As we issue this week’s essay, the leadership of both parties and the White House have announced agreement to end the debt ceiling crisis. The deal, which still requires congressional approval, will increase the nation’s debt ceiling by $2.4 trillion while, over the next ten years, cutting an equivalent amount in government spending. It is a complex and convoluted deal that will make few people happy, but it will end the default nightmare…at least for two years. The process attested to Otto Von Bismarck’s famous lament over a hundred years ago, “Laws are like sausages, it is better not to see them being made.”
The spectacle, leading up to the agreement, of leaders from both houses of congress taking turns bloviating before the TV cameras about the stubbornness of the other side did not, in our opinion, inure to the credit of anyone or of either party. It became an exercise of “pathetic” condemning “more pathetic.”
Incumbents, Republicans and Democrats (including the President), may, we believe, pay a stiff price when they face the voters next year. The political jockeying over the debt ceiling crisis may well result in a plague on both houses as voters contemplate the stress to which Washington subjected them. Most grating to most voters, we believe, is that the crisis didn’t have to be a crisis. Every party to the debate has staked out positions that are politically motivated, unhelpful and laden with risk to ordinary Americans throughout the land.
House Speaker Boehner initially staked out the high ground and than caved on the issue of revenue (even revenue that would be derived from eliminating special interest tax breaks that have long outlived their usefulness or otherwise distort the marketplace). He had proposed, wisely we think, eliminating almost all tax deductions and then reducing marginal rates as a trade-off even though the revenue derived from that exchange might well exceed current tax revenue. The elimination of these special interest tax breaks, which we had suggested in an earlier essay, was subsequently pulled off the table. We believe, and have often stated, that taxes, with few exceptions, should be used to raise necessary revenue rather than to influence, or distort, individual or corporate taxpayer behavior. His earlier insistence on a short-term resolution that would have had the country replaying this farce in a few months has been stricken from the deal.
To his credit, however, Boehner, like Representative Ryan, knows (as does every member of the House and Senate) that the nation will, sooner or later, crash under the weight of the entitlement burden, which a succession of Congresses has piled onto the shoulders of the nation. The average citizen will draw out of Social Security and Medicare much more they will have put in. On this issue, the President and Senate Majority Leader Reid had opted to kick the can down the road yet one more time. The deficit and the debt cannot be seriously addressed without legislating entitlement reform. Who says so? Consider what the Social Security Administration’s own actuaries’ have reported in the agency’s 2011 Actuarial Report To The Nation:
“…After 2014, cash deficits are expected to grow rapidly as the number of beneficiaries continues to grow at a substantially faster rate than the number of covered workers. Through 2022, redeeming trust fund assets from the General Fund of the Treasury will make up the annual cash deficits…After 2022, trust fund assets will be redeemed in amounts that exceed interest earnings until trust fund reserves are exhausted in 2036, one year earlier than was projected last year. Thereafter, tax income would be sufficient to pay only about three-quarters of scheduled benefits through 2085.
“…The drawdown of Social Security and (Medicare) trust fund reserves and the general revenue transfers into SMI (Supplemental Medical Insurance) will result in mounting pressure on the Federal budget. In fact, pressure is already evident. For the sixth consecutive year, a “Medicare funding warning” is being triggered, signaling that projected non-dedicated sources of revenues — primarily general revenues — will soon account for more than 45 percent of Medicare’s outlays. That threshold was in fact breached for the first time in fiscal 2010. “
“…Projected long-run program costs for both Medicare and Social Security are not sustainable under currently scheduled financing, and will require legislative corrections if disruptive consequences for beneficiaries and taxpayers are to be avoided.”
Every Congress for the last generation or more has understood the need to address Social Security and Medicare reform, but it has always been considered the so-called third rail in American politics. That is, anyone proposing reform seriously risks losing his or her next election. This is why the proverbial can has perpetually been kicked down the proverbial road. It is also why the Democrats, when they controlled the House failed, outrageously, to even propose a budget for the last two fiscal years. Representative Ryan and Speaker Boehner, to their everlasting credit, finally have put entitlement reform on the table and have, ever since, taken outrageous and, we believe, intellectually dishonest abuse from the White House and the left’s attack machine. Remember the attack ads asking the question: “Mr. Congressman what were you thinking.”
Senator Reid’s $2.7 trillion cost-cutting proposal, which the Congressional Budget Office determined had overstated cost reductions by $500 billion (CBO had previously dinged the Boehner proposal for overstating reductions), professed gargantuan cuts in the deficits over the next ten years without touching entitlements or raising tax revenue.
Various Democratic luminaries began suggesting that the President had the power to unilaterally raise the debt limit at will under the 14th amendment to the constitution, which states that the full faith and credit of the United States will not be questioned. In other words, the President, they suggested with a straight face, pretty much has the power to borrow whatever he needs to fund whatever he wants.
And, sadly, the President, somewhat characteristically, had been absent as a real contributor to any serious discussion. The White House contribution had been to talk generalities, commit to nothing on paper and then, it appeared, to go to the airways every few days with whatever focus-group-vetted catch phrases provided the best demagogic rhetoric for the forthcoming election. Serious people were grappling with the Gordian Knot of runaway entitlements and other spending while the President flailed away about subsidies for corporate jet owners (which his stimulus plan created) and the need to increase taxes on the 2.0% of taxpayers who already shoulder 48% of the tax burden (which is twice the share of the national income they represent).
Apparently assuming he has safely tucked away the votes of the nearly 50% who pay no income taxes whatsoever, he banged away at the nation’s higher earners with complete abandon. One can imagine the focus group contractor running into the White House waving data that says stress “fair share…millionaires and billionaires…jet plane owners, etc. “… Never mind that people who earn $200,000 aren’t millionaires or billionaires, or that half the people pay no income taxes whatsoever (how’s that for fair share) or that it was Obama’s stimulus program that created the very tax incentives for very wealthy people to buy private aircraft against which the President now rails.
Thankfully, the curtain seems to have fallen on this production of the theater of the absurd, and, for now, a compromise appears to have been reached and the crisis seems to have passed. It has not been a pretty sight. The Great American Sausage Factory would have even made Bismarck blush.
By Hal Gershowitz and Stephen Porter