Pressure for a deal to avoid the so-called "fiscal cliff" at the end of the year is building. Even minor tremors in the stock market are treated as auguries of the panic that will attend a failure to act. A multi-million dollar campaign funded by Wall Street billionaire Pete Peterson and Corporate CEOs demands action to "fix the debt."
The president has put forth a comprehensive $4 trillion-dollar plan, including ending the Bush tax breaks for the top 2 percent, $400 billion in savings from Medicare and Medicaid over 10 years, as well as extension of the payroll tax cut, and creation of an infrastructure bank to help sustain the economy. House Speaker John Boehner scorns this, arguing that the price of defusing the austerity bomb is a deal that combines far more significant cuts in "entitlements" -- that is Social Security, Medicare and Medicaid -- with smaller amounts of revenue coming from lowering top rates and closing loopholes. As the end of the year approaches, the hysteria will build.
Easily lost in the tumult is simple common sense. No deal is a far better alternative than a bad deal -- and the grand bargain now being discussed is a very bad deal. Here are the reasons citizens should be skeptical about the rush to agree.
1. It's time to call the bluff of the economic extortionists
What we face isn't a fiscal cliff; it's economic extortion. The austerity bomb set to go off in January is simply another round of the economic extortion that Tea Party Republicans first used, with destructive effect, over the debt ceiling negotiations in 2011. This time, they've put together a lethal combination of automatic spending cuts and expiring tax cuts to kick in at the end of the year. Over the next months if not reversed, these will likely cripple the recovery and kick the economy back into recession. This threat is used to extort concessions that would otherwise be unacceptable -- cuts in the basic pillars of family security, Social Security, Medicare and Medicaid.
Kowtowing to their demands will only encourage them. After the horrors of the debt ceiling extortion -- which led to the first downgrading of U.S. credit status in our history -- Republican leader Mitch McConnell pocketed the $1.5 trillion in spending cuts and boasted that Republicans could hold the country hostage with the debt ceiling over and over again.
There's no better time to call their bluff than now, right after an election, where the mandate of the voters is clear. Demand that the House join the Senate in extending the tax breaks for all but the wealthiest 2 percent. If they refuse, let the tax cuts expire and then introduce legislation doing the same in the next Congress. Demand that Congress repeal the automatic sequester (across the board cuts) of military and domestic spending. If Republicans balk, let the Pentagon lobbies bring them to their senses.
2. The grand bargain focuses on the wrong problem
It's aimed to curb out of control deficits. But the U.S. deficits aren't out of control. Annual deficits are already down by 25 percent as a percentage of GDP since 2009. This is the fastest rate of deficit reduction since the demobilization of the forces after World War II. It already exceeds prudent speed limits, slowing growth, endangering the recovery and extending mass unemployment. The world is worried the U.S. will turn to austerity, not about its deficits. And of course, cutting Medicare and Social Security benefits a decade from now has nothing to do with deficit reduction.
The austerity crowd argues that a $4 trillion grand bargain will "fix the debt," leaving the U.S. with a strong currency and a manageable debt burden. But the U.S. already has one of the strongest currencies in the world (too strong, given our trade deficits). Interest rates are near record lows. Markets are worried about faltering growth, not soaring inflation.
And as Europe has shown, you can't "fix the debt" without fixing the economy. If the "immediate cuts" demanded by Republicans as part of the grand bargain cripple the recovery, then unemployment will rise, wages will fall, and our debt burdens will get worse, not better. We should be focused on how to get the economy moving, not on how to fiddle with long-term debt projections that assume economic growth.
3. The grand bargain offers the wrong answers
"Everything must be on the table," we're told, for a "balanced agreement," including both more tax revenue and cuts in entitlement. But the reality of the current discussions is that everything is on the table except the reforms that are vital to the economy, some of which could help bring our books in order. Consider:
Redress Gilded Age Inequality: The current extremes of Gilded Age inequality must be redressed to create the effective demand needed for a robust economy. Raising taxes on the rich, taxing investor income at the same rate as worker's salaries, would help in that regard, particularly if we spent most of the revenue on areas vital to our economy like education and infrastructure. (The president's proposal includes modest steps in this direction, ending the top end Bush tax cuts, taxing dividends (but not capital gains) as normal income.)
Shackle Wall Street: We can't let Wall Street's excesses blow up the economy again. A financial speculation tax would help by slowing computerized trading schemes and adding stability. Senator Harkin estimates that a 3-cent tax on every $100 of trading would generate more than $350 billion over 10 years.
