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Lessons of the debt deal -- politics in the age of American decline

The deal to raise the debt ceiling damaged the United States in many ways. It did little to address the long-term economic problems of the country while exposing the fragility of American political institutions and the factional nature of this country's political system. It reveals the politics of America in the age of decline.

David Schultz
Courtesy of Hamline University
David Schultz

Time magazine founder Henry Luce once declared post World War II dominance of the United States the American Century. America's economic dominance financed its political and military supremacy, giving it the leverage to affect world politics. Too often pundits declared the American Century over, yet these proclamations seemed premature. The American supremacy that historian Francis Fukuyma proclaimed with the fall of the Berlin Wall in 1989 was supposed to reveal an America as the sole economic and political superpower in the world. That did not happen. Now whatever one can say about the debt agreement, it did little to reverse the threats to American dominance.

    
The debt deal needed to confront two issues: the debt financing the empire in the past, and the debt financing its future. Paying an increasing percentage of the federal budget to debt management is bad accounting. Yet the agreement really did little to confront either. The debt ceiling was raised — partially averting one problem — but the real choices about how to finance long term spending commitments were ignored. Creating a super committee pledged to find $2 trillion plus in savings merely postponed the tough choices for the future. As such, the agreement was more symbolic than substantive.

Four broad issues challenge U.S. financial future
Yet long-term spending and its economic impact are not the only issues that need to be addressed. Collectively, four broader forces challenge America's financial future, hampering its leadership role in the world.
    
•    The first is the declining economic performance of the country, both short and long term. Short term, the economy is headed to a double-dip recession, simultaneously decreasing tax revenues and increasing demand for government services. Longer term, America needs to reinvest in its infrastructure, schools and workers, modernize its technology, and transition to new energy sources. The debt agreement makes it difficult for the United States by choking off investments required for any of these. Lacking investments in the economy, it will never grow fast enough to generate the tax revenues necessary for the American empire.
    
•    Second, demographics will continue to challenge the United States as its population ages, demanding more health-care expenditures and retirement benefits at a time when the number of workers to sustain their parents decreases rapidly. Health-care reform in 2010 did little to address cost containment, and there is no indication that the debt-reduction super committee will tackle these problems in the coming months, especially as the 2012 elections approach.
    
•    Third, the current tax system is unsustainable. It is inefficient, failing to support economic growth and job production. It is also inequitable, pushing less of a demand on corporations and the wealthy to pay their share. All this was predictable. Nine months ago Obama caved into an extension of the Bush-era tax cuts. Now to pay for them, the poor and middle class must sacrifice. Merely repealing the Bush-era tax cuts would get the United States a long way toward dealing with its longer term debt. Better yet, return the corporate tax rates to what they were in the 1960s, a time when U.S. corporations were their most profitable, and lift the income cap of Social Security taxes, and most of the longer-term debt problems disappear. Instead, the opposite is occurring — the American empire is a corporate one financed more and more by cuts to the poor and middle class.
    
•    Fourth, much of the recent debt is the cost to pay for military excursions abroad in places such as Afghanistan and Iraq. America continues to spend unsustainable amounts to fund its military and foreign-policy objectives. The debt deal did nothing to rethink these priorities and instead threatens military spending as an incentive to make cuts elsewhere.
    
Fewer resources for U.S. priorities in the world
The debt deal thus does little to generate for the United States the resources it needs to maintain its economic and military position in the world. It is vastly overcommitted already, unable to sustain its current objectives let alone take on new ones in the world. For the future the United States will have fewer resources to pressure for human rights in Syria and Iran, to confront global terrorism, and to economically compete in a world becoming better educated and more productive than America.
    
The debt-management deal could have addressed the problems facing America but did not. It failed because of a collapse of domestic politics. The American Century was held together by a bipartisan consensus sustained by economic growth. Take away that growth and the consensus disappears. Thus, the factional politics and serious dissensus between President Obama and the Republicans in Congress over the debt ceiling and reduction was so intense because of a basic dispute over how to finance American commitments in an era of declining resources. Lacking economic growth, politics has become a zero-sum game, with clear winners and losers. Here, the debt deal revealed little in terms of a victory to reverse the decline, thereby suggesting an intensity of politics for the foreseeable future.

