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.
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.
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.
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.
HT: Grande Strategy
Update: I just read that Chalmers Johnson passed away this past weekend; he was 79. See R.I.P. Chalmers Johnson - 1931-2010.