by Robert B. Reich

Big sigh of relief. America will not default. Our full faith and credit is intact.

But that's about the only good thing that can be said about the deal hammered out to raise the debt ceiling. Anyone who characterizes it as a victory for the American people over partisanship doesn't understand economics. Nor the meaning of shared sacrifice.

The deal reduces the federal budget by $2.2 trillion or $2.5 trillion over the coming decade. Yet it doesn't raise taxes on America's wealthy and most fortunate -- who are now taking home a larger share of the nation's total income and wealth than they have since 1928, and whose tax rates are now lower than they have been since 1942.

Of the first trillion dollars of budget cuts, a third will come out of defense spending. The other two-thirds will come out of education, job training, infrastructure, low-income housing, energy assistance, research and development of alternative energy sources, and other so-called "discretionary" programs.

These cuts will burden lower-income Americans far more than the wealthy. They will also make it more difficult for the nation to "win the future" by improving the nation's competitiveness -- something the president urged only months ago.

The remainder of the budget cuts will be decided by the end of the year. A congressional commission will present Congress with recommendations for $1.5 trillion more in cuts -- and Congress will have to vote for or against the entire package. Assuming Republicans continue to refuse to increase taxes (as they're sure to do), the $1.5 trillion would have to come from what remains of discretionary spending, as well as from defense, Medicare, Medicaid and Social Security.

If Congress doesn't vote in favor of the package (or the president vetoes it and Congress can't override the veto), the federal budget will automatically be cut by $1.2 trillion.

What then? We can take some comfort from the fact that Social Security, Medicaid and several other programs for the poor would be exempt from those automatic cuts, and around half the total will come from defense (America's scheduled drawdown of troops from Iraq and Afghanistan).

But most of the remaining burden will necessarily fall on Medicare. Although the plan directs cuts at Medicare providers rather than beneficiaries, it's safe to assume providers will pass them on to beneficiaries in the form of fewer services.

Besides being grossly unfair, the deal won't even solve the nation's real budget problem.

The current budget deficit is mostly due to temporary measures -- George W. Bush's expensive tax cuts (mostly for the wealthy), the bailout of the Street and subsequent stimulus package (which saved 3 million jobs but wasn't big enough to do the overall job), and a soaring defense budget -- all of which are coming to a close. The Bush tax cuts expire in 2012, we'll hopefully exit from Iraq and Afghanistan, the Street will finish paying for its bailout, and the stimulus is over.

The real budget problem arrives years from now, and it's mainly due to rising health-care costs. Aging boomers will cause those costs to escalate even faster.

So the question we ought to be asking ourselves is how to best contain rising health-care costs. The answer isn't to eviscerate Medicare. Just the opposite. It's to use Medicare's bargaining power to reduce the prices charges by pharmaceutical companies and health providers -- and to move from a fee-for-service system (which encourages wasteful tests and procedures) to a payment-for-healthy-results system. In other words, Medicare isn't the problem. Medicare could be a big part of the solution.

But the long-term budget problem shouldn't be the nation's biggest worry right now in any event. It's the lack of jobs.

Perversely, the deal is likely to make the job crisis even worse. Unemployment benefits will not be extended. Nor will the payroll tax cut. There's no room for a Works Progress Administration or a Civilian Conservation Corps or any other spending to get American back to work.

When added to the cuts already under way by state and local governments, the deal's spending cuts only increase the odds of a double-dip recession.

As I said at the outset, we can breathe a sigh of relief. The deal -- as awful as it is -- is still preferable to the economic catastrophe of a default on the debt of the U.S. government. The shame and outrage is that it ever came to this choice.

 

Receive our political analysis by email by subscribing here



Debt Deal: Ransom Paid | Politics

© iHaveNet.com