The Big Rollback

Washington is hyper-ventilating at the prospect of a failure to meet the deadline for raising the national debt limit. Technically speaking, that indeed would create a grave situation with immeasurable consequences. For the United States will have no legal authority to pay its bills ? including the interest on its trillions of debt. A large portion of that debt is in the form of Treasury securities and is held by foreign governments, most notably China and Japan. The commonly held view is that this dire state of affairs is due to partisan party conflict with both Democrats and Republicans holding the national interest hostage to their own selfish interests. This depiction of things, which is purveyed by all the media, has been reinforced even by President Obama who, for his own personal olitical reasons in posing as the intrepid defender of the national welfare who stands above the squabbling politicians on both sides. The White House imprimatur notwithstanding, this is a false representation of what is happening.

The grim truth is that one political party (and only one) ? the Republican ? has broken with the ethic of responsibility that until now has governed thinking and behavior on the public debt. The Federal government’s obligation to meet its financial obligations to honor debt never before has been questioned. The notion that some partisan faction should threaten the solvency of the United States by blocking technical requirements unless its parochial aims were accepted did not enter the mind of legislators.

Times have changed. The radical reactionaries who now control the Republican Party (e.g. Eric Cantor) are threatening in effect to bring down the financial structure of the United States. They insist that their agenda of drastic measures to return the American economy, and large swaths of social policy too, to the postulated heyday of the 1920s be enacted. Remarkably, they have succeeded in getting the country to see this reckless ploy in terms of a contest between the two parties rather than as the Republicans playing fast and loose with America’s health and well-being. Moreover, they have intimidated the Democrats in Congress into a reticence that permits the Republicans to get away with this historic and unprecedented power grab.

As for President Obama, he has played along insofar as he has declined to condemn in stark terms the Republican blackmail – or even state what their reckless game is. Instead, he has bought the formulation that the crisis is all about budget deficits and the needs for long-term spending cuts. This makes no sense politically or in terms of economic policy since it is a guaranteed formula for ensuring a decade at least of economic anemia. Above all, it absolves the Republicans of accountability for their unconscionable conduct. It seems that Obama’s overriding consideration is that this spin strategy will improve his chances for reelection. Whether that appraisal is correct or not, it does not auger well for the health of the Republic. He only benefit so long as most voters remain ignorant of the dismaying truth that they are being taken for a ride.

For Mr. Obama already has agreed to sacrifice Social Security, Medicare and Medicaid. He has done so on specious financial grounds. Those dedicated trust funds are not in deficit; they do not contribute one dollar to the current deficits. Quite the contrary. The accounting device (legal) built into the federal budget numbers consolidates the standard budget, which draws its revenues from the IRS and makes expenditures through legislative appropriations, with those first two trust funds. The latter are financed by the FICA withholdings and make automatic payments according to stipulated formulas. They receive more than they expend. When that flow begins to reverse, there will still be a surplus in the Social Security Trust Fund to last until 2040 ? even without modest adjustments like raising the earnings ceiling for FICA withholdings. But the siphoning of monies from the trust funds to the standard budget also will reverse itself.

The way the dodge has worked is that money taken from the Social Security and Medicare Trust Funds is replaced by Treasury IOUs. Since we have a consolidated budget, the numbers we see about deficits are misstated since they do not register those borrowings and IOUs as expenditures. They implicitly suppose that we’ll never have to make good on them. The budget in fact is not truly consolidated since those Trust Funds have a separate legal and financial standing from tax revenues and expenditures. The hope of our politicos is that we never will have to honor the IOUs if we can keep claims for Social Security and Medicare at an artificially low level and thereby access only the funds remaining after we SUBTRACT the IOUs. That’s the story behind the scare campaign that the Trust Funds are insolvent. The SS Trust fund is solvent and will remain so for decades beyond that if we simply made marginal changes.. Medicare is in more trouble due to spiraling medical costs about which the Obama legislation did nothing. By raising retirement ages, by doing away with the COLA increase, and by simply reducing benefits (as many states are doing on the pensions owed public workers), the Treasury may never have to honor its IOUs. The money then is available for Afghanistan or whatever other pastime tickles our politicians’ fancy – while more elderly Americans may make their sacrifice for the cause of freedom by adding dog food to their staple diet.

The attack on these programs, therefore, is inspired by a combination of a reactionary, and regressive, social ideology and the imperative the uncomfortable accounting fact that the standard budget immediately will balloon as soon as the IOUs placed in the Trust funds begin to be redeemed. So long as we maintain the nominal consolidated budget as our fiscal point of reference, the ‘IOU’ transfers are treated as if the Treasury is transferring bonds to itself. In fact, when we separate the two budgets – revenue/expenditure and Trust funds ? we must recalibrate the budget so as to account for those bonds as expenditures. Then, the funds’ surpluses no longer mask the full discrepancy between government revenues and expenditures with the corollary need that taxes on the rich absolutely must go back to 2000 levels. That is the game our masters have been playing. By cutting Social Security and other dedicated programs, the surplus in those trust funds can continue to be diverted to other purposes. This is massive deceit even if it is not legally fraud.

American wage earners have been played for fools and now are becoming the victims of a swindle ? by President Obama, by Congress, by our political class, by the media, by Washington’s policy intellectuals who all have observed omerta about these goings-on. That is a harsh judgment – one that conforms to our sad reality, though.

So debt roulette not only plays fast and loose with the solvency of the United States; it also has coerced the country into silent acquiescence in the rollback of the greatest accomplishment of the 20th century.

Michael Brenner is a Professor of International Affairs at the University of Pittsburgh.


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Michael Brenner is a Professor of International Affairs at the University of Pittsburgh.

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