The great debt diversion

IS THE showdown over raising the federal debt ceiling just political theater that will finally give way to yet another budget-cutting deal? Or is it a drift toward economic Armageddon?

Given the gang of know-nothing right-wingers in charge of the House of Representatives, it's actually possible that Congress will force the federal government to stop paying its debts at home and abroad by not raising the debt ceiling. Every analyst agrees this would trigger a worldwide financial panic that would make the crash of 2008 seem like a hiccup.

But some 102 House Republicans published a letter to the House leadership June 6 saying that they're ready to throw the dice with the world economy--that they want unprecedented spending cuts before they authorize an increase in borrowing for the federal government beyond the current $14.3 trillion limit.

The newsletter The Hill summarized their case: "The letter called for discretionary and mandatory spending cuts to halve the budget deficit next year, spending caps to hold Washington's spending to 18 percent of gross domestic product and passage of a balanced-budget amendment."

In other words, three years after Wall Street got trillions in federal bailouts, loans and guarantees, House Republicans now want to get the country's fiscal house in order--not by squeezing the banks, but by cutting food stamps, Medicare, education and just about every other program that makes it a bit easier to survive in this miserable economy.

If anyone's tempted to shrug off that letter as Tea Party posturing while more responsible Republicans negotiate with Obama, consider the letter signed by 150 economists at the behest of House Speaker John Boehner: "It is critical that any debt limit legislation enacted by Congress include spending cuts and reforms that are greater than the accompanying increase in debt authority being granted to the president."

In other words, if Obama wants a $2 trillion increase in the borrowing authority of the federal government--roughly the amount necessary to keep the debt ceiling high enough for operations through the 2012 elections--the White House will have to agree to cuts of $2 trillion or more.

Corporate America and the banks don't want the worldwide financial crisis that would result if the debt ceiling isn't raised--and they may still succeed in persuading the traditional first party of big business to back away from the brink. But what's incredible is how close to the edge the House Republicans are willing to go--a measure not only of their chutzpah, but of their confidence that the Obama administration will eventually fold and agree to cuts on a catastrophic scale.

AND WHAT'S the Democrats' response to these bash-the-poor proposals? Keep Medicare cuts off the table----but we're flexible on just about everything else. That's the message coming out of separate closed-door meetings that Obama held with House Republicans and Democrats.

The key voice for the Republicans was Rep. Paul Ryan of Wisconsin, who wants to convert Medicare into a voucher system and leave seniors at the mercy of insurance and pharmaceutical companies.

That's a losing political message, if the resultsof a recent special House election in upstate New York is any indication. An unknown Democratic candidate, Kathy Hochul, put a defense of Medicare and taxing corporations and the rich at the center of her winning campaign.

With their own election prospects in mind, House Democrats pressed the president to publicly back their "hands off Medicare" stance in budget negotiations. According to participants in the meeting, Obama signaled that he'd go along.

But in fact, Medicare is already on Obama's chopping block. His health care reform law cuts $145 billion over 10 years in payments to private Medicare plans. A lot of that money flowed into the pockets of insurance companies, but Obama's law also empowers a Medicare Independent Payment Advisory Board to make future cuts in Medicare that will stand unless Congress specifically reverses them.

Moreover, according to the Associated Press, Obama also told House Democrats that huge budget cuts were coming regardless of the debt ceiling controversy, thanks to bipartisan talks headed by Vice President Joe Biden--and that House Speaker John Boehner would be the president's partner in deciding which programs to whack:

Biden said last month that the group, which includes top lawmakers from both parties, is on pace to generate savings exceeding $1 trillion. At the White House last week, President Barack Obama predicted to House Democrats that the Biden group would come up with perhaps 60 to 70 percent of the requisite budget cuts, and that he and Boehner would negotiate the remainder.

FROM HOPE and change to austerity and suffering. Barack Obama--whose 2008 presidential campaign promised to look to the great traditions of the civil rights and labor movements as inspiration for a new agenda in Washington--is these days offering himself as a slightly lesser evil.

It comes down to this: While the Republicans want to toss grandma under the bus today, the Democrats prefer to spread the pain over the long term, putting the grandmas of tomorrow on a dog-food diet.

Consider the deal that Obama cut with Boehner in April to slash federal spending in the current fiscal year by $38.5 billion--the biggest such cut in U.S. history. Half the money came out education, labor and health care programs. That's the model for the multi-year budget deal that Obama and Boehner will likely reach once again--perhaps during their golf date set for June 18.

The president may force the Republicans to back off some immediate cuts, but there's no questioning the bipartisan consensus that the federal budget has to be reduced dramatically. Since both parties are beholden to Wall Street banks and committed to maintaining the U.S. military-industrial complex, Corporate America and the Pentagon brass will continue to do just fine, while working people bear by far the biggest share of the "shared sacrifice" that Obama keeps talking about.

That's not a conspiracy theory. It's the political reflection of the economic program of Corporate America: To help U.S. capitalism overcome the lingering impact of the worst crisis since the Great Depression, the standard of living for working class people must be cut--deeply and permanently. That's why the austerity drive emanating from Washington is being copied in state capitals across the U.S., often attached to legislation aimed at breaking the power of public-sector unions.

The Democrats object to the Republican plan to frontload the budget cuts for fear that it would undercut the economy and alienate their voting base even further. But make no mistake: The Obama White House is wholly committed to austerity. The already weak economic recovery is continuing to sputter, even according to government statistics--but no one in Washington will propose what's really needed: Further economic stimulus spending and a jobs program to counteract the worst long-term unemployment problem since the Second World War.

There are real economic problems associated with the rising U.S. budget deficit and federal debt. If the dollar is to remain the world's reserve currency, U.S. debts and deficits have to be brought under control, or international investors will pull out their money and drive interests rates up dramatically.

But there's a straightforward solution: Tax the rich at 1950s levels, end the wars in Iraq and Afghanistan, and cut defense spending even further besides. With those measures, the deficit and debt issues would fade.

This is a manufactured crisis. Having looted the U.S. Treasury and Federal Reserve to bail out the banks, the U.S. political establishment now expects working people to pay up yet again--and for the rest of our lives.

Obama may sound better than Boehner at selling this medicine. But the medicine is just as bitter.