Deficit Reduction: The Great Distraction

Tuesday, May 15, 2012 by Common Dreams

by Dean Baker

 

 

This is the week of the third annual Deficit Fest, the event sponsored by Wall Street billionaire Peter G. Peterson. At this event, many of the people most responsible for the current downturn come together to tell us why we should be worried about the deficit at a time when 45 million people are unemployed, underemployed or have given up looking for work altogether and millions face the prospect of losing their homes.

Past deficit fests included exchanges where Peter Peterson and former Treasury Secretary and Citigroup honcho Robert Rubin mused about their comparative net worth. We also got to witness President Clinton bemoan the fact that the Democratic and Republican leadership in Congress teamed up to prevent him from cutting Social Security. Had Clinton gotten his way, millions of seniors would be getting by on Social Security checks that are more than 10 percent smaller than what they now receive.

Peterson is also known for his sponsorship of the "Economic Sleepwalk" tour, which was officially billed as the "Fiscal Wakeup" tour. This involved sending a group of policy wonks around the country to complain about the budget deficit at a time when the housing bubble was growing to ever more dangerous levels. While some of us were doing our best to warn of the imminent disaster, Peterson was using his money and political connections to dominate media space at a time when the country's debt-to-GDP ratio was actually falling.

But why harp on the past? We should be focused on the future.

And one of the items that this group would like to see in our future is a deficit deal like the one proposed by Erskine Bowles and former Senator Alan Simpson, the co-chairs of President Obama's deficit commission. (The Bowles-Simpson plan is inaccurately referred to on the commission's website as a report of the commission, ironically on a page titled "Moment of Truth." In fact, it is only the report of the co-chairs since it did not receive the 14 votes needed to be approved as an official report of the commission.)

This plan includes a wide range of budget cuts, including cuts to Social Security and Medicare. It would reduce the annual Social Security cost-of-living adjustment by 0.3 percent, which would lower lifetime benefits by an average of more than 3 percent. It would also raise the retirement age for Social Security. To balance these cuts to programs that benefit tens of millions of ordinary workers, Bowles and Simpson would cut the corporate tax rate from 35 to 28 percent and would lower the tax rate paid by the very wealthy from 40 percent to 28 percent. While these reductions in tax rates are supposed to be offset by the elimination of loopholes that benefit the wealthy, people have good cause for skepticism.

If these policies seem out of step with the interests of ordinary workers, it should not be surprising given their parentage. Erskine Bowles in particular could be the poster boy for everything that is wrong in national politics today. Bowles rose to become chief of staff in the Clinton White House in the 90s. He then twice competed unsuccessfully for Senate seats in North Carolina. As a consolation prize he became the President of the University of North Carolina.

Since it is hard to make ends meet on a university president's salary these days, Mr. Bowles also did a little bowling for dollars. He moonlighted as a director on corporate boards, serving stints at Morgan Stanley, the huge Wall Street investment bank, General Motors (until it went bankrupt), and most recently Facebook.

Being a director on a corporate board typically involves attending 4-8 meetings a year. For this, directors receive several hundred thousands of dollars in compensation. For example, in 2008 Erskine Bowles received $335,000 in compensation for his work on Morgan Stanley's board.

This year is noteworthy because Morgan Stanley's dealings in mortgage-backed securities brought it to the edge of bankruptcy in the fall of 2008. It was only saved from disaster by the generous intervention of Ben Bernanke. He allowed the bank to change its status in the middle of the post-Lehman crisis, and become a bank holding company. This gave it the protection of the Fed and the FDIC.

Given this near brush with death, shareholders might ask what Mr. Bowles did for the $335,000 that we paid him. "We" is appropriate in this sentence, since much of the public has a stake in Morgan Stanley either through an index fund in a 401(k) that likely holds some of the company's stock or the defined benefit pensions that most state and local governments still have for their workers.

In fact, we should be asking this question of directors more generally. When shareholders voted "no" last month on the pay package of Citigroup's CEO, Vikram Pandit, they were saying that the company's well-paid board was not doing its job. These directors were getting paid $250,000 each year for just a few days' work. Their job is precisely to prevent such outlandish pay packaged for top management.

