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Congress might pass a debt deal this week that would raise the debt ceiling into 2013 and reduce government spending by $2.5 trillion. After all the debate over who would be affected—or not—what does the final policy scoreboard say?
In short, it’s a rout of the lower and middle classes by the wealthiest Americans. Since the deal relies entirely on spending cuts with no revenues—don’t believe the White House spin that revenues are possible, because that would require Republicans to suddenly desire them—the wealthy escape any sacrifice since very few of them rely on the government services that will be cut.
Rather, as Brookings Institution senior fellow William G. Gale writes, “Low- and middle-class households have seen stagnating or declining earnings over the past few decades, and they have been hit hard in the Great Recession by the housing market collapse and the job market collapse. Now, they are being asked to shoulder—via spending reductions—all of the fiscal reduction agreed to so far.” (Yes, that Brookings Institution).
How specific cuts will be determined, and who exactly is affected, is still hard to know. The deal truly “kicks the can down the road,” in the overused Washington parlance. The $917 billion in “immediate” cuts are not really immediate, nor enumerated. Federal spending will operate under caps over the next ten years equal to $917 billion less than what was projected, but the exact areas of reduction are unknown and obviously depend quite a bit on political outcomes. The caps are relatively modest until 2013, and a Republican Congress with a budget proposal from President Rick Perry would make much a different decision about where to cut than would Obama, Pelosi and Reid.
Then, $1.5 trillion in additional cuts will be determined by a so-called super committee of six Democrats and six Republicans. Entitlement programs like Medicare, Medicaid and Social Security are subject to “across-the-board” cuts here, and if no agreement is reached by November 23, a “trigger” will be pulled, with the gun aimed squarely at senior citizens and the Pentagon.
So there are a lot of permutations for these cuts—but make no mistake about who is exposed, and who isn’t. Cuts are guaranteed, revenue is not. Here’s a quick rundown of the larger bill:
Who is exposed:
Veterans: Almost half of the first round of cuts will come from “security spending,” which includes the Pentagon budget but also the Department of Homeland Security, the State Department and notably veterans benefits and compensation. The White House assured veterans they won’t be harmed if the trigger is pulled, but did not assure them they are safe from any of the preceding cuts. More than 2.2 million veterans have served in Iraq and Afghanistan since September 11, 2001, many of whom have been seriously injured and require extensive care. The Disabled Veterans of America already has said it is “anxious” to see how these spending cuts are assembled.
Students: Graduate students would be the hardest hit, as the bill proposes an elimination of the interest subsidy on federal student loans for “almost all” of them. This means that beginning July 1, 2012, grad students will be responsible for the interest on their loans while in school and during any subsequent deferment period. Also, while the federal government currently offers subsidies for on-time payments in order to promote responsible pay-backs, they will be eliminated under the debt ceiling deal. Also, education accounts for the largest share of non-defense discretionary spending. It’s nearly inconceivable that budget-cutters won’t target that juicy budget line in making their cuts.
Seniors: As noted, Medicare is subject to across-the-board cuts in the super-committee, and if the trigger is pulled, provider payments will be slashed—though only up to 2 percent. The makeup of the super-committee and outside-the-Beltway campaigns to protect Medicare will determine a lot about the degree of cuts, but remember that inside the Beltway, the “left” side of the debate has been defined by President Obama and the Gang of Six as raising the eligibility age to 67 and/or $500 billion in cuts. So this probably won’t end well.
The poor: Again, Medicaid will be subject to cuts by the super-committee. The Republican position, articulated in the Ryan budget, is a devastating 35 percent reduction in the next ten years, even as health costs rise. (However, Medicaid is protected from any cuts if the trigger should go off). Beyond that, federal housing assistance is the fourth largest slice of non-defense discretionary spending and is thus a likely target for cuts.
The unemployed: Unlike what happened during the December showdown over the Bush tax cuts, the White House was unable (or unwilling) to secure any extension of help for the jobless. That December extension will expire at the end of this year, and this was one of the last best shots to make sure that 3.8 million people won’t lose their benefits at that point.
The wealthy: Up until very recently, Obama and most Democrats were demanding that wealthy Americans pony up for some deficit reduction. The demands were admittedly narrow, and focused on itemized deductions on people who owned private jets or multiple homes—but both groups are exempted from sacrifice under the current deal. The super-committee could theoretically approve tax increases, including ending those loopholes, but House Speaker John Boehner has already sworn that won’t happen, and it’s tough not to believe that. If the Republicans on the committee refuse to back down on revenues, as they have in every recent negotiation, Democrats on the committee will be facing Medicare-slashing trigger unless they acquiesce—as they have in every recent negotiation.
Wall Street tycoons: In his budget proposal earlier this year, Obama recommended taxing the profit share of private equity managers, venture capitalists and other Wall Street high-rollers at the ordinary personal income tax rate, instead of at the smaller capital gains rate. No such deal was struck under the current bill, so these mega-rich traders won’t spend a penny reducing the deficit—again, unless Boehner undergoes a religious experience and appoints pro-tax, anti–Wall Street Republicans to the super-committee. (He’d have to spend a long time looking first).
Oil and gas companies: Obama repeatedly demanded that oil and gas companies lose their tax breaks, since they are raking in record profits and enjoy many deductions and subsidies in the tax code. “If we choose to keep a tax break for oil and gas companies that are making hundreds of millions of dollars, that means we’ve got to cut some kids off from getting a college scholarship [and] that means we’ve got to stop funding grants for medical research,” Obama said in June. Since those tax breaks were preserved, in hindsight that soundbite was of a prediction than a warning.
There’s a tense vote count in Washington today as House Speaker John Boehner tries to rally Republican members behind his debt ceiling plan. After one postponement and public disapproval by many prominent House Republicans, Boehner’s plan is teetering on the brink.
