Once more on the US fiscal cliff
On 17 October the US public debt hit the $17 trillion mark for the first time – $53,765 for each US citizen;$751,940 per family; $148,747 for each US taxpayer! This is 107% of GDP. Total personal debt is also over $16 trillion. It is more than obvious that these staggering amounts are nothing short of crippling. The question is when will this whole house of cards collapse?
It should be noted that the debt has been growing exponentially. In 2010 it was $14.71 trillion and only last year was $16.10 trillion. It seems that it grew by $328 billion in just one day – 17 October 2013 – beating the previous record for a one-day increase which was $238 billion that arose two years ago.
17 October was of course the first day after the resolution suspending the internecine squabbling between the Republicans controlling the House of Representatives of the US Congress and the Democrats controlling its Senate was finally passed extending the time for agreeing a budget and at the same time lifting the debt ceiling for the next three months.
2013 has been the third year running that has witnessed the US government being driven to the brink as a result of attempts by Republicans to gain electoral advantage at the expense of the Democrats by posing as favouring lower taxation at the expense of greater austerity for the poor. The lure of lower taxation, which as a matter of fact favours the big capitalists, nevertheless acts as an irresistible fly trap for millions of petty-bourgeois and labour-aristocratic Americans who have seen their living standards plummet consequent upon the economic crisis that has seen the super-rich save themselves at the expense of these sections, to say nothing of the poorest sections of the working class.
Falling living standards
According to the Financial Times, ” The typical American family now earns less in real terms than in 1989 after household incomes fell for the fifth consecutive year, highlighting how the sluggish recovery is crimping spending power even as the US Federal Reserve considers slowing its monetary stimulus. …
“According to the Census Bureau, the median household income fell from $51,100 to $51,017 in 2012, and is now 8.3 per cent below its pre-recession peak in 2007…
” Median incomes are still declining even though the economy is almost 5 per cent bigger than its pre-recession peak and more than 10 per cent larger than its trough in 2009, because most of the gains have gone to those with the highest incomes. …
“According to separate figures produced by economist Emmanuel Saez, at the University of California, Berkeley, the incomes of the top 1 per cent of the population rose by nearly 20 per cent in 2012, whereas the incomes of the other 99 per cent rose by just 1 per cent.” (Robin Harding, ‘US families feel the squeeze’, 18 September 2013).
Eduardo Porter, writing in the New York Times of 19 September 2013 (‘America’s sinking middle class’), points out that whereas over the last 25 years US GDP per person has increased 40%, typical household income is now at more or less the same level as then:
“In key respects, in fact, the standard of living of most Americans has fallen decidedly behind. Just take the cost of medical services. Health care spending per person, adjusted for inflation, has roughly doubled since 1988, to about $8,500 – pushing up health insurance premiums and eating into workers’ wages.
“The cost of going to college has been rising faster than inflation as well. About two-thirds of people with bachelor’s degrees relied on loans to get through college, up from 45 percent two decades ago. Average student debt in 2011 was $23,300.
“In contrast to people in other developed nations, who have devoted more time to leisure as they have gotten richer, Americans work about as much as they did a quarter-century ago. Despite all this toil, the net worth of the typical American family in the middle of the income distribution fell to $66,000 in 2010 – 6 percent less than in 1989 after inflation.
“Though the bursting of the housing bubble and ensuing great recession takes a big share of the blame for families’ weakening finances, it is nonetheless startling that a single financial event – only a hiccup on the road to prosperity of Americans on the top of the pile – could erase a generation worth of progress for those in the middle.
“Though the statistics may be startling, the story they tell is, unfortunately, not surprising. It is the story of America’s new normal. In the new normal the share of the nation’s income channeled to corporate profits is higher than at any time since the 1920s, while workers’ share languishes at its lowest since 1965.
“In the new normal, the real wages of workers on the factory floor are lower than they were in the early ’70s. And the richest 10 percent of Americans get over half of the income America produces.
“‘Almost all of the benefits of growth since the trough of the Great Recession have been going to those in the upper classes,’ said Timothy Smeeding, who heads the Institute for Research on Poverty at the University of Madison-Wisconsin. ‘Middle- and lower-income families are getting a smaller slice of a smaller economic pie as labor markets have changed drastically during our recovery.’
“This story is about three decades old.
“In 2010, the Department of Commerce published a study about what it would take for different types of families to achieve the aspirations of the middle class – which it defined as a house, a car or two in the garage, a vacation now and then, decent health care and enough savings to retire and contribute to the children’s college education.
“It concluded that the middle class has become a much more exclusive club. Even two-earner families making almost $81,000 in 2008 – substantially more than the family median of about $60,000 reported by the Census – would have a much tougher time acquiring the attributes of the middle class than in 1990.
” The incomes of these types of families actually rose by a fifth between 1990 and 2008, according to the report. They were more educated and worked more hours, on average, and had children at a later age. Still, that was no match for the 56 percent jump in the cost of housing, the 155 percent leap in out-of-pocket spending on health care and the double-digit increase in the cost of college .”
