August 1, 2011
Congress might pass a debt deal this week that would raise the debt ceiling into 2013 and reduce government spending by $2.5 trillion. After all the debate over who would be affected—or not—what does the final policy scoreboard say?
In short, it’s a rout of the lower and middle classes by the wealthiest Americans. Since the deal relies entirely on spending cuts with no revenues—don’t believe the White House spin that revenues are possible, because that would require Republicans to suddenly desire them—the wealthy escape any sacrifice since very few of them rely on the government services that will be cut.
Rather, as Brookings Institution senior fellow William G. Gale writes, “Low- and middle-class households have seen stagnating or declining earnings over the past few decades, and they have been hit hard in the Great Recession by the housing market collapse and the job market collapse. Now, they are being asked to shoulder—via spending reductions—all of the fiscal reduction agreed to so far.” (Yes, that Brookings Institution).
How specific cuts will be determined, and who exactly is affected, is still hard to know. The deal truly “kicks the can down the road,” in the overused Washington parlance. The $917 billion in “immediate” cuts are not really immediate, nor enumerated. Federal spending will operate under caps over the next ten years equal to $917 billion less than what was projected, but the exact areas of reduction are unknown and obviously depend quite a bit on political outcomes. The caps are relatively modest until 2013, and a Republican Congress with a budget proposal from President Rick Perry would make much a different decision about where to cut than would Obama, Pelosi and Reid.
Then, $1.5 trillion in additional cuts will be determined by a so-called super committee of six Democrats and six Republicans. Entitlement programs like Medicare, Medicaid and Social Security are subject to “across-the-board” cuts here, and if no agreement is reached by November 23, a “trigger” will be pulled, with the gun aimed squarely at senior citizens and the Pentagon.
So there are a lot of permutations for these cuts—but make no mistake about who is exposed, and who isn’t. Cuts are guaranteed, revenue is not. Here’s a quick rundown of the larger bill:
Who is exposed:
Veterans: Almost half of the first round of cuts will come from “security spending,” which includes the Pentagon budget but also the Department of Homeland Security, the State Department and notably veterans benefits and compensation. The White House assured veterans they won’t be harmed if the trigger is pulled, but did not assure them they are safe from any of the preceding cuts. More than 2.2 million veterans have served in Iraq and Afghanistan since September 11, 2001, many of whom have been seriously injured and require extensive care. The Disabled Veterans of America already has said it is “anxious” to see how these spending cuts are assembled.
Students: Graduate students would be the hardest hit, as the bill proposes an elimination of the interest subsidy on federal student loans for “almost all” of them. This means that beginning July 1, 2012, grad students will be responsible for the interest on their loans while in school and during any subsequent deferment period. Also, while the federal government currently offers subsidies for on-time payments in order to promote responsible pay-backs, they will be eliminated under the debt ceiling deal. Also, education accounts for the largest share of non-defense discretionary spending. It’s nearly inconceivable that budget-cutters won’t target that juicy budget line in making their cuts.
Seniors: As noted, Medicare is subject to across-the-board cuts in the super-committee, and if the trigger is pulled, provider payments will be slashed—though only up to 2 percent. The makeup of the super-committee and outside-the-Beltway campaigns to protect Medicare will determine a lot about the degree of cuts, but remember that inside the Beltway, the “left” side of the debate has been defined by President Obama and the Gang of Six as raising the eligibility age to 67 and/or $500 billion in cuts. So this probably won’t end well.
The poor: Again, Medicaid will be subject to cuts by the super-committee. The Republican position, articulated in the Ryan budget, is a devastating 35 percent reduction in the next ten years, even as health costs rise. (However, Medicaid is protected from any cuts if the trigger should go off). Beyond that, federal housing assistance is the fourth largest slice of non-defense discretionary spending and is thus a likely target for cuts.
The unemployed: Unlike what happened during the December showdown over the Bush tax cuts, the White House was unable (or unwilling) to secure any extension of help for the jobless. That December extension will expire at the end of this year, and this was one of the last best shots to make sure that 3.8 million people won’t lose their benefits at that point.
Who’s protected:
The wealthy: Up until very recently, Obama and most Democrats were demanding that wealthy Americans pony up for some deficit reduction. The demands were admittedly narrow, and focused on itemized deductions on people who owned private jets or multiple homes—but both groups are exempted from sacrifice under the current deal. The super-committee could theoretically approve tax increases, including ending those loopholes, but House Speaker John Boehner has already sworn that won’t happen, and it’s tough not to believe that. If the Republicans on the committee refuse to back down on revenues, as they have in every recent negotiation, Democrats on the committee will be facing Medicare-slashing trigger unless they acquiesce—as they have in every recent negotiation.
Wall Street tycoons: In his budget proposal earlier this year, Obama recommended taxing the profit share of private equity managers, venture capitalists and other Wall Street high-rollers at the ordinary personal income tax rate, instead of at the smaller capital gains rate. No such deal was struck under the current bill, so these mega-rich traders won’t spend a penny reducing the deficit—again, unless Boehner undergoes a religious experience and appoints pro-tax, anti–Wall Street Republicans to the super-committee. (He’d have to spend a long time looking first).
Oil and gas companies: Obama repeatedly demanded that oil and gas companies lose their tax breaks, since they are raking in record profits and enjoy many deductions and subsidies in the tax code. “If we choose to keep a tax break for oil and gas companies that are making hundreds of millions of dollars, that means we’ve got to cut some kids off from getting a college scholarship [and] that means we’ve got to stop funding grants for medical research,” Obama said in June. Since those tax breaks were preserved, in hindsight that soundbite was of a prediction than a warning.
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