–What President Obama’s “grand bargain” means to your wallet

Mitchell’s laws:
●The more budgets are cut and taxes increased, the weaker an economy becomes.
●Austerity is the government’s method for widening the gap between rich and poor,
which leads to civil disorder.
●Until the 99% understand the need for federal deficits, the upper 1% will rule.
●To survive long term, a monetarily non-sovereign government must have a positive balance of payments.
●Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.


Why does President Obama want his “grand bargain”: $2.50 of federal spending cuts for every dollar in new federal tax revenue?

Let’s begin with the certainty that Barack Obama is an intelligent man. He is surrounded by economists, who also are intelligent, and being intelligent, they are aware that Gross Domestic Product is the total of: Federal Spending, plus Non-federal Spending, less Net Imports.

Monetary Sovereignty

This graph may look like it contains one line, but actually it contains two perfectly overlapped lines. The blue line is GDP growth. The red line (it’s congruent with the blue line) is the total of:
Government Consumption & Investment [GCE]
+ Personal Consumption Expenditures [PCECA]
+ Private Domestic Investment [GPDI]
– Net Imports [NETEXP]

Mathematically, any reduction in federal spending reduces GDP.

Additionally, federal spending boosts non-federal spending, the reduction of which also reduces GDP. So cuts in federal spending absolutely, positively reduce GDP growth. This neither is hypothesis, nor subject to argument. It is a mathematical fact, based on the calculation of GDP.

President Obama surely knows this.

(Some feel GDP really doesn’t reflect the state of our economy, and there are good arguments for that view. GDP doesn’t directly include happiness and well being, crime, pollution, global warming, civil rights, health, freedom, etc., etc. – nor does it include the income gap — but it does have the advantage of being a mathematically comparable measure and is the single most commonly used datum.)

Let’s continue with the probability at least some members of Congress are intelligent, and of those, at least a few have had the curiosity to investigate and understand Monetary Sovereignty. We have enough leaders who know federal spending cuts will reduce GDP growth. And they know tax increases, by reducing non-federal spending, also negatively impact GDP growth.

In previous posts, we have discussed the motivation for deficit reduction, which by necessity includes some combination of reduced federal spending and tax increases – as we’ve said, both reduce GDP growth. The motivation is not based on ignorance. Rather it is based on knowledge – the knowledge that spending cuts and tax increases each impacts the lower 99% income groups far more than the upper 1% income groups.

The motivation is to increase that gap between the 1% and the 99%, which brings us to the next question: Why?

I don’t think Obama and Romney inherently are mean guys. Obama probably is compassionate. While Romney may lack compassion for the 99% – his business model testifies to that – his motivation probably is split among personal greed, loyalty to his peers and obedience to the religious right wing, which despite being “religious,” have little if any compassion for those different from them.

When we examine the alternatives, and discard the impossible and the unlikely, we are left with one: Obama and Romney, Democrats and Republicans, print and air commenters, all are bought and paid for by the 1%, whose primary motivation is not just to increase their income, but most importantly, to increase that income gap.

Next, why Obama’s strange division between spending cuts and tax increases? Why does he want $2.50 of spending cuts for every $1.00 of tax increases – the Republicans want all spending cuts and no tax increases — when both parties know that both actions will increase the income gap?

I suspect the answer goes like this. Spending cuts will be more regressive than are the likely tax increases. True, most taxes are regressive. The most regressive are FICA, which really punishes the lower part of the 99%. Sales taxes, too, are highly regressive. Less regressive are the so-called “death” taxes, dividend taxes, capital gains taxes and luxury taxes. The least regressive are the top tier income taxes – that 35% tax rate that applies to income over $388K.

But, those top-tier taxes are the ones most likely to be increased. The “fiscal cliff” tax increases would look like this:

The 10% rate will be collapsed into the 15% rate
The 25% rate will become 28%
The 28% rate will become 31%
The 33% rate will become 36%
The 35% rate will become 39.6%.

The 1% would be affected by all these increases, especially the move from 35% to 39.6%, and they don’t like it, which is why they have sworn Grover Norquist’s “Taxpayer Protection Pledge” to oppose tax increases and tax credit reductions. Last I heard, this pledge does not apply to FICA. Surprised?

While tax increases might tweak the wallets of the 1%, spending decreases are much more acceptable to the big boys. Virtually all federal spending benefits the middle and lower classes – about 45% of federal government spending is for “social benefits” (Medicare, Medicaid, Social Security, poverty aid, etc.) For the lower and middle classes, such payments are a lifeline; the rich care little for these benefits.

The other big budget item is Defense, at almost 20% of the budget. This too, benefits the middle and lower classes – most defense spending is for salaries. But defense spending also benefits all those defense contractors, so true to form, the Republicans have demanded cuts in all federal spending except Defense, where they have demanded increases.

Which brings us to Obama’s $2.50 in spending cuts for every $1.00 in tax increases. Like the Republicans, Obama is bought and paid for by the rich. He is paid to increase the income gap. However, being a Democrat, he is obliged to throw a bone to the middle and lower classes.

So he proposes to keep all taxes at their currently “low” levels, with the “bone” to the poor being an increase in the upper income rate. He has positioned the argument, not as “Should we or should we not cut the deficit to increase the gap?” The argument isn’t even “How much should we cut the deficit to increase the income gap?” Rather, the argument is, “How should we cut the deficit?”

Obama’s “grand bargain” is a bargain all right — a bargain for the rich.

