26.10.2013 Author: Salman Rafi Sheikh

A look back at the latest Government Shutdown


“This is very ironic.” 

It has been said that “conflict is endemic to budgeting.” Nothing else would prove this statement more accurately as the example of the latest  government shutdown in the U.S. Conflict between the US Congress, opposition and the US President over fiscal allocations and budgetary reservations should not be construed merely in terms of a ‘financial’ dispute, nor should it be regarded as an ordinary case of economic crisis; rather, there are certain overlapping crucial political and economic agendas and there are certain ‘unspoken’ and unreported aspects as well with strong political underpinnings. For example, the questions: is the shutdown –implying the furloughing of tens of thousands of public employees– a dress rehearsal for the eventual privatization of important components of the federal State system?Does it aim at eventually privatizing multiple state infrastructures whereby large corporations would become the owners?The important question:  Could a process of “state bankruptcy” –which is currently afflicting local level governments across the land– realistically occur in the case of the central government of the US? This is not a hypothetical question; for, a large number of developing countries under the brunt of IMF economic medicine were ordered by their external creditors to dismantle the State apparatus, fire millions of public sector workers as well as privatize State assets.  Whatever might be possible answers to these core questions, it is almost certain that the policies of the US, particularly of the last two regimes (Bush and Obama), have directly contributed to this crisis.

As such, the latest crisis started to develop even before President Obama swore in, when President Bush gave bailouts to temporarily control economic problems. The Bush and then later on Obama bank bailouts led to the appropriation of $1.45 trillion of the US tax revenues. This money was channeled to Wall Street under Bush’s Troubled Assets Relief Program (TARP) and Obama’s bailout program initiated at the outset of his first term. This money was transferred to the banks. Meanwhile, “defense expenditure”, during both these regimes, in support of a war economy had also spiraled: 740 billion dollars had been allocated (Fiscal Year 2010) to fund a vast process of militarization including America`s wars in the Western and South Western segments of Asia. Of significance, there were several other unreported shadowy multibillion dollar bailouts which do not appear in government accounts, not to mention the Pentagon’s black budgets which are not included in the official expenditure accounts of the Department of Defense. According to a 2000 report of Aviation Week, “the Pentagon’s ‘black’ operations, including the intelligence budgets nested inside it, are roughly equal in magnitude to the entire defense budgets of the UK, France or Japan, and 10 per cent of the total.”

In other words, these two categories of expenditure, namely War and Wall Street virtually ate up the bulk of federal revenues. As a result of such over-spending on non-social sectors of development, social development projects had to be financed through debt creation (emission of Treasury bills and government bonds), namely through a dramatic increase in the public debt from $9.9 trillion in FY 2008 to 16.7 trillion (October 2013), a staggering increase of almost 70 percent. In essence, the Federal government has since been financing it own indebtedness through generous handouts to Wall Street and the military industrial complex. In a bitter irony, while the Wall Street financial institutions were the recipients of the government bailouts, they were and still are the creditors of the Federal government as well, which has now been formed into a firm structure of deficit financing controlled by Wall Street. This deficit financing, or Quantitative Easing, does not create employment, it is not expansionary, and leaves very little bearing on the real economy. The various phases of Quantitative Easing throughout the Obama presidency were again largely intended by Wall Street to keep the ship afloat, with an increasingly larger share of the debt owned by the Federal Reserve. The Federal Reserve is not a publicly owned central bank; it is a network of 12 private US banks, with the New York Federal Reserve Bank playing a key role. Operating under a semi-secret veil and major Wall Street financial institutions are its “stakeholders”, its basic is ‘goal’ to guarantee the continual profitability of Wall Street and the personal incomes of the super-rich. And ever since the outset of Obama administration in 2009, the Federal Reserve Banking system (which is an unaccountable private entity) has been granted increased authority in its management of the US economy, overshadowing the prevailing system of public regulation of the financial system, as well as reinforcing the subordinate role of the US Treasury in relation to Wall Street. And, as a matter of fact, The Federal Reserve banks currently hold $2.1 trillion of US public debt.

The explanation given here does reinforce the argument of Tony Cartalucci, who has argued, explaining the worst form of modern capitalism and the so-called democracy of the West, that the real government in the US (as also in some European States) has gone into the clutches of ‘mutuallycooperating groups of powerful corporate entities’, etc, who act as the behind the scene real ‘power managers’ at both domestic and global level, transcending almost all public entities and virtually controlling them—hence, the phenomenon of Wall Street.