David Schultz is a professor at Hamline University School of Business, where he teaches classes on privatization and public, private and nonprofit partnerships. He is the editor of the Journal of Public Affairs Education (JPAE), and he blogs at Schultz's Take.

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Comments (12)

This makes way too much sense for our intellectually and ethically challenged government policy makers. But keep trying.
You may need a little help with your message as to the technical and economic issues which affect new energy sources.

I'm not sure who it was that sold America's wealthiest citizens and those who SO admire them the fallacy that they would suffer NO ill effects if they just decided to stop paying that itinerant traveler who had been piping into being the physical and social infrastructures that created the prosperous economy which had handed them their wealth.

(Without such infrastructures, of course, their "hard work" would not have produced wealth.)

But as in the old story, that Pied Piper, after not being paid for the past decade or more (by healthy taxes on the wealthy) has left our shores for places whose wealthy citizens are willing to pay for his services,...

and has taken our prosperity, our stature, and the well being of our children (if not our children themselves) off to places where those at the top of society are less selfish, less self serving, and more willing to invest, through their taxes, what it takes to build a successful, prosperous society,

in other words, the OPPOSITE of Galt gulch.

How to make a better future?

It's counter-intuitive attack on four of the most vigorous sectors of the economy.

Health care, education, defense and financial.

We need an economy where we produce things that the rest of the world wants to buy.

Until our hospitals are filled with paying foreign patients, until our schools are filled with paying foreign students, until our military is hired mainly as a mercenary force, these sectors of our economy remain an internal drag on our economy that reduces our competitiveness in the world. But these foreign customers won't come because they know they can get them much cheaper elsewhere in the world.

Medical care must be delivered at the lowest possible cost--that means single payer. Education must be delivered at the lowest possible cost with the most support going to courses that lead to paying jobs. The military is not for building new nations but for defense against actual US enemies. The financial sector must be tamed so as to not allow them to become so large and potentially unstable as to endanger the vitality of the economy.

But who has the biggest lobbies now?

Health care--they have mandated no negotiation of prices and no evaluation of effectiveness. For-profit education--you can end up with $80 K in government guaranteed loans from a cooking school where, at best, you can get a job at $10/hour at the end . Defense contractors--making engines that will never be used in any jet. Financial companies--that must be saved by the Fed but cannot be restricted in their speculation or in the fees they charge.

And in fact, all of these groups are, to borrow a phrase used about Goldman Sachs, a "vampire squid on the face of America".

Address these issues--this is where the long term holes in our debt situation are at.

And it sure wouldn't hurt to raise taxes to those of a decade or so ago.

This is a very concise, cogent, and deeply frightening assessment of the decline and fall of the American empire. All the comments that follow are equally astute. I wanted to respond to Mr. Rovick's comment, "We need an economy where we produce things that the rest of the world wants to buy." I think Mr. Rovick has put his finger on a fundamental issue in our economy. For better or worse, America has moved beyond the production of things and into the endless production of desire. We talk about the "information age" and "knowledge work." These are signs of this shift. The objects are made elsewhere (China, U.S. prisons filled with former citizens, fields filled with undocumented workers, etc.), but the desire for them is "made in the U.S.A." More accurately, the desire for the lifestyle which they represent is made here. It's also clear that corporations are utterly resistant to paying citizen/living wages for the production of things. Without an utter collapse of global, interdependent economies, it's doubtful that we can return to the production of desirable objects. There are several theorists who make this point far better than I do, but I think it's a crucial point in understanding the moment in which we find ourselves.

Professor Schultz is wrong on a couple of points.

He's right that the tax code is inefficient and inequitable, but not for the reasons he states. It's inefficient because with the system of differing rates, deductions and exemptions, it doesn't collect the amount of revenue that the effective tax rates should theoretically generate.

It's inequitable because the top 10% of the wage earners pay 70% of the taxes, while 49% of U.S. households paid no federal income tax at all.

So when Obama says he wants a "shared sacrifice," most thinking people would agree that a flatter (single-rate) tax with zero deductions and exemptions would ensure that every wage earner has skin in the game. But the best solution, one that would make revenue generation both efficient and equitable would be to eliminate the personal income tax altogether and replace it with a national sales tax.

