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.