Democracy Now Interview with Michael Hudson

Debt Deal – Economy Sacrificed for Military Bias
August 2, 2011
By Michael Hudson

Democracy Now, August 2, 2011
After Months of Partisan Wrangling, Wall Street & Pentagon Emerge Victorious on Debt Deal

AMY GOODMAN: After months of a bitterly partisan stalemate, the U.S. House of Representatives has voted in favor of raising the federal borrowing limit and avoiding a default on the national debt. The final count showed 174 Republican ayes and 66 Republican nays, with Democrats split evenly, 95 on each side. The vote came just hours before a Treasury deadline that potentially would have seen the U.S. run out of cash and default for the first time in its history. The bill is expected to be approved by the Senate and signed into law by President Obama today.

The deal includes no new tax revenue from wealthy Americans and will provide no additional stimulus for the lagging economy. It will cut more than $2.1 trillion in government spending over 10 years while extending the borrowing authority of the Treasury Department. The deal will also create a new joint congressional committee to recommend broad changes in spending to reduce the deficit.

The compromise deeply angered right-wing Republicans and progressive Democrats alike. Republicans were upset the bill did not further curtail government spending. Meanwhile, both the Progressive Caucus and the Black Caucus rejected the deal for placing the burden of deficit reduction on poor people. Democratic Congress Member Jim McGovern of Massachusetts said, quote, “I did not come to Washington to force more people into poverty.” Congressional Black Caucus chair Emanuel Cleaver blasted the final debt deal on his Twitter account, writing, quote, “This deal is a sugar-coated Satan sandwich. If you lift the bun, you will not like what you see.”

Several other senators said they were struggling with how to vote but suggested if it became a matter of their yes vote or default, they would back the measure. The White House dispatched Vice President Biden to lobby congressional liberals, and House Minority Leader Nancy Pelosi also urged her colleagues to come off the fence.

REP. NANCY PELOSI: It’s hard to believe that we are putting our best foot forward with the legislation that comes before us today. I’m not happy with it, but I’m proud of some of the accomplishments contained in it, and that’s why I am voting for it. Please think of what could happen if we defaulted. Please, please, please come down in favor of, again, preventing the collateral damage from reaching our seniors and our veterans.

AMY GOODMAN: Enough Democrats and Republicans reluctantly joined forces to see the proposed legislation through by a vote of 269 to 161 last night.

In a stunning emotional moment during the extended roll call, Democratic Congress Member Gabrielle Giffords of Arizona received a standing ovation as she voted yes on the bill, her first vote since a near-fatal shooting in Tucson, Arizona, in January.

REP. NANCY PELOSI: Her presence here in the chamber, as well as her service throughout her entire service in Congress, brings honor to this chamber. We are all privileged to call her colleague, some of us very privileged to call her friend. Throughout America, there isn’t a name that stirs more love, more admiration, more respect, more wishing for our daughters to be like her, than name of Congresswoman Gabby Giffords. Thank you, Gabby, for joining us today.

AMY GOODMAN: Congress Member Gabrielle Giffords was among the 95 Democrats who voted for the bill.

White House spokesman Jay Carney called the deal “a victory for the American people.” The debt deal was also a victory of sorts for the Pentagon. Rather than cutting $400 billion in defense spending through 2023, as President Barack Obama had proposed in April, the current debt proposal trims only $350 billion through 2024, effectively giving the Pentagon $50 billion more than it had expected over the next decade. Speaker John Boehner had met earlier with the House Armed Services Committee to assuage alarm about the potential spending cuts from the Pentagon.

For more, we’re joined in studio by William Hartung, director of the Arms and Security Initiative at the New America Foundation, author of Prophets of War: Lockheed Martin and the Making of the Military-Industrial Complex.

We’re also joined by Michael Hudson, president of the Institute for the Study of Long-Term Economic Trends, Distinguished Research Professor of Economics at the University of Missouri, Kansas City, author of Super Imperialism: The Economic Strategy of American Empire.

We welcome you both to Democracy Now! Michael Hudson, what about this vote? What does it mean?

MICHAEL HUDSON: It’s best thought of as an anti-stimulus package. As for the feeling among the Democrats that I’ve spoken to, I’ve never seen them so depressed. What depresses them so much is the irony that it probably could only be passed under a Democratic administration. Yves Smith has called it a “Nixon goes to China moment in reverse.” And that’s because only a Republican could have made an opening to a Communist country and not be accused of being soft on communism. Only a Democratic president could have drawn along a Democratic Congress in support of a law that is going to add tax deflation to the debt deflation we already have in the economy.

