US debt: A retrospective view

AS the crisis on the financial markets deepened, the need for introspection to analyse the causes of the US's plight was all too obvious. On Sunday July 31, Congressmen belonging to the Democratic and the Republican parties reached an agreement aimed at averting a so-called "default," meaning the failure of the government in Washington to pay its bills.
The informal agreement was reached after months of tense negotiations. During the following two days it was passed by the House of Representatives and the Senate, and on the very day when the ceiling on the US public debt was being reached, Tuesday August 2, President Obama signed the bill lifting the ceiling.
There were sighs of relief in Washington. Yet the deal was immediately questioned on a variety of grounds, not least on grounds that it put the main burden of public debt relief on the US's working population. Thus, whereas the ceiling was raised by $2.1 trillion, President Obama once again gave in to the Republicans' demand that there would be no increases in taxation on the country's super-rich and corporations.
Congressional negotiators did mutually agree on budgetary cuts aimed at partially rebalancing the government budget. Yet those cuts were heavily biased against the country's poor: at least three-quarters of cuts agreed on will affect social programmes such as health care.
Meanwhile, few analysts took care to analyse the actual causes of the level of the US public debt, now standing at plus $14 trillion. Hence, the need for introspection and for a brief retrospective on the history of these debts. A proper starting point I believe is the eighties, when Ronald Reagan (a Republican) was president. His period was inaugurated in 1981 by a so called "tax revolution" which had an income effect that was notorious: the superrich benefited from tax reductions, even as social welfare programmes were slashed. Thus the bias of Reagan's budgetary measures was all too obvious.
Yet it did not result in balanced budgets. In fact, throughout his term, the budget deficit kept increasing dramatically. As official data of the US Department of the Treasury confirmed that the US's public debt skyrocketed, from roughly $1 trillion in 1982, to $2.5 trillion in 1989.
These skyrocketing debts were almost uniformly blamed on the fact that the military budget was raised every year. Ironically, during the recent Congressional negotiations, Obama's lieutenant at the Treasury, Geithner, in an attempt to convince Republicans, conveniently referred to appeals to lift the debt ceiling made by Ronald Reagan a quarter century back. Yet it is Reagan who set the pattern that has resulted in the US's present plight!
There is a second irony in the story over Congressional negotiations. Whereas Obama has countered the US recession via double digit-deficit spending -- both military and civilian -- it is the Republican Congressmen who have insisted most strenuously on the need to balance the US's annual budget.
Yet a comparison of different US presidential periods over the last thirty years brings out that there has been no case where a Republican president was parsimonious -- quite the contrary. The only period when a serious attempt was made to re-balance the US government budget was during the 1990s, when Democratic President Bill Clinton was in office. Whereas the late 1990s were characterised by balanced budgets, the US's public debt again started rising rapidly when Republican George W. Bush assumed power in 2001!
To quote from official figures: "The US's outstanding public debt was nearly $6 trillion in 2001, but had risen to $11 trillion when Bush left office in 2009." Again the key ingredients of Republican policymaking were tax reductions for top income categories -- combined with steep increases in allocations for the US armed forces and the wars.
Clearly, the Republican agenda aiming at rebalancing the US government budget does not sound very self-critical, once the history of the public debt is re-discussed. I am not arguing that the use of military allocations for economic stimulation is exclusively a Republican legacy -- far from it in fact. Thus, under Obama the US public debt has steeply risen too. His government too has failed to carry out any meaningful cuts in the military expenditures so far, although it uses civilian spending towards stimulation of the economy much more actively than has been the case in the past.
Again, even when Clinton ruled in the nineties, the US's level of military spending was half the world's total! Yet debt spending for military purposes seems a special Republican legacy. During each Republican governing period, a distinct a pattern of two parallel upward movements can be discerned -- of annual increases in military allocations and of annual increases in the US's public debt.
These parallel movements stand for a specific form of policymaking aimed at drawing the US economy from the slump. Under both Reagan and Bush, wasteful spending had been so large that it became the single most important stimulus.
As to the follow-up to the present Congressional deal: a part of the $2.2 trillion budgetary cuts to be implemented in the future are yet to be worked out by a bipartisan Congressional Committee. Thus, US analysts will argue that patience is required, and that Congressmen have perhaps started seeing the light. According to latest reports, the possibility of cuts in the military budget is now on the table of negotiations at last. An apparently high average figure of $30-50 billion in annual reductions over 10 years has even been suggested. Yet these amounts absolutely pale in comparison with the contribution military expenditures have made to the escalation in the US's debt problems over the last thirty years.
Again, the urgency of drastic measures is all too obvious. Given adverse reactions on the world's financial markets to the last-minute US decision on the debt ceiling, it would be foolhardy to wait. Share prices on the world's stock markets have tumbled, as doubts increase over the US's long-term capacity to repay its domestic and foreign creditors.
Surely, the US's debt problems do not stand alone, and are to be read in combination with debt problems faced by Europe's weak states. Surely, the deregulation of financial markets, the start of which too can be dated from the beginning of the 1980s, is another major cause behind escalating state debts.
Nevertheless it is fair to conclude that the US's longstanding reliance on military Keynesianism is one of the key elements feeding into the debt crisis that has engulfed the Western world.
The writer is an International Columnist for The Daily Star.