The failure of these highly paid directors is a major national problem. Their compensation looks more like payoffs than paychecks. After their palms get greased, they look the other way when the CEOs walk away with tens or even hundreds of millions of dollars of the shareholders' money. And the outsized pay of the CEOs corrupts pay scales throughout the economy. Even heads of charities can now command pay packages in excess of $1 million a year.

Anyhow, when we hear Erskine Bowles and his friends rant about the deficit this week, we should remember that once again they are distracting the public from the country's real problems. And this crew is at the center of those problems; it is not the solution.

The Truth About Capital Gains

How the Rich Game the System
By GERALD SCORSE

When it comes to taxes on capital gains, the emperor suddenly has no clothes. He’s been stripped bare, in bipartisan fashion, by the co-chairs of President Obama’s fiscal commission.

The chairs are Republican Alan K. Simpson and Erskine Bowles, a Democrat. Their initial report included a call for equal taxes on capital gains, dividends and ordinary income such as wages. This upends the current tax code, and it contradicts almost the entire history of capital gains taxes in America.

Implicitly, it also rejects the K Street claim that tax breaks for capital gains grow jobs, grow businesses and grow the economy. If the claim had any truth, Messrs. Simpson and Bowles would never support equal taxes on all income as a way to help cut the national deficit.

Liberals instinctively attacked the right-leaning aspects of the report. House Speaker Nancy Pelosi, in full "no" mode, labeled its recommendations “simply unacceptable”. Not quite, Madam Speaker; apropos investment income, Simpson/Bowles is a Democratic dream come true.

Income from wealth and income from work were taxed at the same rate in only two widely-separated times in America—from 1916-21, and after Ronald Reagan’s Tax Reform Act of 1986. President Clinton restored the tax break on capital gains in 1997, cutting the rate on long-term gains from Reagan’s 28 percent to 20 percent. Six years later, President Bush lowered the levy to 15 percent and did likewise for dividends. The Bush cuts were written to expire in 2010, but it’s not certain they will. Even if they did, the capital gains rate would still be less than the rate on middle-class wages.

The Simpson/Bowles recommendations could die a quick death: a unified final report needs the votes of 14 out of the commission’s 18 members, comprised of nine from each party. If a super-majority of 14 can agree, their report arrives at the White House on December 1.

But the proposals are now on the table, so the genie is out of the bottle. President Obama and Congress were already facing a showdown on extending the Bush tax cuts. Now, in addition, Congress and the Administration have a rare opportunity to set a new course for the nation’s fiscal future.

They could start by revisiting the tax code and creating capital gains tax breaks that really would grow jobs and stimulate the economy. Small companies with big dreams raise seed money through initial public offerings (IPOs) and secondary offerings; larger companies sometimes do the same (e.g., the resurgent GM). In a move that would give a built-in boost to the market for new issues, capital gains on these investments could accrue tax-free. Interest on corporate bonds, now taxed as ordinary income, also deserves a tax break. Corporate bonds raise the money to build corporate infrastructure, much like municipal bonds raise money to build local infrastructure. Interest from municipal bonds gets tax breaks; why not corporate interest?

How to pay for these new tax breaks? Easy: the money would come from ending the unproductive tax break on stock market gains, along with the 2003 tax break on dividends.

In 1986, President Reagan essentially traded tax breaks on capital gains for another round of cuts in the marginal rates. A generation later, the initial draft from Obama’s fiscal commission holds the makings of a similar endgame.

One major milestone has already been reached. The notion that investments deserve a lower tax than wages has been vaporized. The emperor has no clothes, and really never did.

Pillage and Plunder Alert

Deficit Commission Gets Underway
by Mary Bottari
Friday, November 12, 2010 by BanksterUSA.org

Watch out, they're coming. After an election cycle in which Republicans worked themselves into a lather in an attempt to convince voters that the deficit was the source of all their economic woes, the political elites and their Bankster backers are coming for the middle class. What better time to start a new publication - "Pillage and Plunder Alert"? And what better inaugural event than the release of the draft report prepared by the co-chairs of the Presidential Deficit Commission?

