What's Wrong with Washington?

by Hank Van den Berg
UNL Professor of Economics

While attending two economics conferences in the United Kingdom this summer, I was repeatedly confronted by economists from other countries wanting to know: “What is wrong with Washington?” They were concerned that the debt ceiling would not be raised and a U.S. default would trigger another global financial crisis. My explanations ranged from “I know, it’s really stupid” to “You have to understand American politics”.

Indeed, the debt ceiling debate is a very American phenomenon. We are one of the only countries that has a debt ceiling. More mature countries have figured out that when a legislature debates expenditures and taxes, it directly effects the government’s budget balance and, therefore, its total outstanding debt. A separate debt ceiling is superfluous. But in the United States, we like political theater, so we first have a long emotional political debate about the debt ceiling without actually getting into any substantive discussions on expenditures and taxes. Then, we repeat the whole exercise and actually sort of debate budget items. This way, of course, we can get twice the political mileage out of the subject. The news media loves it!

My second explanation is more substantive. The world rankings of corruption by “Transparency International,” which is widely used by economists and social scientists, ranks the U.S. as more corrupt than 27 other European, Asian, and even a couple of Latin American countries. We should, accordingly, stop expecting honest debates on the debt ceiling or anything else in Washington. So, after agreeing to cut Medicaid for the poor and not raise taxes on the obscenely rich, Obama and Congress managed to finally set a higher debt ceiling, only a couple of days before the three private ratings firms could get around to downgrading U.S. government bonds. The most illustrious of the trio, Standard and Poor’s, had apparently worked itself up to such a tizzy that it went ahead and downgraded U.S. debt anyway. The whole farce will repeat itself this fall, when the budget actually has to be decided and the newly-formed congressional ‘super committee’ issues (or decides not to issue) its recommendations on how to cut the deficit.

Of course, the budget deficit can be easily solved with a prudent combination of reduced military spending and higher taxes on the wealthy. Our obscenely high military expenditures do not protect anyone from foreign threats. Of all the possible terrorist threats that were instigated and stopped since 2001, it was police action or dumb luck that prevented disaster—not the military. And as far as taxing the wealthy, let me just note that America’s wealthy already pay fewer taxes than their counterparts in nearly all other rich countries. Also, let’s not forget that the statistical correlation between higher taxes and economic growth over the past 60 years is a positive one. Think of the 1950s and 1960s, when the economy grew much faster than it has since even though income and corporate tax rates were much higher than now.

One has to conclude that the whole budget spectacle serves only to divert our attention from more important issues.

What Could Be More Important Than a Debt Ceiling?

After gradually improving my explanation with each subsequent inquiry about the situation in Washington, I have concluded the following issues are the most critical ones being obscured by the theatrics of our Democratic and Republican politicians:

1. The wealthy are stealing us blind.
2. Much of the budget deficit, and the accumulation of government debt, is due to the annual $1.2 trillion in military- and security-related expenditures.
3. These security expenditures—which cover the cost of protecting overseas investments in energy and other resources—are useless because imminent environmental disasters mandate a quick end to our addiction to carbon-based energy.
4. Population growth is not slowing as much as we thought.
5. Our economy is never going to ‘recover’ its unsustainable growth path.

These five issues translate into one overarching conclusion: the era of economic growth is over.
Let me explain.

We’re Losing Our Shirts

The wealthy are taking as much as they can as quickly as they can by corrupting our governments. Politicians of all parties are effectively paid to enact policies that reduce taxes on the wealthy, thus enabling them to capture ever higher shares of global income. Since 1980, all of the growth in total U.S. national income was captured by the top ten percent of income earners. The average real income accruing to the remaining 90 percent has not gone up in those 30 years. Even though productivity of the average worker rose by over 100 percent since 1972, average wages to workers have declined in real terms. That is, for producing twice as much, the average worker took a pay cut. The top ten percent of income earners in the U.S. captured almost exactly 50 percent of total U.S. income in 2007—a higher percentage than the top ten percent captured during the unequal “Roaring Twenties.” The top one percent of U.S. income earners took about one quarter of total income in 2007. (Compare that to the Netherlands, where people complain that the top one percent gets just seven percent of national income.)

