The Debt Deal: Issue by Issue

The Debt Deal: Issue by Issue

By Fawn Johnson, Chris Strohm, Coral Davenport, Meghan McCarthy, Megan Scully, James Kitfield and Sara Jerome

Updated: August 2, 2011 | 1:45 p.m.
August 1, 2011 | 9:30 p.m.

AFP/GETTY IMAGES

Education

The debt-ceiling deal includes $17 billion for Pell Grants for fiscal 2012 and 2013, which puts it several billion dollars short of what will be needed to give everyone who is eligible the $5,500 per year benefit that helps them pay for college. The Pell Grant provision marks the beginning of a fight between budget hawks and education gurus who insist that Pell Grants are the last place to cut costs if the United States hopes to remain competitive in the global market. It could get nasty. The regular appropriations process is just beginning.
Under the debt deal, Washington Research Group analyst Teddy Downey estimates, the Pell Grant shortfall over the next two years would be just under $3 billion if the annual congressional appropriation for 2012 and 2013 remain stable. But that’s a big if. Keeping Pell Grants funded at their current rate could cost upward of $20 billion for 2012 alone, and there is no guarantee that Congress is feeling generous with its purse strings.

House Budget Committee Chairman Paul Ryan, R-Wis., has called for drastic cuts in Pell Grants to “pre-stimulus” levels, which could more than halve the money available. The debt deal negotiated by House Speaker John Boehner and the White House doesn’t go nearly that far, but Ryan’s sentiment that the Pell Grant program is on an “unsustainable path” isn’t likely to die.

Rank-and-file House Republicans were whining about the Pell Grant provisions in several drafts of the debt deal last week.

The cost of the Pell Grant program has escalated in the past two years because the population of eligible recipients has swelled from 6.2 million to 9.4 million, according to the Education Department. Almost three-fourths of the administration’s requested budget increase for education is designated to meet those Pell Grant needs.

Homeland Security

The deal to address the nation’s debt could result in more funding in fiscal 2012 for the Homeland Security Department—especially for states and cities to deal with natural disasters—than House Republicans wanted.

House Appropriations Committee ranking member Norm Dicks, D-Wash., said that the agreement will provide more discretionary funding next fiscal year than established in the budget bill that House Republicans have already passed.

And that has some House appropriators, including David Price, D-N.C., ranking member of the Homeland Security Appropriations Subcommittee, eyeing more money for their subcommittees.

The debt deal would also change the formula for determining how much funding in the Homeland Security spending bill should go toward disaster relief. It would require Congress to provide disaster-relief funding equal to the average amount that has been spent on disasters over the past 10 years. The spending would not have to be offset and would not count against whatever cap is placed on the annual DHS spending bill, according to a key Democratic aide.

The House approved a bill in June that would provide the Homeland Security Department $40.6 billion in discretionary funds next fiscal year, which was about $2.5 billion less than President Obama requested and about $1 billion less than provided in the current year.

Price said he was especially concerned that the Republicans’ bill cut money for homeland-security grants and science and technology programs. He told National Journal that the debt deal could make more funding available for DHS spending in fiscal ’12.

“What I’ve seen indicates that this should give us a workable situation,” he said. “What I mean by that is that the Senate can pass a bill that has more adequate numbers in these areas that I’m concerned about, and therefore we can get together in the end. Based on what I’ve seen so far, I believe that’s possible.”

Energy and Environment

The debt-ceiling deal likely will lead to a decade of spending cuts in energy research, environmental regulatory programs, land and water conservation funds, and foreign aid to help countries struggling with the impacts of climate change. And it could mean an end to billions of dollars in government tax breaks and subsidies for ethanol, wind power, and oil and gas, as a congressional super committee seeks $1.5 trillion more to cut by November 23.

While they don’t yet know specifics, lawmakers familiar with federal energy and environment spending policy said it’s clear that the immediate top-line cut of $917 billion over 10 years will slice deeply into the budgets of the nation’s energy and environment agencies.

In the House, Republican appropriators will target spending on all programs connected with climate change and regulation of the oil and coal industries, including Environmental Protection Agency programs to measure, monitor, and reduce emissions of greenhouse gases and pollutants like sulfur dioxide and mercury from power plants. In the Senate, Democratic appropriators will fight fiercely to limit damage to those programs and to initiatives promoting clean-energy research.

