Economic Empire Building and Domestic Decay

By James Petras

09/04/06 "Information Clearing House' -- -- While most commentators have in recent months focused on US and Israeli militarism in the Middle East and South Asia, US capitalism is preparing for a new offensive domestically and overseas. Three areas are targeted by the Bush Administration and its Congressional allies: 1) a renewed effort to privatize social security, reduce social programs such as Medicare and Medicaid while increasing individual payments, further reduce taxes on corporations and the rich and state regulatory controls over corporations, especially the Sarbanes-Oxley Law, in order to ease corporate global financial transactions, at the risk of small investors; 2) a big push by US multinational corporations to finance their exploitation and takeovers of ‘emerging countries’ (Third World) by capturing local savings; 3) a major effort to lower trade and investment barriers – such as local subsidies and tariffs – for US industrial, financial and other service corporations while retaining a privileged place for heavily subsidized US agro-exporters and protected US agro businesses in the domestic market.

The inter-relation of economic empire building – both in terms of control over overseas markets and enterprises – is closely linked to domestic policies. Tax cuts for the corporation and rich increase capital for export; privatized social security adds billions in profits for Wall Street investment banks; cuts in Medicare and Medicaid and increased fees and co-payments, provides greater funds to pay wealthy bondholders. The empire grows while the domestic social economy is impoverished.

Empire Building via Cuts in Entitlement Benefits

The appointment of Hank Paulson, former CEO of Goldman Sachs, the leading Wall Street investment bank, to head the US Treasury Department is a decisive move toward re-opening Wall Street’s battle to privatize the trillion dollar Social Security program.

With Paulson leading the cheering section, Congress ended its summer session by eliminating the estate tax (inheritance tax) for all but the wealthiest taxpayers, and extended several business tax breaks (Financial Times August 2, 2006). Clearly the Treasury Secretary is party to the strategy of forcing a budgetary crisis by reducing the taxes on the rich and then blaming the costs of the social security and medical programs upon which the middle and working class depend.

In a plea to Congress, consistent with his Wall Street loyalties, Paulson demanded that all the public social programs be ‘reformed’ to avoid a looming deficit, while defending the elimination of inheritance taxes for multi-millionaires and billionaires. Paulson emphasized that reviving Bush’s failed effort to privatize social security and reduce Medicare and Medicaid “would be his first priority”, (Financial Times August 2, 2006 p1). With typical aplomb and a straight face, Paulson urged Congress to “rise above partisan differences” by handing over the social security payments to Wall Street investment houses. In an even more bizarre move, Paulson justified his tax cuts for the rich and his increase in individual payments for retirees and poor as a problem of ‘demographics”. “Demographics don’t lie and demographics aren’t partisan. If left unchecked, these programs would significantly impair our economic flexibility and erode out competitiveness” (FT August 2, 2006). The problem is not ‘demographic’ – an aging problem – but the large-scale, long-term tax cuts which have reduced government revenue and the Government’s use of Social Security contributions to fund current deficits incurred because of the decline in inheritance, high income, capital gains and other progressive taxes. Paulson’s speech at Columbia University in early August put the privatization of Social Security “firmly back on the agenda”, claiming he had Bush’s full backing. It is clear that Paulson ‘sacrificed’ his multi-million dollar salary at Goldman Sachs and put in ‘trust’ his hundreds of millions in bonuses and options, not out of civic duty, but to turn over billions of dollars of Social Security contributions to be ‘managed’ at lucrative fees by his partners and cohorts in Goldman Sachs, Citibank, JP Morgan and the rest of ‘his gang’.

His move to ‘reform’ entitlement payments to the poor and elderly to provide flexibility and competitiveness for big business means essentially to lower Government outlays to the middle, working and lower classes in order to further lower taxes for the corporate world and increase government subsidies for overseas traders and investors. ‘Flexibility’ in this context means potentially more room to lower corporate taxes, or to move funds from entitlements to fund payments to bondholders; it also likely means extending age requirements for retirees and increasing fees for medical care.

Budgetary constraints have nothing to do with ‘demographics’ and everything to do with fiscal policy. Achieving ‘economic flexibility’ can be accomplished by corporations accepting lower rates of profits, greater emphasis on public investment in a deteriorating infrastructure, big cuts in a ballooning public military spending, and above all enforcing tax collection from evasive billionaires. According to a recent study (Financial Times, August 2, 2006), “abusive tax shelters were costing the US Treasury $40-70 billion dollars a year in uncollected taxes.” If we add other tax loopholes and less ‘abusive’ tax shelters, we could easily double the above figure. One of the biggest tax dodgers uncovered by Congressional investigators is the billionaire Haim Saban, Chairman of the Los Angeles-based Saban Capital Group and major contributor to Israeli political action committees (PACs) in this country as well as numerous Jewish philanthropies. He was accused by a Congressional sub-committee of “shielding” $1.5 billion dollars from capital gains taxes ‘ad infinitum’ by using a web of fake stock deals and phony corporations on the Isle of Man” (ibid). Another billionaire tycoon, Robert Wood Johnson, heir of the Johnson and Johnson Consumer Corporation was also charged with using a securities firm to carry out fake stock sales to show losses.

