headlines are dominated by the war in Iraq, everyone realizes there is
something wrong with the US economy. But few have focused on
the connection between the two.
It is clear that the post-World War II
era of worldwide dollar hegemony is beginning to slip. The ideas of a
"New American Century" put forth by Washington-based neocons actually
may represent a last-gasp attempt to use military force to hold onto a
system whereby the US has supported its domestic economy through trade
domination of most of the rest of the world.
But the world has changed. The US produced half the world's GDP in
1950 vs. twenty percent in 2003. The nations of what used to be called
the "Third World" are growing up. Increasingly, their vision does not
include continuing as dependencies of the IMF, World Bank, and WTO,
all of which have become instrumentalities of US corporate/global
finance. They include many of the nations of mainland Asia, the
Islamic world, Africa, and Latin America. There is also a resurgent
US dogmas cause us to view these changes
as hostile and ideological, even as a "clash of civilizations." It is
this way of thinking, rather than viewing other nations and regions as
having their own legitimate aspirations, that is contributing toward
the possibility of a larger conflagration.
The US military-industrial complex, along with the Council on Foreign
Relations and similar institutions, suggests that to reach for
"full-spectrum dominance" is a sign of strength. Rather it is a
weakness, showing a broad-spectrum failure to devise rational, humane,
and multilateral solutions to trade and economic issues. History shows
that the economic costs of imperial conquest usually outweigh the
benefits. The British Empire, for instance, fell apart after Britain
bankrupted itself fighting World War I.
But the tragedy that is calling to the US with its siren song of
wealth, power, and glory might be averted if we change the way we
think about economic fundamentals.
In this article, I will examine the
unfolding disaster, starting with our domestic economy, then propose
solutions based on the best thinking of cutting edge movements.
Political progressives should take these ideas seriously. By a
"political progressive," I mean anyone who wants to solve the
deepening crisis without a major war.
Amid claims that Federal Reserve Chairman Ben Bernanke has engineered
a "soft landing" by holding interest rates steady after the downturn
of the housing market, he told the Senate Banking Committee on
February 14, "The current stance of policy is likely to foster
sustainable economic growth and a gradual ebbing of core inflation."
But the sense of middle class voters that their standard of living is
on a slippery slope downward was a factor in the Democrats' regaining
control of Congress last November. This sense is not going away,
because it's the result of trends over the last decade. Bernanke said
nothing to the Senate on February 14 or to a House committee the next
day to allay these concerns.
In his response to President George W. Bush's January 23 State of the
Union address, freshman Senator James Webb of Virginia actually put
the health of the economy first before discussing problems with the
war. Webb said that, "Wages and salaries for our workers are at
all-time lows as a percentage of national wealth, even though the
productivity of American workers is the highest in the world." He
added, "In short, the middle class of this country, our historic
backbone and our best hope for a strong society in the future, is
losing its place at the table."
While the economy grew 3.4% in 2006, the unemployment rate moved
higher in January 2007, with manufacturing employment declining for
the seventh straight month. The US household savings rate was negative
again last year. What this means is that we are still in a "jobless
recovery," with consumers taking on even more debt. According to
economist Michael Hudson, the money that is sucked out of the economy
when people pay interest on loans is being recycled by the banks for
more loans, not invested in the producing economy. The debt pyramid is
suffocating normal economic activity.
The Bush administration's strategy of Reagan-style supply-side tax
cuts for the upper brackets, while the private sector replaces
manufacturing occupations with low paying service jobs, has been a
political loser. So was the Federal Reserve's attempt to float the
economy by pumping in cash through lower long-term interest rates, a
failed policy which resulted in asset inflation but is terminating in
the deflating housing bubble.
Like soaring costs for higher education and health care, the housing
inflation is eating away at the incomes of the middle class, after
their initial delight from the cash realized by house-flipping and
refinancing. Foreclosures and bankruptcies, made more arduous by the
2005 "reforms" enacted by Congress at the urging of the credit card
industry, are soaring as ARM monthly payment increases kick in.
Governments which saw tax windfalls from the housing boom are feeling
the pinch from falling revenues due to the slowdown.
It is notorious that the federal government is staying afloat only
through the purchase of Treasury debt by foreign central banks,
chiefly those of China and Japan. On top of this are the astronomical
costs of the failing Iraq/Afghan wars and the botched Katrina
clean-up. Matters look even worse with President Bush's proposed FY
2008 budget, with sharply increased spending for defense and veterans'
benefits and 9.3 percent growth in interest on the national debt.