Also in danger is State Department funding to help poor countries adapt to the ravages of climate change, such as drought and flooding. The administration had pledged to the United Nations $20 billion annually by 2020 for the initiative, with at least some of that funding expected to come from tax dollars.

And as the super committee meets this fall to find another $1.5 trillion in deficit reduction, it undoubtedly will consider ending at least some of the $4 billion in annual tax breaks enjoyed by the oil industry, and the longstanding 45-cent-per-gallon subsidy for the ethanol industry, whose death knell was heralded when the Senate voted in June to let the subsidy phase out by the end of the year.  

Health Care

The debt-ceiling deal would not enact any immediate cuts to Medicare, the $491 billion federal health program for the elderly.

But if a 12-member committee fails to save the government $1.2 trillion by January 15, or if Congress does not send a balanced-budget amendment to the states, then the Office of Management and Budget is tasked with trimming Medicare payments to hospitals, doctors, and insurance companies.

Congressional aides, who spoke anonymously due to the sensitivity of the deal, estimated that the Medicare cuts could lead to a $11 billion reduction in fiscal 2013 and end up totaling $150 billion to $200 billion over 10 years.

OMB can cut 2 percent or less from Medicare providers, depending on how much is needed to meet the $1.2 trillion target.

For the specific rules guiding automatic Medicare cuts—known as a “sequestration” in Congress-speak—the deal-makers in the debt-ceiling talks turned to a 1985 budget law that also threatened automatic cuts to Medicare if Congress didn’t get its fiscal house in order.

The automatic cuts would reduce established payment formulas to hospitals, doctors, and other providers, such as nursing homes, with a cut of 2 percent or less to reimbursement. It would also reduce payments to Medicare Advantage plans and prescription-drug plans under Medicare Part D by 2 percent or less.

The debt-ceiling deal does not address a perennial Medicare doctors’ pay problem, under which a flawed formula has doctors scheduled to take a 29 percent payment cut in 2012. Any potential sequestration would deepen that cut by 2 percent.

Medicaid is exempted from any automatic cuts if the deficit committee fails to get $1.2 trillion in savings. The debt-ceiling deal also protects one of the few Medicare items Democrats and Republicans can agree on: protecting the program from fraud and abuse.

Defense

The debt-ceiling compromise aims to cut $350 billion from the defense budget over the next 10 years as part of an immediate agreement to reduce federal discretionary spending by $900 billion over the next decade.

That number is largely in line with a proposal offered by President Obama to cut $400 billion from security accounts, which includes the Defense Department and other agencies, over the next 12 years.

On Monday, Pentagon spokesman Col. Dave Lapan said the Pentagon is still engaged with the Office of Management and Budget and other parts of the administration to determine how the debt deal would line up with the amount that Obama already announced he would cut from the defense budget. “At this point,” Lapan said, “I don’t have specifics.”

But there could be more cuts to the Defense Department’s accounts. Under the deal reached over the weekend, a bipartisan committee would be charged with finding another $1.5 trillion in savings to reduce the deficit—with Defense Department coffers a likely target for more cuts. If that committee fails to find the savings by Thanksgiving, defense spending would get another cut between fiscal 2013 and 2021 of nearly $500 billion, bringing the total for cuts to the Pentagon’s bottom line to roughly $850 billion. But that is meant to be a worst-case scenario designed to force both parties to compromise—meaning that the total reduction in the Defense Department’s bottom line would likely be somewhere south of $850 billion.

Foreign Affairs

When Congress looks for savings in generic “security spending,” the denizens of Foggy Bottom instinctively reach for their wallets. That’s because on Capitol Hill, spending on the military and intelligence agencies is far more popular than spending on foreign aid and diplomatic operations. So when the proposed Budget Control Act talks about capping “security category” spending at $684 billion in fiscal 2012, or $50 billion below anticipated levels, “soft power” advocates were heard to groan.

“The problem with tossing in international-affairs accounts with the Defense Department, Homeland Security, Veterans Affairs, the Nuclear Security Administration, and the intelligence community is that Congress would much rather spend in those areas than in foreign aid,” said John Isaacs, executive director of the Council for a Livable World. Even though spending on international affairs accounts for less than 1.5 percent of the federal budget, he said, the public thinks that outlays for foreign aid and international operations are much higher. “My fear is that because foreign aid is never popular, Congress will cut it disproportionately as it looks for savings.”

