After months of political theater coming across as partisan bickering over raising the debt ceiling limit to avoid default, the U.S. Congress passed a debt deal that President Barack Obama signed into law on Tuesday. The deal passed the House 269 to 161 and the Senate 74 to 26.
For weeks, politicians and the media said that the United States was in a massive debt crisis. The narrative started from Republican politicians and became accepted as dogma by the Democrats, particularly Barack Obama. Republicans claimed that the budget deficit was the most urgent problem to deal with. The cause for this deficit was too much government spending. Therefore, it was necessary to cut government spending in order to reduce the deficit and the overall public debt [To eliminate any confusion, overall debt increases or decreases with annual budget deficits or surpluses. If the government spends more than it takes in for a fiscal year, it runs a deficit, while a budget surplus is the opposite. If deficits are run repeatedly, the overall debt increases, which is what’s been happening.] As a result, politicians wrangled for weeks over raising the debt ceiling and cutting government spending. If a deal was not reached, the country would have risked default and created another economic crisis. As if widespread economic misery didn’t already exist. This narrative was problematic from the beginning. It ignored the real crisis facing the country — the recession (which is looking more like a depression) and the massive unemployment it created.
Contrary to what politicians and the media have been saying, there was no urgent debt crisis. It is obvious that the United States is racking up massive debt, which totals around $14 trillion, as of 2010 (see also table 7.1. from the White House’s figures). That poses a problem in the long-term since too much debt will bankrupt the country. But the battle over the debt ceiling was unnecessary. For several decades, Congress has repeatedly raised the debt ceiling to pay for the government’s costly programs, particularly unnecessary and immoral wars. So Republicans portraying the budget deficit as the most urgent problem to deal with was incredibly odd, to say the least. If the deficit is an urgent problem now then why wasn’t it a problem during two decades of a Republican-controlled government when deficits increased? Long-term debt is a problem but not apocalyptic enough to warrant a battle over reducing government spending and the debt ceiling.
The overall debt is caused by multiple factors, not just government spending. As economist Jeffrey Sachs points out, the deficit is equally caused by low taxes and high government spending. On the spending side, government spending is high because of “cyclical factors”, such as “unemployment compensation, food stamps, and other federal spending to help the downtrodden in a weak economy,” i.e., the recession. Government spending is also high because of rising healthcare costs, thanks to America’s inefficient privately-run healthcare system, and America’s multiple wars in Iraq, Afghanistan, Pakistan, Libya, Yemen, and Somalia. Not to mention the several hundred military bases America has scattered around the globe.
On the tax end, the recession increased unemployment, which eroded the country’s tax base. In addition, tax revenue is low because of repeated tax breaks to the country’s very rich individuals and multinational corporations. For example, in 2010, General Electric (G.E.), the nation’s largest corporation, paid zero taxes even though it made record profits that year. A combination of multiple wars, tax breaks to the rich, rising healthcare costs, and, most importantly, the recession and widespread unemployment have increased the country’s overall debt.
While overall debt is a problem, the most urgent problem to deal with is the recession. As economist Dean Baker said, “The size of the annual deficit peaked at 10 per cent of GDP in 2009, but it is still running at close to nine per cent of GPD in 2011.” While the Congressional Budget Office (CBO), in early 2008, “projected at the budget deficit in 2009 would be just 1.4 per cent of GDP.” The large increase in the size of the deficit “was entirely the result of the fallout from the housing bubble,” which caused the current recession. Thus, dealing with the recession would alleviate the debt problem.
The recession not only exacerbated the government’s debt but also caused widespread misery throughout the country. This is most apparent in the high level of unemployment. The official unemployment rate is around 9 percent. However, since official figures discount many people, such as those who are underemployed (work part-time but want to work full-time) or who give up looking for work, real unemployment is closer to 20 percent.
Aside from the numbers, the human cost is even more heart-wrenching. Contrary to common stereotypes of the unemployed as “lazy” individuals, they are everyday people who have worked hard their whole lives. Some are well-educated individuals with college degrees or people with years of work experience. Unfortunately, the recession came to their doorsteps in the form of massive lay-offs. As a result, many are joining the increasingly long list of long-term unemployed people. Many are lucky enough to find a job, however, are underemployed. Those who wish to work a full-time job with decent benefits are finding that hard to come by in a depressed economy. Therefore, they settle for part-time jobs or internships with low pay and little economic security.
