America’s Structural Weaknesses Threaten its Future

Steven Hill, Social Europe Journal, April 27, 2011

The U.S. massively wastes money on defence spending, health care, energy/transportation, and income disequilibrium.

The Battle of the Budget Deficit has become centre stage in the United States and will dominate for many months – most likely into the presidential campaign in 2012. The battle in the U.S. mirrors similar ones in Europe, Japan and elsewhere, but there are important differences that put America at a disadvantage.

A budget deficit is like a two-sided coin – if it results substantially from important investment in new technologies, industries and physical infrastructure (roads, airports, etc.), and from investment in human resources via health care, education and job training, it actually can help pave the way toward a more prosperous future.

But if it results from waste, inefficiency and expenditures on bloated bureaucracies, corruption and non-productive activities, not only by government but also in the private sector, it can drain the public coffers and allow the present and past to rob from the future. Especially if other nations are engaged in the right kind of expenditures and investments, allowing them to forge ahead, a country that only treads water will fall behind in relative terms.

Today, most of the world’s developed countries are plagued by large deficits resulting from both the massive bailouts of their financial systems as well as a deep recession. Some of the countries that have the grimmest prospects also suffer from collapsed housing markets. Going forward from this economic crisis, the wealthiest nations are going to need to learn to do more with less, especially since they are facing spirited competition from developing nations. Productivity in every sector – getting more output from the same amount of or even less input – will be key. Successful economies will be those that are able to increase the efficiency and stability of their institutions and practices, whether in health care, retirement pensions, banking and finance, labour, energy and transportation, and spending in general. The bar has been raised, the race is on.

Unfortunately for Americans, the U.S. massively wastes money and resources in four critical areas that other countries in Europe, Japan and even China and India to a lesser degree are not as encumbered by. These four Horsemen, which are sapping vitality from the national economy, are defence spending, the health care system, energy use and transportation, and what I call income disequilibrium.

It is widely known that the U.S. spends as much money on its defence budget as the next 20 nations combined, and three times more than all conceivable enemies combined (and that figure does not include spending for theatre of war operations in Iraq, Afghanistan and Libya, which amounts to another estimated $1 to $3 trillion, nor does it include huge expenditures by the Department of Homeland Security, the National Security Agency, the CIA, the Veterans Administration, or the parts of NASA and the Department of Energy used for military-related activities). Is that level of spending really necessary to secure the homeland and global stability?

The answer is ‘no’. Leading military analysts report that vast sums are being spent on outmoded weapons systems that have little relevance to America’s actual security and defence needs. Most of today’s security risks result from insurgencies led by non-state actors, as in Iraq, Afghanistan and Pakistan. Yet as one defence critic put it, with over 760 military bases around the world, eleven large aircraft-carrier battle groups and other obsolete military hardware, the U.S. military is “still geared to fight the Imperial Navy of Japan.”

In reality then, a substantial part of the U.S. defence budget actually is not for defence but instead is a jobs program. It’s also a major source of pork for the use of politicians in their re-election campaigns. Combined with the insider influence of defence industry lobbyists, it means that the U.S. economy has become hooked like an addict to an ongoing fiscal stimulus from military expenditures.

Yet as a fiscal stimulus, it’s extremely inefficient. For starters, you are building a product – weapons – that you hope to never use, so the market for future sales faces severe constraints. And many of the million plus U.S. soldiers in uniform are stationed overseas, where they are spending their salaries in some other nation’s economy. For all these reasons and more, many studies have shown that the economic ‘multiplier effect’ that causes each dollar spent to ripple through an economy is much higher for spending on physical infrastructure – maintaining roads, bridges, airports and harbours, for which the American Society of Civil Engineers says the U.S. has fallen $2 trillion behind – than military spending.