The conservative rebellion against Boehner’s plan is being driven by Tea Party activists and many of the freshman members they helped elect. For months, the House Republican leadership has been quietly tutoring these members on the intricacies of the federal budget and the need to raise the debt ceiling, using what Politico called a “stunningly simple” presentation of color-coded charts and graphs. This week, leadership even showed a clip from a Ben Affleck action movie to help persuade the members to act.
But so far, the aggressive pitch doesn’t seem to be working—at one point this week, Boehner was only eight votes from defeat. And if he cannot rally his party to support a dreadful plan with no chance of ultimate passage anyhow, what can he get them to vote for? In the words of British Business Secretary Vince Cable, “The biggest threat to the world financial system comes from a few right-wing nutters in the American Congress.”
That may seem harsh, but only to someone that’s not familiar with the specific Tea Party forces that are whipping conservative members into this rebellion. One group in particular, Let Freedom Ring, has mobilized Tea Party groups across the country and enjoys close connections to incredibly powerful Republican lawmakers. And a quick examination of the group’s history shows that if anything, Cable is being generous.
Let Freedom Ring was founded in 2004 by Colin Hanna, a former state official in Pennsylvania who now enjoys very powerful political connections. He is a part of Grover Norquist’s weekly strategy meeting, and has served as emcee of the Conservative Political Action Conference, a yearly gathering of far-right wingers who like to joke about nuking Chicago or the foreign-born, communist occupant of the White House.
In recent months, Let Freedom Ring has made an aggressive pitch for the Cut, Cap, and Balance Act—this is the legislation House Republicans are currently holding out for, contra Boehner’s plan (or any other). The act would immediately cut spending to pre-2008 levels, eventually cap spending at 19.9 percent of Gross Domestic Product, and pass a balanced budget amendment to the constitution. Such dramatic reductions would savage domestic spending programs; Robert Greenstein at the Center for Budget and Policy Priorities said the legislation “stands out as one of the most ideologically extreme pieces of major budget legislation to come before Congress in years, if not decades.” Senate Majority Leader Harry Reid called it “perhaps some of the worst legislation in the history of this country.”
The legislation originated in the Republican Study Committee, a group of 175 ultraconservative House members led by Representative Jim Jordan of Ohio. As soon as the RSC drafted the Cut, Cap, and Balance Act, they turned to outside groups and in particular Let Freedom Ring to help promote it. In a Family Research Council interview with Hanna and FRC president Tony Perkins, Jordan explained that “we just went to members of the RSC and said ‘What makes sense?’ And we came back with this cut spending, cap spending, and get a balanced budget amendment to the constitution. And then you all took off with it,” he said, turning to Hanna. “The outside conservative groups, Americans, have taken off with this.”
Jordan added that if the long-shot legislation doesn’t pass, and the federal government hits the debt ceiling, it wouldn’t be such a bad thing. “I’d rather have the crisis now and say ‘let’s deal with it,’ ” Jordan said. “Versus making a few changes, raising the debt ceiling, and having the crisis in two or three years…. virtually every economist—there’s a consensus out there saying we will have a debt crisis in two to three years.”
Soon after the legislation was unveiled, Let Freedom Ring organized a coalition of over 100 conservative groups, including Americans for Prosperity, Club for Growth, Freedom Works, Tea Party Express, and local Tea Party chapters from coast to coast.
Then Let Freedom Ring and its coalition led the charge. They created a website, cutcapbalanceact.com, which has a pledge asking lawmakers to support the legislation—so far, every major GOP presidential candidate except Jon Huntsman has signed it, along with twelve senators and thirty-nine House members. Over 240,000 people have also pledged to push their elected representatives to support Cut, Cap, and Balance, which already has forty co-sponsors in the Senate and 115 in the House.
The group had a news conference on Capitol Hill in June, featuring Hanna, Jordan, Senators Lindsey Graham, Jim DeMint, Orrin Hatch, Mike Lee and Rand Paul along with Representatives Joe Walsh and Ron Paul, and others. “This is beyond partisanship; this is beyond ideology. This is truly about survival,” Hanna told the assembled reporters.
This week, when Boehner rolled out his latest debt ceiling proposal, the coalition led by Let Freedom Ring struck a major blow against it the same day. In a statement, the group blasted the proposal and said “falls short of meeting (the coalition’s) principles…. we urge those who have signed the Pledge to oppose it and hold out for a better plan.” Soon after, many conservative House members began publically denouncing Boehner’s bill.
This level of influence is impressive for a group that formed only seven years ago. In 2004, Hanna got $1 million from the reclusive conservative financier John Templeton to start Let Freedom Ring. Hanna had gained some national notoriety while commissioner of Chester County, PA, when he refused to remove a Ten Commandments plaque from the county courthouse, and Let Freedom Ring aimed to get evangelical voters to the polls that fall in support of George W. Bush.
At the time, the Wall Street Journal said the group was “attracting wealthy Christians who don’t want to be seen as political.” Hanna said the group would have “a positive political philosophy based upon respect for Constitutional principles, economic freedom and traditional values…. Let Freedom Ring will not engage in negative personal or partisan political attacks.”
That pledge didn’t last long. In 2005, the group aired controversial ads on national television advocating for a border fence with Mexico, where the narrator claims “illegal immigration from Mexico provides easy cover for terrorists” as slow-motion footage of a plane crashing into the World Trade Center plays on screen.
In the 2008 presidential campaign, positivity really went out the window. As the election approached, Hanna sent missives to his large membership base charging that Obama would “appease worldwide Jihadism” and “[transform] America into a country we might not recognize within just 4 to 6 years.”
Let Freedom Ring created smear ads against Obama which channeled virtually every right-wing theory about the Democratic candidate. One ad, “Puzzle,” showed images of Jeremiah Wright (a “radical and [a] racist”), William Ayres, Tony Rezko, Louis Farrakhan, Iran, Fannie Mae and Freddie Mac, and ACORN—all in sixty-one seconds. The ads were praised by Fox News because they “did something that John McCain’s camp has still not done: create a negative ad that challenged Barack Obama’s credibility.”
