Battle Over US Debt Ceiling Is A Distraction

If the US economy continues at its current trajectory without systemic changes, hope for any real recovery is dim [AFP]


The US Economy Is Reeling In The Aftermath Of Poor Decision Making, and Structural Weaknesses Threaten Its Future.

By Steven Hill
Last Modified: 12 Aug 2011 10:02
Courtesy Of "Al-Jazeera"

The first act of the debt ceiling drama is over for now, with all the pundits now assessing the damage to the President, House Republicans, the economy, and more. But during the ordeal, while the politicians traded insults like carnival barkers, the real threats to America's future were ignored. It’s not simply that the country is spending money that it doesn’t have; it’s also a matter of what the money is spent on. Is the debt the result of needed investment - or waste?

Unfortunately, the US massively wastes money and resources in three critical areas, especially when compared with our international competitors: military spending, health care, and energy/transportation.

The US spends as much money on its defence budget as the next twenty nations combined, and three times more than all conceivable enemies combined (and that figure does not include spending for theatre of war operations in Iraq, Afghanistan and Libya, which amounts to another estimated $1 to $3tn, nor does it include large expenditures by the Department of Homeland Security, National Security Agency, CIA, Veterans Administration, or the parts of NASA and the Department of Energy used for military-related activities). Is that level of spending really necessary to secure the homeland and global stability?

The answer is 'no'. Leading military analysts report that vast sums are being spent on outmoded weapons systems that have little relevance to America’s actual defence needs. Most of today's security risks result from insurgencies led by non-state actors, as in Iraq, Afghanistan and Pakistan. Yet as one defence critic put it, with over 760 military bases around the world, eleven large aircraft-carrier battle groups and other obsolete military hardware, the US military is "still geared to fight the Imperial Navy of Japan."

Who Is To Blame?

In reality then, a substantial part of the US defence budget actually is not for defence but instead is a jobs programme. It’s also a major source of pork for the use of politicians in their re-election campaigns. Combined with the insider influence of defence industry lobbyists, it means that the US economy has become hooked like an addict to an ongoing fiscal stimulus from military expenditures.

Yet as a fiscal stimulus, it's extremely inefficient. For starters, you are building a product - weapons and soldiers - that you hope to never use, so the market for future sales faces severe constraints. And many of the million-plus US soldiers in uniform are stationed overseas, where they are spending their salaries in some other nation’s economy. For all these reasons and more, many studies have shown that the economic "multiplier effect" that causes each dollar spent to ripple through an economy is much higher for spending on physical infrastructure – maintaining roads, bridges, airports and harbours, for which the American Society of Civil Engineers says the US has fallen $2tn behind  - than military spending.

Beyond the economic inefficiencies lies the question of relevance. With the Cold War over, it's important to ask who are America's enemies today, and what level of resources does national security require? Is Afghanistan the enemy, a poor, ravaged country of little strategic value with an economy smaller than that of tiny Rhode Island? Is it Iran, a poor country badly in need of economic development that, despite all its oil, has an economy smaller than that of New Jersey?

Indeed, the top analyst in the US intelligence community wrote a report in September 2008 in which he concluded that US superiority in military power will "be the least significant" asset in the epoch that is unfolding. Despite all the trillions spent, America's aggressive brand of unilateralism and military hard power have suffered unexpected setbacks and mixed national security results.

So America is not getting its military money's worth, not by a long shot, and we can no longer afford this kind of waste. But given how the economy is hooked into this wasteful spending as a fiscal stimulus to create jobs and re-elect incumbents, spurred on by the tentacles of defense industry lobbyists, wasteful defence spending is going to be tough to rein in. Yet it's important to try, because even a reduction in military spending to the same share of GDP as it was in 2000 would save $240bn a year, or 1.6 per cent of GDP. In a classic guns vs butter tradeoff, America spends more than twice as much of its gross domestic product on the military as Europe, while Europe spends at least 25 percent more per capita on social spending than the US.

An Unhealthy Affair

In health care, it is widely known that the US spends nearly twice as much money per capita as most other developed countries, nearly 17 per cent of the nation's gross domestic product. Yet despite spending so much more money on health care, various metrics reveal that Americans have worse health than these other countries, with 45-50 million Americans having no health insurance at all. The United States is one of a handful of countries with no mandatory paid sick leave, leaving some sixty million workers - 43 per cent of the private industry labour force - without paid sick days, which further degrades productivity and private earnings. US employers meanwhile spend two to three times as much as their overseas competitors on employee health care costs, reducing their global competitiveness.

The reason why Americans' health care is so expensive compared to Europe or Japan is because America has a for-profit health care system while Europe and Japan have predominantly non-profit health care systems (interestingly, only a few of them have British-style single payer or "socialized medicine"; most nations like Germany, France and Japan base their systems not on government-run health care but on private, non-profit insurance companies).

For-profit health care features CEOs making tens of millions of dollars in salary and bonuses, grossly overpaid doctors, and stockholders seeking to profit off of someone's ill health. Like any corporation looking to maximize earnings, for-profit health care companies have two incentives:  1) to jack up prices, i.e. insurance premiums as high as they can get away with, and 2) to pay out as little as possible on services. That's why they feature outrageous catch-22s like pre-existing condition clauses and annual and lifetime service caps, because your health care eats into their profits. It's a losing proposition for everyone except the insurance companies and health care professionals.

But non-profit health care features an entirely different set of incentives and performance standards because it prioritizes people's health above the company’s profits. This allows for features such as negotiated fees for each service, which helps to hold down costs, and greater transparency. It's the only method ever proven to rein in costs without sacrificing quality. Yet neither US political party has a plan to turn the American system into a non-profit one, so there’s little prospect for reining in costs any time soon.

A Bumpy Ride Ahead
When it comes to energy use and transportation, once again the United States is plagued by wasteful, even gluttonous practices. The average American today uses twice as much electricity as the average European. The average American car uses 40-50 per cent more fuel as the average European or Japanese car. Like with health care, American businesses also spend more than their international competitors on their energy and transportation needs. A recent budget deal gutted the Obama administration's budget for high speed rail, even as high speed rail investment continues apace in Europe and China. By implementing various conservation practices as well as widespread use of renewable energy methods, Europe has managed to reduce its carbon emissions and its overall ecological footprint to half that of the United States for the same standard of living.

When the United States was the world's pre-eminent power in the post-World War II era, we could afford such waste and inefficiency at the core of our economy. But in today's multi-polar, hyper-competitive world, such profligacy has put the US at a disadvantage. What this also means is that it's not just the amount of the deficits and debt that sends a nation hurtling toward a tipping point, but the quality of those obligations - are the deficits due to investment or waste?

No other developed nation in the world suffers from as great a degree of a bloated defense budget, health care waste and gluttonous energy and transportation use as the United States. It's hard to imagine how America can continue to play its pre-eminent global role if it cannot figure out how to stop the leakage. Given how enmeshed these sectors are in the US political economy, and how entrenched are the various special interests that benefit from the status quo, turning the ship of state will be devilishly difficult to do. Especially when the carnival barkers in the US congress distract the nation with a pointless debate over the debt ceiling.

Steven Hill is a political writer and columnist whose latest book is "Europe's Promise: Why the European Way is the Best Hope in an Insecure Age".