WATCH OUT!

They’re Coming after Our Social Safety Net

HENDRIK VAN DEN BERG
UNL PROFESSOR OF ECONOMICS

Our civil society is being transformed into a cruel plutocracy right before our eyes, and no one is paying attention. 

Under the guise of fiscal responsibility, federal, state, and local governments are avidly dismantling the ‘social safety net’—public education, Social Security, Medicare, unemployment insurance, Aid to Dependent Children—that nearly all Americans rely on to protect them against unforeseen disasters and unfortunate economic outcomes. 

The Role of the Budget Deficit

To grasp why the social safety net is threatened, consider the following:

1. In his 2010 ‘State of the Union’ message to Congress, President Obama announced a three-year spending freeze on “non-security discretionary spending” such as education, infrastructure, technology, scientific and medical research.

2. According to the Congressional Office of Management and Budget (OMB), 56 percent of total budgeted U.S. government expenditures in 2009 were for mandatory programs such as Medicaid, Medicare, unemployment insurance and veterans programs.

3. 23 percent of all budgeted 2009 expenditures (and well over half of all discretionary expenditures) were for national defense, and a few percent more that fall in the listed category of “other discretionary expenditures” are for Homeland Security, Star Wars research, international surveillance and covert meddling overseas. 

4. At least 4 percent of total government expenditures in 2009 went for financial bailouts to firms like General Motors, AIG and other recipients not expected to ever repay.

5. Five percent of payments listed in the total 2009 budget—discretionary and non-discretionary—were for interest on the federal debt (a percentage expected to rise to 7 percent in 2011).

6. According to the OMB, this leaves little more than 10 percent of the total budget as “non-security discretionary.” 

7. With the shortfall in tax revenues, the overall deficit for the proposed 2011 budget is on the order of $1.5 trillion—over 30 percent of the total budget and more than 10 percent of the U.S.’s total gross domestic product (GDP).

By itself, the “non-security discretionary” portion of the federal budget—even if we cut all of it—is way too small to erase the entire budget deficit. Financially, however, the U.S. government simply cannot continue accumulating debt at the rate of 10 percent of GDP every year (which is what 2009’s deficit added), as lenders will soon refuse to let us borrow any more money for fear we’ll be unable to pay it back. 

Consequently, our elected officials are faced with having to cut either “security” expenditures or non-discretionary expenditures. 
Faced with what is apparently a very difficult choice, President Obama did what other presidents have done: appoint a ‘bipartisan commission’ to come up with suggestions for cutting the budget deficit. 

The President’s new “Bipartisan National Commission on Fiscal Responsibility and Reform” will have to deal with some ominous trends:

1. The U.S. private saving rate declined drastically over the past 30 years.

2. While federal government expenditures rose, assorted tax cuts on the wealthy have kept revenues from rising with the growth in expenditures.

3. The U.S. rate of unemployment of near 10 percent and the combined estimate of unemployment, underemployment, and withdrawal from the labor market stands at nearly 18 percent of the potential U.S. workforce.

4. Real incomes have stagnated for 90 percent of all Americans; only the top 5 percent of U.S households have experienced real income growth over the past 30 years.

5. The United States is at the bottom of all high-income countries in terms of social mobility—defined as the likelihood that a person born into a low-income family will move to a higher-income bracket later in life. 

6. Global warming and species depletion continues unabated, with carbon about to reach 400 parts per million within the next five years (150 p.p.m. more than the level under which humanity evolved).In short, cost-cutting measures to reduce the budget deficit run the risk of extending the ‘Great Recession,’ the dismantling of social programs threatens to reduce social mobility even further, and we are making no progress in reducing the dangers associated with global warming. 

On the other hand, turning around the economy with costly programs to boost employment and stimulate economic growth on promise to produce more budget deficits.

It’s All Greek to Us

The United States faces a future not much different from the situation currently faced by Greece, where retired workers, students and public employees are rioting against proposed cuts in the government expenditures that they rely on for their existence. The Greek government is cutting spending on education, healthcare, retirement and other social programs because economic analysts warn that financial markets will not provide further loans to cover these budget deficits—not unless, that is, public spending is cut by at least 4 percent in each of the next three years to eliminate the country’s 12 percent budget deficit. If no new lending is forthcoming, Greece faces immediate cuts in government spending of over 12 percent of its GDP—and, most likely, instant economic depression.

Here in the U.S., the government has not yet proposed draconian measures such as Greece’s budget cuts equal to 10 percent of their total budget and 4 percent of their GDP. But such numbers are not entirely out of the question for us in the future. With the total U.S. deficit (now at an unfathomable $12.4 trillion) expected to grow another 20 and 30 percent through 2016, a few cuts in discretionary spending will not help.) Even a large 10 percent cut in “non-security discretionary spending” such as education, health, infrastructure or the environment reduces the overall budget deficit by only 1 percent—all else being equal. Therefore, the President’s commission will probably propose cuts in non-discretionary spending programs like Social Security, Medicare, veterans benefits, retirement expenditures and student loans. 

