[A-List] Going Bankrupt

[Bill Totten <shimogamo@xxxxxxxxxxxxx>]

Why the Debt Crisis Is Now the Greatest Threat to the American Republic

by Chalmers Johnson

Tom Dispatch (January 22 2008)

The military adventurers of the Bush administration have much in common
with the corporate leaders of the defunct energy company Enron. Both
groups of men 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 utter fiscal irresponsibility has been disguised through
many manipulative financial schemes (such as causing poorer countries to
lend us unprecedented sums of money), but the time of reckoning is fast
approaching.

There are three broad aspects to our debt crisis. First, in the current
fiscal year (2008) we are spending insane amounts of money on "defense"
projects that bear no relationship to the national security of the
United States. Simultaneously, we are keeping the income tax burdens on
the richest segments of the American population at strikingly low levels.

Second, we continue to believe that we can compensate for the
accelerating erosion of our manufacturing base and our loss of jobs to
foreign countries through massive military expenditures - so-called
"military Keynesianism", which I discuss in detail in my book Nemesis:
The Last Days of the American Republic. By military Keynesianism, 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 our country. 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. Let me discuss each of these.

The Current 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 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 United States has become the
largest single salesman of arms and munitions to other nations on Earth.
Leaving out of account 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 World War II.

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 thirty to
forty percent 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 somewhat 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. The result is that all
numbers released by the Pentagon should be regarded as suspect.

In discussing the fiscal 2008 defense budget, as released to the press
on February 7 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 $481.4
billion for salaries, operations (except in Iraq and Afghanistan), and
equipment. They also agree on a figure of $141.7 billion 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 $93.4 billion 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 $50 billion to
be charged to fiscal year 2009. This comes to a total spending request
by the Department of Defense of $766.5 billion.

But there is much more. In an attempt to disguise the true size of the
American military empire, the government has long hidden major
military-related expenditures in departments other than Defense. For
example, $23.4 billion for the Department of Energy goes toward
developing and maintaining nuclear warheads; and $25.3 billion 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 $1.03 billion
outside the official Department of Defense budget is now needed for
recruitment and reenlistment incentives for the overstretched US
military itself, up from a mere $174 million in 2003, the year the war
in Iraq began. The Department of Veterans Affairs currently gets at
least $75.7 billion, fifty percent of which goes for the long-term care
of the grievously injured among the at least 28,870 soldiers so far
wounded in Iraq and another 1,708 in Afghanistan. The amount is
universally derided as inadequate. Another $46.4 billion goes to the
Department of Homeland Security.

Missing as well from this compilation is $1.9 billion to the Department
of Justice for the paramilitary activities of the FBI; $38.5 billion to
the Department of the Treasury for the Military Retirement Fund; $7.6
billion for the military-related activities of the National Aeronautics
and Space Administration; and well over $200 billion in interest for
past debt-financed defense outlays. This brings US spending for its
military establishment during the current fiscal year (2008),
conservatively calculated, to at least $1.1 trillion.

Military Keynesianism

Such expenditures are not only morally obscene, they are fiscally
unsustainable. Many neoconservatives 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. Unfortunately,
that statement is no longer true. The world's richest political entity,
according to the CIA's "World Factbook", is the European Union. The EU's
2006 GDP (gross domestic product - all goods and services produced
domestically) was estimated to be slightly larger than that of the US.
However, China's 2006 GDP was only slightly smaller than that of the US,
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. For example, 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 $88 billion per
year trade surplus with the United States and enjoys the world's second
highest current account balance. (China is number one.) The United
States, by contrast, is number 163 - dead last on the list, worse than
countries like Australia and the United Kingdom that also have large
trade deficits. Its 2006 current account deficit was $811.5 billion;
second worst was Spain at $106.4 billion. This is what 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 November 7 2007, the US Treasury announced that
the national debt had breached $9 trillion for the first time ever. This
was just five weeks after Congress raised the so-called 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 in comparison with the rest of the
world.

The world's top ten military spenders and the approximate amounts each
country currently budgets for its military establishment are:

1. United States (FY08 budget), $623 billion
2. China (2004), $65 billion
3. Russia, $50 billion
4. France (2005), $45 billion
5. United Kingdom, $42.8 billion
6. Japan (2007), $41.75 billion
7. Germany (2003), $35.1 billion
8. Italy (2003), $28.2 billion
9. South Korea (2003), $21.1 billion
10. India (2005 estimate), $19 billion

World total military expenditures (2004 estimate), $1,100 billion
World total (minus the United States), $500 billion

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 entrenched in our democratic
political system where they are starting to wreak havoc. This ideology I
call "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 US was haunted by economic anxieties. The Great
Depression of the 1930s had been overcome only by the war production
boom of World War II. 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 US 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 April 14 1950, and signed by President Harry
S Truman on September 30 1950, it laid out the basic public economic
policies that the United States 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, American 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 February 6 1961: "The
conjunction of an immense military establishment and a large arms
industry is new in the American experience" - that is, 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 American manufacturing. From 1947 to 1990, the combined US
military budgets amounted to $8.7 trillion. Even though the Soviet Union
no longer exists, US 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, in fact, a form of
slow economic suicide.

On May 1 2007, the Center for Economic and Policy Research of
Washington, DC, released a study prepared by the global 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. Needless to say,
the US economy has had to cope with growing defense spending for more
than sixty years. He found that, after ten years of higher defense
spending, there would be 464,000 fewer jobs than in a baseline 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.


Hollowing Out the American Economy

It was believed that the US 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 American 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.

Nuclear weapons furnish a striking illustration of these anomalies.
Between the 1940s and 1996, the United States 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 United States
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 American 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 American
preoccupation with its armed forces and their weaponry since the onset
of the Cold War. Melman wrote (pages 2-3):

"From 1946 to 1969, the United States government spent over $1,000
billion 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 US 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. In other words, 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 twenty-first 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 (page 186) "that 64
percent of the metalworking machine tools used in US industry were ten
years old or older. The age of this industrial equipment (drills,
lathes, et cetera) 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 in the period 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 done can never be rectified. There are, however, some
steps that this country 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 the national security
of the United States, 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.

_____

Chalmers Johnson is the author of Nemesis: The Last Days of the American
Republic, just published in paperback. It is the final volume of his
Blowback Trilogy, which also includes Blowback (2000) and The Sorrows of
Empire (2004).

Note: For those interested, click here to view a clip from a new film,
"Chalmers Johnson on American Hegemony", in Cinema Libre Studios'
Speaking Freely series in which he discusses "military Keynesianism" and
imperial bankruptcy.
http://www.tomdispatch.com/p/chalmers_video

For sources on global military spending, please see:

(1) Global Security Organization, "World Wide Military Expenditures"
http://www.globalsecurity.org/military/world/spending.htm
as well as
Glenn Greenwald, "The bipartisan consensus on US military spending"
http://www.salon.com/opinion/greenwald/2008/01/02/military_spending/

 (2) Stockholm International Peace Research Institute,
"Report: China biggest Asian military spender"
http://www.usatoday.com/news/world/2007-06-11-military-report_N.htm

Copyright 2008 Chalmers Johnson

http://www.tomdispatch.com/post/174884/chalmers_johnson_how_to_sink_america

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