To maintain the support of the masses for the very class that is shafting them, it makes perfect sense for the US bourgeoisie, via the Republican Party, to mount a mass campaign in favour of lower taxes, for nobody benefits as much from low taxation as the super-rich! Hence the Tea Party movement.
Fury directed at ‘Obamacare’
Since Obama’s triumph at pushing through plans for universal medical insurance in the US designed to ensure that all US citizens have some form of medical cover, whatever their age or pre-existing medical conditions, the Republicans, who opposed the measure at every step, have focused their attention on trying to ensure that it is never fully implemented.
As a health measure, it is hardly radical. To gain Congressional approval it had to be trimmed down to the minimum – one result of which being that non-citizen workers, for instance, are not covered by the provisions:
” First, the Affordable Care Act, as Obamacare is still occasionally called, is nothing like as its opponents describe it. In reality it is a relatively moderate reform to the market-based US health insurance system. As Republican lawmakers know, the bill’s mechanism was taken directly from a 1993 paper by The Heritage Foundation – the best-funded conservative advocacy group in Washington. Today Heritage is spearheading opposition to the ACA. As they also know, the ACA is in crucial respects to the right of the health reform passed by Mitt Romney, their 2012 presidential nominee, when he was governor of Massachusetts. All of Obamacare’s insurance plans – whether subsidised or not – are offered by the private sector. There is no public option. On substance, the law is a victory for conservative reform.
“Nor, as it is often assumed, can Republican fury be about the size of the US government. More than half of American healthcare is already provided directly by the federal government – Medicare for retirees, Medicaid for the poorest, and the Veterans Administration for anyone who has served in the armed forces.
“In key respects, therefore, half of US healthcare looks like Canada or Britain’s National Health Service. Republicans have no plans to repeal these programmes. When the ACA passed in 2010, many of Mr Obama’s supporters were disappointed he did not simply extend Medicare to cover everyone under 65. Instead, Obamacare will subsidise broader participation in the existing private system. Hopefully a large chunk of America’s 48m uninsured will now get coverage. But if Republicans are worried about big government, they are looking in the wrong place .” (Edward Luce, ‘The Republican lost cause – bringing Barack Obama down’, Financial Times, 30 September 2013).
To mobilise the disaffected middle classes in favour of austerity, Obamacare was chosen – not because there was a lot of money to be saved, and not because the Republican Party was in principle all that upset by it, but because it was a topic on which it has already proved remarkably easy to get the middle class masses going in a self-righteous campaign about how unfair it was that hard-working Americans should have to subsidise the feckless poor.
The money behind the Tea Party
“The current budget brinkmanship is just the latest development in a well-financed, broad-based assault on the health law …
“The billionaire Koch brothers, Charles and David, have been deeply involved with financing the overall effort. A group linked to the Kochs, Freedom Partners Chamber of Commerce, disbursed more than $200 million last year to nonprofit organizations involved in the fight….
“The groups have also sought to pressure vulnerable Republican members of Congress with scorecards keeping track of their health care votes; have burned faux ‘Obamacare cards’ on college campuses; and have distributed scripts for phone calls to Congressional offices, sample letters to editors and Twitter and Facebook offerings for followers to present as their own…
“While Freedom Partners has financed organizations that are pushing to defund the law [deprive Obamacare of funding] , like Heritage Action and Tea Party Patriots, Freedom Partners has not advocated that. A spokesman for the group, James Davis, said it was more focused on ‘educating Americans around the country on the negative impacts of Obamacare.’…
“Heritage Action, which has trained 6,000 people it calls sentinels around the country, sent them to open meetings and other events to confront their elected representatives. Its ‘Defund Obamacare Town Hall Tour,’ which began in Fayetteville, Ark., on Aug. 19 and ended 10 days later in Wilmington, Del., drew hundreds at every stop.” (Sheryl Gay Stolberg and Mike McIntire, ‘A Federal budget crisis months in the planning’, New York Times, 6 October 2013).
It would seem that the über-rich Koch brothers are wily enough to realise that their purposes are best served by ‘educating Americans’, i.e., winding them up against those worse off than themselves, and not by trying to bring about ‘defunding’ – which is what lies behind the refusal of House of Representatives Republicans to agree a budget as proposed by the president, that has already led to a 16-day government shut down and considerable damage to US Incorporated.
Dicing with death
As it was, this richly-funded anti-Obamacare took on a malign life of its own that totally lost sight of the interests of the US imperialist bourgeoisie, damaging the US economy’s fragile ‘recovery’ (which as we have seen was ‘recovery’ only for the moneybags), forcing the government to close down all its ‘non-essential’ operations for no less than 16 days, threatening damage to the US’s credit rating, postponing the ‘taper’ of quantitative easing that has the effect of diluting the value of the dollar, and drawing attention of financial markets, US imperialism’s creditors in particular, to the danger of a US default on its debts. Although in the end the Republicans were forced to back down, considerable damage to the US economy – and to the interests of the big bourgeoisie – was done; though this would have been a great deal worse if no deal had been reached. All this damage, however, has to be added to the damage to imperialist interests being caused by the sequester – also forced on the government by failure of Republicans to agree by 1 March this year the form that some $1tr of cuts over 10 years would take – the result of which is that the US military has had to bear a far greater proportion of the agreed cuts than the US bourgeoisie would have liked.
