[A-List] The Unbearable Costs of Empire

Mon Aug 9 17:34:13 MDT 2004

by Mark Weisbrot

AlterNet (August 02 2004)

Since September 11 2001, the phrases "American empire" and "America as
an imperial power" are being heard a lot more. But in contrast to the
1960s and 1970s, when such terms were brandished by an angry domestic
anti-war movement or by developing nations in UN debates, the concept
they represent has now at least partially entered the mainstream.
However much it has incurred hostility throughout most of the world,
including European and other countries usually allied with the US, 
the "new imperialism" has gained ground among the Establishment here.

The post-9/11 rationale is that America has terrorist enemies and rogue
states that will do it serious harm - maybe even with weapons of mass
destruction - if it doesn't police the world to stop them. "Being an
imperial power is more than being the most powerful nation", writes
Michael Ingatieff at Harvard's Kennedy Center. "It means enforcing such
order as there is in the world and doing so in the American interest".

But what most analysts have missed - whether or not they support the
idea of an American empire - is that the US simply can't afford the role
of global cop.

The Real Debt

First, the US is entering this new age of empire with a gross federal
debt that is the highest in more than fifty years as a percentage of
gross domestic product. For fiscal 2005, which begins in October, the US
gross federal debt is projected to be $8.1 trillion, or 67.5% of GDP. 
By the time 100,000 US troops were in Vietnam in 1965, it was 46.9% 
and falling.

One technical point that's vitally important here: It's the gross
federal debt and deficits that matter, not the smaller "debt held by 
the public" and "unified budget deficit" that are generally cited in 
the press. For example, the most commonly reported estimate of the
annual federal budget deficit is $478 billion for 2004. But this 
number is misleading, because it doesn't include borrowing from 
federal trust funds - mostly Social Security and Medicare.

But the money the government is borrowing from Social Security and other
trust funds will, with nearly 100% certainty, be paid back - just like
the money it borrows when it sells bonds to Bill Gates or the Chinese
government. The annual federal budget deficit is, therefore, $639
billion, according to the numbers from the Congressional Budget Office.
This is 5.6% of GDP, a near-record level for the post-World War II era.

Borrowing from Abroad

America can - just barely - afford this deficit right now, but that's
about to change. First, the interest burden on the debt is currently
manageable because of extremely low interest rates. But the Fed is
expected to raise short-term rates to 2% by yearend. More important,
long-term rates will almost certainly rise even more because inflation
has accelerated to 4.9% over the last six months - a big jump from
2003's 1.9%.

If Kerry wins and takes back the tax cut for households earning more
than $200,000 a year, as promised, that won't even reduce the deficit 
by 1% of GDP. And if he keeps his spending promises, then the monies
realized by repealing the tax cut would be canceled out. The Bush budget,
which the conservative CATO Institute's Chairman Bill Niskanen recently
described as "a fraud" put together by "borrow and spend Republicans",
would make the deficit and debt problem even worse.

Then there's the problem of the US - both the government and the private
sector - borrowing from foreign countries. Most government borrowing is
now being financed from overseas - especially the central banks of China,
Japan, and other countries. These institutions are deliberately buying
dollars in order to keep their currencies from rising against the
greenback. But they won't keep doing this indefinitely. The US is
borrowing more than $600 billion a year from the rest of the world, 
and it can't go on much longer.

The Big Bang

Sometime within a decade, and most likely in the next couple of years,
foreign investors will see that a steep decline of the dollar is
unavoidable and will begin to unload them and US Treasury securities. As
with any bubble, it will be better if this one bursts sooner rather than
later, when it would be even bigger. But adjustment and pain will still
occur, including higher interest rates and consequently slower growth.

Slower growth will also mean larger federal budget deficits. And one
event that will certainly slow growth and increase federal government
borrowing well beyond current projections is the bursting of the housing
bubble. Housing prices have seen an unprecedented run-up since 1995 of
more than 35 percentage points above the rate of inflation. That has
created more than $3 trillion in paper wealth that - just like the
illusory wealth of the stock-market bubble - is programmed to disappear.
This, too, is almost certain to happen in the next few years.

The economic impact will be at least equivalent to that of equities
popping in 2000-02, which caused the last recession. Another slump is,
therefore, likely in the near future, and with it a further ballooning
of the federal budget deficit, as tax revenues fall and automatic
countercyclical spending rises.

China Rising

The combination of unsustainable public debt and foreign debt is a
deadly and explosive mix by itself. Rising real interest rates and 
a looming housing bubble bursting make it all the more dangerous.
Financial markets will exert the necessary discipline if politicians
refuse to do so, but either way the US can't afford even the $486
billion a year that it's currently spending annually on the military 
and homeland security.

And even these spending levels are a lot less than would be necessary 
to maintain America's power in the world. Over the next decade or so,
the Chinese economy will actually surpass the US in size. America has
100,000 troops in East Asia. If the US were to try to maintain its
current dominance of the region - something that will probably prove
impossible - it would boost our military spending even further.

The bottom line is that the American empire just isn't affordable.
Within a decade or so, the US will be forced to be much less preemptive
and outward-looking and to engage in scaled-back foreign policy - even
if the foreign-policy Establishment never changes its views or ambitions.

Reality Check

In the meantime, the segment of American society that would like to see
advances in health care, education, poverty alleviation, or any other
positive economic or social goals will get bad news. The foreseeable
future is a lot different from most of the post-World War II era, during
which the US added such programs as Medicare and Medicaid while spending
literally trillions of dollars on cold and hot wars.

This time, little or no federal money will be available for any of these
things until US foreign policy changes. The most likely scenario is 
that most areas of nonmilitary discretionary spending will be squeezed
relentlessly before anything gives in the realm of superpower ambitions.

The post-9/11 age of American empire will close not with a bang but a
whimper, suffocated by the laws of arithmetic, the constraints of public
financing, and the limits of foreign borrowing. What remains to be
determined is how much the US will pay - in lost and ruined lives, 
as well as bills for future generations - and how many enemies it 
will make throughout the world, before coming to grips with reality.

http://www.alternet.org/story/19420/

This was published on BusinessWeek.com on July 29, 2004.

Please also see:-

"Digging out of Bush's Tax-cut Hole"
by Robert Kuttner, Boston Globe (August 04 2004)
http://www.boston.com/news/globe/editorial_opinion/oped/articles/2004/08/04/digging_out_of_bushs_tax_cut_hole/

"Length matters"
by James K Galbraith, Salon.com (July 07 2004)
http://www.salon.com/opinion/feature/2004/07/07/job_growth/index_np.html

"A Record Deficit"
Washington Post Editorial (August 05 2004)
http://www.washingtonpost.com/wp-dyn/articles/A41149-2004Aug4.html

Bill Totten     http://www.ashisuto.co.jp/english/