First, Go After the Sick and the Elderly

The two chairmen of the deficit commission, former Clinton Chief of Staff Erskine Bowles and former Republican Senator Alan Simpson, surprised Washington Wednesday with the release of their own draft recommendations on federal debt reduction. They were supposed to issue a report December 1, after the full 18-member panel had been given a chance to vote on each item. Knowing that it would be next to impossible to achieve a high level of support on the commission for their recommendations, the raiders decided to go it alone. Their package appears to be about ¾ cuts and ¼ revenue raisers.

High on the list of people who have "feel the pain" are the sick and the elderly. The co-chairs want to "increase cost-sharing for Medicare." In other words, they want seniors' copays and deductibles to increase. Plus, they want a cap on catastrophic medical costs, tossing the severely ill over the cliff. But in what many found to be the most ominous development, the co-chairs navigated far outside the boundaries of their mandate to launch a frontal assault on Social Security.

"The commission's mandate was to deal with the country's fiscal problems. Since Social Security is legally prohibited from ever spending more than it has collected in taxes, it cannot under the law contribute to the deficit. Their proposal would cut benefits for tens of millions of middle class workers who are overwhelmingly dependent on Social Security for their retirement income," said economist Dean Baker.

The commission co-chairs also recommend raising the retirement age for Social Security. "They're talking about raising the retirement age, because people live longer - except that the people who really depend on Social Security, those in the bottom half of the distribution, aren't living much longer. So you're going to tell janitors to work until they're 70 because lawyers are living longer than ever," says Nobel Prize-winning economist Paul Krugman.

When millions of seniors have just seen their retirement savings go up in smoke, is it really the time to be talking about slashing Social Security? AFL-CIO President Richard Trumka was blunt: "The chairmen of the Deficit Commission just told working Americans to ‘Drop Dead.' Especially in these tough economic times, it is unconscionable to be proposing cuts to the critical economic lifelines for working people, Social Security and Medicare."

Spare the Whales, Harpoon the Minnows

Most economists agree that focusing on the deficit during a major economic downturn is counterproductive. But if you are sincerely concerned about the deficit caused by endless war and a massive financial crisis, the best way to solve the problem is to put America back to work. Working people pay taxes. The unemployed do not.

Economist Jamie Galbraith puts it best: "The only way to reduce a deficit caused by unemployment is to reduce unemployment. And this must be done with a substantial component of private financing, which is to say by bank credit, if the public deficit is going to be reduced. This is a fact of accounting. It is not a matter of theory or ideology; it is merely a fact. The only way to grow out of our deficit is to cure the financial crisis."

At Wednesday's press conference Alan Simpson said, "we have harpooned every whale and some minnows" in order to come up with their recommendations. But it is notable that while the minnows are drowning, those blubbery whales on Wall Street have dodged the harpoon. Galbraith recommends that the big banks be forced - once and for all - to clear their books of the toxic assets that are preventing them from lending. Private lending is critical to getting the economy moving again. But it may not be enough.

With a recession this steep, more revenue is needed to put Americans back to work. Dean Baker notes that the "glaring omission" of the Deficit Commission draft is that while it includes taxes on the middle class, it does not include plans for any type of tax on the financial sector, an idea supported by commission members. He notes that a tiny tax on destructive Wall Street speculation alone could raise $1.5 trillion over 10 years, a hefty chunk of change that can be used to put Americans back to work and reduce the deficit.

Despite the deficit hype, polling shows the American public is clear that the deficit didn't crash the economy, Wall Street did. Moreover, Americans know that the big bailed-out banks are doing nothing to improve the situation. Nomi Prins nailed it when she wrote in her book "It Takes a Pillage," that to stop the rampage we need to restructure the financial system to help the many and not the few. We can start by making Wall Street pay to put America back to work.

The Perverse Priorities and Fatal Flaws of the Deficit Commission Report

Plan From a Parallel Universe
By DEAN BAKER

The country in which most people live is experiencing an economic disaster. More than 25 million people are unemployed, underemployed, or have given up looking for work altogether. Tens of millions are now underwater on their mortgages, with millions facing the imminent loss of their homes. Furthermore, there is little prospect that the situation will improve anytime soon.

