Nemesis: The Last Days of the American Republic (47 page)

On February 6, 2006, the Bush administration submitted to Congress a $439 billion defense appropriation budget for fiscal 2007. At the same time, the deficit in the United States’ current account—the imbalance in the trading of goods and services as well as the shortfall in all other cross-border payments from interest income and rents to dividends and profits on direct investments—underwent its fastest-ever quarterly deterioration.
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In the fourth quarter of 2005, the deficit hit a staggering $225 billion, up from $185.4 billion in the previous quarter. For all of 2005, the current account deficit was $805 billion, 6.4 percent of national income. In 2005, the U.S. trade deficit, the largest component of the current account deficit, soared to an all-time high of $725.8 billion, the fourth consecutive year that America’s trade debts set records. The trade deficit with China alone rose to $201.6 billion, the highest imbalance ever recorded with any country. Meanwhile, since mid-2000, the country has lost nearly three million manufacturing jobs.
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To try to cope with these imbalances, on March 16, 2006, Congress raised the national debt limit from $8.2 trillion to $8.96 trillion. This was the fourth time since George W. Bush took office that it had to be raised. The national debt is the total amount owed by the government and should not be confused with the federal budget deficit, the annual amount by which federal spending exceeds revenue. Had Congress not raised the
debt limit, the U.S. government would not have been able to borrow more money and would have had to default on its massive debts.

Among the creditors that finance this unprecedented sum, two of the largest are the central banks of China ($853.7 billion in reserves of dollars and other foreign currencies) and Japan ($831.58 billion), both of which are the managers of the huge trade surpluses these countries enjoy with the United States.
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This helps explain why our debt burden has not yet triggered what standard economic theory would dictate: a steep decline in the value of the U.S. dollar followed by a severe contraction of the American economy because we could no longer afford the foreign goods we like so much. However, both the Chinese and Japanese governments continue to be willing to be paid in dollars in order to sustain American demand for their exports. For the sake of domestic employment, both countries lend huge amounts to the American Treasury, but there is no guarantee how long they will want or be able to do so.

According to Marshall Auerback, an international financial strategist, “Today, the U.S. economy is being kept afloat by enormous levels of foreign lending, which allow American consumers to continue to buy more imports, which only increases the bloated trade deficits.”
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We have become, in Auerback’s terms, a “Blanche Dubois economy” (named after the leading character in Tennessee Williams’s play
A Streetcar Named Desire),
heavily dependent on “the kindness of strangers.” Unfortunately, in our case, as in Blanche’s, there are not many strangers left willing to support our illusions.

Even a severe reduction in our numerous deficits (trade, governmental, current account, household, and savings) would still not be enough to save the republic, because of the unacknowledged nature of our economy—specifically our dependence on military spending and war for our wealth and well-being. Ever since we recovered from the Great Depression of the 1930s via massive governmental spending on armaments during World War II, we have become dependent on “military Keynesianism,” artificially boosting the growth rate of the economy via government spending on armies and weapons.

“Keynesianism” is named for the English economist John Maynard Keynes, author of
The General Theory of Employment, Interest, and Money,
published in 1936, and other influential books. In his writings and his
public career, Keynes developed a scheme to save capitalist economies from cycles of boom and bust as well as the severe decline of consumer spending that occurs in periods of depression. He was less interested in what causes these cycles or in whether capitalism itself promotes underemployment and unemployment, than in what to do when an inequitable distribution of income causes people to be unable to buy what their economy produces. To prevent the economy from contracting, a development likely to be followed by social unrest, Keynes thought that the government should step in and, through deficit spending, put people back to work, even if this meant creating jobs artificially. Some of these jobs might be socially useful, but Keynes also favored make-work tasks if that proved necessary, simply to put money in the pockets of potential consumers. Conversely, during periods of prosperity, he thought government should cut spending and rebuild the treasury. He called his plan countercyclical “pump-priming.”