In addition, young people, particularly recent college graduates, are finding it difficult to find jobs. The unemployment rate for workers between ages 16 and 24 is currently around 19 percent. Young people who have been told their whole lives that working hard in school would secure them a decent job are discovering that to no longer be the case. In addition, most young people (around 85 percent) are moving back home with their parents. As a result, they are delaying major life decisions, such as buying a house and starting a family.
The recession also severely harmed communities of color. There has long been a wealth gap between whites and nonwhites, due to a multitude of factors, particularly racism. However, the collapse of the housing bubble and the recession widened this gap significantly. While all racial groups saw their wealth decrease, “that of whites shriveled much less,” the Christian Science Monitor reports. Now the median net worth of whites is “about 20 times that of blacks and 18 times that of Hispanics.” Between 2005 and 2009, “median wealth fell by 66 percent among Hispanic households and 53 percent among blacks, compared with 16 percent among whites. The losses left Hispanic and black wealth at their lowest levels in at least 25 years.” The Monitor also points out that, “In 2009, the median net worth of white households was $113,149, compared with $6,325 for Hispanics and $5,677 for blacks.” This is primarily because communities of color derive most of their household wealth from their homes, while whites derive wealth from their homes and other sources, such as stocks and mutual funds. Hispanics were hit especially hard because “the housing downturn is where their homes are located — disproportionately in California, Florida, Nevada, and Arizona.” In addition, unemployment among blacks and Hispanics is much higher than whites. While unemployment for whites is 8.1 percent, it is 16.2 percent for blacks and 11.6 percent for Hispanics.
Overall, the recession has caused widespread misery and hopelessness for millions of people. It is the most urgent problem to deal with. Dealing with the recession and unemployment, therefore, must be the top economic priority of the government.
To deal with the recession, the government needs to create a robust jobs program and tax the rich. Roosevelt did the same during the 1930s’ Great Depression and that got the economy back on track. A robust jobs program would put the several million unemployed to work and increase the tax base and revenue, thereby, reducing the deficit and stimulating the economy. This would require government spending, not cuts. Taxing the very rich is also crucial. The nation needs tax revenue to stimulate the economy and fund much-needed programs, such as education and infrastructure. Therefore, the nation’s richest individuals and corporations need to pay higher taxes.
In addition to a jobs program and taxing the rich, the financial system needs to be reformed so similar crises do not occur in the future. The Glass-Steagall Act of 1932 created a firewall between commercial banking and investment banking (which is more risky) to prevent banks from getting so big that their collapse will destroy the economy (“too big to fail”). In 1999, Clinton eliminated this firewall. Therefore, reinstating this firewall is crucial to preventing another financial collapse. Unfortunately, Obama’s financial reform bill did not achieve this nor seriously regulate Wall Street.
For the long-term, it is also important to end America’s multiple costly and immoral wars in the Muslim World. These wars have done the most to wreck the nation’s economy and are destroying the lives of American soldiers and thousands of innocent people in Iraq, Afghanistan, Pakistan, Libya, Yemen, and Somalia. In fact, throughout history, war been the biggest driver of a nation’s debt. It is time to end these wars.
Does the recently-passed debt deal address any of these problems? No. Unfortunately, it exacerbates them.
What will this bill do? The deal cuts government spending by around $2.5 trillion over the next decade, in exchange for raising the debt ceiling by a similar amount. Around $1 trillion will come from discretionary spending, which Congress appropriates annually. Discretionary spending funds non-entitlement programs that are vital to the country’s safety and future, such as education, infrastructure, health, housing, environmental protection, law enforcement, and more. Defense makes up 59 percent of discretionary spending. This bill will cut $570 billion from non-defense discretionary spending, i.e., all the important stuff that is not defense-related (education, housing, environmental protection, etc.), over the next decade.
As for defense spending, that is not entirely clear. The White House claims that defense will be cut $350 billion over the next ten years. However, this number is disputed by Senators Carl Levin and John McCain who chair the Armed Services Committee. The bill is not specific on how much defense will be cut, which means that future Congresses get to decide that amount. It is important to note that figures for defense “cuts” are highly misleading. They are based on inaccurate projections. In debunking Obama’s claim that the Defense Department reduced spending by $400 billion last April, Gareth Porter wrote:
“The figure was concocted, moreover, by using tricky accounting methods verging on chicanery. It was based on arbitrary assumptions about how much all 31 programs would have cost over their lifetimes, stretching decades into the future, assuming they would all reach completion. That methodology offered endless possibilities for inflated claims of savings.”
