Cut Social Security to Destroy the Recovery

FILE - In this June 15, 2012, file photo, President Barack Obama announces that the U.S. government will stop deporting and b
FILE - In this June 15, 2012, file photo, President Barack Obama announces that the U.S. government will stop deporting and begin granting work permits to younger illegal immigrants who came to the U.S. as children and have since led law-abiding lives in the Rose Garden at the White House in Washington. Obama promised to overhaul immigration in his first term but never did. In his second term, he's making immigration a priority, and Republicans also appear ready to deal. (AP Photo/Haraz N. Ghanbari, File)

President Obama picked the very day that new job creation collapsed to propose a deflationary budget deal featuring cuts in Social Security and Medicare. This is perverse economics and worse politics, on several grounds.

The economy created just 88,000 jobs in March, down from close to 200,000 in other recent months, for one main reason: The January 2 budget deal and the March 1 sequester that hiked taxes on working people and cut public spending.

In the January deal, payroll taxes on working people were raised by some $120 billion. The more highly publicized tax hike on the top one percent raised less than $65 billion. The sequester added another $85 billion of budget cuts. The combined economic contraction will be about $270 billion this year, and according to the Congressional Budget Office the result will be to cut economic growth roughly in half.

But the deal that Obama is trying to coax the Republicans into accepting would cut the budget at this rate for an entire decade. The economics are just insane. There is no evidence that banks are waiting to lower interest rates (which are already rock bottom) or businesses waiting to invest, pending progress on a grand budget bargain. Businesses are hesitating to invest because customers don't have money in their pockets -- and a deflationary budget deal will only make the economy worse.

The politics are worse than the economics. President Obama, violating every rule of smart negotiating, has put his final proposal on the table -- cuts in Social Security and Medicare in exchange for the Republicans' (still imaginary) agreement to raise taxes -- before the Republicans have made a single concession.

The Republican habit is well-established -- take Obama's "final" offer as the new starting point and demand further concessions. With this strategy, our president has let them take him to the cleaners for more than four years now, and is still hoping that sweet reasonableness will produce compromise. It never has and never will.

The worst part of all may be the president's offer to cut Social Security, using the sneaky, backdoor method of reducing the annual cost of living adjustment, disguised as a technical change, wink-wink, nod-nod.

The gimmick is "chain-weighting" the consumer price index. The premise is that the CPI overstates inflation because when prices rise, people find cheaper substitutes. There are two problems with this. First, hard-pressed consumers indeed find ways to pinch pennies, but cat food isn't Chicken of the Sea. Second, old folks actually face higher inflation than the rest of us because they spend so much of their budget on health care, whose costs are rising faster than other goods. The elderly are also suffering from the rock bottom interest rates that the Fed is using to keep the economy on life supports -- which translate into very low returns on savings.

If Democrats stand for anything, it is defense of Social Security and Medicare -- America's two most broadly beneficial and most beloved government programs -- and the president just gave away this last bit of product differentiation. You have to wonder where he is getting his advice. (Bob Rubin, maybe?)

Social Security benefits should be increased, not cut. The share of workers with traditional pensions is down to about 15 percent. The rest either have no pensions or have 401k plans that are not pensions at all. 401k's, like IRAs and Keoghs, are tax-sheltered savings plans. More than half of people between 55 and 64 have no pension and no retirement plan at all other than Social Security.

What we need is an increase in core Social Security benefits, and a second tier of Social Security as a universal, fully portable pension. It could be funded by raising taxes on the rich, whose effective tax rates have been steadily cut for four decades, and who now command more of our national income than ever before.

If you don't read any other piece of policy wonkery this year, you owe it to yourself, your parents, and your own golden years to read "Expanded Social Security," the recently published report from the New America Foundation (co-authored by my Demos colleague, Robert Hiltonsmith.) It provides a politically serious blueprint for expanding the retirement income of the elderly, rather than selling them out. If we had a Democratic Party worthy of the name, it would get behind this proposal and change the entire dynamics of the Social Security debate.

The Beltway pundits and supporters the view that the economy can deflate its way to prosperity love to take the president and the Republicans to task for "kicking the can down the road," meaning refusing to make a grand bargain that trades cuts in social insurance for increases in taxes. But that can looks pretty good compared to what's under discussion.

Every Democrat in Congress should be standing up to the White House and refusing to back a budget that cuts a nickel from Social Security or Medicare. Yes, we need to reform those programs, but not in the context of an ill-advised set of general budget cuts that will only sandbag the fragile recovery. In the case of Social Security, reform means increasing, not cutting the income support of the elderly. In the case of Medicare, reform is spelled National Health Insurance.

In the past, Republicans have saved Obama from himself by refusing to consider any tax hikes. Now, I'm beginning to think, it's time for Democrats save him from himself. And the Democratic Party. And us.

Robert Kuttner is co-editor of The American Prospect and a senior Fellow at Demos.