It is widely reported that the Republicans are looking for a face-saving way to back down from the standoff they created on the budget and the debt ceiling. According to these news accounts, this route could involve another stab at the “grand bargain,” a deal that includes some tax increases and cuts to Social Security and Medicare.
This prospect should inspire outrage beyond the fact that it would make the Republicans huge winners coming from a disastrous losing position. (Polls show that shutting down the government to keep people from getting health care is not a popular position.) That’s an issue for political junkies; the more important point is that millions of seniors who are already struggling would be asked to make further sacrifices for basically no reason whatsoever.
What is not in dispute right now is that most seniors are not doing very well. The median income for a person over age 65 is less than $20,000 a year. Relatively few seniors are enjoying anything that could be considered a comfortable retirement. It is completely wrongheaded to look to make their situation worse by the reducing the Social Security cost of living adjustment by adopting the chained CPI as the measure of inflation.
This switch would reduce benefits by roughly 0.3 percentage points annually, implying a cut of three percent after 10 years and a cut of six percent after a person has been retired for 20 years. This is a larger hit to the income of the typical senior than the tax increases faced by the typical wealthy person as a result of the ending of the Bush tax cut last fall. Seniors will be hit even harder if Medicare is cut in ways that lead to increased out of pocket costs for beneficiaries.
Asking some sacrifice from seniors would be understandable if the country was in a situation where it was really strapped for resources and we were asking for everyone to do their part. However this is clearly not the situation we are in today.
We are sacrificing close to $1 trillion in economic output every year precisely because there is not enough demand in the economy. The losses since the start of the recession are now approaching $5 trillion. This is equal to almost $40,000 for every household in the country. This is an incredible amount of money to throw in the garbage.
Of course the losses are not being shared equally. The unemployed and those who have given up looking for work altogether are taking the biggest hits. We also have millions of people who can only find part-time jobs who would like full-time employment. And, we have tens of millions of workers who have not seen any rise in their pay over the last five years because high unemployment undermines their bargaining position.
Whacking seniors with a cut to their Social Security and higher medical expenses makes this situation worse, not better. It means that they will have less money to spend, further reducing demand in the economy.
Perhaps President Obama and the other grand bargainers who think these sorts of cuts to seniors make sense have some theory under which budget cuts in a downturn boosts private sector demand, but most of us have to live in the real world, not the dreams of budget cutters. At this point we have a vast amount of evidence; cutting spending in a downturn leads to slower growth and fewer jobs. That is not a debatable point. It’s sort of like the earth being round, it just happens to be true.
The deficit cutters will have to speak to their own motives. Some may actually want to keep high levels of unemployment because they don’t want workers to have any bargaining power. After all, profits are at record highs as a share of national income right now. Their view may be that we would not want to see more jobs and a stronger labor market, since this could cause wages to grow at the expense of corporate profits.
Other advocates of deficit reduction may just be confused because they continue to think that the federal government’s budget is like a family budget. This is less pernicious than a deliberate effort to hurt workers in order to boost corporate profits, but this confusion should not be allowed to be a basis for national policy.
In the longer term we may well face a situation where have to raise taxes and/or cut spending to keep deficits in line, but we are very far from that situation today. The immediate issue is that we need large government deficits to make up for shortfalls in private sector demand.
It would be really unfortunate if President Obama decided that his peace offering to the Republicans should be a proposal that both hurts seniors and weakens the economy. That might make sense to the Very Serious People in Washington, but not in the real world.
(Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, D.C. His post first appeared on Truthout and is republished with permission.)