The problem of a looming budget crunch can easily be solved by increasing Government regulation and audits of the very wealthy rather than the middle and lower third of our taxpayers. In line with his obfuscation of the revenue side of the budget, Paulson has moved to weaken the recent increase in government oversight of multi-national corporations. Paulson has moved to repeal or water down the Sarbanes-Oxley Act, which imposes tough reporting requirements for corporations. Once more citing the need “to achieve the right regulatory balance to allow us to be competitive”, Paulson is pressing Congress to return to the Enron and WorldCom era when CEOs had greater leeway in cooking the books and fleecing investors and employees. What is especially important is Paulson’s very direct and prompt intervention in response to the leaders of investment banking – he acts exactly as one of them.

With Paulson as the leading economic voice and policymaker in the Bush Administration, the big push is to cut social programs, lower taxes and turn over Social Security funds in order to strengthen the expansion of US financial power overseas, both through acquisitions and mergers as well as by direct majority shares in equities.

Economic Imperialism: Victims Finance their own Exploitation

The new strategy adopted by MNCs in order to acquire overseas enterprises and to finance investments in foreign markets is by borrowing from local banks. This has several obvious advantages – including reducing all risk by using other countries’ savings. According to the Financial Times, “Many chief executive are looking to use the rapidly maturing local capital markets in emerging countries to finance their subsidiaries. By borrowing from local savings in local currencies, the MNC can lower their dollar debt and pay local creditors with devalued currency if inflation increases and decrease “foreign exchange risks”. The biggest US financial and non-financial companies, such as Citigroup and General Electric and financial businesses as well as Volkswagen, Daimler-Chrysler and Kimberly-Clark borrow ‘locally’. By borrowing locally the MNCs free capital for acquisitions of local-public and private enterprises. MNCs on the forefront of empire building have several advantages in pursuing local financing: it reduces the parent company’s equity exposure, shifting the risk to local banks and investors; and it lowers the risk of nationalization because the subsidiary has powerful local bondholders who have clout in local governments which may be reluctant to confront them. With Paulson freeing up more capital for big business, and the latter enjoying greater freedom to borrow risk-free in the Third World, empire building has the material basis to proceed with greater flexibility and with greater competitive advantages.

Trade Imperialism: Collapse of Doha and the Rise of Mercantilism

Most of the world’s advocates of free trade blame the US for the failure of the Doha world trade talks. Apart from Washington’s rhetoric calling for a ‘global free trade’ agreement in the current ‘Doha Round’, in practice it is pursuing a mercantilist policy of protecting non-competitive local producers and setting quotas on imports, which compete favorably with local producers. Washington subsidizes agro-export corporate ‘farmers’ and avidly pushes the rest of the world, particularly Asian, African and Latin American countries to lower tariffs in manufacturing, services and agriculture to highly competitive US corporations. The breakdown of Doha trade talks in late July 2006, was almost unanimously blamed on the US which argued that the rest of the world should lower their farm import tariffs to US agricultural products, subsidized to the tune of $19 billion in 2005 (FT, July 25, 2006 p1).

Even the neo-liberal Brazilian President Lula DaSilva, who shares the US position in reducing farm tariffs, blamed US intransigence on subsidies for the failure of the trade talks. Washington’s ‘trade reforms’ proposed at Doha in 2006 actually raise the ceiling for trade distorting subsidies $3.5 billion dollars over actual spending in 2005 (FT July 24, 2006 p5). Washington’s demand to saturate Asian rice markets, African cotton markets and Latin American soya markets with heavily subsidized agricultural products thus driving millions of Third World farmers and peasants into bankruptcy dampened the spirits even of the most ardent Third World advocates of ‘free markets’. Kamal Nath, India’s Trade Minister, pithily summed up the problem by saying, “Indian farmers con compete with US farmers but not with the US Treasury” (FT July 24, 2006 p5). Washington’s big trading partners in Brazil, India, China, South Africa and elsewhere have offered to lower or eliminate tariffs on manufactured goods, services (including high tech, low tech and information-based industries), financial and banking sectors, retail and wholesale commerce, pharmaceuticals and other sectors, sign on patent protection codes in exchange for the US ending its quotas and tariffs on labor-intensive industries, steel, textile and other light consumer goods industries and eliminating its multi-billion dollar agricultural subsidies. Washington has rejected a global free trade reciprocity agreement, and has instead pursued bilateral trade agreement with client regimes willing to sacrifice local farm and manufacturing producers. For example, Washington has signed bilateral free trade agreements with Chile and Peru, which are largely mineral and raw material-exporting countries; it has signed a free trade agreement with tropical fruit and coffee-exporting Central America and Colombia – the latter a recipient of over $5 billion dollars in military aid over the past 7 years. Uruguay, another likely free trade partner with Washington, is banking on selling more beef, mutton and wool and hosting more highly contaminating paper mills. Mexico is a key ‘free trade’ partner, providing a cheap labor platform for US assembly plants re-exporting to the US, and exporting over 20 million low paid ‘temporary’ workers to the US over the past decade. In addition Mexico has lowered all investment barriers to the US takeover of its banking, transport, retail trade, fast food, telecommunications and agro-export sectors and opening its markets to the massive inflow of US-subsidized agricultural products.

