Deficit debate driven by the wealthy

There must be a reason that every time I hear the term “fiscal cliff,” the image that comes to mind is of Wile E. Coyote pumping his feet in midair just before plunging into the valley below.

Is it that the debate over when and how to cure the federal deficit has reached new heights of cartoonish inanity? That we are now being treated to finger-wagging about the need to get our fiscal house in order by corporate CEOs like JPMorgan Chase’s Jamie Dimon (trading loss $5.8 billion and counting, potential cost to ratepayers from alleged manipulation of the California electricity market $200 million and counting).

Or is it that the remedies for the deficit always seem to involve cutting taxes for the top 1% of U.S. income earners while cutting Social Security retirement benefits (average monthly check: $1,230) for everyone else?

All of the above, probably.

But let’s get serious for a moment. The fiscal cliff is supposedly what lurks at the end of this year, when billions of dollars in tax cuts expire and government spending cuts mandated by the big deficit deal in 2011 kick in.

According to the bipartisan Congressional Budget Office, the combination of a steep increase in the tax bite and a steep reduction in spending across the board could cut economic growth in 2013 to 0.5% from a projected 4.4% (if none of these events takes place). The CBO says that by any traditional reckoning, that would mean recession.

Only a political structure in the grip of hopeless insanity would allow that to happen. That’s why the Washington observer class still expects Democrats and Republicans to reach a deal eventually, even if brinkmanship may keep them yammering past the supposed drop-dead deadline of Dec. 31.

Yet there’s still reason for most Americans to fear the deal-making aimed at avoiding the fiscal cliff. For one thing, the debate seems increasingly to be driven by the wealthy, who can be trusted to protect their own prerogatives while declaring everyone else’s to be wasteful. Just two weeks ago, a squadron of CEOs and bankers, including Dimon and hedge fund billionaire Pete Peterson, lined up behind a campaign to impose adult supervision on our squabbling Congress.

Their working brief is a document grandiosely entitled “The Moment of Truth.”It’s a deficit-reduction plan cooked up by former Sen. Alan Simpson (R-Wyo.) and Erskine Bowles, an ex-investment banker claiming Democratic Party cred from his nearly two-year stint as chief of staff in the Clinton White House. They produced the program as co-chairs of the bipartisan deficit commission impaneled in 2010 by President Obama, though they failed to garner enough votes on the panel to make their plan the official report.

The Simpson-Bowles plan has inexplicably become the starting point for deficit cutters in both parties. House Minority Leader Nancy Pelosi (D-San Francisco), who in 2010 pronounced a draft version “simply unacceptable,” more recently has signaled that she’d support it.

In any environment of serious debate, Simpson-Bowles would be dismissed out of hand. Praised for its sober bipartisan spirit, it’s a compendium of flatulent platitudes (“We all have a patriotic duty to make America better off tomorrow than it is today”), vague prescriptions (“cut all excess spending” and “avoid excessive taxation” — as if reaching broad agreement on the meaning of “excessive” is a snap), and the occasional nostrum that earns a “not” on the gonna-happen scale (strip down the mortgage-interest deduction). According to some estimates by the nonpartisan Tax Policy Center, the plan’s sample cuts in the tax deductions wouldn’t replace the revenue lost to its proposed reductions in marginal tax rates.

“The Moment of Truth” bills itself as a roadmap to deficit reduction, but it’s really a guide to cutting services and benefits for the working and middle class while raising revenues only modestly, if that. (The authors claim to raise tax revenues across the board, but the only way to do that while cutting marginal tax rates, as they propose, is to eliminate virtually all tax deductions, which manifestly is far more difficult than cutting rates.)

The authors give the game away through the report’s internal contradictions. They observe that at 15% of gross domestic product, tax revenues today are at “the lowest level since 1950.” Yet they thunder that the key to cutting the deficit is to “sharply reduce tax rates” while warning that “revenue cannot constantly increase as a share of the economy.” How’s that again?

Every serious analyst of the federal budget knows that healthcare costs, chiefly Medicare and Medicaid, will account for virtually 100% of federal spending increases going forward. The CBO projects that they will rise over the next two decades to as much as 10.4% of gross domestic product from 5.6% now.

Over that time, about half of the increase will come from the aging of the population, and the rest in growth of spending per individual. Not much can be done about aging, and Simpson and Bowles have little to offer about how to rein in the per-capita spending other than to transfer the costs off the federal budget by sticking it to others, including the premium-paying elderly.

They want to cut payments to hospitals for medical education and for coverage of bad debts, which hospitals incur by treating uninsured patients. They want to cut reimbursements to doctors and pay them “based on quality instead of quantity of services,” which is a nice-sounding goal that has proven hellishly difficult to define, much less implement, in practice.

Instead of focusing seriously on healthcare spending, Simpson and Bowles train their gun sights on programs such as federal disaster relief, on which they propose to apply “stricter parameters.” In ancient times, King Canute commanded the tide to recede and failed, which tells us it’s hard to impose strict parameters on nature. In any case, federal disaster spending seems to average about $20 billion a year, or a bit more than a half-percent of the federal budget.

The single program getting the bulk the Simpson-Bowles plan’s attention is Social Security, which in fact contributes not a dime to the federal deficit, and can’t by law. Something else is at work here other than deficit reduction: It’s a plan to cut benefits to seniors by ratcheting back on inflation protection and sharply cutting the benefit formula for everyone, starting with those whose average lifetime earnings are $9,000 a year.

What’s riskiest about Washington’s peculiar approach to deficit cutting, which erodes the programs most important to working Americans while preserving those enjoyed by the wealthy, is that it could sap the resolve of President Obama and his Democratic colleagues to end tax cuts on high levels of income while extending them for average and low-income earners.

This is the root of the argument that it’s foolish to raise taxes on “job creators.” But Obama’s middle-class tax cut, which applies to joint filers’ incomes of below $250,000 and restores pre-Bush Administration rates on anything higher, would still give the richest Americans a lower bill compared with complete repeal of the Bush tax cuts. That’s because their income below $250,000, like everyone else’s, would be taxed less.

The Tax Policy Center calculates that the top 1% (those earning more than about $600,000) would see an average cut of about $16,000, compared with what they’d pay under a complete repeal of the Bush cuts. The top 0.1% (that’s $2.9 million-plus) would pay an average $59,000 less. The valiant middle class — say those earning between $80,000 and $130,000? Their break would average about $1,000.

There’s a lot not to like about fiscal-cliff panic. Allowing deficit-cutting concerns to influence how we address today’s meager economic growth rate of 1.5% is hopelessly backward. So is talking about cutting government programs when they’re needed to maintain employment and assist the poor and unemployed. So as much as corporate CEOs and other privileged incumbents claim they’re concerned about the future, it’s their future they mean.

Michael Hiltzik’s column appears Sundays and Wednesdays. Reach him at [email protected], read past columns at latimes.com/hiltzik, check out facebook.com/hiltzik and follow @latimeshiltzik on Twitter.