Many fewer live in the other America, the world of Wall Street and Washington lobbyists. This is where you’ll find former Wyoming Republican Senator Alan Simpson and investment banker-turned-Clinton Chief of Staff Erskine Bowles, the co-chairs of President Obama’s deficit commission, which on Wednesday outlined its plans for what it calls “fiscal responsibility.” In their world the key fact is that, today, corporate profits are back to their pre-recession peaks. As long as the bonuses on Wall Street are again hitting record highs, the economy must be just fine, so what else is there to do but worry about deficits?

It would be hard to understand how ostensibly serious people could be concerned about the deficit right now, unless we realize that they stand apart from the economic calamity that has engulfed most of the country. The suffering caused by this recession simply does not register on their radar screens.

This is not just a moral complaint, although it is troubling that the people most responsible for the economic wreckage are doing just fine. More important is that there is no evidence that Simpson, Bowles, and the rest of the deficit cutters have the slightest understanding of the economy. If they did they would be looking at the deficit in a completely different way.

First, the current deficit should not even be viewed as a problem. Yes, a deficit of $1.4 trillion is big, but this is a direct result of the loss of demand stemming from the collapse of an $8 trillion housing bubble. This bubble was driving the economy until its collapse. There were two channels through which the bubble generated demand in the economy: bubble-inflated house prices led to a boom in construction, bubble-inflated wealth led consumers to increase their spending, pushing saving rates to almost zero.

This demand has disappeared now that the bubble has deflated. The economy has lost more than $600 billion in annual construction demand as builders cut back in response to an enormous over-supply of both residential and non-residential property. Similarly, consumption has plummeted. This left an enormous gap in demand that, at least in the near-term, can only be filled by the government. If the government were to spend less—say it instantly balanced its budget—the primary result would be a further decline in demand and more job loss.

We are in a peculiar situation where the main problem for the economy is a lack of demand. More demand will mean more growth and more jobs. Government must supply demand because there is no other entity that can step forward to do it—unless someone gets very good at counterfeiting hundred dollar bills.

The failure to understand current deficits also leads to a misunderstanding of the debt burden. Simpson and Bowles raise fears of an exploding debt reaching 90 percent of GDP by the end of the decade. They have raised the prospect of a crushing interest burden facing future generations of taxpayers.

Simpson and Bowles decided to include cuts to Social Security in the mix, even though Social Security has not contributed to the deficit.

But there is no real basis for this concern. There is no reason that the Fed can’t just buy this debt (as it is largely doing) and hold it indefinitely. If the Fed holds the debt, there is no interest burden for future taxpayers. The Fed refunds its interest earnings to the Treasury every year. Last year the Fed refunded almost $80 billion in interest to the Treasury, nearly 40 percent of the country’s net interest burden. And the Fed has other tools to ensure that the expansion of the monetary base required to purchase the debt does not lead to inflation.

This means that the country really has no near-term or even mid-term deficit problem. The current deficit is a positive. In fact, if it were larger we would have more jobs and growth. Furthermore, there is no reason that the debt being accumulated at present should pose any interest burden on future generations. In this vein, it is worth noting that Japan’s central bank holds debt amounting to almost 100 percent of that country’s GDP. As a result, Japan’s interest burden is considerably smaller than the United States’s, even though Japan’s debt is almost four times as large relative to the size of its economy.

Over the longer term the United States is projected to face a deficit problem, but this is almost entirely attributable to the explosive rate at which private-sector health-care costs are likely to grow. More than half of health-care costs are paid by the government, hence the public budgetary impact of our private system.

Of course, those increasing costs will lead to enormous problems for the private sector, too. Rapidly rising health-care costs were a big part of the GM and Chrysler bankruptcies. If per-person health-care costs in the United States were the same as in Canada, then General Motors’ profits would have been $20 billion higher over the last decade. If, on the other hand, health-care costs follow the projected path, we will have many more General Motors and Chryslers.

Simpson and Bowles’s report seeks saving in public-sector health programs, primarily by making patients pay more for care. But there is no discussion of the private health-care system that is the root of the problem.

To no one’s surprise the co-chairs decided to include cuts to Social Security in the mix, even though Social Security has not contributed to the deficit. The program has a designated payroll tax and is prohibited from spending beyond the money provided by the tax. It is structurally impossible for the program to affect the deficit.