No matter what happens, the Democrats and the rich will win. The middle and lower classes will blame the Republicans for wanting tax breaks for the rich (though all tax breaks, even for the rich, are stimulative). The Democrats will seem to fight hard for the middle and lower classes, and if in the end, they must yield and agree to cut spending more, well . . . it’s not their fault.

Bottom line: Deficit reduction increases the gap between rich and poor. While spending cuts and tax increases both reduce the deficit, spending cuts hurt the poor more, thus more effectively increasing the gap – the goal of the rich. Both parties do the bidding of the rich, and the differences between them reflect only differences in how to increase the income gap, not whether this is good for America.

All our efforts to “educate” the politicians and media fall on deaf ears. Education is not needed or wanted; these people already understand Monetary Sovereignty. They listen to only one thing: votes. And votes are bought with money, now with guaranteed access, courtesy of the Supreme Court.

What’s the cure? Education, not of the politicians or the media, but of the public. The Occupy groups could have helped, but they themselves have chosen to remain ignorant of Monetary Sovereignty, so are in no position to educate anyone.

One day, an Occupy group, or something like them — a group that learns Monetary Sovereignty — will focus their demonstrations on teaching the public why deficits must increase, and that will be the beginning.

Rodger Malcolm Mitchell
Monetary Sovereignty


Nine Steps to Prosperity:
1. Eliminate FICA (Click here)
2. Medicare — parts A, B & D — for everyone
3. Send every American citizen an annual check for $5,000 or give every state $5,000 per capita (Click here)
4. Long-term nursing care for everyone
5. Free education (including post-grad) for everyone
6. Salary for attending school (Click here)
7. Eliminate corporate taxes
8. Increase the standard income tax deduction annually
9. Increase federal spending on the myriad initiatives that benefit America’s 99%

No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia. Two key equations in economics:
Federal Deficits – Net Imports = Net Private Savings
Gross Domestic Product = Federal Spending + Private Investment and Consumption – Net Imports


5 thoughts on “–What President Obama’s “grand bargain” means to your wallet

  1. I imagine that Obama is terribly concerned of being painted with additional coats of “socialist” and “radical” if he tries anything that deviates from the intuitive economics and “what everybody knows”. Too bad that “everybody” is wrong and trying to placate the right wing works for no one. Austerity works nowhere but I’m pretty sure that’s what we’ll get when R&R take office. I’m retired and living with a Railroad Retirement pension (federally funded) but I can’t convince my fellow retirees what’s coming – that R&R will torpedo the Railroad Retirement Board, Amtrak and any rail transit system they can get in their sights. Sad.


  2. “The motivation is not based on ignorance. Rather it is based on knowledge.” Yes, and it annoys me to see Warren Mosler perniciously refer to “innocent” frauds, as though the bankers, the politicians, and the 1% are “innocent” of lying. I know that Mosler and Stephanie Kelton are academicians, and will lose their jobs if they are too candid, but why must they emphasize this “innocence” thing? We can’t they simply avoid the issue of innocence vs culpability and explain the facts? Further, I think this fear may play a role in Mosler’s insistence that federal income taxes are necessary to control inflation. (Not the FICA tax, which Mosler wants to eliminate). He is throwing a bone to the 1%. Monetary inflation is a function of demand, i.e. faith in the system, and rarely has anything to do with the actual money supply. Infinite fiat money is not the same as finite commodities. Therefore inflation (i.e. loss of demand for money) can be controlled with interest rates, while federal taxes should all be abolished. On a different note, you say “Votes are bought with money.” Yes, and this proves that we really do live in a pure democracy. One dollar = one vote. The more dollars you command, the more votes you have. Regarding Obama, I will be very surprised if he is not-reinstalled. He is an elitist who poses as a populist. The 1% need “Obamas” in all key spots if the 1% are to continue to rape a willing public. Finally, I’ve done some YouTube videos in the past. I am currently thinking of how to do YouTube videos that simplify Monetary Sovereignty.


  3. Warren and Randy (Wray) believe that federal taxes are necessary to created demand for dollars and that taxes should be used to control inflation.

    I disagree on both counts.

    I already have told Warren and Randy that even if taxes did create demand, there are plenty of state and local taxes to do the job. Federal taxes are unnecessary. They agreed, though they still talk about taxes creating demand.

    As for inflation, taxes are too slow, too political, too unfair and not incremental enough to fight inflation. By contrast, interest rates can be changed instantly, are not as subject to political pressures, are much less unfair, and can be changed in tiny increments, for more accurate control.


  4. Only a Democrat can get away with privatizing Social Security, and radically worsening the depression by cutting the deficit. That’ s why Obama will be re-installed. And to make sure of it, Wall Street propped up an absurd opponent (Romney).

    Obama said this week, “We’ve already made a trillion dollars worth of cuts. (To social programs.) We can do even more cuts. But we are also going to need some revenue.” (That is, higher taxes on the middle and lower classes, as though the US government needed taxes.)

    MoveOn’s 7 million members want to end the Bush tax cuts for people that collect over $250,000, as though this would help the poor. They are also working hard to re-install Obama.

    Almost everyone in the middle and lower classes is stampeding to the slaughterhouse. And as they are killed, they bleat, “We have a deficit crisis!” “We have a debt crisis!” Meanwhile the rich butchers laugh.

    My fear is that Obama will use the “fiscal cliff” as a pretext to ram through his “Grand Bargain”; i.e. his plan to deliberately worsen the depression.


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