Holding the Economy Hostage

Holding the Economy Hostage

The Challenge

Conservatives are trying to extort unpopular cuts in vital programs by holding the economy hostage.

Their simple message: Cut Social Security, Medicare and Medicaid (and programs for the 99 percent), or we'll kill the economy. Here’s how they do it:

They threaten to blow up the economy by assembling a cluster of austerity bombs triggered to explode this spring:  (1) the automatic “sequester” [1] – cut – of $110 billion from military and domestic spending (or nearly 20% in the last half of the fiscal year;  (2) the shutdown of government completely when the continuing resolution [2] providing funds for the year runs out on March 27, 2013; and (3) hitting the debt ceiling [3], which would force the U.S. to default on debts already incurred by the Congress. Any one of these would have devastating effects on jobs and on economic growth. All of them would simply be ruinous.

Conservatives say that they may have to shut down the government to let the president know that they are serious about cutting spending on Medicare, Medicaid and Social Security.

President Obama has stated he would not negotiate on the debt ceiling, and Republicans rescheduled that threat to line up with the sequester and the potential appropriations expiration. The president has agreed to negotiate to avoid the sequester and the shutdown.

America is being held hostage again. In 2011, Congress threatened to default on the debt ceiling; the president negotiated cuts. In December, Congress threatened to go over the “fiscal cliff”; the president negotiated.

In total, the White House has agreed to spending cuts that total $1.5 trillion [4] (or $1.7 trillion including interest savings) over 10 years. And the New Year’s “fiscal cliff” deal [5] will raise $600 billion in taxes over 10 years. But all that has only encouraged them. Now they have triggered the biggest set of austerity bombs in history to go off if they don’t get their way.

Make the Case

Holding America hostage is a ridiculous way to negotiate a budget. It is time to say, "No more." The debt ceiling should be lifted without preconditions. The sequester – the reckless across-the-board automatic cuts – should be cancelled. Negotiations should proceed on appropriations for the remainder of the year.

Call their bluff. When President Bill Clinton successfully stood up to Newt Gingrich’s attempts to make dangerous spending cuts, Gingrich refused to pass a budget. Rather than cave, Clinton let him close the government – twice. Clinton fought back, standing clearly as the protector of popular public priorities: Medicare, Medicaid, education and the environment – M2E2 – and the country rallied to his side. Gingrich backed down, and Clinton’s popularity soared headed into his reelection campaign.

Austerity is a threat, not an answer. America’s biggest problem is not deficits, it is the jobs crisis. More than 20 million people are in need of full-time work. Wages are at a record low and corporate profits at a record high as a portion of the economy. We have a jobs crisis.

Deficits aren’t rising; they are falling faster than is prudent. Deficits in fiscal 2012 are down 22 percent [6] from fiscal 2010 as a portion of the economy and falling faster than any time since the end of World War II [7]. Any faster and the cuts and tax hikes could easily drive the economy back into recession. But the reason deficits are coming down is the growth of jobs. We need to focus on getting the economy going, not on more austerity.

No Cuts in Social Security, Medicare or Medicaid Benefits. Americans don’t believe that you need to cut benefits in programs vital to family security – and they are right. We need to get our economy working. We don’t need to slash programs for the most vulnerable.

Go after what hurts the economy, not what helps families. If there is more deficit reduction, it should focus first on cutting what gets in our way, not on cutting what we depend on. And we can raise revenues without hitting the middle class. A financial transaction tax would generate billions while helping to curb Wall Street gambling. Shutting down overseas tax havens would give companies incentives to invest at home. Cutting subsidies to big oil would end wasting resources on the most profitable corporations in history. Ending the wars and using the money saved to invest at home would help get our priorities straight.

Case in Point

♦ Conservatives claim we have not made a serious dent in the deficit so far. But they are wrong. [8] Bloomberg News recently noted [9] that "federal outlays over the past three years grew at their slowest pace since 1953-56, when Dwight D. Eisenhower was president." Federal spending was 25 percent of the economy in 2009; it's now below 23 percent. The majority of savings politicians have achieved so far, including the January 1 deal, have been spending cuts. They have made $1.5 trillion or 72 percent in spending cuts – and only 28 percent come from new revenue. Most of the spending cuts conservatives are now demanding will do real damage – to the social safety net, to programs to create opportunity for poor Americans, or to essential investments in education, research and infrastructure. The one area of spending cuts conservatives want to rule out is the Pentagon budget, which has plenty of waste to cut. And there is still plenty of room for getting new revenues – from taxing capital gains and dividends just like income from labor, from closing loopholes that benefit big corporations and the top 2 percent of Americans.

♦ USA Today reported [10] warnings from business leaders before the January 1 cliff. In a letter signed by 158 corporate chief executives, The Business Roundtable released a letter warning "The United States will suffer significant negative economic, employment, and social consequences for going over the fiscal cliff," the CEOs said in a letter to congressional leaders. "In many cases, the damage will be long-lasting, if not permanent. But it does not have to happen."

♦ And of course industries that depend on military spending should be expected to step in. Here’s a statement [11] by Marion C. Blakey, President and CEO of the Aerospace Industries Association on the failure to fix sequestration in the fiscal cliff deal: "Sequestration is a slow-motion catastrophe for our military forces, our space program and virtually every critical function of our government from air traffic control and border security to food inspection and more. ... More than 2 million Americans across all sectors of the economy will lose their jobs starting in 57 days if our political leaders fail to fix the self-inflicted wound of sequestration and the dangers it poses to our war-fighters and national security."