The Simpson-Bowles approach involves raising the retirement age, cutting benefits for middle- and higher-income workers, and reducing the annual cost-of-living adjustment so that retirees would no longer see their benefits rise in step with the consumer price index (CPI). Raising the retirement age seems more than a bit unfair, since most of the gains in life expectancy have been going to workers in the top half of the income distribution. Workers in the bottom half have seen minimal gains in life expectancy over the last three decades.

The cuts in the benefit formula will hit anyone who has average wage earnings over their lifetime of more than $36,000. This is not most people’s definition of affluent.

Simpson and Bowles do not seem interested in accuracy; they want to cut benefits.

Finally, the co-chairs want to peg the cost-of-living adjustment to a new CPI that regularly shows a lower rate of inflation than the current measure. The gap is about 0.3 percent, which means that benefits will rise by about 0.3 percent less rapidly than would otherwise be the case.

This effect seems small, but it adds up over time. A retiree who collecting benefits for ten years would have a benefit in their tenth years that was 3.0 percent lower than would otherwise be the case. After 20 years the gap would be 6.0 percent and after thirty years the gap would be 9.0 percent. This policy has the effect of hitting the oldest hardest. These are precisely the people (mostly women) with the least resources.

It is often argued that the new CPI would be a better measure of inflation, but if we are concerned about actually measuring the cost of living for retirees, Simpson and Bowles could have recommended that Congress use a measure constructed by the Bureau of Labor Statistics explicitly to measure the increase in the cost of living for the elderly. This CPI for the elderly consistently shows a rate of inflation that is 0.2-0.4 above the standard CPI that is used now. But Simpson and Bowles do not seem interested in accuracy; they want to cut benefits.

There is one item worth noting for its absence. Simpson and Bowles apparently never considered a Wall Street financial-speculation tax. This is an obvious source of revenue that even the International Monetary Fund is now advocating in recognition of the enormous amount of waste and rents in the financial sector. It is possible to raise large amounts of revenue from such a tax.

University of Massachusetts professor Robert Pollin and I calculated the potential revenue at more than $100 billion a year, with little impact on productive economic activity. The main impact would be to reduce the shuffling of financial assets. The refusal to consider this source of revenue is striking since at least one member of the commission has been a vocal advocate of financial-speculation taxes. Bowles is a director of Morgan Stanley, one of the Wall Street banks that would be seriously affected by such a tax.

There are some positive items in the report. It would limit the mortgage interest-rate deduction and get rid of the deduction for “cafeteria” benefit plans. But the report is fatally flawed because its authors, principally Simpson and Bowles, never seriously reflected on their basic economic assumptions. It would be best if this is yet another one of those Washington commissions that is quickly forgotten.

Deficit Panel Targets Social Security and Taxes

by Jeff Mason and Donna Smith
Wednesday, November 10, 2010 by Reuters

WASHINGTON - The co-chairmen of a presidential commission to cut the budget deficit on Wednesday proposed reducing benefits and raising the U.S. pension retirement age among an array of tax and spending changes.

Taking aim at some of Washington's most politically explosive fiscal issues, the draft proposals were portrayed as achieving $4 trillion in deficit reduction through 2020, but they got a mixed reception from other commission members.

With a final report due from the panel on December 1, Democratic Representative Jan Schakowsky, a commission member, told reporters: "It's not a proposal I could support."

Republican Representative Paul Ryan, also a commission member, said: "There are things in here I like, things I don't like. This is a serious, impressive effort. It's a good start ... We've got a long way to go."

Co-chairmen Erskine Bowles and Alan Simpson also called for changes to the mortgage interest tax deduction, cuts in defense spending, and a reduced base rate for corporate taxes, according to the draft proposal distributed to reporters.

The proposal suggests raising the Social Security retirement age to 68 by 2050 and 69 by 2075 with a "hardship exception" for certain occupations where that would be unrealistic, the draft said.

Bowles, a Democrat, was chief of staff for President Bill Clinton. Simpson is a retired Republican senator. The two were named to head the commission this year by President Barack Obama in a move meant to show the White House is serious about tackling the deficit.

The two also proposed phasing in budget cuts beginning in fiscal 2012 and bringing down federal spending eventually to 21 percent of gross domestic product.

Fourteen of the panel's 18 members are supposed to approve a final report for Obama containing recommendations to balance the budget. But analysts expect it to be difficult to reach that kind of consensus and predict the commission may end up issuing a less conclusive report.