During the New Deal in the 1930s, the United States tried to put Keynesianism into practice. Through various schemes the government attempted to restore morale—if not full employment.
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These included “social security” to provide incomes for retired people; giving unions the right to strike (the Wagner Act); setting minimum wages and hours and prohibiting child labor; creating jobs for writers, artists, and creative people generally (the Works Projects Administration); financing the building of dams, roads, schools, and hospitals across the country, including the Triborough Bridge and Lincoln Tunnel in New York City, the Grand Coulee Dam in Washington, and the Key West Highway in Florida (the Public Works Administration); organizing projects for young people in agriculture and forestry (the Civilian Conservation Corps); and setting up the Tennessee Valley Authority to provide flood control and electric power generation in a seven-state area.

The New Deal also saw the rudimentary beginnings of a backlash against Keynesianism. Conservative capitalists feared, as the German political scientist and sociologist Jürgen Habermas has noted, that too much government intervention would delegitimate and demystify capitalism as an economic system that works by allegedly quasi-natural laws. More seriously, too much spending on social welfare might, they feared, shift the balance of power in society from the capitalist class to the working class and its unions.
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For these reasons, establishment figures tried to
hold back countercyclical spending until World War II unleashed a torrent of public funds for weapons.

In 1943, the Polish economist in exile Micha Kalecki coined the term “military Keynesianism” to explain Nazi Germany’s success in overcoming the Great Depression and achieving full employment. Adolf Hitler did not undertake German rearmament for purely economic reasons; he wanted to build a powerful German military. The fact that he advocated governmental support for arms production made him acceptable to many German industrialists, who increasingly supported his regime.
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For several years before Hitler’s aggressive intentions became clear, he was celebrated around the world for having achieved a “German economic miracle.”

Speaking theoretically, Kalecki understood that government spending on arms increases manufacturing and also has a multiplier effect on general consumer spending by raising workers’ incomes. Both of these points are in accordance with general Keynesian doctrine. In addition, the enlargement of standing armies absorbs many workers, often young males with few skills and less education. The military thus becomes an employer of last resort, like the old Civilian Conservation Corps, but on a much larger scale. Increased spending on military research and the development of weapons systems also generates new infrastructure and advanced technologies. Well-known examples include the jet engine, radar, nuclear power, semiconductors, and the Internet, each of which began as a military project that later formed the basis for major civilian industries.
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By 1962-63, military outlays accounted for some 52 percent of all expenditures on research and development in the United States. As the international relations theorist Ronald Steel puts it, “Despite whatever theories strategists may spin, the defense budget is now, to a large degree, a jobs program. It is also a cash cow that provides billions of dollars for corporations, lobbyists, and special interest groups.”
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The negative aspects of military Keynesianism include its encouragement of militarism and the potential to create a military-industrial complex. Because such a complex becomes both directly and indirectly an employer and generator of employment, it comes to constitute a growing proportion of aggregate demand. Sooner or later, it short-circuits Keynes’s insistence that government spending be cut back in times of nearly full employment. In other words, it becomes a permanent institution whose “pump” must always be primed. Governments invariably find it politically
hard to reduce military spending once committed to it, particularly when munitions makers distribute their benefits as widely as possible and enlist the support of as many politicians as possible, as they have in the United States. In short, military Keynesianism leads to constant wars, or a huge waste of resources on socially worthless products, or both.

By the mid-1940s, everyone in the United States appreciated that the war boom had finally brought the Great Depression to an end, but it was never understood in Keynesian terms. It was a war economy. State expenditures on arms in 1944 reached 38 percent of gross domestic product (the sum total of all goods and services produced in an economy) or GDP, which seemed only appropriate given the nation’s commitment to a two-front war. There was, however, a profound fear among political and economic elites as well as the American public that the end of the war— despite all the promises of future peacetime wonders like TVs, cars, and washing machines—would mean a return to economic hard times. Such reasoning lay, in part, behind the extraordinary expansion of arms manufacturing that began in 1947. The United States decided to “contain” the USSR and, in the early 1950s, to move from the production and use of atomic bombs to the building and stockpiling of the much larger and more destructive hydrogen bombs.

