SRA Commentary: Dictate, Dependence and Deficits

"Work expands so as to fill the time available for its completion…The thing to be done swells in importance and complexity in direct ratio with the time to be spent. This fact is widely recognized, but less attention has been paid to its wider implication, more especially in the field of public administration."

- C. Northcote Parkinson, Parkinson’s Law, John Murray 1957, pp 4, 5

"This is not a way of life at all, in any true sense. Under a cloud of threatening war, it is humanity dangling from a cross of iron."

General of the Army Dwight David Eisenhower, speaking of what he later termed the “military, industrial, and congressional complex” to the American Society of Newspaper Editors, April 16 1953, quoted in Arms, Politics and the Economy, Robert Higgs, ed. Holmes and Meier, 1990, p.1

"It’s clearly a budget. It’s got a lot of numbers in it."

President George Walker Bush, quoted by Reuters 5 May 2000, cited in The Bush Dyslexicon, Bantam, 2001, p. 264

Degrees of Defeat

The contemporary apotheosis of Parkinson’s Law is without a doubt the grotesquely misnamed American Department of Defense. Spending enough to fight a world war, managing to achieve less every decade with each dollar that it spends than it achieved in the decade before, it is mobilising itself to obliterate the armed forces of a fifth rate, virtually land locked power of some 24 million souls, of whom about half are aged 15 or younger.

Having already demonstrated itself incapable of subduing an even smaller land-locked power, or, rather, power-vacuum called Afghanistan, it is not at all clear that the United States is up to the task. Its ally, Israel, has been unable in 55 years of conventional and unconventional war, massacre and suppression to bring peace to a far smaller and more easily demarcated and controlled region, Palestine.

The calculation that underlies the proposed invasion, conquest, and occupation of Iraq has no historical basis to justify the optimism of its proponents. It cost the British 100,000 casualties and £350 million pounds to drive the Turks out during World War One.

Granted the situations are not the same. Arguably this time they are even worse.

To win the US has to do what it is worst at, which is governing a potentially hostile and sullen population, and make good on its promises to better their lot. All the regime of Saddam Hussein has to do is to last longer than 48 hours. Everything in between is a degree of American defeat.

The American government’s calculation is presumably that direct control of Persian Gulf oil is worth it. Time will tell, but we doubt it.

Undemocratically Imposing Democracy

It is suggested that this is a war to bring democracy to a politically backward part of the world. This is a risible idea, most easily refuted by reference to the rapid dismemberment of civil liberties and democratic process in the United States itself and by the obvious disdain that the protagonists in Washington, London and Tel Aviv feel for the overwhelming international popular opposition their policy has engendered. The costs, meanwhile, are already mounting. Of these, the price in dollars is easily the least important.

The belligerence of the American Axis has managed to create common cause from the China Sea to the North Atlantic where there was none. The American government may seriously believe its own propaganda to the effect that Berlin and Paris are isolated because the European periphery has joined in parroting the call for war.

If this is the best that the US can do under the circumstances, it is in deep trouble, because none of those governments have popular support. As the assassination of Serbian premier Zoran Djindjic last week demonstrated, American clients are easily dispensed with. Sandwiched between Germany and Russia, dependent on the former for money and the latter for energy, Eastern Europe has little chance of providing serious support for the US.

The costs are already mounting

Ironically, the international justification for the 1990 war to oust Iraq from Kuwait was that Iraq had violated the territorial sovereignty of the Kuwaiti state. Iraq had, it must be admitted, a grievance. Iraq had never accepted the creation of Kuwait as a monarchy of the al-Sabah family by the British in the first place.

What is more, it contended that Kuwait was tapping Iraqi oil reserves with horizontal drilling. The American administration of the day signalled that it considered the matter an Arab dispute in which it had no interest. It was, presumably, its contemplation of the consequences of the destruction of one UN member by another that moved it to change its mind.

National sovereignty has provided a useful and pragmatic basis for international dispute resolution for some two hundred years. The 1990 Gulf War demonstrated its utility once again, with the US raising a coalition that included not only NATO allies but also a number of Arab states.

Today the United States is arguing that the world should acquiesce to “regime change” in Iraq on the strength of no more than America’s say so. The United Nations, whose raison d’être is based on the principle of the nation state, is dismissed as irrelevant by the Americans and the British. They have determined to push on with their invasion of Iraq irrespective of the position of the UN Security Council, where a veto counts, it seems, if it is an American veto, but not if it is a French or Russian veto.

It is hard to distinguish this sort of behaviour from Italy’s invasion of Ethiopia, or Japan’s invasion of Manchuria. The Anglo-Israeli-American Axis is, likewise, pursuing access to what it deems a vital resource. The fact that others in the industrial world have a justifiable claim on that resource, and consequently a claim to a voice in its disposition, is just too bad.