Social services for the most vulnerable Americans will be cut by
twelve percent, and proposed reductions for health care are being
called "devastating" by the American Hospital Association. The federal
deficit is still projected at $250 billion.
Yet it's the best of times for the wealthiest class of Americans whose
main financial problem is angst over where to park their surplus cash.
It's the same for a banking industry whose wealth is multiplied by its
ability to create and profit from liquidity from its fractional
reserve lending privileges. While huge federal deficits from tax cuts
and the Iraq War spill government red ink, they add to the banking
system's reserve lending base and spread dollar hegemony abroad.
It's also no problem for consumers to continue to get unsecured loans
or run up huge charges on their credit cards. But while corporate
profits have not been impressive, the glut of capital has kept stock
prices high, with businesses taking advantage of productivity gains
without raising wages. Meanwhile, the average wage and salary earner
is steadily falling behind as debt payments come due and new loans
must be taken out to pay down the old ones. Bernanke says debt is not
a problem because bankruptcies are not increasing, without noting that
2005 "reform" legislation made the criteria for bankruptcy declaration
much more onerous and excluded student loans from eligibility for debt
What gives the situation urgency is the dilemma federal policymakers
now face with the value of the dollar. If it continues to slide -- the
euro is now at $1.32 against the dollar vs. $1.18 two years ago --
foreign investors will continue to dump them as a reserve currency,
leaving the US with no way to finance its enormous trade and fiscal
deficits. On February 14, the day of Bernanke's House testimony, CNBC
reported that foreign purchase of Treasury securities for December
2006 was at its lowest level for five years. On the other hand, if the
government shores up its public and private debt through higher
interest rates, millions of ordinary people could be worse off and
even lose their homes and jobs.
The Iraq war is making things worse. The unspoken essence of the
Bush administration's war policy is to prop up the domestic economy
through control of Middle Eastern resources. The policy is on the
brink of disaster because even if we "win," the costs are no longer
sustainable. The total likely cost of the Iraq War has been estimated
at $2 trillion. It we attack Iran, it will be much higher. It's that
much more money the government will have to borrow.
The solutions to the economic side of the problem proposed by the
Democratic leadership in Congress would only nibble around the edges.
Their proposals include trying to roll back some of the Bush tax cuts
for the wealthy, somewhat lower interest rates for college loans,
vaguely-worded encouragement of technological innovation, raising the
federal minimum wage to a slightly less-onerous plateau of poverty,
cheaper prescription drugs under Medicare, collection of unpaid taxes,
and federal fiscal discipline.
But these measures, even if any could be passed and were signed into
law by President Bush, would only make life a little easier for the
eighty percent of Americans who are struggling to compete in what is a
fractured trickle-down economy. The only proposal that would help
ameliorate the bubble economy would be to reverse Bush's tax cuts.
Something has to give. Even Paul Volcker has said the economy is on
thin ice due to non-existent household savings. Warnings have come
from the International Monetary Fund about the dire effects of the US
housing crash. Some even speak of a worldwide recession or depression
or of a "controlled" disintegration of national economies.
We indeed may see epochal changes. We are at the end of the era
of monetarism, where Federal Reserve monetary targeting was
implemented by free market ideologues frustrated with the stagnation
of New Deal and post-World War II central government planning
The Keynesianism from those days and the monetarism that followed
each lasted a full generation. But as noted earlier, the world has
changed, especially with the rise of the huge Asian economies of China
and India. We must now search for the principles and mechanisms that
can work in a world no longer dominated by the Western victors of
World War II, where domestic production is stagnant, and where
financial bubbles distort measures of real value.
So what is the next big idea that can truly make a difference, and
will it serve or undermine political and economic democracy?
One truly big -- and bad -- idea that is being pushed by economists
with ties to the Federal Reserve (see the July/August Journal of the
Federal Reserve Bank of St. Louis) is to open the floodgates to
large-scale purchase of our domestic assets by China, which may want
to use its massive dollar reserves to buy up real estate and
businesses within the US
The Chinese tried this a couple of years ago, when it took White
House intervention to block the purchase of Unocal by the Chinese
government's oil agency. China is also using its US dollars to make
loans to African nations and is gaining economic leverage on that
continent as well as in Latin America. It appears that dollar hegemony
has finally backfired and is starting to undermine national security.
This is one reason observers assume the US military views China as a
The entire domestic and international economic system now has to be
questioned. A slightly higher federal minimum wage is not enough.
