People's Democracy

(Weekly Organ of the Communist Party of India (Marxist)


No. 42

October 20, 2013




The Crisis of the US State


Prabhat Patnaik


A BIZARRE drama is being played out in the United States. The American financial year ends on September 30. Federal expenditure after that date can come only out of the budget for the new financial year. But the House of Representatives where the Republican Party enjoys a majority has not only refused to accept President Obama’s budget for the new financial year, but has even opposed legislation allowing the federal government to continue spending until a new budget is approved.


It has insisted, as a condition for its allowing legislation to continue federal government spending, that President Obama’s healthcare plan should be postponed by a year. Since this is unacceptable to President Obama, the Democratic Party and the bulk of the American population, there is an impasse: the federal government’s ability to undertake expenditure has got curtailed and there is what is called a “partial shutdown” of the US government.




This does not of course mean that all federal spending has come to an end. Military spending and a range of so-called “essential” expenditures are being allowed; but “inessential” expenditures cannot be undertaken, and those employed in such sectors cannot get paid. Hence thousands of US government employees, engaged in the provision of such “inessential” services, have been forced to go on unpaid leave for an indefinite period. For instance, the staff employed at Mount Rushmore, where the faces of four past American presidents are carved on stone, has been sent on unpaid leave, closing down that particular tourist attraction.


Such unpaid leave for large numbers of Federal government employees entails not only a direct loss of livelihood for them, but also a reduction in the US GDP, both directly (since their output is foregone) and indirectly (since the cut in their incomes affects the demand for other sectors’ output as well). The GDP loss is estimated at 300 million dollars per day; a fortnight’s shut-down is likely to reduce the annual GDP by 0.3 percent and a month’s shutdown by 1.4 percent.


Serious though this crisis is, even worse is likely to follow. The US, from the very beginning of its history, has a constitutional provision which fixes the ceiling on its government’s debt in absolute terms. Now, obviously, with the passage of time, the absolute magnitude of debt must keep increasing; but even until now, oddly enough, instead of amending the constitution to remove altogether this anomalous provision of an absolute limit on government debt, the US has only kept revising this debt ceiling every year through appropriate legislation. The current debt-ceiling stands at 16.7 trillion dollars which is going to be hit in mid-October. Once that happens, the US government cannot borrow any more unless legislation is passed to allow it to raise the debt-ceiling. And this, again, the Republicans in the House of Representatives are refusing to do unless President Obama postpones his healthcare bill by a year.


If the US government cannot borrow, then not only will its expenditure suffer, but so will its ability to pay back its debt. If a US government bond of 100 dollars, for instance, matures on October 20, then to pay this money on October 20 the government may need to borrow 100 dollars. Even though this borrowing merely results in one debt replacing another, i.e. a freshly borrowed 100 dollars being used to settle an old debt of 100 dollars, there is normally a brief period, following the date of the fresh borrowing, for which the debt amount will be temporarily higher. Even this, however, will violate the debt-ceiling, and is not allowed under the law.  In short, the inability to pass legislation to raise the debt-ceiling will result in the US government defaulting on its debt, quite apart from being hamstrung in undertaking even the “essential” expenditure that it is allowed to incur despite the “shutdown.”




This will have a serious impact on the entire capitalist financial system. Large numbers of wealth-holders all over the world hold US government debt. In fact, in the wake of the 2008 financial crisis when private balance sheets were affected, directly or indirectly (i.e. at one or more removes), by the presence of “toxic assets,” US government debt came to be regarded as the safest form of wealth-holding for global capitalism. What the current standoff in the US threatens therefore is an undermining of what has hitherto been considered the safest form of wealth-holding in the capitalist world. Even countries like China, which have run persistent current account surpluses vis-a-vis the United States for years, hold their claims upon that country largely in the form of US government treasury securities. The consequences of the current standoff in the House of Representatives for the entire world economy, especially the global capitalist economy, therefore, can be well imagined; it will precipitate a serious crisis indeed.


This will be in addition to the impact of the reduction in US GDP which will reduce aggregate demand in the world economy. Hence this standoff threatens the world economy with an accentuation of the current recession. The fact that nothing severe has happened till now, and not even any alarm bells sounded yet, is because most people expect the standoff to disappear soon. But if it persists, then serious consequences will follow.


