Should Gov't "Live Within Its Means"?

One ubiquitous political sound bite in the U.S. nowadays is that the government should "live within its means," and it is frequently compared to a U.S. household.

Comparing the federal government to a household is misguided.


A household obtains revenue for the purpose of procuring its needs for existence and that also, largely, determines what a household spends.  Furthermore, the budgeting of any individual household does not directly affect the finances of its neighbors.

A state is not a household.

Not only does a state appropriate and expend wealth, but these and other actions determine the value of its currency and assets as well as the level of demand, both domestically and globally.  I have written previously about how the existence of the state is primarily as a tool of cultivating regional boundaries for the uneven development of prices and wages.  Such unevenness is necessary for capitalist profitability.

The primary purpose of U.S. government spending the past few decades has not been to fund government programs.  It has been to inject demand into a global economy faced with a crisis of overproduction.  Whether this is a wise strategy or not, U.S. deficit spending has almost single-handedly kept the entire global economy afloat.  When the U.S. tried to reverse course in the late 1970s and early 1980s, it precipitated a massive Third World debt crisis that threatened to undermine the entire world economy.  So Keynesian deficit spending was resumed.  Likewise, Clinton's austerity measures in the 1990s ended with an East Asian financial crisis that started to snowball out of control and necessitated a bailout by the U.S.  (Furthermore, all the effort to balance the budget amounted to nothing in the long run...)

One can argue that the situation of the past few decades, in which the U.S., for the most part, (and someone at all times) played the role of deficit-spender, is neither ideal nor effective nor sustainable.  And I would tend to agree, myself.  On the other hand, those who propose to drastically reduce government spending in order to balance the budget must not take such a myopic view of the economy and realize that such a decision could be accompanied by dramatic consequences, including deepening economic crisis.  At the very least, be prepared!

The Crisis of Overproduction

One of Marx's most fundamental propositions is that capitalism is based on a number of contradictions that limit its potential for unfettered growth, and ultimately destabilize the entire system.

1.  One of the primary ways by which capitalists profit is by keeping wages low. However, lowering wages also reduces demand for the goods that are produced. Thus, the tendency to try to minimize wages and to maximize demand are contradictory.

2.  Investment in new productive technology, while increasng the efficiency of the production process and initially raising profits, actually lowers the rate of profit. This is because profit is the realization of surplus value, and surplus value derives from the ability to obtain human labor in excess of what one is paying for the labor through wages. Thus, surplus value and profit are directly dependent on human labor. Introducing new technology into the production process reduces the proportion of human labor embedded in the price and cost of each object produced. This means that it is more difficult to accumulate surplus labor at the same rate. The reduction in the rate of profit can be forestalled through the creation of monopolies (for example, through copyrights), which allows one to keep prices high despite lowered production costs. However, monopolies can only be sustained for so long.

These contradictions that are particular to capitalism derive from principles pertinant to the accumulation of wealth in general (capitalist or non-capitalist). Recall the primary principle that continued investment in profitable enterprises decreases their profitability. Essentially (though this is a slight over-simplication) when one expands an enterprise (by re-investing accumulated surplus capital), then one risks undermining advantages on both the input and output end of the production process:

-Increasing the supply of goods that one is providing drives down prices
-Increasing the demand for inputs drives up the cost of the inputs

Thus, material expansion endangers profitability from both ends. When one accumulates more capital than one can profitably re-invest (i.e. when such a re-investment would enlarge the enterprise beyond the point of profitability) the result is a crisis of overaccumulation. One has two options. Either one can find other outlets for investment (other enterprises, financial speculation, public works and philanthropy - the latter also working as a means to cultivate political power), or one can actually continue to invest the accumulated capital and expand the enterprise. If the latter course is chosen, then a crisis of overaccumulation will become a crisis of overproduction. In a crisis of overproduction, the investment of excess capital in material expansion beyond the point of profitability results in a surfeit of goods produced in relation to demand.

Such is the situation the world now finds itself in. The post-WW2 era was a period of rapid economic acceleration and expansion. The widespread incorporation of mechanized production and assembly line production techniques, in addition to the rise of the transnational corporation, afforded rapid economic growth and productivity increases to the world's industrial powers, most notably the U.S., Western Europe, and Japan. By the end of the 1960s, however, this economic expansion was already becoming a crisis of overproduction.

One response to the overproduction crisis has been the use of Keynesian deficit-spending tactics. This has been most prominent in the United States, even in the 1980s when Reagan ratched up military spending. However, many countries in the world are now saddled with massive amounts of debt, so it is certainly not a strategy confined to the U.S.

Another approach has been to divert investment away from production and toward financial speculation. This began toward the end of the 1970s and particularly with the advent of Reagan-Thatcherism. Results of this strategy have included: Third World economic collapse and debt crises, bubbles, bubbles, and burst bubbles. The events of the past few years have, I think, made it very clear that financial speculation is not a path to sustainable prosperity.

History suggests that a crisis of overproduction of the scale now plaguing the world economy cannot necessarily be "overcome." Instead, a certain level of systemic collapse and reorganization is necessary. And this takes a long, long time. We might have to deal with global economic depression for the rest of our lifetime. Enjoy the ride!

The Real Threat of National Debt

There has been a lot of talk in the U.S. recently about national debt, balancing the budget, and reducing the federal deficit.  Many Americans think that our debt has become just too high.

It is true that national debt can undermine the long-term stability of a country.  I don't think many people would try to argue that debt is a good thing.  However, to what extent is our national debt simply a problem endemic to the U.S., and more narrowly, of irresponsible governance?  How does U.S. national debt compare to other countries?

The answer to the last question is, it's high, but certainly not the highest.  About 35 other countries have national debts that exceed the U.S.  Furthermore, world debt, as a whole, has been steadily increasing.

The increasing debt of any single country is merely a symptom of a global phenomenon that is inherent to the capitalist world system.  Manufacturing, the base of the industrial capitalist economy, has for the last few decades been characterized by a crisis of overproduction, decreasing profitability, and overall stagnation.  This, in turn, is a result of the general contradictions of the capitalist system:  in particular, the drive to increase production through economies of scale and investment in technology, while simultaneously limiting demand through the containment of wages and employment rates.

To counter the crisis of overproduction, capitalist interests have been forced to turn to the state (the life-support system of capitalism) to create demand through deficit spending, most especially on a permanent arms economy.  Thus, worldwide state deficit spending and rising national debts are a result of the inability of capitalists to sustain the profitability of their enterprises.


So, the capitalists can't maintain a high rate of profit, and what do they do?  They continue to engorge themselves with wealth, essentially by leaching money from everyone else's pocketbooks.  We all drown in debt to finance the 38% increase in wealth of the handful of the world's wealthiest.  That is where all this debt is going!!

Will balancing the budget and cutting government spending solve all our problems?  No.  Because the root of the problem is overproduction and stagnation within the manufacturing sector.  Cutting spending will just further cripple the already ailing economy... which may or may not be a bad thing.  Clearly real systemic change is needed.  If hitting rock bottom is necessary to give impetus to this change, then perhaps spending cuts will ultimately help move things in the right direction.  It will just be very painful for most of us.