The
United States has an archaic piece of legislation, passed
in 1917, which puts a ceiling on the magnitude of the
debt of its federal government in absolute dollar terms.
(Since the various State governments in the U.S. are
not allowed to run fiscal deficits and hence incur debt,
the federal debt is synonymous with government debt).
Fixing a debt ceiling in absolute dollar terms is extraordinarily
silly for two obvious reasons: first, as the federal
government incurs fresh fiscal deficits every year which
add to its debt, this ceiling fixed in absolute terms
is naturally bound to get exceeded. Secondly, as prices
and output rise, the Federal government's revenue and
expenditure also rise, and so does its fiscal deficit
in absolute terms. Any absolute debt ceiling therefore
must get exceeded for this reason as well. The debt
ceiling in short needs to be revised upwards every so
often. Not surprisingly there have been umpteen such
revisions, though, strangely, nobody has pushed for
either repealing this archaic piece of legislation or
even amending it to convert the ceiling to a percentage
of the GDP. (In Europe and in India, the size of the
fiscal deficit, which is a flow as distinct from debt
which is a stock, is fixed as a percentage of the GDP).
The previous revision in the debt ceiling was on February
12, 2010, which fixed it at $14.3 trillion. This ceiling,
it was known in advance, would have to be revised upwards
again, but it was expected to be a routine affair to
which nobody paid much attention. Since the government's
budget had already been approved by the legislature,
which had given sanction to the various items of federal
expenditure, a revision of the debt ceiling to accommodate
the expenditures already sanctioned was expected to
occur in the normal course. But it became a crisis in
the US because the Republicans, who of late have moved
further Right, and without whose consent the revision
of any debt ceiling could not be effected, began demanding
their pound of flesh, in the form of cuts in federal
expenditure, especially on social security and on programmes
of benefit to the poor such as Medicare.
The class aspect of this insistence should not be missed.
The previous Republican administration under George
Bush had brought about massive tax cuts for the rich,
sharply accentuating the post-tax income inequalities
in the US. In an effort to appease the Republicans,
Obama in December 2010 had agreed to continue with those
tax cuts, apparently in the mistaken belief that, since
one favour begets another, the Republicans would in
turn do him the favour of raising the debt ceiling,
a normally routine affair as we have seen, without much
ado. The Republicans however insisted upon eating their
cake and having it too. Having got Obama to continue
with the Bush-era tax cuts, they made it a condition
that they would agree to an increase in the debt ceiling
only if severe cuts were effected in a range of items
of federal expenditure which were of benefit to the
poor. And Obama has had to bow before them. Under the
shadow of a silly piece of legislation passed in 1917,
a further grotesquely regressive shift in income distribution
has been effected by the far Right in the US which currently
dominates the Republican Party. In the process the strength
of the far Right in American politics has increased
greatly: it is now confident that it can push a pusillanimous
Obama in the direction it wants.
Since in the absence of an increase in the debt ceiling,
the US government would have defaulted on its payments,
which is a matter great embarrassment for any government,
many in the US are happy that a solution has been found
to such a crisis through mutual agreement, no matter
what the terms of the agreement between Obama and the
Republicans might be. But this is a naïve position
which ignores the great damage that this compromise
has done to the US society (in the form of a sharp regression
in income distribution), to the US polity (in the form
of a remarkable shift to the Right) and to the US and
world economy (in the form of an accentuation of the
world recession, on which more later).
Some would argue that Obama had no choice in the matter,
that to avert the crisis which would have ensued if
the US government had defaulted on its payments, he
had to bow to the Republicans. But this is erroneous.
Quite apart from the fact that he had been pusillanimous
all along, especially in continuing with the Bush-era
tax-cuts, he turned out to be pusillanimous even when
it came to the crunch. He did have an obvious way out
which was suggested by many, but he did not follow it.
The way out was as follows.
While government bonds are counted as government debt,
money issued by the government is not. The Federal Reserve
holds $1.7 trillion of government bonds at the moment,
which it has been buying in its effort to lower long
term interest rates (for stimulating a recovery). This
sum is counted as government debt and hence figures
in all calculations about whether government debt is
within the statutory ceiling. If the government merely
substitutes money printed by it for government bonds
in the Federal Reserve Board's portfolio, then its debt
falls well within the ceiling (since the estimated excess
over the ceiling is $1.5 trillion which is less than
the $1.7 trillion of government bonds with the Fed).