The details for remaining under the proposed spending caps have yet to be worked out, but the House State-Foreign Operations Appropriations Subcommittee recently tipped its hand on where cuts might fall. In its fiscal 2012 markup, the subcommittee voted to slash spending on non-war-related international-affairs programs by roughly 20 percent below 2010 levels. State Department and USAID operations, along with multilateral development-assistance programs, bore the brunt of the cuts. For its part, the House Foreign Affairs Committee recently voted to cap fiscal 2012 State Department and foreign-assistance spending at 2011 levels, representing deep cuts from the administration’s request.

Technology

In a significant victory for broadcasters over their rivals in the tech and wireless industries, spectrum measures were not included in what may be the final version of the debt bill. 

Tech lobbyists and lawmakers on both the House and Senate the commerce panels have been negotiating for weeks over whether airwave auctions should be folded into the debt package as a revenue-raiser.

Spectrum auctions could raise almost $12 billion, according to a Congressional Budget Office analysis of a debt proposal released last week by Senate Majority Leader Harry Reid, D-Nev., before spectrum was dropped from the deal.

Cellular service providers want Congress to authorize auctions in which TV stations can sell their airwaves to wireless companies and go out of business. Wireless companies with increasing data demands could buy the spectrum to improve their networks. Revenue would go to broadcasters and the government.

“It was a missed opportunity but not a wasted one,” Jonathan Spalter, chairman of Mobile Future, an AT&T-backed wireless group, said in an interview. “Lawmakers are now more aware than ever of the incredible potential of spectrum auctions.”

It may not be the end of the line for spectrum auctions in this Congress.

A Senate Commerce aide and telecom analysts said spectrum proposals will likely reemerge in a package proposed by the prospective bipartisan deficit-reduction panel created by this week’s debt bill. The panel is slated to recommend ways to bring down the deficit later this year.

“It seems like a no-brainer to include spectrum. It’s a way to raise revenue without raising taxes,” the aide said. 

Mr. Obama’s scare tactics to get Democrats to vote for his Republican Wall Street plan

Mr. Obama’s scare tactics to get Democrats to vote for his Republican Wall Street plan

Michael Hudson

   You know that the debt kerfuffle is as staged as melodramatically as a World Wrestling Federation exhibition when Mr. Obama makes the blatantly empty threat that if Congress does not “tackle the tough challenges of entitlement and tax reform,” there won’t be money to pay Social Security checks next month. In his debt speech last night (July 25), he threatened that if “we default, we would not have enough money to pay all of our bills – bills that include monthly Social Security checks, veterans’ benefits, and the government contracts we’ve signed with thousands of businesses.”

            This is not remotely true. But it has become the scare theme for over a week now, ever since the President used almost the same words in his interview with CBS Evening News anchor Scott Pelley.

            Of course the government will have enough money to pay the monthly Social Security checks. The Social Security administration has its own savings – in Treasury bills. I realize that lawyers (such as Mr. Obama and indeed most American presidents) rarely understand economics. But this is a legal issue. Mr. Obama certainly must know that Social Security is solvent, with liquid securities to pay for many decades to come. Yet Mr. Obama has put Social Security at the very top of his hit list!

            The most reasonable explanation for his empty threat is that he is trying to panic the elderly into hoping that somehow the budget deal he seems to have up his sleeve can save them. The reality, of course, is that they are being led to economic slaughter. (And not a word of correction reminding the President of financial reality from Rubinomics Treasury Secretary Geithner, neoliberal Fed Chairman Bernanke or anyone else in the Wall Street Democrat administration, formerly known as the Democratic Leadership Council.)

            It is a con. Mr. Obama has come to bury Social Security, Medicare and Medicaid, not to save but them. This was clear from the outset of his administration when he appointed his Deficit Reduction Commission, headed by avowed enemies of Social Security Republican Senator Alan Simpson of Wyoming, and President Clinton’s Rubinomics chief of staff Erskine Bowles. Mr. Obama’s more recent choice of Republicans and Blue Dog Democrats be delegated by Congress to rewrite the tax code on a bipartisan manner – so that it cannot be challenged – is a ploy to pass a tax “reform” that democratically elected representatives never could be expected to do.

