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Dec 04 2012

The ‘fiscal cliff’ and the ‘grand bargain’

I have learned to be very wary when politicians describe a situation in apocalyptic terms. It is usually accompanied by demands that we must act now, now, now, immediately or things will fall apart and all manner of horrible consequences will ensue. This is usually a device to stampede people into accepting things that they would reject if allowed to think things through and explore all the consequences.

The three main examples of this were the passage of the appalling USA PATRIOT Act immediately following the attacks of 9/11, the way were stampeded into attacking Iraq, and the massive bailout of the big banks that followed the financial crisis in 2008 that essentially gave free money with few strings attached and no restructuring required to some of the very banks that were responsible for causing the mess, allowing their executives to pay themselves huge bonuses and continue doing what they did before.

So when I hear the phrase ‘fiscal cliff’, I smell a scam and brace myself for some action that is going to be rammed through that will largely benefit the oligarchy and hurt the rest of us. It will be dressed up as a great act of statesmanship instead of the money and power grab that it actually is. In this case, the phrase being used to sell the deal is the ‘grand bargain’.

So it is worthwhile asking the question about what exactly the fiscal cliff is and whether it is as dire as it is being made out to be. Kevin Drum has a post in which he explains that there are several components to it. As part of previous legislation, the Bush-era tax cuts, reductions in payroll taxes, extended unemployment benefits, and some other tax credits all expire on December 31, 2012. But it will take a while for those cuts to take effect and we will not actually notice anything on January 1 if we go over the cliff. (Drum also has a post explaining the Simpson-Bowles deficit cutting plan that was once thought dead but now seems to be making a modest comeback.)

In addition, as a result of the last deal to raise the debt ceiling, legislation was passed that if no new budget deal was reached by December 31, 2012, automatic cuts of the order of $1.2 trillion would go into effect, to be divided equally between defense and non-defense discretionary budgets, but the latter would exempt Social Security, Medicaid, unemployment insurance, programs for low-income families, and civilian and military retirement. Likewise, any cuts to Medicare would be capped and limited to the provider side.

So why is this bad? The Congressional Budget Office estimates that this would result in the economy shrinking by about 0.5% and unemployment rising. Economists have warned that such cuts in spending at this time may trigger another recession, the same way that budget cuts have thrown many European countries into recession.

The oligarchy is using grossly inflated fears about the budget deficit and the national debt to push for policies that will make themselves even more wealthy. It is important to realize that the budget deficit is not a serious immediate problem for the economy, when measured in terms of the percent of GDP. Raising taxes for the rich, and even the middle class, will not cause a problem either. Cutting the bloated defense budget is also long overdue. What is a problem is slow growth, unemployment, and poverty, and massive spending cuts will make those things worse.

Let us be clear what is going on. The oligarchy thinks that money spent on old and poor and sick people is money that they could have instead. They have long had their eyes on cutting spending on Social Security, Medicare, Medicaid, and other government services and regulatory agencies so that the savings generated could be used to continue their tax cuts or give them even more. In addition, they have long wanted to get their hands on the Social Security trust funds to invest in the modern casino that is the stock market. Such a massive influx of capital will undoubtedly boost stock prices and make a lot of wealthy people even more wealthy. Hence we see the repeated calls for the privatization of Social Security, the raising of the age for eligibility for Social Security and Medicare, and cuts in government programs and services. In this ‘debate’, they are aided by the media in that a proposal is only described as ‘serious’ and even ‘courageous’ if it harms a lot of poor and vulnerable people and labeled as ‘not serious’ if it adversely affects mostly rich people.

If Obama and the Congress do nothing, the Bush tax cuts will expire on December 31, 2012, raising considerable revenues for the government and that alone will reduce the deficit considerably. But this fact will be obscured because the oligarchy does not really care about the deficit, they have their sights set on decimating the social welfare net by cutting Social Security, Medicare, and Medicaid.

At this stage, most observers agree that Obama and the Democrats have the upper hand. If the Republicans refuse to deal with them, they can metaphorically go over the cliff and then come back in January with a new set of tax cuts for all but the top 2% and dare the Republicans to defeat it. Some Democratic congresspersons are warning that the ‘grand bargain’ is just a way to steal from the middle class to benefit the wealthy and warning Obama and the democratic leadership to stay away from the ‘grand bargain’.

But we have to bear in mind that the Democrats are also the party of the oligarchy and I warned that they might agree to something along these lines when the earlier deal was struck in August 2011. Glenn Greenwald points out that Democrats are notorious for talking tough at the beginning of negotiations in order to satisfy their base and then caving in. He says that there is a pretty standard identifiable six-stage process by which the Democrats gradually sell out their supporters while proclaiming victory. There are some ominous signs that for all his tough talk, Obama may take a dive, the way he has so many times before, even though some Republicans already seem to be resigned to higher taxes on the wealthy.

I have been fooled by tough talk from Obama and the Democrats before. They have a history of doing this kind of sleight-of-hand. Let’s see if this time they mean what they say.

5 comments

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  1. 1
    baal

    Great post Mano. These points all cannot be stated often enough.

  2. 2
    machintelligence

    It may well be that the “fiscal cliff” is more of a speed bump which will slow the recovery somewhat, but not stop it. If I were a Republican I would be shaking in my shoes, since the Democrats are holding the winning hand no matter what (unless they fold, of course).
    This is the time to bet the farm. Propose treating capital gains as ordinary income. Go large or go home. The Democrats won the election, now they should act like it.

  3. 3
    Kyle

    Another very good post Mano, your blog always has be coming back :).

    I notice you often reference the oligarchy in posts of this nature. I was wondering if you have ever done a post specifically discussing your understanding of the oligarchy. Namely companies or people you believe are holding the sway, how they are pulling the strings and what you think they are really after (and why?).

    … Or would such a post be ‘detrimental to your health’? *wink wink*

    Anyway, I love reading your thoughts here. Keep up the great work.

  4. 4
    theschwa

    “The Democrats won the election, now they should act like it.”
    The key word here is “should”. I REALLY hope they do this. But I smell a fold coming. They won the election, not a spine.

  5. 5
    Marcus Ranum

    I have noticed that I need to be skeptical whenever a politician’s lips are moving.

    The “fiscal cliff” is basically a strategy by the republicans to hold the economy hostage – threatening to crater it on Obama’s watch. But the fact that they aren’t doing it really tells me that they know it’d be worse for them – after all, if the economy gets cratered the republican’s pay-masters that are going to get hurt, too. The republicans are OK with hurting pretty much anyone except the rich.

    The midterm elections could be very interesting, indeed.

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