By Alex Callinicos
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US budget crisis can lead to a new slump

This article is over 8 years, 3 months old
Issue 2374

Once again the United States is shutting down government services because of a confrontation between president Barack Obama and the Republicans in Congress.

There are two dimensions to this. First, because the White House and the Republican-controlled House of Representatives can’t agree on a budget, large numbers of government workers are being laid off.

This has happened before—for example in 1995-6 in a standoff between another Democrat president, Bill Clinton, and the Republican Speaker of the House of Representatives, Newt Gingrich. The economic impact was minor, and in the end the Republicans backed down.

But this time they face a much more serious deadline, 17 October, when the US government needs renewed authority to carry on borrowing. The hard-right Tea Party fanatics in the Republican party are threatening to block this unless Obama is willing to suspend his healthcare reforms, which are due to come into force shortly.

If the US defaulted on its debt this would be serious. The dollar is the main global reserve currency, and the smooth functioning of the American economy and the international financial system both depend on a steady flow of US government borrowing.

My North American friends assure me that the US won’t default. They predict that the Republicans will eventually blink first, and negotiate a deal with Obama. Maybe this is true. However, US politics seems not just fractious, but to have evolved more and more out of alignment with the interests of the ruling class.

One main plank of Tea Party philosophy is a balanced budget. They see government borrowing as immoral, and some at least are prepared to force a default as a step towards this objective.

In a muddled way they are onto something. The US economy is kept afloat by a vast mass of public and private debt. The central bank, the Federal Reserve Board, recently decided that it had to continue with quantitative easing. 

This involves the Fed creating dollars that it pumps into the financial system by buying up some of this debt.


So the Republican right correctly point to the dependence of the US economy on artificial support from the federal government. But to stall the great borrowing machine might precipitate another slump. 

The Tea Party strategy is like the US major who said during the Vietnam War, “It became necessary to destroy the town to save it”.

Why are these free market fanatics so powerful? This has a lot to do with the politics of the American South. When he was first elected, Obama liked to compare himself to Franklin Roosevelt, whose New Deal rescued US capitalism during the Great Depression of the 1930s.

But Roosevelt was a much more adventurous politician who imposed tough controls on private capital. He could afford to be because he could count on solid Congressional majorities. As Ira Katznelson shows in a new book called Fear Itself, the Democratic Party in the South played a key role in delivering these majorities.

The South was still a one party state, in which black people were disenfranchised, and the Democrats dominated politics. They used their Congressional power to deliver Roosevelt’s economic and social reforms. 

In exchange he did nothing to stop lynching or the system of Jim Crow laws that preserved white supremacy.

This setup unravelled in the 1960s, when Democratic administrations dismantled Jim Crow under pressure from the Civil Rights movement. This allowed the Republicans, starting with Richard Nixon in 1968, to win over disgruntled white voters in the South.

Now the Republicans dominate the South. Gerrymandered Congressional districts mean that incumbents worry not about the Democrats but challenges from fellow Republicans even further to their right. The Tea Party makes the political running.

The saddest part of this story is that Obama is angling for an agreement that would allow the government to keep borrowing, but also cut welfare programmes. These have already been pared to the bone. 

We’re a long way from the New Deal.

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