simple and manageable. There is no crisis in Social Security in the longer run. It is not necessary to implement draconian cuts in Social Security benefits in order to ensure its continuation. All it needs to do is: restore the funds taken from it; stop draining it to enable tax cuts; start making the wealthy and super-wealthy pay into it by raising the cap and/or making the super- wealthy millionaires pay into it.

What about Medicare and its three trust funds, Part A, B, and D? Only Part D has contributed significantly to the deficit and debt and Parts A and B only due to health insurers’ and providers’ price gouging. Therefore, the argument, that Medicare is a major cause of the deficit/debt is mostly nonsense. But what about the argument that both are going to go broke in another decade? Here’s some facts regarding “they’re going broke” by Teapublican radicals like Ryan in Congress:

The Part A hospital fund in Medicare has a surplus of $270 billion. It will still have a surplus in 2020 of $108 billion, despite tens of millions more boomer generation seniors accessing the program. And estimations come directly from the Medicare trustees report of 2011.

The same applies to Medicare’s Part B doctors trust fund, which has a surplus of $71 billion, which will  rise to $110 billion in 2020. Is that a crisis justifying slashing Medicare benefits or, as Ryan proposes, gutting Medicare and turning it into a privatized voucher program requiring seniors to pay up to half of all medical costs?

As for Part C, the prescription drug fund has been in deficit since it was legislated that way in 2005. So what’s so different today, six years later? However it, too, like the hospital and doctors trust funds, can be easily addressed, according to the Medicare trustees by introducing a 0.25 percent increase in the Medicare payroll tax and another 0.25 percent a decade from now. That would raise the Medicare payroll tax from today’s 1.45 percent to a mere 1.7 percent, hardly perceptible in one’s weekly paycheck. That will cover the annual shortfall. After another decade the pressure on all the Medicare funds will ease. Medicare will actually need less funding per capita by 2030, providing the real problem underlying it—the price gouging by health industry servicers—is contained along the way.

Another way to address the matter of the financing of all the funds and ensure they have sufficient surpluses for the next two decades is to do something about getting jobs for today’s 25 million unemployed. The U.S. has had 25 million jobless for 3 consecutive years. Twenty more million with jobs means more payments into all the trust funds and even higher surpluses in all of them. Put people back to work and a major source of additional funding for Social Security and Medicare reappears.

Raising wages in the U.S. would have a similar effect. Raise the average weekly earnings of America’s 110 million non-supervisory production and service workers by:

·        stopping sending jobs overseas

·        stopping destroying unions and collective
bargaining

·        stopping shifting tens of millions of jobs from full time to part time and temporary

·        raising the minimum wage

·        ending free trade

·        lowering wages

·        controlling escalating health care costs



Raising wages also translates into more payroll tax payments into the Social Security and Medicare funds, providing an ever greater surplus.

To Sum Up

For the past three decades an attack on workers nominal wages has been underway. The consequence has been a decline in wages and income for the 110 million in particular—the core of the U.S. working class. Now that corporate America has driven down their current (nominal) wages, they are intent, through their politicians, to attack those wages that workers agreed to forego and have paid into Social Security, Medicare, and their pensions over the past quarter century. It’s their past wages that Teapublican radicals like Ryan are intent on taking back. Social Security and Medicare is not an entitlement. They are simply wages workers agreed to forego and collect when they retire. Not satisfied with driving down current wages, Ryan and his colleagues in the direct service of corporate interests and the interests of the wealthiest 1 percent are now intent on taking back the deferred wages of the working and middle class in America now as well.

Z


Jack Rasmus is the author of the pamphlet, An Alternative Program for Economic Recovery and the author of Obama’s Economy: Recovery for the Few, forthcoming and Epic Recession: Prelude to Global Depression, same publishers, 2010.