♦AFL-CIO President Richard Trumka, commenting on the Senate fiscal showdown agreement, said, "Because of Republican hostage taking, the deal simply postpones the $1.2 trillion sequester for only two months and does not address the debt ceiling, setting the stage for more fiscal blackmail at the expense of the middle class. Instead of moving to address our nation’s real jobs and public investment crisis, our leaders will be debating a prolonged artificial fiscal crisis."

Counterpoint

When they say: We can’t keep kicking the deficit problem down the road while each year America’s debt and deficits get larger. We may have to shut down government to make the president get serious about cutting entitlements.

You can say: The American people don’t want the cuts you are trying to impose on Social Security, Medicare and Medicaid. And you are wrong that the deficit is still growing. It's down 25 percent and falling faster than any time since the end of World War II. More spending cuts and tax hikes are just kicking it. We’d be wise to make sure the economy keeps growing before inflicting deep cuts. And that means we should focus on cutting the stuff that hurts the economy, and investing in areas vital to jobs and our future.

When they say: We don’t have a revenue problem, we have a spending problem. Our goal should be at least $4 trillion in deficit reduction over 10 years. We’ve just raised taxes on wealthy Americans, and we can’t do more tax increases – so we’ve got to cut a lot of spending to meet the goal of reducing the deficit.

You can say: That’s a recipe for recession. Cutting the deficit by $4 trillion over 10 years is an artificial and arbitrary goal that pays no attention to how many people are still in need of work. Cutting that much could throw the economy into recession and throw millions of Americans out of work. Our goal should be to stabilize the deficit as a percentage of the size of the economy – and the best way to achieve that goal is to invest in jobs and grow the economy.

When they say: We can reform Social Security without hurting beneficiaries by reducing over time the overly generous adjustments for inflation. Even President Obama thinks we should switch to the so-called “chained” CPI. And if we did that, we would save more than $236 billion over the next 10 years.

You can say: This is a hidden cut in Social Security benefits (and a stealth hike in middle-class taxes). Social Security is in surplus; by law it cannot contribute to the deficit. If Social Security needs “reform,” then that should be done thoughtfully and separate from threats to shut down government in budget hysteria. And if the inflation adjustment is wrong, let’s sponsor a serious study about the costs seniors face. You haven’t done that because it’s likely, given their need for health care, that the adjustments should be more generous, not less. We won’t allow you to use this fake crisis to extort cuts in Social Security. (For a good case against imposing the chained CPI in the context of budget extortion, see this January 13 New York Times editorial, "Misguided Social Security ‘Reform.’" [12])

When they say: Well, everyone agrees that rising Medicare costs are the long-term drivers of our deficit problem. We have to issue these threats to force the President to come up with sensible proposals to cut Medicare benefits.

You can say: It is true that over the decade and beyond, Medicare costs are projected to grow. But the reason for those projections is the expected growth of costs in the private health care economy. And in fact, the rise of health care costs slowed to only 3.9 percent [13] in 2011. As a result costs for Medicare (which is more cost effective) have been growing at only 3 percent, less than half the rate in past years. Nobody knows exactly why health costs have suddenly slowed, but if the reforms in the Affordable Care Act, just coming online, can keep them at these levels, then we have no long-term deficit problem. We don’t have an entitlements problem; we have a broken health care system. If we spent per capita what other industrial countries spend on health care, we would be projecting surpluses for as long as the eye can see. We have to fix our health care system, not strip seniors of Medicare benefits.

The Public Pulse

Almost six in 10 Americans (58 percent) agree that raising the debt ceiling should be kept separate from decisions regarding spending cuts. Only slightly more than a third of voters support the Republican strategy of holding the debt ceiling hostage to their budget demands. (The Washington Post-ABC News [14])

♦ By a margin of 60 to 34 percent, Americans reject as unacceptable changing the way Social Security benefits are calculated so that benefits increase at a slower rate than they do now (The Washington Post-ABC News [15]).

♦ By a margin of 3 to 1, voters in the swing states of Ohio, Florida and Virginia don’t believe Social Security and Medicare need to be cut to reduce our deficits (The Washington Post-Kaiser Foundation [16]).

♦ Given choices for reducing the deficit, including raising taxes on the wealthy and reducing Medicare benefits, 83 percent of American’s oppose cutting Medicare (13 percent supported those cuts) and 68 percent favored “raising taxes on households with incomes higher than $250,000 per year (The Washington Post-Bloomberg News [17]).

♦ 58 percent disapprove of reducing programs to help lower-income Americans in order to reduce the national debt and deficit (Pew Research Center [18]).

♦ 66 percent of Americans, including 45 percent of Republicans and 64 percent of independents, favor increasing income taxes for upper-income Americans, compared with 42 percent of Americans who support making “significant changes” to Social Security (Gallup [19]).

♦ 64 percent of Americans believe the fiscal cliff measures (now postponed) would harm the country and their own personal financial situation, while 33% disagree. A majority of those in all key subgroups are worried, the most concerned group was “pre-retirement-age adults,” those 50 to 64 years old (Gallup [20]).

Tweet This

New conservative threat: Cut Social Security, Medicare or we kill the economy. Americans hate threats and cuts. #smarttalk http://t.co/D7ZOk10b [21] @OurFuture

Just say no to made-up budget crises. No to short-term debt ceiling increase. No to sequester. #smarttalk http://t.co/D7ZOk10b [21] @OurFuture

Tell Congress: Go after what hurts working families, not what helps them. Focus on growing the economy. #smarttalk http://t.co/D7ZOk10b [21] @OurFuture

Learn More

» "Debt, Deficits, and Demographics: Why We Can Afford the Social Contract," [22] Center for Economic and Policy Research

» "Budget Battles in the Lame Duck and Beyond," [23] Economic Policy Institute

» Center for Budget and Policy Priorities budget analysis page [24]