Why the U.S. Has Gone Broke
By Chalmers Johnson
26/04/08 " Le Monde " -- The military adventurers in the Bush administration have much in common with the corporate leaders of the defunct energy company Enron. Both groups thought that they were the "smartest guys in the room" -- the title of Alex Gibney's prize-winning film on what went wrong at Enron. The neoconservatives in the White House and the Pentagon outsmarted themselves. They failed even to address the problem of how to finance their schemes of imperialist wars and global domination.
As a result, going into 2008, the United States finds itself in the anomalous position of being unable to pay for its own elevated living standards or its wasteful, overly large military establishment. Its government no longer even attempts to reduce the ruinous expenses of maintaining huge standing armies, replacing the equipment that seven years of wars have destroyed or worn out, or preparing for a war in outer space against unknown adversaries. Instead, the Bush administration puts off these costs for future generations to pay or repudiate. This fiscal irresponsibility has been disguised through many manipulative financial schemes (causing poorer countries to lend us unprecedented sums of money), but the time of reckoning is fast approaching.
There are three broad aspects to the U.S. debt crisis. First, in the current fiscal year (2008) we are spending insane amounts of money on "defense" projects that bear no relation to the national security of the U.S. We are also keeping the income tax burdens on the richest segment of the population at strikingly low levels.
Second, we continue to believe that we can compensate for the accelerating erosion of our base and our loss of jobs to foreign countries through massive military expenditures -- "military Keynesianism" (which I discuss in detail in my book Nemesis: The Last Days of the American Republic). By that, I mean the mistaken belief that public policies focused on frequent wars, huge expenditures on weapons and munitions, and large standing armies can indefinitely sustain a wealthy capitalist economy. The opposite is actually true.
Third, in our devotion to militarism (despite our limited resources), we are failing to invest in our social infrastructure and other requirements for the long-term health of the U.S. These are what economists call opportunity costs, things not done because we spent our money on something else. Our public education system has deteriorated alarmingly. We have failed to provide health care to all our citizens and neglected our responsibilities as the world's number one polluter. Most important, we have lost our competitiveness as a manufacturer for civilian needs, an infinitely more efficient use of scarce resources than arms manufacturing.
Fiscal disaster
It is virtually impossible to overstate the profligacy of what our government spends on the military. The Department of Defense's planned expenditures for the fiscal year 2008 are larger than all other nations' military budgets combined. The supplementary budget to pay for the current wars in Iraq and Afghanistan, not part of the official defense budget, is itself larger than the combined military budgets of Russia and China. Defense-related spending for fiscal 2008 will exceed $1 trillion for the first time in history. The U.S. has become the largest single seller of arms and munitions to other nations on Earth. Leaving out President Bush's two on-going wars, defense spending has doubled since the mid-1990s. The defense budget for fiscal 2008 is the largest since the second world war.
Before we try to break down and analyze this gargantuan sum, there is one important caveat. Figures on defense spending are notoriously unreliable. The numbers released by the Congressional Reference Service and the Congressional Budget Office do not agree with each other. Robert Higgs, senior fellow for political economy at the Independent Institute, says: "A well-founded rule of thumb is to take the Pentagon's (always well publicized) basic budget total and double it." Even a cursory reading of newspaper articles about the Department of Defense will turn up major differences in statistics about its expenses. Some 30-40% of the defense budget is 'black,'" meaning that these sections contain hidden expenditures for classified projects. There is no possible way to know what they include or whether their total amounts are accurate.
There are many reasons for this budgetary sleight-of-hand -- including a desire for secrecy on the part of the president, the secretary of defense, and the military-industrial complex -- but the chief one is that members of Congress, who profit enormously from defense jobs and pork-barrel projects in their districts, have a political interest in supporting the Department of Defense. In 1996, in an attempt to bring accounting standards within the executive branch closer to those of the civilian economy, Congress passed the Federal Financial Management Improvement Act. It required all federal agencies to hire outside auditors to review their books and release the results to the public. Neither the Department of Defense, nor the Department of Homeland Security, has ever complied. Congress has complained, but not penalized either department for ignoring the law. All numbers released by the Pentagon should be regarded as suspect.
