Obama’s bargaining strategy and tactics with regard to deficit cutting over the past three years have proven to be an unmitigated disaster. From the idea of seeking a ‘grand bargain’ with Teapublicans in the House of Representatives in May 2011, to the debt ceiling and sequester deals of August 2011 that resulted in $2.2 trillion in spending-only cuts and no tax hikes whatsoever on the rich, to caving in on the so-called ‘Fiscal Cliff’ this past January 1 agreeing to a deal to tax only the richest 0.7%—Obama’s bargaining strategy and tactics have proven a case example of exactly what not to do in negotiations.
Obama’s first error was to believe that by offering hundreds of billions in entitlement cuts back in the summer of 2011 in exchange for revenue hikes that Republicans would agree to raise taxes a mere year before the 2012 elections. Obama and the Democrats subsequently further believed that by linking $1.2 trillion in sequestered spending-only cuts in August 2011, as part of the debt ceiling deal, that Republicans would not allow $500 billion in sequestered defense spending cuts to take effect and would agree to some tax hikes in exchange. Obama then made the error this past December thinking Republicans would continue to discuss tax revenue proposals after they agreed to the minimal $60 billion in Bush tax cut extensions (aka ‘Fiscal Cliff’) on January 1, 2013.
Since January, his strategy has been no less effective than it had for the preceding two years. His assumption has been that Republicans would have to agree to some kind of tax revenue enhancement deal on March 1 to prevent the January 1 postponed sequestered defense cuts from taking effect. Or on March 27 when the government ran out of money he, Obama, could strike a deal to avert a shutdown that would include tax revenue enhancements. But the Teapublicans proved him wrong in every one of these accounts. How and why did this all happen? And will Obama and the Democrats continue to get outmaneuvered in the coming final round of deficit negotiations that commences with Obama’s latest budget, to be announced on April 10?
Some Key Questions of Strategy
"Verdana","sans-serif";mso-bidi-font-family:"Times New Roman"”>The answer to the first question is Teapublicans in the House got a tax deal they simply couldn’t refuse on January 1, a deal which their big corporate campaign benefactors, the Business Roundtable, wanted and helped engineer together with the Obama administration. They got to keep $4 trillion of the Bush tax cuts, which are now permanent and which include nice ‘sweeteners’ (i.e. further tax cuts) like no more Alternative Minimum Tax and an even more generous Inheritance tax than Bush himself had introduced.
"Verdana","sans-serif";mso-bidi-font-family:"Times New Roman"”>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 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. That leaves only $1.2 trillion to go!
"Verdana","sans-serif";mso-bidi-font-family:"Times New Roman"”>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. Graham’s proposal is for $600 billion in social security and medicare cuts and another $600 billion in unspecified tax revenues. $1.2 trillion is now the remaining ‘target’ number.
"Verdana","sans-serif";mso-bidi-font-family:"Times New Roman"”>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 debt ceiling crisis in May, Obama has been stripped of all his leverage points in bargaining. He has no ‘stick’, only more ‘carrots’ to offer and his opposition knows it. Obama has left only the option to offer even more social security, medicare and Medicaid cuts. And throughout March he has continued to do so, unilaterally once again. Not just offering once again to cut COLA adjustments for social security but to suggest his willingness to confront big cuts—in the $600 to $700 billion range—for medicare and social security and more for Medicaid. Even more specific reductions will be forthcoming in weeks to come.
"Verdana","sans-serif";mso-bidi-font-family:"Times New Roman"”>And what are the Simpson-Bowles recommendations for Medicare cuts?
"Verdana","sans-serif";mso-bidi-font-family:"Times New Roman"”>In his typical bargaining approach of ‘let’s make a unilateral offer and see what the Teapublicans do’, in recent weeks Obama has again unilaterally offered to reduce social security COLA increases that will take more than $230 billion out of the pockets of seniors. He has also proposed to introduce a means test for the wealthy, which Teapublicans will begin to extend down to the middle class. As for Medicare, watch for the Simpson-Bowles recommendations in some form to appear, likely scaled in over time. If not in the budget itself, then surely in negotiations that follow. Readers should also note that Obama last week announced higher payments to medicare health providers, while simultaneously planning in his budget cuts for seniors. But Medicare ‘cuts’ will not be mandated benefit reductions. Instead, seniors will have to pay more for the benefits they have, or opt for lower benefit coverage. Social Security Disability recipients will be also significantly impacted by the forthcoming proposals. And Republican state governors will be permitted to reduce their spending in part on Medicaid. And of course, almost certainly there will be the changes to social security: reduction of cost of living adjustments, means testing, and a raising of the eligibility age at least to 67 and later possibly even higher.
"Verdana","sans-serif";mso-bidi-font-family:"Times New Roman"”>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 middle east (Afghanistan, Iraq) operations and not 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 US military focus to the pacific. They Army brass had its land wars in Asia; now it’s the turn of Navy and Air Force in the pacific.
"Verdana","sans-serif";mso-bidi-font-family:"Times New Roman"”>In retrospect over the past three years, and especially since November 2012 elections, the ‘grand bargain’ looks less like a bargain and more like a ‘grand collusion’ between 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.
"Verdana","sans-serif";mso-bidi-font-family:"Times New Roman"”>It’s not a grand bargain; it’s a charade and a ‘grand collusion’ from the very beginning from Simpson-Bowles to the present.
What Should Be Done
"Verdana","sans-serif";mso-bidi-font-family:"Times New Roman"”>Jack Rasmus 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 at www.kyklosproductions.com/videos.html.