Deficit Hysteria : Waging Class War from the Top Down

Chapter I : Deficit Hysteria

The next time you hear the words “Fiscal Cliff”, “Sequester” or “Deficit”, think of Charles Dickens' "Artful Dodger."

It’s been easier, lately, to get through a day without hearing about the supposed fiscal crisis affecting the United States.

But that doesn't mean the topic has gone away, because it never goes away. The US and global monied elite regularly whip up fear around the deficit, whenever cover for a swindle is needed. So if you suspect that the recent smoke and noise is meant to distract you while your pocket is picked, your instincts are correct. The latest round of deficit hysteria has been orchestrated to allow Barack Obama to become the first United States President to cut Social Security and Medicare. And once that nasty little deed is done, we’re on the slippery slope to losing those programs entirely. It may end up being this President's enduring domestic legacy.

How did we get here?

From surplus to deficit... then a loud crash

In 2000, President Bill Clinton handed President George W. Bush a budget surplus. Prez Bush immediately commenced turning that surplus into a deficit. First, through a needless tax cut benefiting (mostly) very wealthy taxpayers, and then through our two long foreign wars, charged to Uncle Sam’s credit card, estimated to cost between $4-6 Trillion.


With war sentiment raging, the deficit hawks - in either of the ruling parties - were nowhere to be found. Besides, Bush had a plan to privatize Social Security, which would -  somehow - lower US financial obligations while benefiting Wall St. That plan was rejected out of hand, and the subject was dropped. That is, until the 2012 Presidential election, when Romney-Ryan, supporters both of the wars and social security "reform," began to beat the drum again for privatization. These proposals were cloaked, as always, in the guise of “fiscal responsibility.” Who can forget Ryan's epic clash with Vice-President Joe Biden on this (see video below).

While US politicians were free-spending to send young American men and women to die in Iraq and Afghanistan, a speculative bubble was building in the housing market.

Credit : unknown

The practice of combining and "re-packaging" standard issue home mortgages into “institutional securities” became rife with fraud. Lending standards were drastically lowered to spur demand and create more mortgage “products” to sell. The quality of the resulting investment products was so low that they became known as toxic and sub-prime. The resulting pyramid of financial shit has been amply covered and documented elsewhere, notably by Matt Taibi.

(The Wall St. narrative is presented compellingly in Michael Lewis' The Big Short )

This latent financial toxicity - that created such a menace to the whole economic system - was hidden, buried under and within endless layers of  so-called derivative structures.The resulting garbage was then sold to unsuspecting money managers around the world - who represented cities, workers' pension funds, national treasuries, etc.  All were assured that their assets and investments would be safe. No one, including those who created the products, understood the risk involved, either being too naive or busy enriching themselves. For good measure and that extra sense of security, the investments were given fraudulently high ratings by agencies like Standard and Poor’s.

When the bubble inevitably popped, the economy crashed with it. Some of the gory details of the post mortem are provided by economist Dean Baker:

We lost $600 billion in annual demand due to residential construction falling through the floor. We will not return to normal levels of construction until the vacancy rates return to normal levels. Vacancy rates are still near post-bubble record highs.

We also lost close to $500 billion in annual consumption spending due to the loss of the $8 trillion in housing-bubble-generated equity that was driving this consumption. This demand will also not come back. This created a gap in annual demand of more than $1 trillion Huffpost

The resulting crash drastically reduced federal tax receipts, further increasing the deficit that had been so quickly created. A timeline of US deficit growth  :


So the deficit wasn’t caused by your, or my, or our neighbors' overspending. That's a folksy and convenient politicians' narrative spun to mask their service to the Wall St. profit machine.

The narrative serves high-end bankers who, when confronted by an outraged US public -- and the occasional congress person -  smirk like Alice in Wonderland's Cheshire Cat and say they did it all to help spoiled Americans afford a life of luxury.

Since they're such financial geniuses, they know full well that Americans are in a desperate struggle to afford the basics  - a safe home, an education, and healthcare, resorting to personal debt (re : credit cards and high interest loans and bank fees on "advances") - to make up for ever shrinking paychecks in a constrained labor market.

We chalk deficits up instead to reckless waste by US government elites on “wars of choice,” while giving tax cuts to friends and letting Wall Street gamble with the global economy.

And now they want us to pay for it.

Again, With Feeling: Social Security has nothing to do with the deficit

Now that we know what caused the deficit, it's also important to remember what didn't cause it.

All financial operations for Social Security are handled through trust funds, whose source of income is primarily payroll taxes, but also interest earned from the bonds it owns. Currently, social security funds are in surplus to the tune of $2.6 trillion, enough to cover benefits through 2033 or so. There's no impending Social Security crises in 2013, nor in 2014 or 2015.


