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 US 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 of 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 emphasising 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: onlywhat 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 emphasised 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.
Prabhat Patnaik is a Marxist economist in India. This article was first published in People’s Democracy on 7 August 2011; it is reproduced here for non-profit educational purposes.
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