The Other Red Peril
Deficits, Debt and US Power
The Age of Deficits…
... And The Age of Debt
The New Red Peril: C21 Debt Projections
Roots of the New Red Peril: Entitlement
An even worse scenario – entitlements and
interest payments
... And inadequate federal tax revenues
But tax increases are not the sole answer!
The Political Impasse ...
• Broad consensus that deficit and debt control are
essential but no agreement about means
• Republicans insist that spending retrenchment is the
only solution
• Democrats want mix of spending cuts and revenue
• Efforts to depoliticize the deficit/debt solution –
Obama Fiscal Commission, congressional supercommittee – founder on rocks of partisan
polarization and ideological inflexibility
... But deficit/debt is embedded in structural
problems of post-1980 economy
• The Volcker Fed’s success in conquering
inflation through the monetarist ‘shock’ of
1979-82 stabilized the value of money
• But real interest rates remained high
because of the need for foreign capital to
make up the deleterious effect of the
Reagan-era fiscal deficits on national savings
• The effect was a burgeoning trade deficit as
a strong dollar sucked in imports and the
hollowing out of US manufacturing
The US Trade Deficit
The ‘financialisation’ of the US economy
• High interest rates meant that profits increasingly
derived from provision/transfer of capital.
Production share of GDP fell from 30 percent in
1970 to 16 percent in 2000, FIRE rose from 15
percent to 24 percent (this sector increasingly
sought high return in relatively short time)
• Financialisation exacerbated income inequality: in
1976, richest 1 percent owned 9 percent of nation’s
pre-tax wealth; in 2007, its share was 24 percent
(richest 0.1 percent got 12 percent)
• Low interest rates (1996-1999, 2002-2005)
produced speculative frenzies in high-risk financial
ventures – boom, sub-prime mortgages
What is to be done?
• US needs to save, produce and export more;
borrow, consume and import less
• Only about 4 percent of US firms (15
percent of manufacturing ones) do any
exporting at all; and just 1 percent of firms
account for 80 percent of US export value
• In 2010 exports made up 10.9 percent GDP;
the US needs to get to 20 percent in a
relatively short time to achieve economic
How? The state’s constructive role
• Key to rebalancing is timely pre-emption of
fiscal crisis i.e. not too soon to flatten
recovery, but in time to prevent debt
undermining economic foundations
• This needs political agreement on
entitlement control and tax increases
• It also necessitates creating adequate fiscal
margin for (i) defence and (ii) public
investment (education & training,
infrastructure, green initiatives) to enhance
What Obama can do? One option...
... Or “Teach Reality”
• Abandon meaningless rhetoric of keeping the
American economy “No 1” in the world
• Teach the reality that rebalancing is needed through
a shift from financialisation to production, but that
this will involve pain (borrowing/consumption
• Find a positive way of asserting the role of the state
in America’s economic renewal because the market
is the problem not the solution
• Use American influence to promote international
economic coordination towards global rebalancing
and elimination of distorting trade and capital flows
Without fiscal/economic course correction ...
• The US enters a period of steady
economic decline from the 2030s
• As economic power is critical to both
its hard and soft power, America’s
preeminent global position cannot be
• Increasing income inequality leads to
growing lack of social cohesion at