Government-printed money in the US is not a new idea:
Abraham Lincoln had printed notes called ''Greenbacks''
(the term is still used in common parlance to refer
to the dollar), precisely in a similar situation when
the Federal government had got into a debt crisis because
of financing Civil War expenditure. True, substituting
government notes for government bonds (it does not matter
to the Fed because interest rates on government bonds
are near-zero, and much of the Fed's interest earnings
come to the government treasury anyway), appears to
be a phoney solution; but since the debt-ceiling problem
is a phoney problem anyway, a phoney solution is all
that it requires, and this solution is quite enough
to counter the arm-twisting by the Republicans.
The reason Obama did not do it is structural; it is
not because of some personal failure on his part, as
Liberal writers have been suggesting. Obama's apparent
pusillanimity in other words is not a character trait
but a consequence of his bowing to the pressures of
finance capital. A big debate has been on for some time
in the US about the size of the fiscal deficit. While
many progressive economists have been rightly emphasizing
that in the midst of a recession a large fiscal deficit
is necessary for stimulating the economy, and that it
cannot possibly do any harm, not even on the inflation
front (since the inflation in the US, not alarmingly
high in any case, is not caused by excess demand), the
financial interests and the media controlled by them
have been systematically wanting a cut in the fiscal
deficit. This is hardly surprising: finance capital
is always opposed to any form of State activism except
that which promotes its own interests. It propagates
not just the view that what is good for finance is good
for the economy, but an even stronger version of it:
only what is good for finance is good for the economy.
For it to admit that the interests of the economy can
be served by government action that is not aimed at
promoting its own interests, is to undermine its own
raison d'etre. The phoney problem of the debt ceiling
has been used to effect a real cut in the fiscal deficit.
And that too without affecting the interests of the
rich, the reversal of whose tax-cuts had already been
carefully removed from the agenda earlier.
A fiscal deficit can be curtailed either through garnering
larger tax revenue or through effecting expenditure
cuts. How it is curtailed, and upon whom the impact
of tax increases and expenditure cuts falls, are important
issues affecting the class distribution of income. Finance
capital not only wants a cut in the fiscal deficit,
but a cut effected correctly in class terms (from its
point of view). Obama has done both to its satisfaction.
No doubt he was goaded by the Right, but he could not
stand up to finance capital, because his own election
was funded largely by that bastion of finance capital,
Wall Street. Underlying what Liberal writers, quite
rightly, see as a shift to the Right in US politics,
is the increase in the power of finance capital.
Ironically, a good deal of the increase in government
debt in the US has been caused by the government's effort
to bail out banks from the financial crisis they had
collectively brought upon themselves, and also by the
Bush tax-cuts for the rich, which themselves not particularly
anti-recessionary, could not be reversed even as the
government had to work out a stimulus package against
recession. But this very increase in government debt
imposed by the rich and the financial interests has
been used by the same interests to bring about cuts
in welfare expenditures for the poor!
The fact that this would worsen the recession in the
US, and hence in the world capitalist economy as a whole,
has been rightly emphasized by many writers. Countering
a recession requires increased spending. Since the US
cannot suddenly expand its net exports (and if it did,
then some other countries' recession would be accentuated
since it would have to be based on a ''beggar-my-neighbour''
policy), its domestic expenditure has to increase. Since
neither private consumption expenditure nor private
investment are showing any signs of a recovery (they
would recover once the economy begins to recover), the
increased spending will have to come from the government,
and, in the absence of taxes upon the rich, will have
to be financed by a fiscal deficit (taxes on the poor
nullify the expansionary effects of government spending).
Curtailing the fiscal deficit, and that too via cuts
in expenditures for the poor, will therefore aggravate
the recession in the US, and hence the world economy.
It may be asked: why is finance capital insisting upon
such a course which is ultimately dangerous for the
system as a whole, since it confronts the system with
both greater popular antagonism and a worse crisis?
The reason is because capitalism is not a planned but
a spontaneous system. This spontaneity is what makes
it doomed. Paraphrasing Lenin we can say that if capitalism
could do all those things which were reasonable and
humane, then it would not be capitalism.
|