Hanna was also busted by NBC News conducting a push poll in Pennsylvania only days before the election, in which voters were asked if “knowing that the former head of Fannie Mae made millions of dollars while working there and worked on the Obama campaign" would make them less likely to vote Democratic.
After Obama was elected, Hanna helped push the idea that Obama wasn’t born in the United States. In an MSNBC interview, Hanna said “Obama and those supporters around him have not answered perfectly simple and straightforward questions that would have put this to rest long ago. Where is the proper documentation?”
Let Freedom Ring was instrumental in putting together the Tea Party and 9/12 rallies in 2009, and last year the group released a photography book of signs from the protests called Grandma’s Not Shovel-Ready. In the foreword, Hanna wrote that “it is our hope that these signs will give you strength, encouragement and an occasional chuckle in these challenging times. This book proves that in America, the spirit of freedom still lives!”
The book featured signs labeling “Comrade Obama” as “World’s #1 Crypto-Marxist,” and an “undocumented worker.” The book also flirted with revolution and overthrowing the government. “Oust the Marxist Usurper! Honduras did it!” read one sign.
Another man was pictured grimly holding a sign that said “I will give my blood for my children’s freedom.” (“Blood” was dripping with red ink). Another woman was shown holding a sign that said “A revolution is brewing. We will not subsidize tyranny. Violate our liberty at your peril.” A man stood next to her, wearing a T-shirt with crossed AK-47s and holding a sign that said “find out what happens.”
This type of Tea Party vitriol and dirty politics is unfortunately standard fare, accepted long ago by mainstream journalists as part of the political game. But it’s long past time to question how an organization that puts out a book like Grandma’s Not Shovel-Ready can also be a major power player in a debate that has the country five days from financial catastrophe.
Representative Peter King’s third installment in a series of hearings examining domestic Muslim radicalization, held Wednesday on Capitol Hill, didn’t have a particularly inflammatory topic—the committee was exploring the real, albeit rather minor, problem of radicalization among Somali-Americans. But ever the showman, King began the hearing by throwing some bloody meat to the packed hearing room and the conservative media that lay beyond.
In Monday’s New York Times, columnist Roger Cohen labeled King an “ideological fellow traveler” of Anders Breivik, the Oslo shooter, because King’s frequent Islamophobia. (Cohen didn’t get specific, but for example, King has said there are “too many mosques in this country.”)
In his opening remarks Wednesday, King tore into the newspaper. “I note that certain elements of the politically correct media, most egregiously the vacuous ideologues at the New York Times, are shamelessly attempting to exploit the horrific tragedy in Norway to cause me to refocus these hearings away from Muslim-American radicalization,” King said.
“If they had even a semblance of intellectual honesty, the Times and the others would know and admit that there is no equivalency in the threat to our homeland from a deranged gunman and the international terror apparatus of Al Qaeda and its affiliates who are recruiting people in this country and have murdered thousands of Americans in their jihad attacks.”
King then went on to characterize his hearings as “liberating and empowering” to “many Muslim-Americans” who “are now able to come forward,” and closed by invoking the victims of the September 11 attacks.
From there, the hearing didn’t have too many fireworks—committee members questioned law enforcement officials and other experts about the recruiting efforts of Al Shabaab, a group fighting to overthrow the Somali government. Al Shabaab has successfully recruited about forty Somalis from the Minneapolis area to join their cause, including Shirwa Ahmed, who drove a truck bomb into a Somali government building in 2008.
Notably, Al Shabaab only seems interested in recruiting Americans to fight the Somali government—not the American one—but it’s at least something the House Committee on Homeland Security might reasonably investigate. This is in contrast to King’s first two hearings; the first one was general enough to potentially indict all Muslim-Americans, and as I reported last month, the second hearing discussed Islamic radicalization in prisons but offered no actual examples of terrorists converted behind bars.
In any case, practical inquiry into Al Shabaab’s efforts frequently devolved into nonsense. With a thick Southern drawl, Representative Jeff Duncan of South Carolina offered his advice for “eye-mams” in American mosques. “In my church, I’m Baptist, we sing patriotic hymns about America, we talk about American greatness, we talk about freedom of religion and separation of that and government, and our founding fathers’ creating of this land,” he said. “That’s what I would hope the imams in the mosque would begin to talk about.”
Later, Texas Democratic Representative Al Green engaged in a protracted exercise of asking the witnesses what they knew about the physical characteristics of Colleen LaRose, a Pennsylvania woman known as “Jihad Jane” for her amateur efforts to join an Islamic resistance movement. Hurried along by a frustrated King, Green cut to the chase and asked each witness to raise his hand if he knew Jihad Jane was white. (Even King hasn’t suggested that only dark-skinned people are subject to Islamic radicalization).
During the hearing, King’s staff released a report into Al Shabaab radicalization efforts, which is useful insofar as it goes. But with Al Shabaab out of the way, where will the committee turn next?
Given his tirade against the New York Times at the start of today’s hearing, perhaps King will aim directly at the liberal media. He does, after all, view them—and liberals “in general”—as complicit with Al Qaeda. In an April interview with National Review Online, King described a “liberal psychological disorder” that actively helps terrorists.
“There’s no doubt that radical Islamists in this country have become a protected force,” he said. “All of the radical Muslim groups such as CAIR, their allies in the media, and liberals in general have just rallied to their defense…. The New York Times trips over itself defending [radical Islamists].” Perhaps Jill Abramson should watch her mailbox for a subpoena.
The proposals and counter-proposals and counter-counter-proposals on how to pass a debt ceiling hike have been flying at a furious pace in Washington. Most people left their offices in the capital on Friday contemplating a “grand bargain” between President Obama and House Speaker John Boehner, in which there would be about $3 trillion in cuts, serious reductions in Social Security, Medicare and Medicaid benefits, and $800 billion in new revenues—generated by a tax code overhaul that would have lowered overall rates but closed a wide variety of personal and corporate loopholes and exemptions.