While continuing to formally pursue a global free trade agenda, Washington, in practice, is building a series of satellite bilateral trade and investment pacts which extend the US economic empire.

Economic and Military Modes of Empire Building

While world attention has focused largely on Washington’s military interventions and violent covert operations as the most visible signs of empire building, they have overlooked the far more successful domestic and overseas economic strategies designed to enhance the US economic empire. Substantial evidence exists that US Middle East policymakers did not take account of major multi-national corporate interests in launching the Afghan and Iraq Wars, and backing the Israeli invasions of Gaza and Lebanon. The predominant role of civilian militarists (predominantly Zionists and pro-Israel officials inside the government) and the multi-headed Jewish Lobby were far more active than oil, or military industrial manufacturers in designing, planning and propagandizing sequential wars against Arab and Muslim adversaries of Israel. The adverse consequences of these US proxy wars, particularly the record oil price has over time pushed the US economy toward a recession. To compensate for the economically and politically costly losses resulting from US military expansion and the negative repercussions working their way through the economy, the Bush Administration has turned away from previous industry-based Treasury Secretaries to Wall Street’s premier representative Hank Paulson. His strategy is to work within the militarist parameters imposed by the neo-conservatives and vigorously pursue a cut and slash policy on all major social policies, including the privatization of Social Security. Faced with and conforming to the policy of a huge and growing military budget and massive tax cuts for the rich, the only option for fueling US overseas economic expansion is by putting trillions of dollars of Social Security funds under Wall Street management, slashing government funded Medicare and Medicaid funds, undercutting corporate legislation facilitating imaginative accounting and overseas transfers, encouraging US overseas subsidiaries to exploit local savings and pushing neo-mercantilist bi-lateral trade agreements that allow US subsidized exporters and investors to take over client regime economies.

Will Paulson, Bush’s closest economic adviser, succeed in expanding the economic empire while the Pentagon and State Department wage war? There are several reasons to doubt his success. Bush’s previous effort to privatize Social Security failed. Although the vast majority of US citizens vehemently oppose privatization, Paulson will pursue a step-by-step process by which he may be able to build a ‘bi-partisan’ coalition, especially as a fiscal crisis resulting from the recession may lower tax revenue and raise the decibels about doing ‘something’ (cuts) in entitlement programs. The route of bilateral trade agreements will continue but cannot expect to advance beyond overt client regimes, especially in Latin America because of mass pressure, the opposition of Venezuela and the non-reciprocal nature of US liberal trade reforms (the maintaining of US farm subsidies). If the wars in the Middle East continue to erode political support for the Bush regime, Paulson’s capacity to implement regressive social policies will decline. It is hard to imagine even the US public supporting the privatization of Social Security, cuts in Medicaid, a growing casualty rate in Iraq and Afghanistan and global diplomatic isolation for backing the Israeli war machine. One might argue that the economic empire builders will eventually displace the civilian militarists, the Israel-Firsters and re-assert a new ideological cocktail of domestic nationalism and overseas economic expansionism. This is highly unlikely under Paulson’s watch precisely because he is tied to Wall Street which is par excellence based on international movements of capital and would be deeply concerned with any variant of ‘nationalism’ which might provoke overseas imitators.

Whether Paulson succeeds in imposing his reactionary agenda to fuel the economic empire will largely depend on the degree of mobilization of the passive majority and the degree of popular resistance in the Middle East: together they can undercut Paulson’s capacity to create a bi-partisan empire-building coalition.

James Petras, a former Professor of Sociology at Binghamton University, New York, owns a 50 year membership in the class struggle, is an adviser to the landless and jobless in brazil and argentina and is co-author of Globalization Unmasked (Zed). His new book with Henry Veltmeyer, Social Movements and the State: Brazil, Ecuador, Bolivia and Argentina, was published in October 2005. He can be reached at: jpetras @ binghamton.edu