DEFICIT REDUCTION TARGETS

The commission's proposal came as a separate, private-sector panel called for a shake-up of the budget process that would set clear targets for reducing red ink and impose spending cuts and tax increases if targets were missed.

The recommendation by the Peterson-Pew Commission on Budget Reform, a balanced-budget advocacy group that has no official government role, recommended that the president and Congress be required to respect deficit-reduction targets and that serious consequences be levied for falling short.

If a budget enacted by Congress missed a target, the president could propose cuts to bring it in line, the Peterson-Pew Commission recommended.

"If the target were still missed, spending reductions and tax increases would be imposed through automatic trigger mechanisms," the Peterson-Pew Commission said.

The report from Peterson-Pew -- one of a handful of panels studying the deficit problem -- comes days after an election that swept Republicans to power in the House of Representatives partly on a wave of voter outrage over the $1.3 trillion deficit and the national debt of more than $13.6 trillion.

The presidential commission has held five public meetings this year. Closed-door meetings have occurred regularly.

Democrats are resisting spending cuts, while Republicans, emboldened by the election results, are likely to keep refusing to consider tax hikes, according to commission members.

Most budget analysts agree that some mix of both is needed to tackle the huge problem, but aides said it seemed unlikely that the presidential commission would reach a consensus by the time their final report is due on December 1.

The Odious Alan Simpson

He's Not Only Offensive; He's Ignorant!
Co-Chair of Obama's 'Fiscal Commission' Calls Social Security: 'Milk Cow with 310 Million Tits'
By DEAN BAKER

Former Wyoming Senator Alan Simpson, the co-chairman of President Obama's deficit commission, has sparked calls for his resignation after sending an offensive and sexist note to Ashley Carson, the executive director of the Older Women's League. While such calls are reasonable -- Simpson's comments were certainly more offensive than remarks that led to the resignation of other people from the Obama Administration -- the Senator's determined ignorance about the basic facts on Social Security is an even more important reason for him to leave his position.

I was also a recipient of one of Simpson's tirades. As was the case with the note he sent to Carson, Simpson attached a presentation prepared for the commission by Social Security's chief actuary. Simpson implied that this presentation had some especially eye-opening information that would lead Carson and me to give up our wrong-headed views on Social Security.

While I opened the presentation with great expectations, I quickly discovered there was nothing in the presentation that would not already be known to anyone familiar with the annual Social Security trustees' report. The presentation showed a program that is currently in solid financial shape, but somewhere in the next three decades will face a shortfall due to an upward redistribution of wage income, increasing life expectancy and slow growth in the size of the workforce. The projected shortfall is not larger than what the program has faced at prior points in its history, most notably in 1982 when the Greenspan Commission was established to restore the program's solvency.

It was disturbing to see that Simpson seemed surprised by what should have been old hat to anyone familiar with the policy debate on Social Security. After all, he had been a leading participant in these debates in his years in the Senate.

Simpson's public remarks also seem to show very little knowledge of the financial situation of the elderly or near elderly. He has repeatedly made references to retirees driving up to their gated communities in their Lexuses. While this description may apply to Simpson's friends, it applies to very few other retirees, the vast majority of whom rely on Social Security for the bulk of their income. Cutting the benefits of the small group of genuinely affluent elderly would make almost no difference in the finances of the program.

Furthermore, the baby-boom generation that is nearing retirement has seen most of its savings destroyed by the collapse of the housing bubble that both wiped out their housing equity and took a big chunk of the limited money they were able to put aside in their 401(k)s. Simpson shows no understanding of this fact as he prepares to cut benefits for near retirees.

He also doesn't seem to have a clue as to the type of work that most older people are doing. While it is possible for senators to continue in their jobs late in life, nearly half of older workers have jobs that are either physically demanding or require they work in difficult conditions. Simpson seems totally clueless on this point when he considers proposals to raise the retirement age.

The key facts on Social Security are not hard to understand. The shortfall is relatively minor and distant. Most retirees have little income other than their Social Security, and most workers would find it quite difficult to stay at their jobs in their late 60s or even 70. We might have hoped that Senator Simpson understood these facts at the time when he was appointed to the commission, but we should at least expect that he would learn them on the job.