Between the 1940s and 1996, the United States spent at least $5.8 trillion on the development, testing, and construction of nuclear weapons alone. By 1967, the peak year of its nuclear stockpile, the United States possessed some 32,500 deliverable bombs, none of which, thankfully, was ever used. But they perfectly illustrate Keynes’s proposal that, in order to create jobs, the government might as well decide to bury money in old mines and then pay unemployed workers to dig it up. Nuclear bombs were not just America’s secret weapon but also a secret economic weapon. As of 2006, we still have 9,960 of them.

The Cold War contributed greatly to the country’s sustained economic growth that began in 1947 and lasted until the 1973 oil crisis. Military spending was around 16 percent of GDP in the United States during the 1950s. In the 1960s, the Vietnam War sustained it at around 9 percent, but in the 1970s, strong economic competition from the free riders, Japan and Germany, forced a significant decline in military spending with a consequent U.S. decline into “stagflation” (a combination of stagnation and inflation).

The American response was a classic example of military Keynesianism—namely, Reaganomics. In the 1980s, President Reagan carried out a policy of large tax cuts combined with massive increases in defense spending allegedly to combat a new threat from communism. It turned out that there was no threat, only a campaign of fear-mongering from the White House bolstered by the CIA, which consistently overstated the size and growth of the Soviet armed forces during this period. The USSR was in fact starting to come apart internally because of serious economic imbalances and the deep contradictions of Stalinism. Reagan’s policies drove American military expenditures to 6.2 percent of GDP, which in 1984 produced a growth rate for the economy as a whole of 7 percent and helped re-elect Reagan by a landslide.
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During the Clinton years, military spending fell to about 2 percent of GDP, but the economy rallied strongly in Clinton’s second term due to the boom in information technologies, weakness in the previously competitive Japanese economy, the government’s more nationalistic support of the economy internationally, and serious efforts to reduce the national debt.

With the coming to power of George W. Bush and the launching of his Global War on Terror, military Keynesianism returned with a vengeance. According to Andrew Gumbel, a regular contributor to the
Independent
newspaper of London, during the second quarter of 2003, when the Iraq war was in full swing, some 60 percent of the 3.3 percent GDP growth rate was attributable to military spending.
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In the U.S. budgets for the years between 2003 and 2007, defense occupied just over 50 percent of all discretionary spending by the government. This is money the president and Congress can actually appropriate, as distinct from mandatory spending in compliance with existing laws (for social security payments, medicare, interest on the national debt, and so on).

The official 2007 Pentagon budget is $439.3 billion—not including the costs of America’s current wars. It essentially covers salaries and weapons—the funds for missile defense and other operations in outer space (between $7.4 billion and $9 billion a year since fiscal year 2002), new ships and submarines for the navy, and aircraft that were designed to fight the former Soviet Union’s air force but that have been kept as active projects because of industry and air force lobbying. As Jonathan Karp of the
Wall Street Journal
observes, “Weapons spending has swelled faster than the overall Pentagon budget, soaring 43 percent in the past five years
to $147 billion, with the majority of the funding going to programs conceived before 9/11. The estimated lifetime cost of the Pentagons five biggest weapons systems is $550 billion, 89 percent more than the top-five programs were projected to cost in 2001.”
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One of the absurdities of the Bush administration’s defense appropriations is that the official defense budget has nothing to do with actual combat in Afghanistan and Iraq. We have built a fantastically high-tech military, but in order to use it, Congress has to appropriate separate annual “supplements” of around $120 billion a year. In the fiscal 2007 budget, the Congressional Research Service estimates that Pentagon spending will be about $9.8 billion per month for Operation Enduring Freedom and Operation Iraqi Freedom, or an extra $117.6 billion for the year.
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As of 2006, the overall cost of the wars in Iraq and Afghanistan since their inception stood at about $450 billion.