This means that the Defense Department will throw out a wildly high number for how much the sum of their programs will cost. Then when the final bill comes with a really high number that was slightly lower than their projection, the Defense Department claims it saved money and call it a “cut”. As Foreign Policy Magazine’s The Cable points out, this seems to be the case with defense cuts in the debt deal.
What one can expect, though, is that whatever “cut” is made to defense will be relatively small compared to its overall expenditures. For fiscal year 2011, total defense-related spending amounts to well over $900 billion — and that’s just for one year. Thanks to America’s multiple wars, since 2001, U.S. military spending has doubled. If defense is cut by $886 billion over ten years, which is what the “Gang of Six”, a bipartisan budget group, proposed or by $350 billion, which is what the White House estimates, that will, respectively, be $35 billion to $89 billion in defense cuts each year. Considering that defense-related spending totals over $900 billion in a year (and is steadily increasing), these cuts will be very mild. As long as the wars continue, the Pentagon will not bear the brunt of the cuts. Whatever cuts do occur will largely be felt in other defense-related spending, such as veterans’ benefits and the Department of Energy, rather than the Pentagon. As analyst William Hartung points out, House Speaker John Boehner made sure to protect the Pentagon, the defense industry, and military contractors in this deal. Overall, military spending will remain relatively untouched.
In addition, to discretionary cuts, this deal calls on Congressional Democrats and Republicans to create a bipartisan, 12-member committee (six Democrats and six Republicans) to further reduce the deficit by $1.5 trillion over the next decade. This time, cuts to entitlement programs, such as Social Security, Medicare, and Medicaid are on the table, in addition to tax increases. However, Boehner and Republicans are committed to appointing people on the committee who will not raise taxes. So do not expect any tax increases to come from this committee. The committee issues its report by Thanksgiving of 2011, which Congress will vote on by the end of the year. If Congress fails to enact the cuts or the committee fails to cut $1.2 trillion over the next decade, that kicks in an across-the-board spending cuts trigger (around $1 trillion through the decade) with no tax increases. The cuts will be split 50/50 between defense and domestic spending. However, “Social Security, Medicaid, Medicare benefits, unemployment insurance, unemployment insurance, programs for low-income families, and civilian and military retirement,” will be exempt, according to the White House. Any cuts to Medicare will be capped and limited to the providers.
This committee could turn out to be a huge mess. If the committee will not raise tax revenue (which is very likely), economist Robert Greenstein writes that there are only three options, “severe cuts in entitlement programs, deep cuts in entitlements coupled with even deeper cuts in discretionary programs (i.e., cuts on top of the at-least $1.1 trillion in discretionary cuts that the annual caps will produce), or a failure to meet its target.” If the committee only cut entitlement programs, the cuts would be very deep. Greenstein further writes:
“The deal that President Obama and Speaker Boehner were negotiating several weeks ago would have raised Medicare’s eligibility age, raised Medicare cost-sharing charges, shifted significant Medicaid costs to states, modified cost-of-living adjustments in Social Security and other benefit programs (and in the tax code), and instituted other entitlement savings. Those steps would have saved $650 billion to $700 billion over ten years. The joint committee would have to produce cuts twice as deep — and roughly twice as deep as those in the Gang of Six plan.”
If Democrats will not agree to entitlement cuts but support tax increases, while Republicans will not agree to tax increases but support entitlement cuts, that will create gridlock. Then the trigger would kick in with cuts across-the-board but no tax increases. It is also likely that conservative Democrats could be appointed the committee and agree to entitlement cuts with little to no tax increases. In either case, massive cuts will occur and the average citizen will be harmed by them.
Overall, this debt deal exacerbates the economic misery facing the country. As economist Paul Krugman said:
“We shouldn’t even be talking about spending cuts at all now. We have 9 percent unemployment. These spending cuts are going to worsen unemployment. It’s going to hurt the long run fiscal picture, because we have a situation in which more and more people are becoming long-term unemployed, and if you have a situation in which you are going to permanently raise the unemployment rate, which is what this is going to do, that’s actually going to reduce future revenue, so these spending cuts are even going to hurt the long-run fiscal position let alone cause lots of misery, and then on top of we’ve got these budget cuts which are entirely, basically the Republicans said we’ll blow up the world economy unless you give us exactly what we want, and the President said, okay. That’s what happened.”