AMY GOODMAN: What does that mean, “add tax deflation to the debt deflation”?

MICHAEL HUDSON: That means that the government is going to be sucking money out of the economy. Normally, government is supposed to provide the economy with purchasing power. Running a deficit is traditionally, for 5,000 years, how every country’s government has supplied money. But now the government isn’t going to do it. There’s a kind of junk economics belief that governments shouldn’t run deficits. Yet it’s by running a deficit that an economy expands. That’s what injects the purchasing power in it.

This is why Mr. Obama had the $700 billion stimulus package a few years ago. The idea was for government spending to stimulate employment, or at least slow the unemployment.
Right now, the economy is shrinking. It needs some kind of spending to overcome the shrinking. If the government doesn’t supply the credit, the economy will have to rely on commercial banks. And they’re going to charge interest. This means that all of the growth that does occur in the economy is basically going to be paid to Wall Street, not to the people who produce the wealth, not to industry or its employees. The economy is going to shrink. Industrial corporations will shrink. Real estate prices will shrink further. But the government isn’t doing anything to prevent this shrinkage into a deeper and deeper recession.

AMY GOODMAN: So, why did Obama go this route? What were his alternatives?

MICHAEL HUDSON: He had many—

AMY GOODMAN: And what about the relationship that was touted between Obama and Boehner, ultimately people saying it was the Tea Party that broke with Boehner, and so he just couldn’t follow through for Obama?

MICHAEL HUDSON: It wasn’t the Tea Party. Suppose that a Republican were president, or George Bush. If George Bush or Republican McCain would have been president and proposed this, you would have had the whole Democratic Congress voting against it. And you would have a lot of progressive Republicans voting against it. But they’re not going to vote against a Democratic president. And in fact, that’s why it was called a “Nixon goes to China in reverse.” Only a Democrat could have imposed so deflationary, so negative and regressive a fiscal policy. And that’s why the Democrats felt so frustrated when they were split, as you pointed out, 95 to 95. They felt that they had to support the Obama Administration.

The reason why they’re so disappointed is that there were many alternatives. While this fight was building up last week, you didn’t have a squiggle in the bond market. Wall Street was not worried that there was going to be any problem.

Obama could have invoked the 14th Amendment, saying that the government is always going to pay the debts, that can’t be questioned. He could have issued a $1 trillion platinum coin, worth maybe $50, to the Federal Reserve and retired the government debt. There were all sorts of technicalities that he could have done. He didn’t propose to do any of them.

The reason seems to be because, as he explained to voters in his speech last week, he believes in running a budget surplus. He believes that’s good for the economy. And that’s the tragedy of all this: It’s not good.

AMY GOODMAN: I want to turn to Obama. Unveiling the deal on Sunday night, he said the agreement was borne out of a need to compromise.

PRESIDENT BARACK OBAMA: Now, is this the deal I would have preferred? No. I believe that we could have made the tough choices required, on entitlement reform and tax reform, right now, rather than through a special congressional committee process. But this compromise does make a serious down payment on the deficit reduction we need and gives each party a strong incentive to get a balanced plan done before the end of the year. Most importantly, it will allow us to avoid default and end the crisis that Washington imposed on the rest of America.

AMY GOODMAN: Your assessment of what President Obama said and how this could have been averted? I mean, there was a person, a journalist at a press conference in December, when he went along with the Bush tax cuts for the wealthy, saying, why didn’t you attach this, a guarantee of a debt ceiling, if you were going to do that at the time? And Obama said he wasn’t afraid.

MICHAEL HUDSON: Well, the real question is the reverse. How did these tax issues get attached to a debt ceiling issue? Since 1963 the debt ceiling has been raised every eight months on the average. It’s just automatically been raised. Nobody in any of these 83 times has ever tried to attach a policy rider to the debt ceiling. It’s always been like an accountant signing off on everything. This is the first time that a debt ceiling has ever been linked to tax policy. That’s never been done before. So there didn’t have to be a compromise. Mr. Obama could have simply said, “Tax policy is tax policy. If you want to argue over that, spend a year in doing that. But a debt ceiling is something all by itself.”

AMY GOODMAN: But clearly, people already saw that this might be an issue, because the Tea Party Republican activists were already talking about it.

MICHAEL HUDSON: Yes. I think that Mr. Obama didn’t anticipate that it would be made an issue. He was thinking like a lawyer and thinking this is how it’s normally done, there’s no connection. What he could have done is gone to the people and explained why he believed that. He could have said, “Look, I didn’t anticipate it, because this is outrageous. This has never been done, and I’m not going to let the Republicans link a rider onto this. I don’t have to compromise, because this isn’t the point to compromise.” Compromise is when the Senate and the House debate a tax law, but this isn’t the time for debate. This is the time to approve what the Congress has already agreed to spend.