But before Friday’s happy hours were even over, the deal was dead. An angry President Obama appeared from the White House podium just after 6 pm, blasting Boehner for pulling out of the deal that Obama described as “unbalanced in the direction of not enough revenue.” Boehner appeared at a Hill press conference not long after, blaming Obama for insisting on an additional $400 billion in revenue.
Negotiations are now being conducted between Congressional leaders. Republicans are crafting plans to enact a short-term debt ceiling hike, with commensurate cuts and no revenue, while the White House and Congressional Democrats insist any short-term hike is unacceptable and won’t pass the Senate nor be signed by the president. Instead, Senate Majority Leader Harry Reid is reportedly crafting a package that cuts $2.7 trillion in spending, with no revenue increases, and raises the debt ceiling until 2013.
Though it’s hard to rule out any possibilities as Boehner and Reid crank the debt ceiling Rubik’s cube, one thing seems clear: revenues are permanently off the table. Since Reid has released a revenue-less proposal with one week and a day until the country defaults, it’s hard to see how revenue is revived for any deal.
Removing revenue from the deal seems like (yet another) stunning capitulation by Democrats. For months, both the White House and Congressional Democrats have been insisting that new revenue must be part of any deal. As recently as Thursday, Reid himself said “there has to be some revenue in the cuts, my caucus agrees with that, and hope the president sticks with that.”
In this sense, the Republicans have won. Their original position all along was to cut spending without revenue increases, it now seems they will succeed in making Grover Norquist happy. And in a larger sense, forcing a Democratic president and a Democratic Senate to cut trillions of dollars in spending amidst a recession is a substantial political feat.
But there are some important ways in which the Republicans’ hard line on taxes may have been self-defeating in the long run, and why Reid’s new proposal isn’t so bad given the alternatives.
For one thing, entitlement cuts seem to also be off the table, and that would have been a disaster at both the political and policy levels. (Paul Krugman has a terrific evisceration of the proposed entitlement cuts today.)
More important to note is that the new revenue in the grand bargain would have essentially replaced an expiration of the Bush tax cuts. Under the grand bargain, a tax code overhaul—which, again, lowered rates while eliminating exemptions—would have done away with the old tax system and replaced it with a new one, and the Bush tax cuts become a non-issue.
The expiration of the Bush tax cuts would generate far more revenue for the government than the $800 billion in the original grand bargain—and would also raise rates on top earners instead of lowering them.
Obama already pledged a fight on letting the Bush tax cuts expire—he was actually slyly reneging on that pledge with the tax overhaul proposed in the grand bargain, but with its death comes an opportunity for Democrats to fight another day on a more fair tax system that generates more revenue.
It’s extremely unlikely that Boehner didn’t realize this. But reports suggest he just can’t get his hard-line members to agree on any revenue generation now. Too bad for them—and not so bad for Democrats.
President Obama endorsed the Senate's Gang of Six deficit reduction plan Tuesday, saying that the proposal “is broadly consistent with the approach that I’ve urged” and “makes sure that nobody is disproportionately hurt from us making progress on the debt and deficits.”
However, an examination of the plan’s specifics reveals that corporations and wealthy Americans won’t feel much pain at all—in many cases, just the opposite. The plan slashes taxes and could bring the top personal income rate down as low as 23 percent—meaning CEOs like Jamie Dimon and Lloyd Blankfein could see their after-tax income increase by as much as $3 million, according to Dean Baker, co-director of the Center for Economic and Policy Research. The corporate tax rate would be reduced from 35 percent to between 23 and 29 percent under the proposal. (Supposedly enough loopholes would be closed to keep total revenue from corporate taxes the same. Even in that scenario, corporations won’t pay an extra penny). Military spending also remains virtually untouched.
Meanwhile, the harm done to seniors, students, working families and others under the Gang of Six plan is unmistakable. Social Security benefits would be reduced, and there are also cuts to Medicare and Medicaid. Students and the disabled would lose some federal government support. Here’s a quick look at who would be most harmed under the new most popular proposal in Washington.
Seniors: Americans over age 65 get hit from several directions under the Gang of Six proposal. First, the plan reduces Social Security benefits by 0.3 percentage points per year by tinkering with the formula that adjusts benefits based on inflation. This could lead to annual reductions of over $1,300 for some seniors. Social Security is solvent through 2037 and does not contribute to the deficit, so this change is particularly misguided.
Medicare also would also face serious reductions. The plan directs the Senate Finance Committee to reduce doctor payments by $300 billion and then cut another $200 billion from the program overall. To achieve that, anything from raising the eligibility age to increasing cost-sharing could be considered and would almost have to be in order to find savings of that magnitude.
The poor: Medicaid will no doubt suffer under the Gang of Six plan, though it’s not possible to put a dollar amount on the cuts yet. The proposal says that the government must “spend healthcare dollars more efficiently in order to strengthen Medicare and Medicaid.” That’s obviously code for spending fewer dollars, which means Medicaid recipients can expect to receive less.
The cuts would be negotiated by another bipartisan group of senators over the next six months, but the starting point for Republicans on Medicaid is downright draconian. In the budget passed by House Republicans earlier this year, supported by a vast majority of Republicans when it came up for a vote in the Senate, the program would be cut by a whopping 35 percent by 2021—even as medical costs skyrocket between now and then. It’s not likely the GOP would win that steep of a reduction, but even halfway to that point would be catastrophic for Medicaid recipients. As none other than Sen. Kent Conrad, a key figure in the Gang of Six, told the Huffington Post in June, Medicaid operates on such low overhead that a cut “goes right to medical services.”
The disabled: The Gang of Six plan completely eliminates a disability insurance program created under the 2009 healthcare reform bill. The Community Living Assistance Services and Supports Act, or CLASS Act, provides in-home care for anyone who becomes disabled, as an alternative to being placed in a nursing home. It provides up to $18,250 annually for these costs, with no lifetime cap. Premiums are $5 per month for students or people under the poverty line, and about $123 per month for everyone else, but it’s also voluntary—anybody can ask their employer to simply opt out.