Nor is there any actual connection between the federal deficit created by two wars, tax breaks to the very-wealthy, or reduced corporate income taxes and Social Security. The fact that billionaires like Pete Petersen, want us to think there is gives away the kind of game afoot here. As always, the governing rule is tax relief for those at the tip top of the pyramid, rigid fiscal austerity and hard choices for everyone else.

In reality, Deficit Hysteria is the decades-long smoke screen for the never-ending campaign to reverse the New Deal and dismantle its programs entirely. Why? Because global corporate and financial elites don't want government efficiently providing services that they could gouge us for. Think of all that retirement money that could be sitting in 401(k)s, earning fat fees and lush commissions. (To read about the transition from Defined Benefit Contribution plans to 401ks, click here) The insurance companies' rage over so-called Obamacare - the Executive's feeble attempt to limit their power - echoes similar resentments over lost markets and customers.

The essence of the flimflam is to make US citizens believe that social programs are one cause of the deficit and start to cut them, out of a misplaced sense of ‘shared sacrifice’. Such swindles are further enabled by anti-government libertarians who either a) don’t believe in the concept of society at all or b) disagree with the US Constitution that government should promote the general welfare. Add an incompetent and/or dishonest media that dutifully echoes elite views and you've got deficit hysteria. Don't believe us? Just listen to how VP debate moderator Martha Raddatz sets up the question, then poses the follow-ups during the VP debate :

If you think the self-anointed new media are going to call the old media, think again. Slate thought Raddatz' line of questioning hunky-dory.

Brand Obama: the one-man corporate front group

President Obama put Medicare and Social Security "on the table' in 2009 -  before anyone even started negotiating. Why?

One theory is that the President wants to be seen as brokering a ”Grand Bargain,” cementing his legacy as a super-conciliator who single-handedly, miraculously, brought two intransigent sides together. His actual legacy is rapidly becoming that of the President who undid the work of his Democratic predecessors.

A second theory: he doesn’t think the Republicans will accept his offer and he’ll come off looking like the reasonable one in this debate. In other words, the President again as master negotiator.

But the most obvious explanation is that his last campaign cost $1 billion, and a lot of that came from business and finance. And this President has a track record of perpetually putting business at the top of his list, to the detriment of the country. Pritzker nomination, anyone?

Recall the so-called public option during the health care debate. Even though the President publicly appeared to embrace the idea, he immediately negotiated it away, in private with the for-profit hospital industry,

Perhaps a more telling example : how the administration dealt with the aftermath of the 2007-2008 financial crash, perpetrated in no small part through fraud and illegal acts.

It turns out, banking crises are cyclical. There's just something about bank managers in close proximity to such funds that seems to breed expansive schemes – and the corruption and illegality that goes with it.

But unlike the savings & loan crisis of the 1980s and early 1990s, when over 1,000 bankers were put in jail, this time not a soul has put on an orange jumpsuit. Most recently, the bank HSBC was found by a court to have laundered close to a billion dollars for drug lords. The US freely throws its own citizens jail, many for non-violent offenses, allegedly at rates greater than Stalin's gulag. But the Obama justice department can’t see fit to jail a single banker for financing such activities.

Now, our President joins the billionaires, banks, and medical industry elite, proposing to cut the benefits of the poor and elderly through what’s called a "chained CPI."

What is A Chained CPI, you would be right to ask :

The CPI is the Consumer Price Index, used to calculate how much the price of a selected basket of goods changes over time. The CPI measures inflation and, more critically, is used to make adjustments to government benefits paid out, such as Social Security. The ‘chained’ CPI incorporates the notion that consumers might change their buying patterns and shift to other products if prices rise too much, making it a more accurate tool.


While the tool may gauge household expenses for for the average consumer, it's not accurate for seniors, as economist Paul Krugman explains:

...there is no reason to believe that the chained index is a better measure of inflation facing seniors than the standard CPI. It’s true that the standard measure arguably understates inflation for the typical household — but seniors have a different consumption basket from the young, one that includes more medical expenses, and probably face true inflation that’s higher, not lower, than the official measure.”  NY Times

In reality, switching to the chained CPI is a benefits cut. It doesn’t help the long-term viability of Social Security – it merely shows the President’s corporate pay masters that the he is willing to abandon the voters who gave him a second term.

There are a number of ways to fix Social Security if that’s what this was really about. The easiest – in terms of numbers, not politics – is simply to remove the cap on income taxed for social security.

Currently, only the first $113,000 of an individual's paycheck has Social Security and Medicare taxes taken out. With that rule in place, most Americans pay about 7% of their total income in Social Security Taxes. Pete Peterson, with an estimated net worth of $2.8 billion dollars, pays .00000000001% of his annual income under social security's regressive tax scheme. Or something like that. In fact, since he doesn't work for a paycheck, he may not pay anything at all.