Also, to restore middleclass jobs we need to restore the manufaturing base. We could do that by reducing the world's highest corporate tax rate from 35% to 0%. This would attract foreign automakers and other manufacturers from overseas to build plants here while also encouraging American manufacturers to bring some of their outsourced jobs back home.

Other than those two small points, I agree with Schultz' observations.

Good article, good comments. #4 please include or add the names of these several theorists. Anxiously waiting your reply.

Yes to Mr. Schultz and to all above commenters.

When I heard about the sudden worldwide drop in share values/stock markets, it made sense to me. Investors looked at the immature, ideological and economically ignorant way we "solved" our deficit problem by refusing to raise revenue while cutting investment in the very areas that would benefit business: infrastructure, education, research and development, and clean, inexpensive energy to replace oil and coal.

Unless the Administration can pull off some of its hoped-for plans to address these issues without raising additional revenue, our economy will continue its descent without interruption.

What will Paul Ryan et al. think then?

The American tax and benefit model is to rely heavily on graduated income taxes, which are referred to as 'progressive', and to offer the major government benefits universally, i.e. irrespective of need. The European model uses far more flat taxes, such as a VAT or a flat tax on earnings, but offers benefits only to those who most need it (universal health care being a partial exception). This is why Europe sees its system as being more 'fair' despite taxes that American liberals label 'regressive'. Economically, the European system is much more efficient. 'Progressive' taxes discourage work and encourage evasion. Taxing to pay for benefits for wealthy people is clearly inefficient, and serves a purely political purpose.

That political purpose is key. American liberals since FDR have been trying to sell the message that government services, which we should all want because they are equally for all, can be expanded while only taxing the rich. This doesn't work of course, and the middle class ends up paying money to the government in hopes of seeing some of it come back in the form of services that the middle class could have bought for itself, had it not been taxed. To a large degree, the success of the American right in keeping tax rates low has been because of the dissatisfaction of the American middle class with the inefficient system of progressive taxes and universal benefits, which repeatedly makes American Liberals seem economically incompetent. Only in those countries where there are flat taxes and progressive benefits has the scope of government services been able to expand to the level desired by American Liberals.

Thanks all for the good comments. I may disagree with Mr. Tester's solution (corporate tax breaks) but he is correct that the USA just does not make anything anymore. I get frustrated going to to the store, never finding any products we make. We may live in a service economy world but products still need to be made and we need to create an economic climate and workforce able to make these items profitably and in a way that pays a decent wage.

#8 & #9, what say you to the latest New Yorker article on the demise of Wall Street "The End of Kings". One quote and idea sticks with me "Son you see those toyotas out there at 25K well the Japanese make them and it is our job (W.S.) to get the money back with creative financial schemes" also that the work done on Wall Street was wildly overcompensated with lax regulation and little transaction tax.

Mr. Schultz is right about the politics of the debt debate, however his solutions to the debt problem is just “politics as usual.”

“Investments” in the typical democratic special interest groups, hoping it will trickle down to benefit the rest of the economy, has been tried and failed miserably. The only thing a new “stimulus” will create is more cash flow from these special interests groups to the Obama reelection campaign.

One of the reasons we are in this mess is because of dependency we have created on big government. Big government is not the solution, but the problem.

The problem is that even a year won't do it. At current savings rates, the American consumer is likely to continue deleveraging (with the accompanying poor housing market) for another 3-5 years. If the federal government starts deleveraging at the same time, we're very likely to find ourselves in a recession again, at which point deleveraging will cease to work for both consumers and the government.

The smart way to be addressing the debt today is to be looking at long term reform of the entitlements to the elderly that are the long term threats to budget balancing. Making a major change in either pensions or health care is likely to involve immediate additional expenses (buying somebody off) followed by long term savings. This would be the perfect time, for instance to implement universal (but rationed) healthcare to replace Medicare and Medicaid or individual retirement accounts to replace Social Security. The expensive transition would be expansionary and stimulative now, when we need it, but would be a big step towards solving long term budget issues, which would build confidence more than any short term hair shirt austerity program that the current debt ceiling theater is likely to produce.