AMY GOODMAN: Our guests are Bill Hartung of the Center for International Policy and Michael Hudson of the University of Missouri, Kansas City, an economist. I want to turn to who won and who lost. Now, let’s be clear on what this commission is and what’s going to happen to Medicare, Medicaid, Social Security. Michael Hudson?

MICHAEL HUDSON: The commission is going to be composed of three people, suggested by the House leader, Republican and Democratic leaders each, and the Senate Republican and Democratic leaders. The Republican—six Republican appointees to the commission are already pledged to no taxes, and especially no closing of loopholes, nothing that will increase the money paid by their campaign contributors to the Republican Party.

We don’t know who the Democratic appointees are going to be. But in the last commission that Mr. Obama appointed, the deficit reduction commission, they were Democrats who were in favor of cutting Social Security. They were Wall Street Democrats, or what used to be called the Democratic Leadership Council. So the worry is that the Democrats are going to push their own tax cutters and that really there’s not going to be very much difference between the Democrats and the Republicans in what they propose for Social Security and Medicare.

Mr. Obama had threatened that there wouldn’t be enough money to send out Social Security checks, and that simply isn’t true. The Social Security Administration has its own holdings of Treasury bills, just like an individual would hold their own savings. Of course they could have cashed in the Treasury bills.

AMY GOODMAN: What about the credit agencies, the rating agencies?

MICHAEL HUDSON: They have played a very bad role in this. Here’s what happened. Under the Frank—the bank reform—

AMY GOODMAN: With Congress Member Frank.

MICHAEL HUDSON: —the rules for the credit rating agencies were changed. The government was angry at them for giving AAA ratings on junk, and their defense in courts saying, “Well, yes, we gave AAA ratings on junk mortgages, but they’re legally only opinions.” So the Dodd-Frank bill said, “You rating agencies are liable for your opinions.” Well, then the rating agencies said, “We want to make money on selling our opinions, and we don’t want to have to take any responsibility for them, so we’re going to get you. We’re going to threaten to downgrade the U.S. government, until you say, ‘OK, we don’t want to hear your risk assessments anymore, because you’re hurting us.’”

But the proper response is to say, look, the rating agencies are just out to make money selling their opinions that are up for sale. The rating agencies are trying to get brownie points with Wall Street for opposing Social Security, for essentially yelling fire when there isn’t any fire. And at the same time, they want to weaken the Dodd-Frank bill so that they don’t have to ever be liable for making a warning about a country, and they can continue to go back to giving AAA ratings for junk, which is how they make their money.

AMY GOODMAN: Bill Hartung of the Center for International Policy, what happened to the Pentagon in this? They were actually surprised in the other direction, that they did so well.

WILLIAM HARTUNG: They did reasonably well. President Obama, as you mentioned, had talked about $400 billion in cuts over about a decade. That would have allowed the Pentagon to still grow with inflation, so that wasn’t even a real cut. So this is less than that, at $350 billion, and it counts other things. They can cut veterans’ benefits. They can cut the Department of Energy. They can cut international affairs. They can cut Homeland Security. So even down at $350 billion, the Pentagon will not bear all of it. And that was John Boehner’s contribution to the package, was to protect the Pentagon and that larger basket of agencies.

AMY GOODMAN: How powerful were the military contractors, the lobbyists, in what has taken place, in the final deal?

WILLIAM HARTUNG: Well, they weren’t too vocal about it, because they didn’t want to look like special interests, but they worked on the inside. They had Boehner on their side. They had Buck McKeon, the head of the House Armed Services Committee, whose biggest contributor is Lockheed Martin, who’s got big military facilities in his district. They had people like Randy Forbes, whose district is near the Newport News Shipbuilding complex, which builds attack submarines and aircraft carriers. So they used their influence to get people on the inside, their allies in the House, to push their agenda.

AMY GOODMAN: Let me ask you, Michael Hudson, how the debt ceiling was put into place to begin with? In fact, it was linked to the military, right?

MICHAEL HUDSON: It was put in place in 1917 during World War I. The idea was to prevent President Wilson from committing even more American troops and money to war without Congressional approval. It was much the same in every country of Europe—England, France and so forth. Parliamentary control over the budget was introduced to stop ambitious kings or rulers from waging wars. So the whole purpose was to limit a government’s ability to run into debt for war, because that was the only reason that governments ran into debt. Almost all governments, for hundreds of years, have been in balance in their domestic spending. War is what pushes up debt, as it has done in the United States.