            The devil is always in the details. And Wall Street lobbyists always have such details tucked away in their briefcases to put in the hands of their favored congressmen and dedicated senators. And in this case they have the President, who has taken their advice as to whom to appoint as his cabinet to act as factotums to capture the government on their behalf and create “socialism for the rich.”

            There is no such thing, of course. When governments are run by the rich, it is called oligarchy. Plato’s dialogues made clear that rather than viewing societies as democracies or oligarchies, it was best to view them in motion. Democracies tended to polarize economically (mainly between creditors and debtors) into oligarchies. These in turn tended to make themselves into hereditary aristocracies. In time, leading families would fight among themselves, and one group (such as Kleisthenes in Athens in 507 BC) would “take the people into his party” and create a democracy. And so the eternal political triangle would go on.

            This is what is happening today. Instead of enjoying what the Progressive Era anticipated – an evolution into socialism, with government providing basic infrastructure and other needs on a subsidized basis – we are seeing a lapse back into neo-feudalism. The difference, of course, is that this time around society is not controlled by military grabbers of the land. Finance today achieves what military force did in times past. Instead of being tied to the land as under feudalism, families today may live wherever they want – as long as they take on a lifetime of debt to pay the mortgage on whatever home they buy.

            And instead of society paying land rent and tribute to conquerors, we pay the bankers. Just as access to the land was a precondition for families to feed themselves under feudalism, one needs access to credit, to water, medical care, pensions or Social Security and other basic needs today – and must pay interest, fees and monopoly rent to the neo-feudal oligarchy that is now making its deft move from the United States to Ireland and Greece.

            The U.S. Government has spent $13 trillion in financial bailouts since Lehman Bros. failed in September 2008. But Mr. Obama warns that thirty years from now, the Social Security fund may run a $1 trillion deficit. It is to ward it off that he urges dismantling the plans for such payments now.

            It seems that the $13 trillion used up all the money the government really has. The banks and Wall Street firms have taken the money and run. There is not enough to pay for Social Security, Medicare or other social spending that the Blue Dog Democrats and Republicans now plan to cut.

            Not right away. The plan will be to “paper over” the current crisis by delegating the plans to a “Deficit Reduction Commission #2,” appointed from Congressional members.

            Finally, we have “Change we can believe in.” Real change is always surprising, after all.

The faux crisis

            Usually a crisis is needed to create a vacuum into which these toxic details are fed. Wall Street does not like real crises, of course – except to make quick computer-driven speculative gains on the usual fibrillation of today’s zigzagging markets. But when it comes to serious money, the illusion of a crisis is preferred, staged melodramatically to wring the greatest degree of emotion out of the audience much like a good film editor edits a montage sequence. Will the speeding train run over the girl strapped to the tracks? Will she escape in time?

            The train is debt; the girl is supposed to be the American economy. But she turns out to be Wall Street in disguise. The exercise turns out to be a not-so-divine comedy. Mr. Obama offers a plan that looks very Republican. But the Republicans say no. There is an illusion of a real fight. They say Obama is socialist.

            Democrats express shock at the giveaway being threatened. Many say, “Where is the real Obama?” But it seems that the real Obama turns out to be a Republican Wall Street imposter in Democratic clothing. That is what the Democratic Leadership Committee basically is: Wall Street Democrats.

            This is not as much of an oxymoron as it may sound. There is a reason why today’s post-Clinton Democrats are the natural party to undo what FDR and earlier Democrats stood for. A Democratic Senate never would stand for such giveaways to Wall Street and double-cross of their urban constituency if a Republican president would propose what Mr. Obama is putting before them.

            Here’s what the next Republican presidential candidate can say: “You know that whatever we Republicans want, Mr. Obama will support us. If you don’t want a Republican policy, they you should vote for me for president. Because a Democratic Congress will oppose a Republican policy if we propose it. But if Mr. Obama proposes it, congress will be de-toothed, and cannot resist.”

            It’s the same story in Britain, where the Labour Party is called upon to finish up the job that the Conservatives start but need New Labour to subdue popular opposition to privatizing the railroads and a Public/Private Partnership financial giveaway for the London tube line. And it’s the same story in France, where a Socialist government is supporting the privatization program dictated by the European Central Bank.

