THE GREAT DECEPTION of US PUBLIC DEBT

Is the US public debt as serious an obstacle to economic growth and development as some strict monetarists (those advocating that government control the amount of money in circulation) contend; was the public debt at current 2012 levels created because of 'generous' government spending on social programs and entitlement programs; did the public debt create the global recession of 2008-present, or was it the private sector debt rooted in speculative - parasitic  or non-productive - enterprises mostly confined to financial institutions and insurance companies (banking crisis vs. fiscal structure crisis, with the former causing crisis in the latter); did the public debt rise owing to sharp rise in defense/intelligence/security, lower taxes for the top ten percent of the richest Americans, and a rise in corporate welfare; a combination of all of the above, with some areas having far greater responsibility than others?

Ever since the LEHMAN BROS failure that triggered the global recession, there been a massive PR effort on the part of corporate America - and corporate Europe, Japan, etc. - along with mainstream politicians, economists, journalists, and self-styled analysts to deceive the public about the nature of public debt vs. private debt in the economy, and to what degree has that deception convinced the general public - minus the Occupy Wall Street and other minority voices engaged in grassroots protests?  A synopsis of US public debt may provide a good background of where we are today and where we are headed.

Representing bankers, merchants and commercial farmers, the Founding Fathers realized the importance of public debt as a matter of both stimulus to the economy as well as national sovereignty. The US made remarkable economic progress in the post-Civil War era, an era that coincided with the vast expansion of railroads, agriculture as part of the 'Westward Movement', as well as mining, manufacturing, and banking. All along, the US was a net debtor nation, borrowing from western Europe to finance its vast infrastructure, as well as the primary, secondary and tertiary sectors of the economy. Such borrowing in the 19th century established the foundations for propelling the US into the preeminent global economic position in the 20th century. Growth and development carried out in part with borrowed money, a point that Harry S. Truman made during his presidency, helped America that was nearly self-sufficient in natural resources and benefited from cheap African-American and immigrant labor costs.

Naturally, it was not just foreign borrowing that laid the foundations for US economic hegemony during the era of the Second Industrial Revolution, which coincided with the era of New Imperialism of 1870-1914. The US aggressively sought markets in its own backyard, Latin America and the Caribbean, as well as in Asia after colonizing the Philippines. The US was producing a surplus that needed foreign markets, otherwise it would suffer periodic contractions as the depression of the 1890s proved. At the same time, the US benefited by the rapid decline of Western Europe as a result of wars of imperialism that led to the Great War and then to the Second World War.

The two wars, the Great Depression, and the rise of Communism left an economic gap in the world market economy that propelled the US into preeminence after 1945. Keynesian policies (New Deal) combined with the enormous stimulus the war provided further helped to strengthen the US in relationship to its global competitors that had to endure fighting wars on their own soil and losing colonies after WWII. It should be noted that the US along with European creditor nations benefited from massive transfers of wealth from underdeveloped countries that were suffering public debt problems and fell under financial control by the advanced countries. In other words, public debt crises have served as a means of capital transferring from the periphery to the metropolis. Finally, the US benefited by the transferring both private and public capital from Europe and its colonies as well as Latin America. Public debt played a monumental role as a growth stimulant during the war, even as the US and the rest of the world had accepted the credit economy as the future.

Enjoying the strongest reserve currency in the world, good as gold and backed by it, the US became the undisputed superpower in a political, military and economic sense during the Truman and Eisenhower administrations, and it established the domestic and international institutional mechanisms to maintain that hegemony. However, by the end of the Eisenhower administration, it was evident that the creditor-based Pax Americana expansion was beginning its long road to economic decline.

Keynesian militarist policies, deficit spending to fund the growing arms race with the Communist bloc as a means of maintaining global hegemony entailed weakening of the civilian economy and slowly becoming a net debtor. No matter L. B. Johnson's claim during the Vietnam War about the country's ability to continue spending to maintain a strong defense sector, while keeping a steady trend toward upward mobility for the middle class and a welfare state, the US was sinking deeper in debt owing largely to its ideological commitment stemming from the Cold War militarism, which was invariably linked to global economic expansion through various methods of government support for the corporate sector - what would eventually become known as corporate welfare capitalism. The Cold War and the commitment to subsidize businesses resulted in rising public debt at a time that government wanted to maintain a welfare state.