In discussing the fiscal 2008 defense budget, as released on 7 February 2007, I have been guided by two experienced and reliable analysts: William D Hartung of the New America Foundation's Arms and Security Initiative and Fred Kaplan, defense correspondent for Slate.org. They agree that the Department of Defense requested $481.4bn for salaries, operations (except in Iraq and Afghanistan), and equipment. They also agree on a figure of $141.7bn for the "supplemental" budget to fight the global war on terrorism -- that is, the two on-going wars that the general public may think are actually covered by the basic Pentagon budget. The Department of Defense also asked for an extra $93.4bn to pay for hitherto unmentioned war costs in the remainder of 2007 and, most creatively, an additional "allowance" (a new term in defense budget documents) of $50bn to be charged to fiscal year 2009. This makes a total spending request by the Department of Defense of $766.5bn.
But there is much more. In an attempt to disguise the true size of the U.S. military empire, the government has long hidden major military-related expenditures in departments other than Defense. For example, $23.4bn for the Department of Energy goes towards developing and maintaining nuclear warheads; and $25.3bn in the Department of State budget is spent on foreign military assistance (primarily for Israel, Saudi Arabia, Bahrain, Kuwait, Oman, Qatar, the United Arab Republic, Egypt and Pakistan). Another $1.03bn outside the official Department of Defense budget is now needed for recruitment and re-enlistment incentives for the overstretched U.S. military, up from a mere $174m in 2003, when the war in Iraq began. The Department of Veterans Affairs currently gets at least $75.7bn, 50% of it for the long-term care of the most seriously injured among the 28,870 soldiers so far wounded in Iraq and 1,708 in Afghanistan. The amount is universally derided as inadequate. Another $46.4bn goes to the Department of Homeland Security.
Missing from this compilation is $1.9bn to the Department of Justice for the paramilitary activities of the FBI; $38.5bn to the Department of the Treasury for the Military Retirement Fund; $7.6bn for the military-related activities of the National Aeronautics and Space Administration; and well over $200bn in interest for past debt-financed defense outlays. This brings U.S. spending for its military establishment during the current fiscal year, conservatively calculated, to at least $1.1 trillion.
Military Keynesianism
Such expenditures are not only morally obscene, they are fiscally unsustainable. Many neo-conservatives and poorly informed patriotic Americans believe that, even though our defense budget is huge, we can afford it because we are the richest country on Earth. That statement is no longer true. The world's richest political entity, according to the CIA's World Factbook, is the European Union. The E.U.'s 2006 GDP was estimated to be slightly larger than that of the U.S. Moreover, China's 2006 GDP was only slightly smaller than that of the U.S., and Japan was the world's fourth richest nation.
A more telling comparison that reveals just how much worse we're doing can be found among the current accounts of various nations. The current account measures the net trade surplus or deficit of a country plus cross-border payments of interest, royalties, dividends, capital gains, foreign aid, and other income. In order for Japan to manufacture anything, it must import all required raw materials. Even after this incredible expense is met, it still has an $88bn per year trade surplus with the U.S. and enjoys the world's second highest current account balance (China is number one). The U.S. is number 163 -- last on the list, worse than countries such as Australia and the U.K. that also have large trade deficits. Its 2006 current account deficit was $811.5bn; second worst was Spain at $106.4bn. This is unsustainable.
It's not just that our tastes for foreign goods, including imported oil, vastly exceed our ability to pay for them. We are financing them through massive borrowing. On 7 November 2007, the U.S. Treasury announced that the national debt had breached $9 trillion for the first time. This was just five weeks after Congress raised the "debt ceiling" to $9.815 trillion. If you begin in 1789, at the moment the constitution became the supreme law of the land, the debt accumulated by the federal government did not top $1 trillion until 1981. When George Bush became president in January 2001, it stood at approximately $5.7 trillion. Since then, it has increased by 45%. This huge debt can be largely explained by our defense expenditures.
The top spenders
The world's top 10 military spenders and the approximate amounts each currently budgets for its military establishment are
Our excessive military expenditures did not occur over just a few short years or simply because of the Bush administration's policies. They have been going on for a very long time in accordance with a superficially plausible ideology, and have now become so entrenched in our democratic political system that they are starting to wreak havoc. This is military Keynesianism -- the determination to maintain a permanent war economy and to treat military output as an ordinary economic product, even though it makes no contribution to either production or consumption.
This ideology
goes back to the
first years of
the cold war.