The elimination of the CLASS Act is another example of sacrificing a valuable program that simply does not contribute to the deficit but rather conflicts with conservative ideology. The Congressional Budget Office estimates the program actually saves the government $70 billion through 2019, because people have to pay premiums for five years in order to qualify for benefits. It also keeps people out of nursing homes, which are a major driver of increasing medical costs.
Students: The Gang of Six blueprint directs the Senate Committee on Health, Education, Labor and Pensions, which oversees federal student loan programs, to come up with $70 billion in budgetary savings. Given the somewhat limited scope of what the Committee oversees, in terms of areas that actually create federal expenditures, it’s virtually impossible it could find savings of that scale without serious changes to federal student loans.
One idea popular with the Bowles-Simpson debt commission, and echoed recently by Representative Eric Cantor, would be to end the Stafford student loan program, which subsidizes the interest on loans while students are enrolled in college. An outright elimination of the program would save the government $40 billion over ten years, but would force students to pay interest on their college loans while still in school and likely not drawing much of an income, if any.
Pell Grants, which are federal scholarships for low-income students, are also likely to be on the chopping block. The program is already running an $11 billion deficit, and will no doubt be a juicy target for Senators looking to get $70 billion in cuts.
These are the areas currently identifiable based on the Gang of Six blueprint—but it calls for massive, yet-unspecified spending reductions, and possibly discretionary spending caps down the road. Given the current slant towards reductions for needy Americans in the blueprint, it’s hard to imagine future reductions will be any different.
When Representative Luis Gutiérrez, a liberal member of the House Financial Services Committee, heard over the weekend that President Obama had nominated Richard Cordray to head the Consumer Financial Protection Bureau, he wasn’t sure what to think. Not because he was unsure about Cordray’s record—Gutiérrez just didn’t know who he was.
“I am not familiar with Attorney General Richard Cordray, but a quick Google search was very reassuring,” Gutiérrez said in a statement Monday. “He is the type of strong, experienced leader we need to get the agency fully up and running.”
Cordray may have a very low national profile, but in Ohio—where he’s been active in Democratic politics since the early ’90s, and served as state attorney general for two years beginning in 2009—he’s much more of a known commodity.
Since the economic crisis in 2008, Ohio has been plagued with high foreclosure rates. One out of every 608 homes in the state is in foreclosure, and in the Cleveland area, foreclosures have tripled since 1998. The problem was exacerbated by mass “robo-signing” fraud by big banks in the aftermath of the collapse—banks were routinely foreclosing on homes without the proper paperwork or legal documentation.
Cordray quickly stepped in, and last fall was the first state attorney general to sue a mortgage lender over foreclosure fraud. He targeted GMAC Mortgage and Ally Financial, the parent company, and immediately demanded to meet with other top lenders in the state, including Bank of America, JPMorgan, Citibank and Wells Fargo.
The White House reaction to the emerging robo-signing scandal was rather cautious at the time. “We are looking at their process in order to determine their compliance with the law,” then–White House Press Secretary Robert Gibbs said. “Obviously, they have certain requirements under the law that have to be met, and if they're not meeting those requirements they certainly face fines from us and they can face legal actions from homeowners.”
Cordray opened a much more direct line of attack on the industry itself. “What we’re talking about here is not just sloppy paperwork,” he said. “We’re talking about fraud in a court of law. The [foreclosure document signers] were lying under oath, to a judge.” He later characterized the big banks’ foreclosure processes as “a business model built on fraud.”
Only weeks after filing the lawsuit, Cordray lost a statewide election for attorney general to former Senator Mike DeWine, and was quickly picked by Warren to head the CFPB’s enforcement bureau. But his aggressive work combating foreclosure fraud wasn’t the only time Cordray faced off against Wall Street during his short two years as attorney general.
In 2009, Cordray was the lead plantiff in a multibillion-dollar suit against Bank of America over its acquisition of Merrill Lynch during the frenzied economic collapse the previous fall. Cordray sued on behalf of Ohio’s largest public employee funds, claiming that Bank of America had misled them about the poor financial condition of Merrill Lynch prior to the acquisition.
Cordray also reached a settlement on behalf of Ohio schools and pension funds with insurance giant AIG over a “conspiracy” to provide fake commercial casualty insurance quotes. The schools and pension funds received $9 million from AIG in the settlement.
Ed Mierzwinski, the consumer program director for Ohio PIRG, worked frequently with Cordray’s staff during his tenure as attorney general and praised his tough stance against big banks, and added that he was “extremely well-qualified” to head the CFPB. “He recouped a lot of money from Wall Street banks that they looted from Ohio retirees, homeowners, pension funds and Ohio municipalities,” Mierzwinski said.
If confirmed as head of the CFPB—which will be no easy task, given Republican intransigence—Cordray will still be tackling some of the same issues he faced as attorney general, only on a much bigger stage. Foreclosure fraud will no doubt be high on the list, as it continues to plague several areas of the country. “Robo-signing is not even close to over," one Michigan county official told the AP this week. “It's still an epidemic.”
Naturally this has Wall Street a bit concerned over Cordray’s nomination. One attorney who represents the industry said that of all the officials at CFPB now, Cordray “frightens me the most.” Another bank lobbyist said Cordray has “all the hard edge and ambition of [Elizabeth] Warren without the charm.”
But bankers back home have a bit of a different view, indicating that perhaps there’s something to Obama’s claim in the Rose Garden on Monday that Cordray “successfully worked with people across the ideological spectrum, Democrats and Republicans, banks and consumer advocates.”
In an interview with The Nation, Jeffrey Quayle, a senior vice president and general counsel with the Ohio Bankers League, echoed typical industry concerns that the CFPB has “an unlimited budget [with] no checks and balances.” But Quayle said he supports Cordray for the job.