The Waste of the Military

The actual Pentagon budget plus supplemental appropriations bring annual expenditures to about $750 billion. Add in the CIA (which flies the drones), the NSA (which runs the surveillance infrastructure), the State Department (which controls thousands of mercenaries), the Veterans Department (which has to deal with the casualties of war), Homeland Security (which is unconstitutionally intertwined with the Defense Department), drug enforcement agencies (who carry out the clandestine military operations in Latin America), and numerous other related agencies, and we approach $1 trillion per year. Then, add in the interest on the public debt due to all these expenditures, and we are up to $1.2 trillion. Remember, this number is conservative because current interest rates are extremely low by historical trends. A debt default would raise interest rates and increase the cost of military-generated government debt.

This military and security expenditure is mostly used to protect our access to foreign oil and other natural resources. These foreign resources increasingly include foreign land where we grow the foods we import. The United States needs the resources of many countries because our lifestyles require many more resources than nature provides us within our own territory. We are not the greatest nation for nothing! But, we increasingly fear that foreigners might eventually demand more of their own resources, as China is already doing. After Iraq, Afghanistan, Yemen, and Libya, more wars, invasions and killing will probably be necessary to satisfy our addiction to foreign resources in the future.

The Environment Says ‘No’

Military spending is futile, however, because there are simply not enough natural resources for economic growth as usual. Oil production seems to be peaking now, as new supplies are available only at much higher costs. In addition, global warming, rapid losses of biodiversity, and mutations driven by industrial agriculture (all exacerbated by the continued increase in population throughout the world) point to a limit on further expansion of material production. China’s rapid economic growth ensures we will run into growth limits even sooner than feared. This has already become apparent in the commodity markets, where every time there is news suggesting world economic growth is about to pick up, the prices of oil, corn, wheat and all other commodities shoot up. Never before have commodity prices been this high in a global economic recession.

Commodity scarcities are the least of our problems, however. Global warming is progressing faster than the most dismal forecasts projected a few years ago. The melting of the Arctic ice is now irreversible. (Ironically, the oil producers who contributed so much to the melting in the first place are keenly aware of this, and they are already investing in exploration and shipping facilities in the soon-to-be unfrozen Arctic Ocean.) Furthermore, the Russian tundra is melting, releasing methane that speeds up global warming and enables tundra fires that will put even more carbon into the air. While flying over Greenland on the way back from Ireland in early August, I could observe the ocean full of icebergs broken off from the Greenland ice shelf; these will all melt and raise the ocean level. The potential costs of climate change mandate that we stop putting even more carbon into the air. At nearly 400 parts per million and rising, we must reduce carbon levels in the atmosphere to 350 parts per million. That means less production and less carbon energy usage.

Too Many People

One of the lectures at the “Green Economics Conference” in Oxford in July was on “The Astounding Complacency towards Population Growth among Environmentalists.” The message was simple: The environmental footprint of humanity is equal to per capita carbon emissions times the total population of the earth. If population continues growing, the human footprint will grow even if all of us freeze our consumption. Policymakers and even environmentalists simply refuse to look at this second component of the formula for the environmental footprint, however.

Note that world population is still growing by over one percent per year, which means it is still on pace to double before the end of this century. In much of Africa and the Middle East, populations are growing at two percent per year or more. Yes, the rates have been falling since the early 1960s, and some European countries and Japan now have zero natural population growth. But, in some other high-income countries, natural population growth has begun to rise again. If population growth remains near one percent for this century, can the earth support a population of 14 billion in 2100, especially if we insist on further economic growth and thus increasing each person’s consumption? Obviously, human society will collapse if we try this.

