Saving Social Security: Stopping Obama's Next Bad Deal
by: Dean Baker
t r u t h o u t | News Analysis
20 December 2010
http://www.truth-out.org/saving-social-security-stopping-obamas-next-bad-deal66099

President Obama insists that he is a really bad
negotiator, therefore, the deal he got on the two-year
extension of the Bush tax cuts and the one-year
extension of unemployment insurance benefits was the
best that he could do. This package also came with a
one-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 an overwhelming 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 principal on debt
that is coming due; in effect requiring it to default on
its debt.

The prospect of the US 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.

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
privatization 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
country's 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 of 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, it 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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