Balance Our Trade: We can't sustain destabilizing trade deficits of over a billion a day. Taxing profits reported abroad at the same rates as those reported at home, closing down tax havens, ending the tax breaks for moving jobs abroad would both generate $100 billion in revenues or more each year, and help move to more balanced trade.
Fix Health Care: We can't afford a broken health care system that now costs twice per capita to provide health care -- with worse results -- than other industrial nations. If we spent about what other industrial nations spend, we'd project surpluses as far as the eye can see. The needed reforms aren't addressed by depriving the vulnerable of health care -- by raising the eligibility age for Medicare or cutting Medicaid. It requires taking on the entrenched corporate lobbies -- the insurance and drug companies, the private hospital complexes that drive up prices -- and reforming how we deliver and price health care. Allowing Medicare to negotiate block discounts for prescription drugs would be an easy place to begin, saving an estimated $350 billion over the next decade.
Stop Endless Wars: If we are going to rebuild America, we can no longer afford to police the globe, wage wars on a credit card, and coddle Pentagon waste and corruption which is the worst in the federal government. Sensible reforms, and ending the war in Afghanistan, could save hundreds of billions over the next decade. (The president's proposal apparently counts the savings from ending the war in Afghanistan as part of the package)
Lead the Green Industrial Revolution : We can't afford to ignore the catastrophic climate changes already hitting us, and we can't prosper without capturing a lead in the green industrial revolution that is already forging new markets across the world. A modest carbon tax would generate $1.25 trillion in revenue over the next decade that could be used to renovate our infrastructure and offer tax relief to those most impacted.
All of these reforms are necessary -- if not sufficient -- to getting the economy back on track. Ironically, none of them -- with the exception of those noted -- are on the table in the grand bargain discussions. Instead, what Republicans are demanding as the price of a deal is trickle down tax reform, peddling the big lie that lowering top rates fosters growth, and cuts in benefits increasingly important to family security -- Social Security, Medicare and Medicaid.
4. A Grand Bargain Insults Our Democracy
We just had an election in which voters had a clear choice. Mitt Romney ran as the candidate by, for and of the 1 percent. He argued for lowering tax rates, closing loopholes, "reforming" entitlements and trickle down economics. Barack Obama ran against the odds of a lousy economy, calling for raising taxes on the rich to help invest in areas vital to our future.
Now the CEOs behind the "Fix the Debt" coalition are pushing a deal that tracks Romney's position -- including even the outrageous notion of using the fiscal showdown to sneak in a huge new tax loophole -- passing a territorial tax system that would exempt companies from paying U.S. taxes on profits reported abroad, essentially turning the entire world into a potential tax haven. Secure in their lavish pensions, the CEOs are ardently campaigning to curtail the retirement security vital to working Americans. This is, as Paul Krugman notes, simple class warfare from above.
Voters expressed very different priorities for any grand bargain -- across partisan lines. Large majorities of Democrats and Republicans both want benefits for Social Security, Medicare and Medicaid protected. Large majorities want investments in education, infants and children protected. Majorities of both parties support raising taxes on the rich, shutting down corporate tax havens, saving money by ending the war in Afghanistan. Yet in their current form, Washington politicians seem intent on standing with their donors, the CEOs, and ignoring their voters.
So call the bluff of the extortionists. The president has put out a plan that already compromises more than desirable. If Republicans can't accept it, just say no. The markets will scream; the pundits will predict the end of the world; the economy may take a hit.
But if there is no deal, the structural change that occurs is the end of the Bush tax cuts. Republicans will rush to join Democrats in reviving the lower rates for the 98 percent in January. The across the board spending cuts in the "sequester" exclude most programs for the vulnerable and any cuts in Medicare, Medicaid and Social Security benefits. The Pentagon and contractors lobbies will force a rollback of the spending cuts, which can be changed at any time. That is a lot better than a grand bargain that makes structural cuts in benefits for the most vulnerable (by raising the eligibility age for Medicare or slowing the inflation adjustment for Social Security for example) that will be virtually impossible to reverse.
Just saying no has one other benefit. Instead of a big deal that is more likely to be harmful to the vulnerable than not, no deal opens the possibility of a new focus on what we need to do to get the this economy on the right track. The president could use his State of the Union to lay out a new foundation for growth that will also get our books in order. No deal might just clear the air for a new debate.
But that will open space for a serious argument about what we need to make this economy work once more. And it will do much less damage than a grand bargain that ignores the reforms we need, propagates the myths we can no longer afford, and adds burdens to the majority of Americans who are already struggling with declining wealth and increasing insecurity.