And he’s right. According to the Economic Policy Institute, this new debt deal “could lead to roughly 1.8 million fewer jobs in 2012”. So this debt deal would increase unemployment, thereby exacerbating the recession. As the Nation Magazine perfectly summed up, the biggest losers in this deal are veterans, students, seniors, the poor, and the unemployed, while the biggest winners are the wealthy, Wall Street, and oil and gas companies.
From the beginning, this debt ceiling was a ruse for something else. As Dean Baker points out:
“The claim that the deficit is a chronic problem and not primarily the result of a severe cyclical downturn also opens the door for cuts to the country’s major social welfare programs. These cuts are hugely unpopular. All three major programs enjoy overwhelming support among people in all demographic groups, including conservative Republicans. There is no way that an ambitious politician would ever suggest major cuts to these programs apart from a crisis. In this respect, the crisis over the debt ceiling is the answer to the prayers of many people in the business community. They desperately want to roll back the size of the country’s welfare state, but they know that there is almost no political support for this position. The crisis over the debt ceiling gives them an opportunity to impose cutbacks in the welfare state by getting the leadership of both political parties to sign on to the deal, leaving the opponents of cuts with no plausible political options.“
And that’s exactly what happened.
Overall, Obama’s debt deal fails to address to economic misery facing millions of Americans. Rather than addressing the most urgent problem of the recession, it ignores and will likely exacerbate it. Instead of taxing the rich and creating a robust jobs program, this debt deal promises no new tax revenue and will actually increase unemployment by eliminating 1.8 million jobs rather than decreasing it. Praising this legislation as some sort of “bipartisan” “compromise” that gives Obama political points for bringing Democrats and Republicans together to craft a worthless bill that fails to address the suffering of millions is incredibly laughable. This debt deal is a colossal failure.
More significantly, this debt deal reveals the corruption of our two-party political system. While America has historically been a country that favors elite interests, the Democratic Party, since the 1930s, was a vehicle to advance progressive reforms that benefitted everyday people. It was Franklin Roosevelt, a Democrat, who created many New Deal programs during the 1930s, such as Social Security, that still enjoy massive support, even from conservatives. During the 1960s, President Lyndon Johnson, also a Democrat, signed civil rights legislation that beat back Jim Crow racism and advanced equality for nonwhites. The Democratic Party was never perfect but it was a working vehicle for reform.
However, since the 1980s and ’90s, the Democratic Party has been taken over by financial elites on Wall Street. President Bill Clinton, during the 1990s, played a big role in helping the financial sector gain control of the Democratic Party. Clinton signed several pieces of legislation that deregulated Wall Street, which contributed to the financial crash of late-2008 and the current recession. This debt deal reveals how far the Democratic Party has colluded with corporate interests. Far from being a weak negotiator held hostage to right-wing extremists, President Obama was a willing player in this debt ceiling game. It was Barack Obama, not Tea Party Republicans, who first put entitlement cuts on the table for the debt deal. He did this to please elite interests, not poor and working people. So the idea that Democrats were being held hostage to recalcitrant Republicans is misguided. With the exception of progressive Democrats, both parties worked together to screw over the poor and the middle class and benefit the very rich. The Democratic Party is no longer a vehicle to advance progressive values and the interests of poor and working people. Like the Republican Party, the Democrats represent the interests of rich people and multinational corporations.
Therefore, it is important for the masses of everyday people to organize and form a progressive movement independent of the two-party system. As the ongoing Arab revolutions and previous movements have shown, real change does not come from benevolent leaders at the top. It comes from below — from everyday people working together and organizing for a better future. Boycotts, demonstrations, strikes, education, petitions, and sit-ins are among the various effective, nonviolent tactics the common citizen can utilize to challenge the plutocracy and militarism that governs America. We must demand an end to America’s wars, sharp cuts in military spending, taxing the rich, creation of a jobs program, and investing in America’s vital infrastructure to rebuild the economy and create a better future. That can only be achieved if people get mad and get organized.
Photo Credit: Wikimedia Commons