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THE PROGRESSIVE REVIEW - December 23, 2010
Saving Social Security: Stopping Obama's Next Bad Deal
by: Dean Baker
truthout - News Analysis
President Obama insists that he is a really bad negotiator,
therefore the deal he got on the 2-year extension of the
Bush tax cuts and the 1-year extension of UI benefits
was the best that he could do. This package also came with
a 1-year cut in the Social Security tax.
This cut will seriously threaten the program's finances
if next year, the Republican Congress is no more willing
to end a temporary tax cut than this year's Democratic
Congress.
The logic here is straightforward. Under the law, the Bush
tax cuts were supposed to end in 2010. Tax rates returned
to their pre-tax cut levels in 2011. However, the
Republicans maintained a steady drumbeat about the evils
of raising taxes in the middle of a downturn, even if the
tax increase would just apply to the richest 2 percent of
the population.
As we saw, President Obama and the Democratic Congress
could not muster the votes needed to overcome the
Republicans and ended up extending the tax cuts for the
richest 2 percent of the population. The Democrats will be
faced with a similar situation at the end of 2011 when the
Social Security tax cut is scheduled to expire, except that
this time the tax cut in question will apply to overwhelm-
ing majority of working people.
Also, the House will be controlled by the Republicans and
the Senate will be considerably less Democratic. This
raises the possibility, if not the likelihood, that the
tax cut will remain in place indefinitely, more than
doubling the size of Social Security's projected long-
term shortfall.
Before we even get to this juncture the Republicans will
have another opportunity to impose a really bad deal on
President Obama. Sometime in the spring the government
will run up against its debt ceiling. This will prevent
the government from any further borrowing.
Since the government has a substantial deficit, with
spending exceeding revenue, hitting this limit would
mean that the government would not have sufficient funds
to pay for all its programs. It also would mean that the
government could not pay interest or principle on debt
that is coming due; in effect requiring it to default on
its debt.
The prospect of the U.S. government defaulting on its debt
creates the sort of end of the world scenario in which
Congress rushed to pass the TARP in 2008. Back then,
President Bush, Fed Chairman Ben Bernanke and all sorts
of other luminaries told members of Congress and the
public that we would have a second Great Depression if
the Wall Street banks were not immediately bailed out, no
questions asked. And the money flowed.
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The prospect of defaulting on the debt will create a
similar outbreak of shrill warnings of disaster. This
would likely to lead to scenario in which President
Obama signs whatever debt ceiling package House
Republicans hand him, even if it includes the privati-
zation of Social Security and Medicare and major cuts
and/or elimination of other important programs. The
argument from the administration will be that they have
no choice.
In order to avoid this train wreck, supporters of Social
Security and Medicare have to restructure the options.
They have to push President Obama to announce in advance
that he will never sign a debt ceiling bill that includes
cuts to Social Security and Medicare, the countries two
most important social programs.
These programs are crucial to the financial security and
health of tens of millions of people. If there are to be
changes in these programs then they should occur after a
full public debate in the light of day, not as the result
of Republican trickery and parliamentary game playing.
This would be a hugely popular position since not only
Democrats, but also independents and even Tea Party
Republicans overwhelming support Social Security and
Medicare. Furthermore, the gun, in the form of a potential
debt default, is actually pointed at the Wall Street banks,
not the public.
A debt default would be a very bad situation and one that
we absolutely should try to avoid. But the day after the
default, the country would still have the same capital
stock and infrastructure, the same skilled labor force and
the same technical knowledge as it did the day before the
default. In other words, the ability of our economy to
produce more than $15 trillion in goods and services each
year will not have been affected.
One thing that would not be around the day after a default
is Wall Street. The default would wipe out the value the
assets of the Wall Street banks, sending Goldman Sachs,
Citigroup and the rest into bankruptcy. The recovery for
the economy from such a situation will be difficult, but
the shareholders of the Wall Street banks would be wiped
out and their top executives unemployed.
For this reason, the threat of a default is a gun pointed
most directly at Wall Street. Given the power of Wall
Street over Congress, is inconceivable that they would
ever let the Republicans pull the trigger.
This means that if President Obama is prepared to take the
right and popular position of supporting Social Security
and Medicare, he will win. This is both good policy and
great politics. The public just has to force President
Obama to stand up and show some leadership.
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