“We haven’t agreed on policy, but he has been available and accessible to debate issues with us,” Quayle said. “He’s proven to be a competent manager.”
Ohioans like Quayle have had a long time to get to know Cordray, who had a twenty-year career in state politics. He was elected to the state house in 1990, and when his seat was redistricted, Cordray ran for Congress in the 1992 elections. He lost a three-way race in a fairly conservative central Ohio district. He later served as the state’s first solicitor general and as the treasurer in Franklin County.
In 1998, during his first, unsuccessful attempt at being elected state attorney general, Cordray told the Columbus Dispatch that his parents inspired him to a life of public service. His father was born blind, and became a program director for a treatment center for the mentally disabled. His mother, who died while Cordray was in college, was a social worker who founded the first foster grandparent program in Ohio that matched elderly foster parents with mentally disabled youths.
Cordray said he spent a considerable amount of his childhood around these programs. “It gave me a leaning towards social services and the Democratic Party before I started to think these kind of things out for myself,” he told the paper. “My parents never ran for political office, but they set an example for public service.”
Running for Congress in a conservative district, Cordray certainly had to make attempts at bipartisanship. During that race he pledged to leave federal office in four years if the federal budget deficit wasn’t halved, and publicly challenged then–Vice President Dan Quayle to make the same pledge during one of Quayle’s campaign stops in Ohio.
While Cordray did embrace a seemingly hawkish stance on the deficit, he had a decidedly uncompromising prescription for addressing the problem. He told the Columbus Dispatch that “billions can be saved by canceling the B-2 bomber, charging market rates for leases of federal lands for timber and mineral production, scaling back the Strategic Defense Initiative and abolishing Radio Free Europe.”
Unemployment is stuck above 9 percent, and recent jobs reports have been increasingly ominous. With the legislative branch mired in what can charitably be called cataclysmic paralysis, the Federal Reserve stands as one of the few Washington institutions that can help goose the economy and stimulate employment.
In November, the Fed began a second round of quantitative easing, in which it bought up $600 billion worth of long-term US Treasury bonds in order to lower interest rates and stimulate growth. That program ended on June 30.
On Capitol Hill this week, Fed chairman Ben Bernanke faced an onslaught of questions in both the House and Senate about the possibility of a third round of quantitative easing given the still-dire employment situation. Republicans, who deeply oppose such a move, seemed nervous that Bernanke would undertake QE3. Democrats generally seemed nervous that he wouldn’t. Bernanke’s scattershot testimony managed to alternately satisfy and frustrate both sides—perhaps indicated that the Federal Reserve is as divided as the Congress.
On Wednesday, appearing before the House Financial Services Committee, Bernanke said “the possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might re-emerge, implying a need for additional policy support.” Media reports proclaimed the Fed was prepared to undertake QE3, and the stock market rallied.
The next day, appearing before the Senate Banking Committee, Bernanke dialed back those expectations. “We’re not proposing anything today,” Bernanke said. “The main message I want to leave is that this is a serious situation. It involves a significant loss of human and economic potential.” Stocks fell on the news.
How should Bernanke’s comments be interpreted—will the Fed try to help the address the jobs crisis? It’s somewhat odd that he sent mixed signals, given that the Fed chairman’s words and actions are parsed so closely that investors can find themselves examining the size of his briefcase on a particular day.
One possibility is that Bernanke is walking a tightrope because the Fed itself is divided on QE3. “I think that he’s trying to manage dissent at the Fed,” said Dean Baker, co-director of the Center for Economic and Policy Research. “I don't have any inside knowledge, but it is pretty clear that many members of the [Federal Open Market Committee, a part of the Fed] wants him to be fighting inflation. I suspect the deal was a wait and see approach and he may have been worried that he looked like he was jumping the gun yesterday.”
Inflation is a byproduct of quantitative easing, and is often used as the counter-argument to taking action. But inflation is low, unemployment is high, and progressive economists advocate aggressive action. Baker echoed an argument from Paul Krugman, who noted that at Princeton, Bernanke advocated a Japanese response to their fiscal crisis that involved targeting a high inflation rate—around 3 to 4 percent. “That would lower real interest rates and reduce debt burdens,” said Baker. “That probably is not politically feasible, but it would be good policy.”
As for what is feasible, Baker suggested targeting a longer-term interest rate, perhaps a 1 percent target for the five-year rate through 2012.
Either way, it’s clear that Bernanke is not yet ready to take action. Perhaps there’s solace in the fact he even floated the idea—that passes for progress in Washington these days.
Despite daily meetings at the White House and a flurry of press releases from negotiators, a deal to raise the debt ceiling effectively died over the past several days. On Saturday, House Speaker John Boehner pulled out of talks that might have produced a “grand bargain.” President Obama was reportedly willing to raise the Medicare eligibility age from 65 to 67, tinker with Social Security’s cost-of-living formula, lock in tax rates below a full repeal of the Bush-era cuts, and enact $4 trillion in spending cuts. The catch was that he also insisted on raising government revenue, which prompted Boehner’s walkout.
Revenue and recalcitrant Tea Party members stand as seemingly immovable obstacles to a deal. There are at least sixty or seventy Republicans in the House, mostly Tea Partiers, who will vote against any deal that comes before them—either on principle, because they simply don’t believe the debt ceiling should be raised at all (John Boehner admitted this on Fox News yesterday), or because they will only approve a deal that includes a balanced budget amendment, which is not making it into any package.
These holdouts mean that any deal will need significant Democratic votes to pass the House. But minority whip Steny Hoyer has vehemently insisted that a bill that doesn’t raise revenue won’t get a single Democratic vote, and he’s probably right. Meanwhile, majority leader Eric Cantor has said that any deal that does raise revenue won’t get Republican votes—also probably correct. This impasse isn’t likely to be resolved. The Rubik’s cube, as Boehner calls it, is basically unsolvable.