All These Trends Translate into ‘No Recovery’

It is difficult to see how we can create more jobs by raising demand for more production when a small percentage of the world’s population is taking virtually all of the increased income that would be generated by the extra production. Total supply must equal total demand, or production is not sustainable. Karl Marx famously predicted that capitalism would collapse for precisely this reason: because capitalists try to increase profits by squeezing the wages of workers, eventually there will be no one with enough income to buy their production. Keynesian economics is also built around this idea, as are the recent stimulus measures enacted by most countries around the world after the financial collapse in 2008.

With the rich capturing all income increases (but putting their earnings into monetary assets rather than consumption or real investment), economic recovery has not happened. We should have seen this problem coming. Since the financial deregulation in the late 1970s, increased credit was extended by an eager financial system to those whose incomes did not rise, and this allowed for increased consumption despite falling wages. Of course, debt accumulated, and now the debt levels put repayment into doubt. Especially ominous is the situation in the United States, where rising debt has been used to buy houses and vehicles that are too large in terms of their energy usage. The government’s debt was largely incurred paying for military expenditures to safeguard that energy.

Rising demand for economic output must now come from the wealthy themselves and consumers in a few emerging countries like China. However, extreme wealth does not encourage much additional consumption: how many yachts do you need? Because some of the financial advisors of the wealthy correctly interpret the debt-driven consumption as a ‘Ponzi scheme,’ the stock market has fallen, eroding wealth and making the modestly-wealthy less willing to consume. At the same time, China is not likely to drive world demand either because it is facing enormous resource shortages and major environmental problems, the same ones the entire world faces.

The pending global environmental collapse can only be avoided if the whole world goes through a crash program to overcome its energy and natural resource addiction. This will require less consumption, production and completely new lifestyles. Of course, this means continued economic recession, at least in the short run. In the longer term—if we are to survive—we will have to find ways to spend more of our time consuming less and producing less. This means more unemployment if we insist on a few people working long hours. Or… we could shift to a 20-hour workweek. We can shift consumption to less energy-intensive products, such as education, entertainment, socializing, etc. We could also devote more time to maintenance rather than producing replacements; we could stop tearing down buildings; and we could keep our cars for 25 years instead of putting them in the junkyard after ten years. We could also live in houses with half the square feet we now occupy; we could stop spending entire afternoons mowing one-acre lawns of Kentucky bluegrass in Nebraska; and we could just spend more time talking to friends in pleasant sidewalk cafes.

The Debt Ceiling Debate Again

This brings me back to the debt ceiling debate, and my first explanation to my international colleagues. Humans are often not very smart. We are probably not going to even try to understand the economy and the ecosystem, much less seek intelligent solutions. Our politicians will invariably approach the future by insisting on a return to debt-financed consumption (as preferred by most of the rich campaign contributors and lobbyists). After all, resource addiction is perfectly legal in a capitalist system! The economy and nature are stronger than we are, however, so this will not work out well.

On the other hand, if we use our heads, we can opt to change the way we live. After sitting in a few sidewalk cafes and riding public transportation in Holland, France and Switzerland this summer, I can reassure you that life can be quite pleasant without a car. Now, if only we can go back to ocean liners instead of carbon-spewing jets, then I can travel to these more sane places less destructively. I can also assure you that the shorter workweeks, the six-week vacation, taxing the disproportionately rich, and free university educations actually enhance the quality of life, and they are potentially sustainable.

It is our American lifestyle and the corrupt political establishment in Washington that most certainly are not.



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November 8th 2011

Icon - Great piece Dr. Van den Berg! You hit the nail on the head. The biggest problem facing mankind is mankind, too many!

October 11th 2013

Thinking - Unfortunately your 5 points are all based on a presuppositional foundation that is itself flawed. I appreciate the insight and thought provoking discussion but as with any one perspective in life, you too have glaring flaws in your argument.