Round up the usual fallacies

            Whenever one finds government officials and the media repeating an economic error as an incessant mantra, there always is a special interest at work. The financial sector in particular seeks to wrong-foot voters into believing that the economy will be plunged into crisis of Wall Street does not get its way – usually by freeing it from taxes and deregulating it.

            Mr. Obama’s first fallacy is that the government budget is like a family budget. But families can’t write IOUs and have the rest of the world treat it as money. Only governments can do that. It is a privilege that the banks would now like to obtain – the ability to create credit freely on their computer keyboards, and charge interest for what is almost free, and what governments can indeed create for free. (That is the State Theory of Money. See the UMKC Economics Blog.)

            “Now, every family knows that a little credit card debt is manageable. But if we stay on the current path, our growing debt could cost us jobs and do serious damage to the economy.”  But economies need government money to grow – and this money is provided by running federal budget deficits. This has been the essence of Keynesian counter-cyclical spending for more than half a century. Until the present, it was Democratic Party policy.

            It’s true that Pres. Clinton ran a budget surplus. The economy survived by the commercial banking system supplying the credit needed to grow – at interest. To force the economy back into this reliance on Wall Street rather than on government, the government needs to stop running budget deficits. The economy will then have a choice: to shrink sharply, or to turn almost all the economic surplus over to banks as economic rent on their credit-creation privilege.

            Mr. Obama also pretends that credit ratings agencies are able to act as mascots for their clients, the large financial underwriters, by making the entire economy pay even higher interest rates on its credit cards and banks. “For the first time in history,” Mr. Obama dissembled, “our country’s Triple A credit rating would be downgraded, leaving investors around the world to wonder whether the United States is still a good bet. Interest rates would skyrocket on credit cards, mortgages, and car loans, which amounts to a huge tax hike on the American people.”

            The reality is that running a budget surplus would increase interest rates, by forcing the economy into captivity to the banking system. The Obama administration is now deep into its Orwellian rhetorical phase.

Why Wall Street needs Obama Democrats to shepherd Rubinomics #2 through Congress

            During Mr. Obama’s speech I could not help feeling that I had heard it all before. And then I remembered. Back in 2008, Treasury Secretary Henry Paulson sought to counter Sheila Bair’s argument that all FDIC-insured depositors would be able to ride out the September crisis, with only the reckless gamblers losing the gains they hoped to make on their free credit. “If the financial system were allowed to collapse,” he warned in his Reagan Library speech, “it is the American people who would pay the price. This never has been just about the banks; it has always been about continued prosperity and opportunity for all Americans.”

            But of course, it is all about the banks! Wall Street knows that to get sufficient Congressional votes to roll back the New Deal, Social Security, Medicare and Medicaid, a Democratic president needs to be in office. A Democratic Congress would block any Republican president trying to make the kind of cuts that Mr. Obama is sponsoring. But Congressional Democratic opposition is paralyzed when President Obama himself – the liberal president par excellence, America’s Tony Blair – acts as cheerleader for cutting back entitlements and other social spending.

            So just as the City of London backed Britain’s Labour Party in taking over when the Conservative Party could not take such radical steps as privatizing the railroads and London tube system, and just as Iceland’s Social Democrats sought to plunge the economy into debt peonage to Britain and Holland, and the Greek Socialist Party is leading the fight for privatization and bank bailouts, so in the United States the Democratic Party is to deliver its constituency – urban labor, especially the racial minorities and the poor who are most injured by Pres. Obama’s austerity plan – to Wall Street.

            So Mr. Obama is doing what any good demagogue does: delivering his constituency to his campaign contributors on Wall Street. Yves Smith has aptly called it Obama’s “Nixon goes to China moment in reverse.”

            The Republicans help by refraining from putting forth a credible alternative presidential candidate. The effect is to give Mr. Obama room to move far to the right wing of the political spectrum. Far enough so that it is his own Democrats who are most intent on scaling back Social Security, not the Republicans.

            This is done most easily under pressure of near panic. This worked after September 1008 with TARP, after all. The Wall Street bailout melodrama should be viewed as a dress rehearsal for today’s debt-ceiling non-crisis.