During the late
1940s, the U.S.
was haunted by
economic
anxieties. The
great depression
of the 1930s had
been overcome
only by the war
production boom
of the second
world war. With
peace and
demobilization,
there was a
pervasive fear
that the
depression would
return. During
1949, alarmed by
the Soviet
Union's
detonation of an
atomic bomb, the
looming
Communist
victory in the
Chinese civil
war, a domestic
recession, and
the lowering of
the Iron Curtain
around the
USSR's European
satellites, the
U.S. sought to
draft basic
strategy for the
emerging cold
war. The result
was the
militaristic
National
Security Council
Report 68
(NSC-68) drafted
under the
supervision of
Paul Nitze, then
head of the
Policy Planning
Staff in the
State
Department.
Dated 14 April
1950 and signed
by President
Harry S. Truman
on 30 September
1950, it laid
out the basic
public economic
policies that
the U.S. pursues
to the present
day.
In its
conclusions,
NSC-68 asserted:
"One of the most
significant
lessons of our
World War II
experience was
that the
American
economy, when it
operates at a
level
approaching full
efficiency, can
provide enormous
resources for
purposes other
than civilian
consumption
while
simultaneously
providing a high
standard of
living."
With this
understanding,
U.S. strategists
began to build
up a massive
munitions
industry, both
to counter the
military might
of the Soviet
Union (which
they
consistently
overstated) and
also to maintain
full employment,
as well as ward
off a possible
return of the
depression. The
result was that,
under Pentagon
leadership,
entire new
industries were
created to
manufacture
large aircraft,
nuclear-powered
submarines,
nuclear
warheads,
intercontinental
ballistic
missiles, and
surveillance and
communications
satellites. This
led to what
President
Eisenhower
warned against
in his farewell
address of 6
February 1961:
"The conjunction
of an immense
military
establishment
and a large arms
industry is new
in the American
experience" --
the
military-industrial
complex.
By 1990 the
value of the
weapons,
equipment and
factories
devoted to the
Department of
Defense was 83%
of the value of
all plants and
equipment in
U.S.
manufacturing.
From 1947 to
1990, the
combined U.S.
military budgets
amounted to $8.7
trillion. Even
though the
Soviet Union no
longer exists,
U.S. reliance on
military
Keynesianism
has, if
anything,
ratcheted up,
thanks to the
massive vested
interests that
have become
entrenched
around the
military
establishment.
Over time, a
commitment to
both guns and
butter has
proven an
unstable
configuration.
Military
industries crowd
out the civilian
economy and lead
to severe
economic
weaknesses.
Devotion to
military
Keynesianism is
a form of slow
economic
suicide.
Higher
spending, fewer
jobs
On 1 May 2007,
the Center for
Economic and
Policy Research
of Washington,
DC, released a
study prepared
by the economic
and political
forecasting
company Global
Insight on the
long-term
economic impact
of increased
military
spending. Guided
by economist
Dean Baker, this
research showed
that, after an
initial demand
stimulus, by
about the sixth
year the effect
of increased
military
spending turns
negative. The
U.S. economy has
had to cope with
growing defense
spending for
more than 60
years. Baker
found that,
after 10 years
of higher
defense
spending, there
would be 464,000
fewer jobs than
in a scenario
that involved
lower defense
spending.
Baker concluded:
"It is often
believed that
wars and
military
spending
increases are
good for the
economy. In
fact, most
economic models
show that
military
spending diverts
resources from
productive uses,
such as
consumption and
investment, and
ultimately slows
economic growth
and reduces
employment."
These are only
some of the many
deleterious
effects of
military
Keynesianism.
It was believed
that the U.S.
could afford
both a massive
military
establishment
and a high
standard of
living, and that
it needed both
to maintain full
employment. But
it did not work
out that way. By
the 1960s it was
becoming
apparent that
turning over the
nation's largest
manufacturing
enterprises to
the Department
of Defense and
producing goods
without any
investment or
consumption
value was
starting to
crowd out
civilian
economic
activities. The
historian Thomas
E Woods Jr.
observes that,
during the 1950s
and 1960s,
between
one-third and
two-thirds of
all U.S.
research talent
was siphoned off
into the
military sector.
It is, of
course,
impossible to
know what
innovations
never appeared
as a result of
this diversion
of resources and
brainpower into
the service of
the military,
but it was
during the 1960s
that we first
began to notice
Japan was
outpacing us in
the design and
quality of a
range of
consumer goods,
including
household
electronics and
automobiles.
Can we
reverse the
trend?
Nuclear weapons
furnish a
striking
illustration of
these anomalies.