Faced with the very real possibility of a federal default, Senate minority leader Mitch McConnell opened the escape hatch yesterday. He floated a plan that would give Obama the authority to raise the debt limit all by himself. There’s a catch, of course—Obama has to request the increase three times before the end of next year, with the final request coming only months before the presidential election.
Under McConnell’s plan, when Obama requests a debt limit increase, $100 billion is given to him automatically. He must also outline spending cuts commensurate to the increase. Then Congress has to consider his request to raise the debt limit, and either chamber can pass a “resolution of disapproval” by a simple majority vote. That freezes the increase, but only temporarily—Obama can veto that resolution, meaning Congress would need to muster two-thirds of members to overturn that veto, which will not happen.
It’s a stunning de-leveraging of their position—after spending much of 2011 threatening to execute the economy unless they get their way, McConnell is now proposing to just release the hostage without one scrap of policy concessions from Democrats. Obama will propose spending cuts, but there’s nothing guaranteeing anything happens with that proposal.
One certainly wonders if McConnell was pressured to act by his Big Business backers once negotiations hit a wall. In his remarks yesterday, McConnell said that it was “extremely important that the country reassure the markets that default is not an option.” A large coalition of Wall Street and Main Street business leaders stepped up public pressure to find a deal this week, and there is increasing concern over market potential market reactions even before August 2.
For progressives concerned about contractionary spending cuts or damaging changes to social welfare programs, news of McConnell’s proposal was welcome. “I think it's great,” said Dean Baker, co-director of the Center for Economic and Policy Research. “It shows that Wall Street would never let the Republicans default on the debt, as I had been saying all along. Now they need cover to back down, and this plan is all about cover.”
Baker said he is not worried about the $2.5 trillion in cuts Obama must propose, since the president simply has to make them unpalatable to Congress, and then nothing will happen. “If Obama can't just blow off the cut proposals—suggest cutting all spending in Kentucky and Ohio—then he isn't competent to be running a corner grocery store, much less the country,” Baker said.
He remained equally unconcerned about the political ramifications. “People are going to vote based on jobs. No one cares about this idiocy other than the Washington press corps,” Baker said.
So there it is—the debt limit standoff has been defused without a single damaging policy outcome. But it is worth at least pausing to consider how the staggered increases Obama must request might influence the upcoming elections.
Imagine it’s July 2012, and the election is in full swing. Polls show an extremely tight race between Obama and Mitt Romney, and the two candidates jockey for slight advantages through a relentless grind of carefully calibrated stump speeches and attack ads. The media devotes days of coverage to minutae, like the tire-pressure gauges or “lipstick on a pig” incidents of summer 2008.
Then President Obama must leave the campaign trail, return to Washington and ask Congress to increase the nation’s debt limit so he can keep borrowing money—$900 billion, to be exact. After two days of fiery floor speeches from Republicans, the House of Representatives dramatically rejects his near-trillion-dollar borrowing request.
Attention turns to the Senate, where—much to the delight of political reporters everywhere—nobody knows how the vote will turn out. Democratic Senators in red states who are themselves up for re-election in the fall, like Sens. Claire McCaskill, Jon Tester, Ben Nelson and Joe Manchin announce they will vote against their president and their party. This puts centrists like Mark Warner and, alas, Joe Lieberman in the driver’s seat. Crossroads GPS blankets the airwaves in the state of any Democratic Senator up for re-election, pressuring them not to vote for deeper national debt.
Perhaps the Senate doesn’t end up passing a disapproval resolution, and the kabuki ends there. But if it does pass, it sets up yet another vote in the House and Senate. Republicans once again take their time on the floor, denouncing the president’s profligate ways and urging an overturn of the veto. There isn’t anything close to a 2/3rds majority needed to overturn it, but along the way a bunch of vulnerable Democrats are put in an incredibly difficult position.
Meanwhile, Romney gleefully crisscrosses Florida and Ohio, denouncing the borrow-and-spend president to every microphone put near his face.
If these events suck up media oxygen for even a couple weeks, it’s a nightmare scenario for the Obama campaign, not to mention the campaigns of vulnerable Democrats across the country. But is that a worthwhile tradeoff in order to avoid a debt deal that would almost certainly damage the already fragile economy?
That's the White House's choice now, but McConnell’s deal first has to pass. And so we return to the House of Representatives. Boehner said he supports McConnell’s plan, but he will have to convince his party to accept a concession-less deal. One GOP House aide told National Review Online yesterday that it's a non-starter there.
This is the true nightmare scenario. If McConnell and the GOP leadership can’t open the escape hatch, what then?
House Democrats are circulating a resolution accusing majority leader Eric Cantor of a salacious conflict of interest: he owns shares in a fund that takes a short position on long-dated government bonds, which in layman’s terms means Cantor stands to profit if the government defaults on its debt, and so probably shouldn’t be such a prominent negotiator in the ongoing debt ceiling talks.
It’s a juicy bit of meat, but the attack is actually pretty silly. According the resolution, which was obtained by the Huffington Post, Cantor's shares in that fund total $3,300, and it’s quite a stretch to imagine that someone who is worth as much as $7.7 million would tank the US economy in order to profit on such a paltry investment. (As Cantor’s spokesman also pointed out, his $263,000 government pension means he would lose more than he would gain if the government defaulted anyhow).
Cantor is a good target for Democrats, as he is now back in the driver’s seat of his party’s debt limit talks after House Speaker John Boehner was unable to win a large-scale deal. However, if one is to examine Cantor’s finances in search of a motive—and the finances that really matter, his campaign account and leadership PAC—a different story emerges. Cantor, much like the GOP as a whole, is so thoroughly beholden to Wall Street firms it’s hard to imagine he won't agree to a deal by August 2.
Wall Street unquestionably wants a deal done: it told House Speaker John Boehner exactly that in the spring. Master investor Warren Buffet has likened the Republican strategy to a game of Russian roulette, and Alan Greenspan says it’s an “extraordinarily dangerous” situation. Stocks for big banks and investment firms are at fifty-two-week lows, and market concerns over the debt ceiling talks are already playing a role in their poor fortune.