How, it may be asked, is this standoff being allowed to continue, when, because of its potentially serious consequences, international finance capital cannot but be opposed to it? The answer lies in the fact that the US corporate financial elite has created a Frankinstein’s monster which has, for the present at least, got out of its control.


For years now, starting from the days of Ronald Reagan, it has used the Republican Party as its instrument for extracting huge concessions from the US state. Not only has that party itself moved massively to the right, but even the Democratic Party, indeed the entire American politics, has also moved to the right.


This no doubt is a universal phenomenon associated with globalisation itself, which destroys trade unions, attacks petty production and small business, weakens Left politics generally, and creates all kinds of divisions among the people along racist, communal and fascistic lines to prevent any united struggle for an alternative development trajectory that can reduce the unemployment and immiserisation that come in its wake everywhere. But in America this process has gone further than in many other countries.


There is corporate financing of racist and fascist groups which spread hatred and use violence, and which are also used to ensure Republican victory. There is the Fox news which again is exclusively devoted to a right-wing agenda, spreading falsehoods, jingoism, disinformation and hatred. And there are stories, even in “respectable” newspapers like the New York Times which, committed to the neo-liberal ideology, are slanted to discredit the welfare state measures: a typical ploy for instance is to give absolute figures of expenditure on this or that welfare scheme which sound astronomical to the uninitiated, even though they are quite trivial as a percentage of the GDP (which is never mentioned). And finally there is the Tea Party caucus within the Republican Party whose role is to push the larger party further to the right.




This entire apparatus has been systematically used in the past to oppose Obama’s healthcare programme, even though it is a paltry programme criticised even by mainstream economists like Paul Krugman for being excessively modest and conservative. In contrast to most other advance capitalist countries, the US does not have a tax-financed universal public healthcare system on the lines of the British National Health Service. And Obama’s programme never even aimed to introduce such a system. It simply sought to universalise health insurance, and that too not at the expense of the state: indeed the number of persons who were supposed to get state-funded insurance under Obama’s scheme, approximately 12 million, was even smaller in absolute terms for a population in excess of 200 million than the number for whom the last LDF government in Kerala had provided insurance premia out of the state budget, which was 15 million for a total state population of a little over 30 million.


It is significant that even when this meagre healthcare programme was being introduced, the corporate-funded groups of fascist thugs in numerous American small towns used to abuse and physically threaten Democratic Party spokesmen who tried to explain it to the people in public meetings. This orchestrated opposition has now crystallised into a powerful force, before which even the so-called “moderate” Republican Party leaders like John McCain are powerless. So, the corporate-financial elite has become hoist with its own petard.


The opponents of Obama’s healthcare scheme constitute no more than a small minority of America’s population. Indeed the Republican Party itself, which controls the House of Representatives, does so on the support from a small minority of the country’s population, since the voting percentage in national elections is abysmally low. But even a small but ill-informed minority, fed systematically on stories of how the state takes “their hard-earned” money to support a whole bunch of “lazy” and “good-for-nothing” poor people, can prevent measures for the benefit of overwhelmingly superior numbers, to the chagrin even of those who fed them these stories in the first place.  


This is not the first time that the genie of fascism, unbottled by the corporate-financial elite, has got out of control of that elite. Even Hitler, promoted by German big business to destroy the communists and the trade unions, had acted in a manner which, though profitable for them (the Krupps and the I G Farbens made masses of money from the war and the concentration camps), had gone far beyond their own plans.


How the American standoff resolves itself remains to be seen. There is, however, a lesson in it for the Indian corporate-financial elite which, not satisfied by the enormous propaganda barrage let loose by the media it controls against the Left, the trade unions, the public sector, and public welfare expenditure, and not content with the massive shift to the right that has occurred under neo-liberalism, is currently promoting an avowed communal-fascist as the next prime minister of the country. Such fascist entities invariably get out of control of those who promote them. But it follows too from the same law of “spontaneity” that those who promote them never learn from history and never desist from doing so.