One may here argue that the US has experienced such shutdowns in the past; therefore, the current crisis is nothing new. Although it is a stated fact that the US governments did undergo through such shutdowns, the reasons for the past crisis were markedly different. For example, the two most recent funding gaps and corresponding shutdowns occurred in FY1996.The first, which lasted five full days from November 13 to 19, 1995, resulted in the furlough of approximately 800,000 federal employees. However, it was basically caused, as it is stated in a report of the US Congressional Research Service, by the expiration of a continuing resolution agreed to on September 30, 1995 (P.L. 104-31), and by President Clinton’s veto of a second continuing resolution. The second FY1996 partial shutdown of the federal government lasted 21 full days between December 15, 1995, and January 6, 1996.41 The shutdown was, as in the previous case, triggered by the expiration of a continuing resolution enacted on November 20, 1995 (P.L. 104-56), which funded the government through December 15, 1995.

The factors which directly or indirectly contributed to this shutdown were altogether missing in the two cases of the shutdown described here. The overall condition of economy was much better during those years. During 1996, the U.S. economy saw moderately high growth with low inflation and historically low unemployment. The economy created approximately 2.5 million additional jobs in 1996, a 2.1 percent increase from 1995 levels, and inflation again was low and in control, around 3.0 percent. The growth rate was not too high, but that was because the US economy was recovering from recession of 1991-92.It is for these reasons that the affects of previous shutdowns didn’t receive much extensive attention in both public and private sectors; and, the affects of the current crisis, though an agreement between the government and the opposition is imminent, are being received far more extensively and critically across the US primarily because of poor economic performance of the US economy, and war weary mood of the US public.  The United States GDP Annual Growth Rate reached a record low of -4.1 Percent in June of 2009. Since then, the US has failed in recovering, with unemployment rate standing as high as 7.3 percent and budget deficit standing at $607 billion (as of August 2013), and immensely rising public debt in what is called the world’s biggest economy.

However, despite poor economic performance, the US did little to reduce its defense spendings; rather, defense expenditures continued to increase progressively each year. The figures are as follows:-

FY-2008 $686 billion.
FY-2009 $782 billion.
FY-2010 $846 billion
FY-2011 $838 billion.
FY-2012 $909 billion.

Although it cannot be said categorically that the decades long wars have caused economic crisis in the US, these wars have certainly contributed to the decline. In fact, the wars in Iraq and Afghanistan have raised deficits by about 1% of GDP each year since 2001. The Center for Budget and Policy Priorities finds that the deficit-financed wars are one of the main drivers of the projected debt, totaling $20 trillion by 2019 if current policies continue. And, it is also a fact that the US spent more on its military than 13 nations (China, Russia, India, UK, France, Japan, etc.) combined in 2011. Although defense budgets are expected to decrease in coming years, however, it is not because that the US government has decided to ‘reduce’ defense expenditures but because the Wars in Iraq in Afghanistan are expected to wind down.

Is the latest crisis then a crisis of modern capitalism and democracy—a system which gives power to multinational corporations and big business firms? Democracy encourages private enterprise, and eventually, the former is hijacked by the latter. This is precisely what seems is happening in the US. The crises are creating further problems, and it is directly paving the way for increased privatization; for, State programs can be downsized, phased out or transferred out of the public purse to the private corporate sector—hence, more control of Wall Street and Federal Reserves. No major reforms of the structure of indebtedness are being contemplated by the US Congress, which could meaningfully change the government’s relationship to the Federal Reserve and its Wall Street handlers. Thus, it is the creditors who ultimately decide. To add to it, what is being contemplated is merely marginal modification of the status quo including legislation to push the debt limit to December 31st 2014. And, And, although the government has succeeded in achieving the desired legislation, it is not a victory; for, this token arrangement would temporarily increase the federal government’s borrowing ability through the issuing of Treasury bills and government bonds by about one trillion dollars. Under this scheme, however, the powers of the Wall Street Banks and the New York Federal Reserve would not only be maintained, but they would be reinforced. This is very ironic. The US is going yet again to rely upon those forces of corporate interests which have directly and indirectly pushed the US economy to the limits of default. The crisis is not over; the government has just suspended temporarily what seems inevitable. Who will then end this crisis—the government (borrower), or Wall Street (the creditors)?

Salman Rafi Sheikh is a research-analyst of International Relations and Pakistan’s foreign and domestic affairs. Exclusively for the online magazine New Eastern Outlook.

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