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Second in a series

The debt ceiling debate

The House Republican proposal to “Cut, Cap, and Balance”
By Masao Suzuki |
July 25, 2011
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This is the second in a series. See parts one, three, four and five.

In the current debate about what to do about the debt ceiling, there are two positions that are prominent in Washington, D.C. and in the corporate controlled media. One is the House Republican position summarized as Cut, Cap, and Balance, and the other is the Senate bipartisan position that has been welcomed by President Obama. What is missing from the debate is a clear alternative from the Democrats, not to mention a progressive position that would help the people as opposed to Wall Street. This article focuses on the House Republican position, to be followed by articles on the bipartisan position and finally a progressive or people’s position.

The House Republican position of Cut, Cap, and Balance starts with Republican Congressman Paul Ryan’s proposal to cut almost $4.5 trillion in spending over the next ten years. More than two thirds of these cuts, or about $3 trillion, would come from programs helping lower-income households, including Medicaid (health care), SNAP (food stamps), and Pell Grants (college financial aid). Pell Grants would be cut 50% in the first year of the Ryan proposal.

Ryan’s proposal would also eliminate Medicare as a federal health insurance program and replace it with vouchers that individuals can use to buy private health insurance. Under this plan, seniors would have to pay for most of their health care costs, since the vouchers would not cover the full cost of private insurance. (Oh, yes, the private insurance companies would gain billions of dollars in profits too.) It would allow private insurance companies to charge more for older seniors, guaranteeing that all but the most well-to-do elderly will not be able to afford health insurance. It would also eliminate Medicare for 65 and 66 year olds.

The Ryan proposal also includes more than $4 trillion in tax cuts, with nearly all of the benefits going to households making $200,000 or more. To reduce the deficit, the Ryan proposal would eliminate many tax credits, deductions and exemptions. Many of these tax breaks do benefit middle-income and working households. On balance, the Ryan plan is one of massive cuts for the poor and elderly, higher taxes for working and middle income people and big tax breaks for the well-to-do.

The House Republican position also includes Ryan’s proposal to cap the level of federal government spending as a percentage of the total economy measured by Gross Domestic Product or GDP. It would lower federal spending to 14% of GDP (excluding payments on interest) and lower non-interest, Medicare, Medicaid, and Social Security spending to 3.5% of GDP by 2050. Given that military spending alone comes to about 5% of GDP today, even with cutting the military by 30%, every other federal program would have to be eliminated. This includes all spending on education (college financial aid, Head Start, and other), research on new medicines and diseases, the Environmental Protection Agency (EPA), food stamps, unemployment insurance, Temporary Aid for Needy Families (TANF or welfare), Earned Income Tax Credit (EITC for low-income working parents), housing aid for low-income and elderly renters, etc.

Finally, the House Republican plan calls for a balanced budget amendment to the U.S. Constitution, which would require the federal government to balance tax revenues and spending every year. But at the same time, they refuse to say how they would balance the budget with no new taxes. House Republicans have also refused to cap military spending, which has grown faster than Social Security and Medicare - military spending has grown more than 155% over the last 12 years, more than the 147% increase in Medicare and 86% increase in Social Security. To actually balance the budget without cutting the military and interest on the debt, other spending would have to be cut in half - meaning big cuts for Social Security and Medicare.

Supporters of the balanced budget often argue that households have to balance their budgets, so why shouldn’t the federal government? But in fact many households do not balance their budgets each year. How many people can buy a home without borrowing money? If all households had to balance their budgets, almost no one would be able to buy a home. Many, if not most people would not be able to buy a car. Many, if not most students would not be able to go to college. Borrowing money is not evil, it can be good if it is spent on something that will pay off over a long period of time, like a house, a car, or a college education.

While the federal government does pay for key infrastructure like roads and bridges that could be paid for by borrowing, it also plays an important role during recessions like the one we just had from 2007 to 2009. During a recession, millions of people lose their jobs, so households cut back on spending. With less spending, businesses have fewer sales, so they cut back. With less spending and less income, tax revenues go down, forcing state and local governments (which already have balanced budget requirements) to spend less. As the recession spreads to other countries, they buy fewer American products. The only sector than can borrow and spend more is the federal government, to try to put people back to work. If the federal government has to cut back even more because of balanced budget amendment, the recession could well turn into a depression. This is what happened under the Republican President Herbert Hoover, whose efforts to balance the federal budget helped turn the recession that started in 1929 into a Great Depression that lasted for more than ten years.

Next: The Bipartisan Senate Proposal and President Obama