His determined ignorance in the face of the facts is the most important reason why he is not qualified to serve on President Obama's commission. Someone who is co-chairman of such an important group should be able to critically evaluate information, not just insult and demean his critics.

Latest Bi-Partisan Attack on Social Security: "Let Them Eat Cat Food!"

Monday, August 23, 2010 by This Can't Be Happening
by James Ridgeway

President Obama’s Deficit Commission is all smoke and mirrors. Its members are making a big show of laboring over ”painful” choices and considering all options in their quest to bring down the deficit. But inside the Beltway everyone knows what’s going to happen: The commission will reduce the deficit on the backs of the old and the poor, through cuts to Social Security, Medicare, and Medicaid. Some opponents have taken to calling it the Cat Food Commission, since that’s what its victims will be forced to eat once the commission gets done slashing away at their modest entitlements.

In fact, the true intent of the Deficit Commission was evident before it was even formed. That intent was only driven home when Obama appointed as its co-chair Alan Simpson, a former Republican senator from Wyoming who is well known for voicing, in the most colorful terms, what Paul Krugman calls the "zombie lie" that old-age entitlements will soon "bankrupt the country."

So why the big show? Because neither Obama nor the Congress wants to get caught cutting Social Security and Medicare in public, certainly not before the November elections. (Medicaid will be cut as well, but politicians tend not to worry so much about poor people, since they don’t go to the polls in the numbers we middle-class geezers do.) So instead, they are foisting off this unpleasant task onto the Deficit Commission, showing what the lawyers call “due diligence,” sucking their thumbs and pretending to study how to cut the deficit. They’ve got $1 billion in walk-around money to pay for propaganda so the PR industry ought to be plenty happy. So too should billionaire Pete Peterson, as he and his foundation lackeys push forward towards a victory in their longstanding attack on so-called “entitlements.”

Quite frankly, if the Republican Right could get itself together and shove the Tea Party nuts back into their cave–as Reagan did with the crackpots hanging around him–they too could reap the benefits of the Cat Food Commission’s work. Ever since the New Deal, the Right has been kicking and screaming about Social Security. Things just got worse in the 1960s with Medicare and Medicaid. And now, thanks to our supposedly “socialist” president, they are within a few inches of cutting a nice hefty hunk out of the largest social programs this nation.

But just when it looks like the right wingers have collected themselves, the nutcases throw spanners into the works. This time it’s not the Tea Party, but economists from the Federal Reserve and intellectuals from NYU and Harvard. Four of these people have united to publish an 8-page paper via Boston College’s Center for Retirement Research last month entitled What is the Age of Reason?

This paper is about what to do when old people start losing their marbles, plunging into dementia, euphemistically called "Cognitive Decline among Older Adults," and simply aren’t up to such basic tasks as investing their own money. To save these poor fools from themselves, the intellectuals propose "possible policy choices," including such anemic remedies as full disclosure in such things as mutual fund and 401(k) fees.The authors doubt disclosure will have much import. Then there is the intriguing prospect of "Financial `Driving Licenses,” which would require "that individuals pass a `license’ test before being allowed to make nontrivial financial decisions,such as opting out of `safe harbor’ investment products."Another scheme envisions " mandatory advance directives. It is described as follows: "One direct way to address the impact of cognitive decline on financial decision-making would be to require older adults to put in place a financial advance directive before reaching a certain age, so that the management of their assets could be transferred to a third party in the event of incapacity."

Get the picture? Cuts in entitlements, including Social Security and Medicare, will be accompanied by a push to get people to invest part of their Social Security income in Wall Street so as to make up what is being lost in the cuts. And since we are to believe that old people are going crackers, why then, wouldn’t it make more sense to let Wall Street take charge and invest the money directly? That would save a lot of hassle and bring about a windfall in earnings. Remember how we made so much money in our 401(k)s in the recent recession that we all went broke? Wouldn’t it be fun to do it all over again?