Between the
1940s and 1996,
the U.S. spent
at least $5.8
trillion on the
development,
testing and
construction of
nuclear bombs.
By 1967, the
peak year of its
nuclear
stockpile, the
U.S. possessed
some 32,500
deliverable
atomic and
hydrogen bombs,
none of which,
thankfully, was
ever used. They
perfectly
illustrate the
Keynesian
principle that
the government
can provide
make-work jobs
to keep people
employed.
Nuclear weapons
were not just
America's secret
weapon, but also
its secret
economic weapon.
As of 2006, we
still had 9,960
of them. There
is today no sane
use for them,
while the
trillions spent
on them could
have been used
to solve the
problems of
social security
and health care,
quality
education and
access to higher
education for
all, not to
speak of the
retention of
highly-skilled
jobs within the
economy.
The pioneer in
analyzing what
has been lost as
a result of
military
Keynesianism was
the late Seymour
Melman
(1917-2004), a
professor of
industrial
engineering and
operations
research at
Columbia
University. His
1970 book,
Pentagon
Capitalism: The
Political
Economy of War,
was a prescient
analysis of the
unintended
consequences of
the U.S.
preoccupation
with its armed
forces and their
weaponry since
the onset of the
cold war. Melman
wrote: "From
1946 to 1969,
the United
States
government spent
over $1,000bn on
the military,
more than half
of this under
the Kennedy and
Johnson
administrations
-- the period
during which the
[Pentagon-dominated]
state management
was established
as a formal
institution.
This sum of
staggering size
(try to
visualize a
billion of
something) does
not express the
cost of the
military
establishment to
the nation as a
whole. The true
cost is measured
by what has been
foregone, by the
accumulated
deterioration in
many facets of
life, by the
inability to
alleviate human
wretchedness of
long duration."
In an important
exegesis on
Melman's
relevance to the
current American
economic
situation,
Thomas Woods
writes:
"According to
the U.S.
Department of
Defense, during
the four decades
from 1947
through 1987 it
used (in 1982
dollars) $7.62
trillion in
capital
resources. In
1985, the
Department of
Commerce
estimated the
value of the
nation's plant
and equipment,
and
infrastructure,
at just over
$7.29 trillion
... The amount
spent over that
period could
have doubled the
American capital
stock or
modernized and
replaced its
existing stock."
The fact that we
did not
modernize or
replace our
capital assets
is one of the
main reasons
why, by the turn
of the 21st
century, our
manufacturing
base had all but
evaporated.
Machine tools,
an industry on
which Melman was
an authority,
are a
particularly
important
symptom. In
November 1968, a
five-year
inventory
disclosed "that
64% of the
metalworking
machine tools
used in U.S.
industry were 10
years old or
older. The age
of this
industrial
equipment
(drills, lathes,
etc.) marks the
United States'
machine tool
stock as the
oldest among all
major industrial
nations, and it
marks the
continuation of
a deterioration
process that
began with the
end of the
second world
war. This
deterioration at
the base of the
industrial
system certifies
to the
continuous
debilitating and
depleting effect
that the
military use of
capital and
research and
development
talent has had
on American
industry."
Nothing has been
done since 1968
to reverse these
trends and it
shows today in
our massive
imports of
equipment --
from medical
machines like
proton
accelerators for
radiological
therapy (made
primarily in
Belgium,
Germany, and
Japan) to cars
and trucks.
Our short tenure
as the world's
lone superpower
has come to an
end. As Harvard
economics
professor
Benjamin
Friedman has
written: "Again
and again it has
always been the
world's leading
lending country
that has been
the premier
country in terms
of political
influence,
diplomatic
influence and
cultural
influence. It's
no accident that
we took over the
role from the
British at the
same time that
we took over the
job of being the
world's leading
lending country.
Today we are no
longer the
world's leading
lending country.
In fact we are
now the world's
biggest debtor
country, and we
are continuing
to wield
influence on the
basis of
military prowess
alone."
Some of the
damage can never
be rectified.
There are,
however, some
steps that the
U.S. urgently
needs to take.
These include
reversing Bush's
2001 and 2003
tax cuts for the
wealthy,
beginning to
liquidate our
global empire of
over 800
military bases,
cutting from the
defense budget
all projects
that bear no
relationship to
national
security and
ceasing to use
the defense
budget as a
Keynesian jobs
program.
If we do these
things we have a
chance of
squeaking by. If
we don't, we
face probable
national
insolvency and a
long depression.
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