The reason I expect this recommendation is because President Obama’s choice for the chair of this commission is the long-time Democratic operative Erskine Bowles, who currently serves on several corporate boards, including General Motors and Morgan Stanley. Despite also serving as president of the University of North Carolina, Bowles received over half a million dollars in compensation for serving on the Morgan Stanley board. And did I mention that nearly half of the Commission’s members are Republicans?

Cuts in the social safety net are now common events at state and local levels in California, New York, Nevada and even in Nebraska. Worse cuts have been avoided only through federal stimulus funding—although even with the stimulus spending and assistance to state and local governments, California nevertheless just announced pink slips for 23,000 teachers. That will not help social mobility.  So what can we do to avoid further cuts in the social safety net?

We Could Easily Raise Some Taxes

One obvious alternative to cutting government expenditures is to raise some taxes. Interestingly, while Social Security has received much attention, a relative small increase in Social Security taxes (say by raising the income level at which taxes are cut off—currently about $106,000—to about $200,000) will permit the system to cover the currently promised benefits for the next 75 years. Of course, the financial industry wants to privatize the Social Security system, so such a straightforward solution will never even be put on the table.

The budget deficit can also be cut by restoring the marginal tax rate for high-income earners to 40 percent—the level where it was under President Reagan. Such a rise will not have any adverse effect on economic growth (after all, the historic highs for U.S. productivity growth occurred during the 1950s and 1960s, when the top marginal tax rate was 90 percent!) When a government has the income to expand education, invest in science and technology, and improve infrastructure, the economy grows, income distribution improves, and everyone benefits. There is the real ‘bubble-up’ effect—in contrast to the ‘trickle-down’ mythology that was used to justify recent tax cuts.

Or, We Could Cut Defense Expenditures

The most obvious solution to the budget deficit—while avoiding further damage to the economy, the environment or the social safety net—is to cut defense expenditures. President Obama’s defense budget for 2011 is at an all-time record high, despite the fact that we have no real enemies with a significant military capability. As Paul Olson reminds us in his ‘Speaking Our Peace’ column in this Nebraska Report, well over half of the discretionary portion of the U.S. government budget goes to past, current and future wars and national security. Including all “security” expenditures brings expenditures to about 30 percent of the total national budget (7 percent of GDP). Taking even just half of that would be enough to maintain expenditures on education, anti-poverty programs, unemployment insurance, Medicaid, food stamps, and some serious environmental programs such as public transportation and real alternative energy research.  

We Must Stop the Destruction of the Social Safety Net

The destruction of the social safety net mostly affects those in greatest need in our society: the poor, the very young and very old, ethnic minorities, immigrants, and the sick and disabled. Some contend that the dismantling and privatization of the government’s social safety net is inevitable because (1) the people not currently in need are not directly affected by the cuts, (2) there is a huge propaganda machine touting the efficiency of privatization over the ‘waste’ of government, and (3) we are led to believe that expenditures on entitlements are out of control and unaffordable in the long run. All three of these points are inaccurate.

All Americans rely on and participate in the public social safety net. Virtually everyone working today will be eligible for Social Security and Medicare. The persistent job losses over the past three years have made millions of Americans eligible for unemployment benefits. Federally subsidized student loans are the norm for middle class families with college-age children. Most Americans benefit from tax exemptions for employer contributions to health insurance and various types of retirement plans. Then there are subsidies and crop insurance for farmers, tax credits for home improvements, tax exemptions for medical expenses, charitable giving, and interest on home loans. We are all part of the social safety net; this is not just for some ‘other’ group of people.

And most people know this first hand.

We of course have to get past the myth that the government is less efficient at protecting us from danger, misfortune and disaster. To the contrary, in the case of healthcare, other developed countries all provide all of their citizens with better healthcare at, on average, about 60 percent of the average U.S. cost by accepting universal, single-payer systems and much higher levels of regulation and mandates. Recent OECD (Organization for Economic Cooperation and Development) data for the world’s rich countries also makes it stunningly clear that the U.S. education is also falling further behind other countries that rely much more on public education than we do. 

Finally, we can afford to maintain—and even expand—the social safety as well as seriously reduce the future budget deficits that are now on course to bankrupt our government. All we need to do is reinstate some modest tax increases on the wealthy elite that captured all of the past 25 years’ income gains, and we must stop our senseless militaristic extravagance. 

Nebraskans for peace, take note: What’s good for peace is good for the economy! 

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