Now, the irony of all this is that three weeks ago you had Dennis Kucinich and Ron Paul trying to stop the Libyan—

AMY GOODMAN: Democrat and Republican.

MICHAEL HUDSON: —the Libyan war by introducing a rule to deny Mr. Obama the funding to continue to wage war on Libya and to enforce the War Powers Act on the president – to say, look, the president can’t go to war for more than three months without getting congressional approval.

Mr. Obama said we’re not at a war. Even when we bomb people, that’s not a war; only if our people are killed while we’re bombing them are we at war. And none of our people are getting killed. Bombing people is not war. And then you had, all of a sudden, this fortuitous budget deficit issue coming up, and that untracked the whole discussion of limiting the budget from the discussion about war, where Mr. Kucinich and his Republican colleague had tried to prevent the American military expansion in the Near East. That worries them, and it worries a lot of other Congresspeople too. But somehow, despite the fact that war is always the main cause of budget deficits, that wasn’t an issue in this time around.

AMY GOODMAN: Bill Hartung, your response to that, and also, the whole issue of how—the kind of lobbying power the Pentagon itself has, not just the military contractors, and when there are cuts, where those cuts go, who is hurt most?

WILLIAM HARTUNG: Well, first of all, I think on the issue of war spending driving the debt, that’s absolutely true. If you look at Korea, you look at Vietnam, you look at the Bush administration, along with the tax cuts, that’s been the huge driver of the deficit. So it’s ironic now we’re dealing with that deficit without touching the Pentagon, essentially.

In terms of the distribution of cuts, if you’re giving more money to Lockheed Martin and Northrop Grumman, it’s going to come from feeding programs, from housing programs, from administration of justice, from environmental protection. The whole rest of the budget, other than Social Security and a few entitlement programs, is discretionary. The Pentagon gets 56 cents on the dollar out of that already. And if they suffer almost no cuts, they’ll be a bigger part of the discretionary budget when this is all over.

AMY GOODMAN: And then, in terms of overall what someone wants their nation to be, when you are a first-rate military power—and there’s no question that the U.S. is the most powerful military on earth—but other parts of your country—the economy, the health levels of the people, all of the different aspects that make a country great—are much lower, are second-rate, isn’t this a problem, when it comes to how you approach problems, the first—your first point of attack will be to attack, because it’s your strongest way to deal, Michael Hudson and Bill?

MICHAEL HUDSON: This is what the fight of classical economics in the 18th and 19th century was all about. Parliamentary reform was intended to stop the power of the kings and the aristocracy from going to war, and to refocus the economy on developing national industrial power. For hundreds of years this was the essence of economics. And all of a sudden it is no longer being discussed now. The war is—ever since the Vietnam War, the military spending has been deindustrializing the American economy. If you have a Pentagon contract, it is cost-plus. The higher they spend on airplanes, on armaments, the more money they get. So you have them engineering not to cut costs, but to maximize costs, because that’s how they make their profit.

So you have a warping of American engineering and technology toward the military, and that’s why the industrial core has been shifting to Asia, because they don’t have this military bias. The economy is being sacrificed to the military. And that’s somehow evaded discussion here. And yet, in Europe, for hundreds of years, this is what economics was all about.

WILLIAM HARTUNG: Well, it’s interesting.
AMY GOODMAN: Bill Hartung?

WILLIAM HARTUNG: This year is the 50th anniversary of Eisenhower’s military-industrial complex speech. He talked about the need for a balanced economy, for a healthy population. Essentially, he’s to the left of Barack Obama on these issues. And—

AMY GOODMAN: The general turned president.
WILLIAM HARTUNG: Yes.

AMY GOODMAN: Of course, a Republican, Dwight Eisenhower.
WILLIAM HARTUNG: And we’re spending twice as much on the military as we did when Eisenhower gave that speech. So, we’ve got a huge imbalance in our budget. You can’t really defend your country if people are sick, people aren’t healthy, people aren’t educated. So it’s kind of undermining the roots of the ability to defend the country, going forward, to throw money at weapons makers, to throw money at this huge military base infrastructure that isn’t needed for defense proper of the country. So, it’s completely out of balance, and we’re going to pay a price for that if we don’t turn that around.

AMY GOODMAN: Well, I want to thank you both for being with us. Bill Hartung, author of Prophets of War: Lockheed Martin and the Making of the Military-Industrial Complex, now at the Center for International Policy. And also, Michael Hudson, professor of economics at the University of Missouri, Kansas City. His website michael-hudson.com.