That's hardly the worst of it. Peterson, ranked by Forbes magazine at 149 on the list of the planet's wealthiest billionaires, is not content to say "thank you" and pay his negligible social security taxes. He actively works, through his foundation, to have the program eliminated. He recently spent about $500 million to do so. Huffpost

Peterson, the staunch advocate of fiscal responsibility, is the former CEO of ill-fated Wall St. firm Lehman Brothers, which collapsed into bankruptcy amidst widespread accusations that its risky trades and fraudulent accounting practices helped precipitate the global financial meltdown.

Additionally, only 83% of of all wages are taxed for Social Security this way. Just going back back to the standard that patron "conservative" Saint Ronald Reagan used in 1983 would increase to 90% wages being taxed for Social Security. Such an adjustment would create a new taxable income cap of $200,000 (instead of the current level of $113,000) This would eliminate 1/3 of the funding gap we will allegedly face in 2034.

But, on another point, why tax only wages? The current social security  set up gives those who reap enormous investment returns - people like Pete Peterson a free ride on that income. By taxing all earned income – including income made through investments - the Social Security Trust Fund would remain solvent, right through the baby boomer era. But then, mega-investors like Peterson would need to kick in a bit more.

When it comes down to funding for protecting the nation's elderly, and making up real or imagined gaps, who can afford it more  - the widow across the street or Warren Buffett? The average Joe or Pete Petersen? Thoughts? Anyone?

The AARP site features a handy calculator for seniors to figure out exactly how much they are getting screwed. Playing generations off each other is a key part of the strategy. Wall St. counts on Younger Americans not to care – until their time comes. At which point it will be too late for them.

There are legitimate ways to address the US federal deficit without affecting Social Security and Medicare

Once way to do this would be to restore corporate tax receipts to historical percentages. Corporate taxes fell from 26.4 percent of total tax revenue in 1950 to just 7.4 percent of total tax revenue in 2010.  

Apologists blather about the high (published) corporate tax rate, but they don't mention that federal tax receipts from US corporations - are at historic lows. Or that this is occurring during one of their most profitable business cycles ever – corporate profits are sky-high while many are still searching for full-time work.

How did this happen? Tax loopholes that have cost the country a total of $1.7 trillion over ten years. Believe us, these guys can afford to pay, since they don't seem inclined to spread their firms' riches into the job market. Defying supply-side logic, they horde their cash, keeping it far away from the US treasury in offshore accounts. From there, it can be floated and managed tax-free, leveraged for enormous personal gain – by money-makers like Pete Peterson. forbes

Another more “drastic” way would be to lower the Medicare eligibility age to 0. Yes, you read that correctly. “Medicare for All”” would eliminate the health care insurance industry with its bloated 20%-25% overhead and save the United States an estimated $400 billion annually. Everyone would be covered, and unlike Obamacare, cost containment would be a key feature of the program.

Postscript – solving the real problem

The real problem in this country is the jobs deficit, not the budget deficit. The Back to Work Budget, authored by the largest caucus in Congress (the Congressional Progressive Caucus) addresses this problem directly. Here are some highlights:


  • Jobs – 7 million new jobs in one year

  • Deficit reduction - $4 trillion

Job Creation

  • Infrastructure – substantially increases infrastructure investment to the level the American Society of Civil Engineers says is necessary to close our infrastructure needs gap 

  • Education – funds school modernizations and rehiring laid-off teachers

  • Aid to States – closes the recession-caused gap in state budgets for two years, allowing the rehiring of cops, firefighters, and other public employees 

  • Making Work Pay – boosts consumer demand by reinstating an expanded tax credit for three years 

  • Emergency Unemployment Compensation – allows beneficiaries to claim up to 99 weeks of unemployment benefits in high-unemployment states for two years 

  • Public Works Job Programs and Aid to Distressed Communities – includes job programs such as a Park Improvement Corps, Student Jobs Corps, and Child Care Corps

Fair Individual Tax  

  • Immediately allows Bush tax cuts to expire for families earning over $250K

  • Higher tax rates for millionaires and billionaires (from 45% to 49%)

  • Taxes income from investments the same as income from wages 

Fair Corporate Tax

  • Ends corporate tax bias toward moving jobs and profits overseas 

  • Enacts a financial transactions tax 

  • Reduces deductions for corporate jets, meals, and entertainment 


  • Returns Pentagon spending to 2006 levels, focusing on modern security needs

Health Care

  • No benefit cuts to Medicare, Medicaid, or Social Security 

  • Reduces health care costs by adopting a public option, negotiating drug prices, and reducing fraud


  • Prices carbon pollution with a rebate to hold low income households harmless 

  • Eliminates corporate tax subsidies for oil, gas, and coal companies



CK Patton for UWS Digital News