Neither is making it a little more affordable for young Americans to
go to college if there are insufficient jobs waiting when they get
out. Nor are welfare-to-work programs that generate a few more jobs at
the poverty level the answer.
It's also time to realize that the problems cannot be solved by
enhancing the ability of the US economy to compete in the
international marketplace because every other nation obviously has the
Rather a solution, as put forth by the Asia Times, among
others, may be a new worldwide focus on internal economic development.
In the US, this could start with attention to our crumbling physical
infrastructure -- schools, hospitals, roads, mass transit, levee
repair, electricity-generation, water and sewage systems, etc.
We must also address the threat from global warming and mobilize our
R&D capability to break our dependence on oil, as outlined by the
Rocky Mountain Institute in a 2005 report funded partly by the Defense
Department: Winning the Oil Endgame: Innovation for Profits, Jobs, and
Security. The report states that the technology exists today, not only
for alternative energy, but also for a highly accelerated program of
oil conservation. Such measures could be implemented through a
meaningful government commitment, one which we have yet to see,
despite the political rhetoric. Military R&D still outweighs energy
research in the federal budget by a factor of 37:1.
How to shift focus in these new directions is what Congress should now
be debating. As always, the question is: how to pay for it?
One way would be serious tax reform, not only by eliminating the Bush
tax cuts, but also by heavily taxing non-productive asset transactions
through restoration of higher capital gains taxes, shutting down
offshore tax havens, a universal land-use tax on rents and mineral
rights, or higher taxes on earnings from privatized public utilities
These would all be taxes aimed at the financial sector which rarely
invests in real production but instead floats the speculative bubbles.
These taxes would also attack value-less inflation of those assets and
would lower the increasingly onerous tax burden on workers and the
If progressives looked at alternative monetary theories they would
also find tools that could make a difference, as the American Monetary
Institute (AMI) is proposing with its draft American Monetary Act. AMI
questions the dogma that government expenditures can be paid for only
through taxation or debt. One provision of the act would permit
selected instances of direct spending of currency into circulation as
was done with the Greenbacks during the Civil War, as President
Roosevelt was authorized to do during the Great Depression, and as the
British/Canadian Social Credit movement has advocated for decades.
Also, Congressmen Steven LaTourette (D-OH) and Dennis Kucinich (D-OH)
have introduced legislation for a Federal Infrastructure Modernization
Bank that would use existing Treasury funds on deposit at the Federal
Reserve to make available $50 billion a year in interest-free loans
for state and local infrastructure projects. Of course $50 billion
would be a drop in the bucket. Such legislation would be much more
effective if it allowed such a bank to multiply its capital by the
same fractional reserve lending authority enjoyed by private sector
And writing in a 2006 article in The Progressive entitled "Our
Sinful Economy," editor Matthew Rothschild has proposed a guaranteed
annual income for all citizens, an idea supported in the past by such
disparate figures as Dr. Martin Luther King, Jr., and Milton Friedman.
Legislation entitled "A Tax Cut for the Rest of Us," written by
members of the US Basic Income Guarantee Network, was introduced last
year by Representative Bob Filner (D-CA) as H.R. 5257.
The legislation would transform the tax code's standard deduction and
personal exemptions into a refundable credit of $2,000 for each adult
and $1,000 for each child, even if a person had no reportable income.
The credit would be a first step toward a true basic income guarantee
that could eliminate the scourges of poverty and homelessness that
give the lie to every politician who claims our economy is either fair
or fundamentally sound. Peace in the Middle East could immediately cut
defense expenditures by a third, which alone could pay for "A Tax Cut
for the Rest of Us."
What these taxation and monetary reform proposals have in common is
that they show how a developed national economy can pull itself up by
its own bootstraps through central control of monetary resources
rather than relying on massive deficits or exploitation of other
nations through trade. Such resources would be invested or spent for
tangible goods and services, not for paper wealth like financial
securities. The workers, salary earners, and businesses of the
producing economy would be protected from financial bubbles. It's the
way the US became an economic powerhouse in the first
Richard C. Cook is the author of
Challenger Revealed: An Insider's Account of How the Reagan
Administration Caused the Greatest Tragedy of the Space Age,
called by Publisher's Weekly, "easily the most informative and
important book on the disaster." He worked in the Carter White House
and NASA before spending 21 years as an analyst with the US Treasury
Department. He is now a writer and consultant on public policy issues
and is working on a book on economic and monetary reform. Visit his
website is at: