A compromise too far

In his much vaunted “Twitter Townhall,” President Barack Obama took no more than 140 characters to reveal that he had buckled under Republican pressure to put cuts to Social Security and Medicare back on the table. — PHOTO: NARAYAN LAKSHMAN

In his much vaunted “Twitter Townhall,” President Barack Obama took no more than 140 characters to reveal that he had buckled under Republican pressure to put cuts to Social Security and Medicare back on the table. — PHOTO: NARAYAN LAKSHMAN  

Barack Obama is all set to create a new record — for being the first incumbent Democrat President of the United States to get re-elected primarily by Republican voters. During his time in office, which began with high hopes for a strong, liberal-Democratic policy agenda, Mr. Obama has steadily drifted to the right, nudged along by a series of drastic compromises with a truculent opposition party and a stalemated Congress.

After reneging on campaign promises to close the legally-dubious Guantanamo Bay prison, after soft-peddling on comprehensive immigration reform, and after prevaricating on the U.S. troop drawdown in Afghanistan, the President's latest compromise poses a grave threat to the country's largest social welfare programmes, Social Security and Medicare.

After secret negotiations with Republican House of Representatives Speaker John Boehner, the President, last week, delivered the unkindest cut of all to the liberal base of the Democratic Party. In his much vaunted “Twitter Townhall,” the President took no more than 140 characters to reveal that he had buckled under Republican pressure to put cuts to Social Security and Medicare back on the table.

‘Entitlement programmes'

Some context is necessary here. Social Security and Medicare, along with Medicaid, are among the largest so-called “entitlement programmes” — a term that Republicans and Tea Partiers now use in a pejorative sense. Yet these programmes have, since their inception in 1935 and 1965 respectively, comprised the “centrepiece of the nation's social contract, an intergenerational commitment to provide at least a subsistence income to the most vulnerable of citizens.”

Certainly, their Leviathan-like magnitude today has made them a tempting target for public expenditure cuts, especially as the August 2 deadline for raising the U.S. debt ceiling of $14.3 trillion approaches. Social Security accounts for more than 20 per cent of the federal budget, and, according to its operator, it handed out close to $672 billion in benefits to around 51 million Americans in 2009. Medicare is similarly massive.

The ongoing discussions between Mr. Obama and Mr. Boehner reflect a genuine effort to forestall the nightmare scenario of sovereign default. Mr. Obama was not exaggerating when he warned that if no agreement on the debt limit was reached, then “our credit could be downgraded, interest rates could go drastically up, and it could cause a whole new spiral into a second recession, or worse.”

Yet at the heart of these negotiations lies a gun that is aimed squarely at the head of the poor, the elderly, the infirm and those who have watched what savings and assets they had at the start of the 2000s wiped out by eight years of unbridled free-market policies under George W. Bush.

The threat that Republicans now hold out to Mr. Obama, to compromise on cuts to welfare programmes or else face the prospect of plunging the nation into a debt crisis, is both opportunistic and, ultimately, internecine. The fallout of a sovereign default will be electorally catastrophic for both sides. A second recession would push American middle class families, already struggling with a sinking housing market and rampant joblessness, into a tailspin of economic despair. They will not forget to punish those responsible.

So far as Republicans' political incentives are concerned, their leadership is still highly contested and struggling to throw up a candidate who might have a realistic chance of defeating Mr. Obama in November 2012. For the Grand Old Party then, it makes no sense to do anything but try and discredit Mr. Obama and Democrats, especially in such high-profile negotiations.

Ironically it would appear that GOP and fiscally conservative Tea Partiers are succeeding in their efforts and the President seems to be walking these policies to the fiscal guillotine. If he permits free-market forces to whittle them down into a shadow of their current form then no longer will those born in this country with fewer than average opportunities rise to become the great entrepreneurial successes, the school-dropout billionaires of the future.


Yet to the consternation of top Democrats, last week Washington was abuzz with news that Mr. Obama was considering a “back-door” reform to cut Social Security spending. This reform would see the current methodology for cost-of-living adjustments substituted with a chain-weighted version of the Consumer Price Index.

The problem with using such chain-weighted indexes, as Max Richtman of the National Committee to Preserve Social Security and Medicare explained in the New York Times , is that “Social Security beneficiaries did not receive a cost-of-living adjustment this year or in 2010 because inflation, as measured by the standard Consumer Price Index (CPI), was so low.”

It is certain, then, that in the current low-inflation, slow-growth U.S. economy, the hard-to-reverse inclusion of the chain-weighted CPI could have devastating consequences for senior citizens and the poor. The fact is there would be no need to resort to such obscure definitional manipulations if the President had not allowed Republicans to block all negotiations on one vital component of the public accounts — tax revenue.

Some background is in order here too. During the last few months of 2010 — by which time the House was already lost to Democrats and Republicans had the numbers to hold the legislative process hostage on a whim — there was a negotiation between the two parties that was similar to the present one. The discussion focussed on whether to extend the Bush-era tax cuts for the wealthiest one per cent of Americans, those earning above $250,000 per year, or let them expire per deadline.

As it played out, Republicans demanded that the tax breaks that these wealthy sections enjoyed be retained in exchange for which they would permit tax breaks for ordinary, middle-class families to also continue. As a consequence the federal income tax rate for the top income bracket is 35 per cent today, far less than the 70 per cent that it was under Republican President Richard Nixon in the 1970s and certainly less than the 91 per cent that it was under Republican President Dwight Eisenhower in the 1950s.

What Mr. Obama was hoping to achieve in the last round of negotiations was merely to knock the tax rate for the wealthiest back up a few points to the 39 per cent-level that it was under President Bill Clinton — and that too only on income in excess of $250,000. Extrapolating from estimates by the non-partisan Pew Charitable Trusts, this could have netted the exchequer an additional $1.1 trillion over the next decade, a not-inconsiderable proportion of the $2 trillion that both sides are hoping to agree in cuts.

Yet the fiscal hawks who are effectively holding the nation hostage have insisted that the very mention of tax cuts being withdrawn is unacceptable. In late June, Republican negotiator Eric Cantor walked out, in an almost impetuous fashion, from meetings convened by Vice-President Joe Biden as part of a serious effort to find a common ground. In the face of such truculence, White House officials were reduced to pleading for no more than “positive revenue increases.”

While Mr. Obama has acquired a reputation for carefully hedging his bets in various policy dealings, the debt negotiation may well be the one situation where he cannot please all parties concerned. This zero-sum game may require him to call the Republican bluff. The President should not fear this outcome but have faith that Americans believe that their nation was built on firm social justice foundations.

At the heart of the debt limit negotiations is putting a gun to the head of the poor, the elderly and the infirm.

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