Beyond the economic inefficiencies lies the question of relevance. With the Cold War over, it’s important to ask who are America’s enemies today, and what level of resources does national security require? Is Afghanistan the enemy, a poor, ravaged country of little strategic value (other than the never-ending Osama bin Laden chase) with an economy smaller than that of tiny Rhode Island? Is it Iran, a poor country badly in need of economic development that, despite all its oil, has an economy smaller than that of New Jersey?

These countries need help developing their economies so that employment will be a better career option than strapping on a suicide vest. Indeed, the top analyst in the U.S. intelligence community wrote a report in September 2008 in which he concluded that U.S. superiority in military power will be the least significant” asset in the epoch that is unfolding. Despite all the trillions spent, America’s aggressive brand of unilateralism and military hard power have suffered unexpected setbacks and mixed national security results.

So America is not getting its military money’s worth, not by a long shot, and we can no longer afford this kind of waste. The recent bipartisan deal to keep the U.S. government solvent contained some modest defence cuts, but given how the economy is hooked into this wasteful spending as a fiscal stimulus to create jobs and re-elect incumbents, spurred on by the tentacles of defence industry lobbyists, wasteful defence spending is going to be tough to rein in. Yet it’s important to try, because even a reduction in military spending to the same share of GDP as it was in 2000 would save $240 billion a year, or 1.6 percent of GDP.

In health care, it is widely known that the U.S. spends nearly twice as much money per capita as most other developed countries, about 17 percent of gross domestic product. Yet despite spending so much more money on health care, various metrics reveal that Americans have worse health than these other countries, with 45-50 million Americans having no health insurance at all. The United States is one of a handful of countries with no mandatory paid sick leave, leaving some sixty million workers — 43 percent of the private industry labour force — without paid sick days, which further degrades productivity and private earnings. U.S. employers meanwhile spend two to three times as much as their overseas competitors on employee health care costs, reducing their global competitiveness.

The reason why Americans’ health care is so expensive compared to Europe or Japan is because America has a for-profit health care system while Europe and Japan have predominantly non-profit health care systems (interestingly, only a few of them have British-style single payer or ‘socialized medicine’, most nations like Germany, France and Japan base their systems not on government-run health care but on private, non-profit insurance companies). For-profit health care features CEOs making tens of millions of dollars in salary and bonuses, grossly overpaid doctors, and stockholders seeking to profit off of someone’s ill health. Like any corporation looking to maximize earnings, for-profit health care companies have two incentives: 1) to jack up prices, i.e. insurance premiums as high as they can get away with, and 2) to pay out as little as possible on services. That’s why they feature outrageous Catch 22s like pre-existing condition clauses and annual and lifetime service caps, because your health care eats into their profit. It’s a losing proposition for everyone except the health care corporations.

But non-profit health care features an entirely different set of incentives and performance standards because it prioritizes people’s health above the company’s profits. This allows for features such as greater transparency as well as negotiated fees for each service, which helps to hold down costs. It’s the only method ever proven to rein in costs without sacrificing quality.  Yet neither U.S. political party has a plan to turn the American system into a non-profit one, so there’s little prospect for reining in costs any time soon.

When it comes to energy use, fuel efficiency and transportation, once again the United States is plagued by wasteful, even gluttonous practices. The average American today uses twice as much electricity as the average European. The average American car uses 40-50 percent more fuel as the average European or Japanese car. Like with health care, American businesses also spend more than their international competitors on their energy and transportation needs.  The recent budget deal gutted the Obama administration’s budget for high speed rail, even as high speed rail investment continues apace in Europe and China.  By implementing various conservation practices as well as widespread use of renewable energy methods, Europe has managed to reduce its carbon emissions and its overall ecological footprint to half that of the United States for the same standard of living.