In the last campaign cycle, as Cantor was on his way to becoming majority leader in the House, his campaign committee and leadership PAC took in $1.2 million from securities and investment firms—the entities that could be hardest hit by tremors in the bond markets. They formed, by far, Cantor’s biggest industry support. The next-largest industry contributor, the real estate sector, gave about half that.
Many of the large financial institutions that gave money to Cantor have specifically said the debt ceiling must be raised. Jamie Dimon, the CEO of JPMorgan Chase, said, “If anyone wants to push that button…I think they're crazy.” JP Morgan Chase is among the top twenty contributors to Cantor’s campaign committee and leadership PAC, kicking in $27,800 in the last cycle alone between the company PAC and employee contributions.
An even bigger financial backer for Cantor is KKR & Co., a major private equity firm whose employees gave Cantor $52,600 during the last cycle, making them his fifth-largest contributor. In their first-quarter performance report, KKR & Co. described serious concerns over a failure to raise the debt ceiling.
Failure to raise the debt ceiling “could also limit our ability and the ability of our funds and portfolio companies to obtain financing, and it could have a material adverse effect on the valuation of our portfolio companies and other assets held by our funds,” their statement read. “Under such circumstances, the risks we face and any resulting adverse effects on our business, financial condition and results of operations would be significantly exacerbated.”
Cantor said today that his party’s concession, their only concession, is “the fact that we are voting—the fact that we are even discussing voting for a debt ceiling increase.”
That’s the state of play most everyone agrees upon: the Republicans have constructed a devious but effective hostage situation. But given their deep financial ties to Wall Street, one wonders to what extent they’re really bluffing.
This week, as the federal debt ceiling battle churns closer to Treasury Secretary Timothy Geithner’s August 2 deadline, there’s increasing talk about an amendment to the Constitution that would require balanced budgets. Senate minority leader Mitch McConnell, a key negotiator in the debt ceiling talks, spoke this weekend about the need to “save our entitlements and our country from bankruptcy by requiring the nation to balance its budget.” Senator Rand Paul now insists a balanced budget amendment must be part of any debt ceiling deal, and said Sunday that he will filibuster any agreement that doesn’t include it. Leading presidential candidate Mitt Romney also said recently that the United States should default on its debt unless Congress passes a balanced budget amendment.
Several media outlets dutifully noted the new turn in negotiations but few actually describe the fundamental, radical shifts in American government required by the proposed balanced budget amendment. It’s crucially important to understand what the new GOP demand actually requires.
The most important thing to know is that if enacted, the balanced budget amendment would actually make a balanced budget impossible. Both the House and Senate versions of the legislation not only mandate a balanced budget starting in 2018 but also mandate how it must be done. Federal spending cannot exceed 18 percent of the national Gross Domestic Product, and there would be a super-majority requirement for any new revenue: in other words, two-thirds of Congress would have to vote to approve any tax increase.
It is not hard to imagine that under a sixty-seven-vote threshold, Congress will simply never raise taxes again. Republicans have made it clear they will not support tax increases in virtually any situation, and most GOP Senators have signed Grover Norquist’s no-new-taxes pledge. So if the government permanently handicaps revenue, how can it possibly achieve a balanced budget, especially as healthcare costs are certain to increase as baby boomers become senior citizens?
It simply might not be possible, which then raises basic questions of enforceability. Say the amendment was enacted, but one year Congress passes a budget where spending exceeds revenues. Would the federal courts rule the budget unconstitutional? And if they did, what then? As Bruce Bartlett wonders, would Americans have to send back their Medicare checks or federal salaries? (Bartlett, a former official in George W. Bush’s Treasury Department, has called the BBA idea “idiocy” and “especially dimwitted.”)
Then there’s the 18 percent spending cap. First of all, given that taxes are basically frozen by the supermajority provision, it’s quite possible that the government won’t even be able to raise revenue equal to 18 percent of GDP, meaning that Congress would have to spend even less than that in order to have a balanced budget. But putting that aside, even spending at 18 percent of GDP would be practically impossible and would require unimaginable reductions in government services.
As Ezra Klein notes, federal spending exceeded 18 percent of GDP every single year of Reagan’s presidency, every single year of George W. Bush’s presidency, and all but two years under Bill Clinton. Not only would the BBA have made Ronald Reagan’s entire economic stewardship unconstitutional, it also would make Paul Ryan’s budget illegal—his plan still forecasts federal spending of 20.75 percent of GDP in 2030.
The only budget proposal that would come close to federal spending at 18 percent of GDP is the ultraconservative plan put forth by the Republican Study Committee. The Center for Budget and Policy Priorities examined that budget, and found that it gets to 18 percent spending with a 70 percent reduction in non-defense discretionary spending by 2021. This is the area of the budget funding everything from “veterans’ medical care, most homeland security activities, border protection, and the FBI…[also] education, environmental protection, protecting the nation’s food and water supply, and medical research, as well as services for disadvantaged or abused children, frail elderly people, and people with severe disabilities.”
Beyond that, the budget raises the Social Security retirement age to 70, makes deeper cuts to Medicare than Ryan’s plan, and cuts $86 billion over ten years from Pell Grants. If the idea is to shrink government “to the size where I can drag it into the bathroom and drown it in the bathtub,” in the words of Grover Norquist, then the BBA is the watery coup-de-grace.
Impossible and unworkable as it sounds, every single Republican Senator co-sponsored the BBA legislation now in the Senate and, as noted, leading GOP negotiators and presidential candidates are demanding it. Calling for a balanced budget makes good politics—a poll released yesterday shows more than seven in ten registered voters support a constitutional amendment to balance the budget.
But the same poll also shows that the support plummets to around 30 percent when the voters are told it would require deep cuts to Social Security and Medicare. This is why the media need to be clear about what the GOP is proposing—the balanced budget amendment is one of the most dangerous soundbites in recent political history.