It’s going to take a lot to waylay the likely course of future events: The Cat Food Commission will undoubtedly recommend, and a lame duck Congress will pass, legislation that looks fairly innocuous: trimming Social Security a bit, maybe by upping the age by a few years, and cutting a little from Medicare–none of it affecting anyone who is over 65 right now. That will enable the politicians now in office to look like they are protecting seniors and fending off any drastic cuts, while at the same time appearing “tough” on the deficit. But the legislation, in the usual Washington mode, will gradually widen as the years go by, so that by the time this bunch of pols are retired (on their fat pensions) and out of the fray, the new rules will be eating into entitlements in a big way.

The other side of this Faustian bargain would appear to be Congress passing some tax increases. ”In setting up his National Commission on Fiscal Responsibility and Reform,” William Greider recently wrote in The Nation, ”Barack Obama is again playing coy in public, but his intentions are widely understood among Washington insiders.” As Greider puts it, “The president intends to offer Social Security as a sacrificial lamb to entice conservative deficit hawks into a grand bipartisan compromise in which Democrats agree to cut Social Security benefits for future retirees while Republicans accede to significant tax increases to reduce government red ink.”

It remains to be seen how “significant” those tax increases actually turn out to be. But even former Federal Reserve Chair Alan Greenspan seems to be on board with this general plan. Greenspan’s credentials include chairing the first major entitlement-cutting commission back in the 1980s, as well as promoting the Bush-era tax cuts that helped the deficit grow to its current proportions. He still says that reductions to Medicare benefits are necessary–but in a recent interview in the New York Times, Greenspan also says that he now wants to remove all the Bush tax cuts. Seeing as it comes from the champion of “let them eat cake” economics, this pronouncement must be seen as predictor of how conservatives could end up voting. In short, the old and the poor will have to eat cat food, but the rich might kick in a few crumbs as well.

Deficit Reduction Comm. member Alan Simpson argues for Cutting SS benefits

Meet the Man Who Perversely Argues for Cutting Social Security Benefits to "Take Care of the Lesser People in Society"
By Jane Hamsher

Each time the Catfood Commission -- aka Obama's Budget Deficit Reduction Commission -- holds its secret meetings, Alex Lawson of Social Security Works has been outside with his camera, shooting video of the closed front door as FDL runs a live stream on our front page. The Washington Post wrote it up recently.  As committee members go in and out of the room Alex asks them questions when he can and yesterday he had an exchange with Alan Simpson that was…well, extraordinary.

Simpson is apparently a graduate of the Bobby Etheridge school of charm. Alex Lawson was incredibly respectful and polite as the crankly Simpson berated, interrupted and cussed him. Simpson has been a long-time supporter of rolling back the New Deal, and when asked about cuts he would recommend to the President and Congress on CNBC, Simpson said  “We are going to stick to the big three,” meaning Social Security, Medicare and Medicaid.  His sentiments haven’t changed.

CJR’s Trudy Lieberman recently ran down Simpson’s history of delicate statements on the subject of Social Security.   He is equally decorous on camera with Alex, who clearly knows a great deal more about the subject than he does.  Simpson starts from the premise that the Treasury will default on the bonds issued to the Social Security trust fund, because all the best people apparently know that it’s better to default on America’s senior citizens and plunge them into poverty than it is to default on, say, the Chinese.

Despite Simpson’s assertions, raising the retirement age to 70 IS a benefit cut.  It would put an estimated 1.5 million  senior citizens into poverty. After two years of watching billions of dollars in taxpayer money being paid out to Wall Street CEOs in lavish bonuses while the White House breaks every promise they’ve made to rein them in, that takes a fat load of nerve.

The commission is also looking into cutting Medicare benefits, because the deal guaranteeing no-bid Medicare contracts to the pharmaceutical industry by both Republicans and Democrats can’t possibly be abrogated.  The committee claims it’s independent, but it’s not THAT independent.  So, old people, too bad for you.

Erskine Bowles has returned to run the same play he ran during the Clinton administration, when he negotiated the secret deal between Bill Clinton and Newt Gingrich to cut Social Security benefits.  Despite warnings from both John Boehner and John Conyers that the commission will report its recommendations to a lame duck Congress who could pass it before the end of the term.  Both Harry Reid and Nancy Pelosi have promised to bring the commission’s proposalsup for votes.

In the absence of any transparency coming from the committee about what transpires in its secret meetings, Simpson’s comments to Alex are the best insight we have into what is being discussed there.