Finally, America is trailing in the area of income equilibrium. It is widely known that the United States has one of the highest rates of economic inequality in the developed world, but income equilibrium is different than income equality. Capitalist economies are delicate balancing acts between production, consumption, investment, spending and savings. The macro-economy must (over time) consume what it produces, and every business has to sell the goods and services it makes, or else they have to cut production and lay off workers. So if not enough customers have sufficient discretionary income to buy what’s produced – if their wages are too low, or too much of their pay is being siphoned away by high costs of health care, energy and fuel, taxes paid on wasteful military expenditures, or lack of paid sick leave and more – then they reduce their buying and a recession or worse occurs. In other words, consumer spending has the ability to act as an automatic stabilizer that provides ongoing stimulus to the macro-economy, and without a sufficient level, your economy takes a tumble.

Unfortunately, for the last three decades the wage levels of average American workers have remained stagnant, forcing many of them to borrow to make ends meet and take on unprecedented amounts of private debt. Yet at the same time, businesses have prospered and the wealth of the wealthiest has skyrocketed. Incredibly, the 400 wealthiest Americans now own $1.4 trillion in wealth, which is more than the gross domestic product of the entire country of India with a billion people. Yet President Obama joined with Republicans to extend the Bush-era tax cuts for the richest 2% of Americans, which Obama had previously vowed to end. Tragically, the stark level of inequality in America is not just a moral outrage, it’s also debilitating to the smooth functioning of its capitalist economy because not enough people have sufficient money in their pockets to buy up what is produced. One way to overcome this is to export what you produce but the U.S. isn’t doing that either, instead it has a massive trade deficit. So the income equilibrium in the United States has become greatly unbalanced, causing damage to the broader macro-economy which will make it even tougher to emerge from the current economic crisis.

Related to this is the issue of retirement pensions. Leaving aside for a moment the moral issue of how well a society takes care of its seniors, from an economic standpoint most seniors spend nearly all of their retirement income on their daily needs. Their consumption also is an important part of the automatic stabilizers that provide ongoing stimulus to the macro-economy.  Even as the ‘debate’ over Social Security has narrowed to those who say cut it because we can’t afford it and others defending the status quo, neither position deals with the utter breakdown of America’s retirement system in the aftermath of the Great Recession. America’s ‘three-legged stool’ of retirement security (the three legs being company pensions, personal savings centred around homeownership and Social Security) has become endangered since two of those legs (company pensions and personal savings/homeownership) have substantially collapsed.

The one remaining leg, Social Security, is too short by half since it provides such a meagre payout. It only replaces about 35 percent of a worker’s average final wage before retirement (compared with most European countries, where it replaces about 65-85 percent of a worker’s final average wage, depending on the country). That’s not enough money to live on if it is your primary, perhaps your only, source of retirement income, as it will be for an increasing number of American seniors with little savings and no company pension. With insufficient income, many seniors’ spending will be forced to cut corners and will no longer be able to act as a stimulus or automatic stabilizer of the national economy. Cutting Social Security will only make this situation worse.

Already America has more of its head below water than Europe does, with the current EU debt average at 73% of gross domestic product, higher than the target of 60% but quite a bit lower than the U.S. at 93%.  In a classic guns vs. butter trade-off, America spends more than twice as much of its gross domestic product on the military as Europe, while Europe spends at least 25 percent more per capita on social spending than the U.S.

When the United States was the world’s pre-eminent power in the post-World War II era, it could afford such waste and inefficiency at the core of its economy. But in today’s multi-polar, hyper-competitive world, such profligacy will put the U.S. – as well as any other country so encumbered – at a disadvantage. What this also means is that it’s not just the amount of the deficits and debt that sends a nation hurtling toward a tipping point, but the quality of those obligations – are the deficits due to investment or waste?

No other developed nation in the world suffers from as great a degree of a bloated defence budget, health care waste, gluttonous energy and transportation use, and income disequilibrium as the United States. Other nations might suffer from one or two of these, but not all four. It’s hard to imagine how America can continue to play its pre-eminent global role if it cannot figure out how to stop the leakage. Yet given how enmeshed these facets are in the U.S. political economy, and how entrenched are the various special interests that benefit from the status quo, that will be devilishly difficult to do.