Thus the US is casting aside an international system that has served it well over the course of its history, in favour of a unilateralism ill fitting in a power that cannot finance itself from its own savings, and that depends on others for the basic manufactures that form the foundation of its economy, and consequently is extraordinarily dependent on trade and free capital flows. This combination of dictate with dependence implies an extraordinary increase in international instability, and with that the increased likelihood of conflict.

But Why!

The reason for this is evident in a simple set of numbers. The US at the end of 2002 was running a quarterly current account deficit at an annualised rate in excess of 5% of GDP, just as we at SRA forecast it would. This means that it requires no less than an additional $151 million dollars per day in foreign funding to operate at 2002’s real GDP rate of 2.75% per annum. This rate is apparently considered recessionary these days by most American economic pundits, and certainly by the current White House and Treasury. They appear to be intent not on raising the national savings rate, but on reducing it.

In the last two quarters of 2002, the balance on income component of the current account deficit moved deeply into deficit. This is very troubling.

It is due to the US earning less on its foreign investments than it pays to foreigners for their investment in the United States. Given the large drop in the dollar over the course of the year, one might have reasonably expected this to have moved in the opposite direction, given the increased value of foreign earnings flows after currency translation. Likewise, the balance on goods and services deteriorated over the course of the quarter and the year in spite of the weaker dollar, which might have been expected to increase demand for American exports. Oil imports only accounted for 40% of the increase in imports.

The problem is clear enough. Years of outsourcing the nation’s industrial supply chain and competition to domestic civilian industry from the military sector are to blame. This is not a partisan political problem either. The national economic “strategy” based on increasing consumption by inflating asset prices with cheap money and boosting final demand with military spending has been shared by Republicans and Democrats alike, a fact that goes some ways to explaining the remarkable cross-party consensus about the War on Terror on Capitol Hill.

Economic policy: a vacuum filled by war

It cannot be stated often enough or strongly enough that this is not an economic policy but an absence of economic policy. Under such circumstances, the constraints on economic decision makers are very tight. It is just as well that Secretary of the Treasury Snow thinks that deficits are a good thing. He wouldn’t have his job if he did not. This leaves his economic plan reading like a lesson for pre-schoolers: increase consumer spending, promote investment, and deliver help to the unemployed. The pre-schooler-in-chief said during a presidential debate in Boston in 2000, “I would have my secretary of Treasury be in touch with financial centres not only here but at home.” One suspects that ex-secretary O’Neill got in touch with those markets, “not only here but at home,” and decided to leave his job. One wonders about Mr. Snow. Is he in touch yet?

“I don’t care what the polls say. I don’t. I’m doing what I think what’s wrong.” George Bush.

“It’s a hoot, isn’t it?” John Snow.

It must be of increasing political concern, if the political police of the Bush administration still think about domestic politics, that in spite of the exploding federal deficit, job growth continues to flag and the unemployment rate stubbornly refuses to decline. Here again it is not too hard to find probable cause. The Democrats under Clinton embraced Bush Senior’s pet project, the North American Free Trade Agreement, which among other things has banished tens of thousands of industrial jobs from the country. This is a double blow, because not only are there fewer manufacturing jobs to create, but the country manufactures less and less that anyone else might wish to buy. The war economy, which is the principal beneficiary of Bush’s deficits, is too narrowly based to help much, and it too relies more and more on imports.

Typically, financial market economists tend to look at the aggregate statistics. Sometimes, though, it is useful to look at the detail. In the case of unemployment, the gap between blacks and everyone else is mind boggling. This is relevant for a number of reasons. It goes a long ways towards explaining why the economy can seem to be in poor shape but people keep right on spending. When you consider that blacks dominate the prison population as well, the message could not be clearer.

Another way of looking at the labour market is to examine the participation rate, which expresses employment as a percentage of the available work force. The US has eked out more growth in money GDP by putting its women to work, which largely explains the rise in the participation rate from the 60s to the early 90s. This is, of course, a one-time exercise. The participation rate has been basically flat for the last thirteen years.

For the managers of the American political economy, this represents a major political hurdle. One way of dealing with this would be to encourage more immigration. Certainly, through the 90s this has been a factor. The surge in illegal migrants does not appear in these numbers because they do not officially exist. Although this has the “benefit” of improving money GDP, it comes at a price, as America’s deteriorating relations with Mexico attest. One can build more prisons to house a larger and larger pool of forced labour. One can inflate the balance sheet, and get a temporary boost to money GDP and productivity with debt inflation. All this has been tried.

Or you can go to war.

ENDS

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