Joe Nocera of the New York Times pointed out the damage that would be caused not only to the US economy but to the world economy should the US have been forced to default on the repayment of its debts:
“The … U.S. government debt is the only risk-free asset in the world. That debt undergirds the entire world financial system – precisely because the whole world has such faith in it. There is always demand for U.S. government debt. Almost every other asset you can think of is in some way measured against it. A default would destabilize the market for Treasuries. And that, in turn, would likely destabilize every other asset.”
Of course, if US repayment was only held up on a technicality rather than because the US was insolvent, failure to pay on time would not be as catastrophic as creditors would know they would be paid – that the cheque was indeed in the post. The problem is that the US is in fact insolvent and can only keep going by borrowing more and more, so these glitches are potentially a threat to the whole financial system.
Joe Nocera continues: “Let’s move to the havoc a destabilized Treasury debt would have on the banking system. ‘The plumbing of the global financial system depends on Treasuries [i.e., US government debt] ,’ says Karen Petrou, a banking expert at Federal Financial Analytics. Remember what happened to Lehman Brothers? As the market lost faith in the company’s ability to meet its obligations, Lehman lost access to the ‘repo’ market, which is the way banks are funded on a short-term basis. Treasuries make up a great deal of the collateral in the repo market. If a default were to cause the repo market to freeze, the entire banking system would find itself in crisis. Meanwhile – more shades of Lehman Brothers – the ratings agencies would likely downgrade Treasuries, forcing money market funds to start dumping government debt.
“Painful choices would have to be made. Right now, the Treasury Department says it does not have the authority to pick and choose which creditors to pay. But, in the event of a default, it is hard to imagine that the government wouldn’t make some tough decisions about who should get paid in the short term – and who would have to wait. And, though this would infuriate millions of Americans, bondholders in China would likely get their money ahead of, say, Social Security recipients.
“‘From a purely cost-benefit analysis,’ says Mark Zandi of Moody’s Analytics, ‘not paying bondholders would wind up costing the U.S. much more than not paying Social Security recipients’ – because if bondholders lost faith in Treasuries, it would cost the government billions more in interest payments each year.
“During the 2011 debt-ceiling crisis, consumer confidence dropped by 22 percent. When consumer confidence falls, people are less willing to spend and businesses are less willing to hire. That’s how recessions – or depressions – begin, and that may be the most important consequence of all.” (‘Why the debt ceiling matters, 8 October 2013).
We would respectfully suggest that not paying social security cheques might well prove the most important consequence of all, the spark that sets the masses off on to a collision course with the bourgeoisie.
Interestingly stock market prices were relatively unaffected by this dire threat to the world financial system. It would seem that the bourgeoisie the world over remained convinced that another eleventh hour agreement would be reached, and they were right:
” With the Treasury Department warning that it could run out of money to pay national obligations within a day, the Senate voted overwhelmingly on Wednesday evening, 81 to 18, to approve a proposal hammered out by the chamber’s Republican and Democratic leaders after the House on Tuesday was unable to move forward with any resolution. The House followed suit a few hours later, voting 285 to 144 to approve the Senate plan, which would fund the government through Jan. 15 and raise the debt limit through Feb. 7.
“Mr. Obama signed the bill about 12:30 a.m. Thursday.
“Most House Republicans opposed the bill, but 87 voted to support it. The breakdown showed that Republican leaders were willing to violate their informal rule against advancing bills that do not have majority Republican support in order to end the shutdown. All 198 Democrats voting supported the measure .” (Jonathan Weisman and Ashley Parker, ‘Republicans back down, ending crisis over shutdown and debt limit’, New York Times, 17 October 2013).
And the Financial Times points out: ” The compromise reopens the government until January 15, suspends the debt ceiling until February 7, and requires negotiations to reduce the budget deficit to be completed by December 13. It includes a mechanism for Republicans to voice their disapproval for an extension of the borrowing authority, though this would not have a practical effect .” (Richard McGregor and Stephanie Kirchgaessner, ‘US eleventh hour deal averts default’, 18 October 2013).
The eleventh hour agreement reached on 16 October therefore only postpones matters to the new year. During the course of the last few weeks the popularity ratings of the Republican Party have been falling heavily as the public becomes convinced that the antics of the Tea Party are threatening real damage to the US economy. There is therefore a possibility that the party’s negotiators will become more ready to reach agreement. After all, there is no difference between the Republicans and the Democrats as to the need for drastic cuts. It is not even as if one party were proposing attempting Keynesian ‘cures’ that the other was opposing – it’s austerity all the way along the line.