The debt-to-GDP ratio began to grow, but it did so significantly when Reagan opted for both massive military spending, tax cuts to the rich, and strengthening the corporate sector through varieties of fiscal measures. Debt-to-GDP ratio almost doubled in the 1980s, leveling off during the growth 'Clinton decade' of the 1990s, and then skyrocketing under George Bush who followed a policy of massive military spending and vast transference of wealth, using the state fiscal system as a conduit, to the corporate sector. Debt-to-GDP ratio rose sharply under Bush, while private debt climbed even faster, causing the global recession in 2008 as much in the US as in Europe currently suffering from public debt crisis because banks needed bailing out. Public debt under Bush has risen at about $500 billion annually since 2003, topping $1 trillion in 2008 and $1.9 trillion in 2009 amid the massive bailouts of financial institutions.

In May 2012, debt held by private investors was $11 trillion, half of which is owned by foreign investors. Non-marketable treasury securities debt was $4.76 trillion - the largest portion of which China and Japan own. Total public debt amounts to $15.77 trillion, or 102% of GDP - roughly half of Japan's debt-to GDP ratio. While public debt was growing at unsustainable levels in the last ten years, it helped the US that China and Japan were buying treasury securities, while the eurozone's public debt problems helped to maintain a relatively stable dollar as a reserve currency. A modest degree of growing debt helped to fuel the world economy, but the massive private debt problem seriously undercut the public debt market. That household debt rose commensurately with business debt and public sector debt entailed a convergence that created a crunch in the money markets.

As private sector debt has been declining, largely because the public sector has poured massive amounts of capital into the financial institutions, the problem now rests with public debt created as a result of speculative 

finance capitalism that was parasitic and failed to create real economic growth. Nevertheless, mainstream politicians, media, economists and self-styled analysts insist that the public sector has the problem, not the private sector that created both the public debt crisis and the global economic contraction. This is not just in the US where politicians are hasty to reach conclusions about the evils of government debt, but throughout Europe as well as other parts of the world that essentially follow the neo-liberal model, the same model that the IMF and World Bank peddle and the one that created the current economic and public debt crisis.

It is amazing that there are still people - politicians, journalists, economists, and other analysts - who still claim that the private sector left to its own devices creates economic growth, and that the only problem is the involvement of government. While it is true that the political class under representative of authoritarian regimes has a major role in determining the course of the economy, the political elites' interests are so intertwined with those of the socioeconomic elites that it is absurd to speak of them separately. Can a politician - US or French, etc. - of modest means be elected in absence of massive amounts of money needed to carry our a political campaign? And even if one succeeds to be elected, can such a politician survive private sector pressures? Can the business world function without the considerable intervention of government on its behalf, something that both European and American politicians recognized in the late 19th century - Progressive Era politics for the US. Given the private sources of public debt, is it sounds politics or mass deception to claim that the problem is government spending on social programs and entitlements?

With the exception of sharp rise in health care costs owing to hikes in pharmaceutical, hospital and health insurance. the cost of social welfare and pensions has remained steady and it is expected to stay so for the decade of the 2010s. By contrast, tax rates for the top ten percent and for corporations, combined with a rise in defense/national security and corporate welfare programs that include outsourcing services to private contractors, often at double the cost of what it would take for government to carry out. (see my article entitled "Outsourcing Secrets"). The obvious question is why are taxpayers asked to carry the burden of public debt that the private sector creates and from which it benefits, with minor benefits accruing to the middle class and workers?

Given that there is convergence of interests between the political and socioeconomic elites, how much of a chance does the rest of society have to make progress, how much hope can there be for a growing middle class or a feeble working class not just amid the era of global economic contraction, but for the next decade as well? It will not be long before more and more people demand a reexamination of the social contract, something that may take place in the next cycle of economic contraction, probably by the end of the 2020s-early 2030s that would mark the 100 year-anniversary of the Great Depression of the 20th century.