The Real Cause of the Financial Crisis

Much has been written and said about our current financial crisis but there has been little discussion of the real cause of the crisis, which is our massive debt. The sub-prime mortgage mess was merely the straw that broke the camel's back. There are three broad aspects to our debt crisis.

First, in the current fiscal year, we are spending massive amounts of money on "defense" projects that bear no relationship to the national security of the United States. It is virtually impossible to overstate the profligacy of what our government spends on the military. The Department of Defense's expenditures for 2008 are larger than all the other nations' military budgets combined. Our military spending for fiscal 2008 will exceed $1 trillion for the first time in history. Such expenditures are not only morally obscene, they are fiscally unsustainable. We are financing these huge military expenditures through massive borrowing from China and other nations. If you begin in 1789, at the moment the Constitution became the supreme law of the land, the debt accumulated by the federal government did not top $1 trillion until 1981. When George Bush became president in January 2001, it stood at $5.7 trillion. Since then, it has doubled to over $11 trillion!

Second, we continue to believe that we can compensate for the accelerating erosion of our manufacturing base and our loss of jobs to foreign countries through massive military spending. This is based on the mistaken belief that public policies focused on frequent wars, huge expenditures on weapons and munitions, and large standing armies can indefinitely sustain a wealthy capitalist economy. The opposite is actually true. It is often believed that wars and military spending increases are good for the economy. In fact, most economic models show that military spending diverts resources from productive uses, such as consumption and investment, and ultimately slows economic growth and reduces employment. Military spending is, in fact, a wasteful economic activity. America can no longer afford to operate on the flawed economic assumption that we can maintain a permanent war economy and treat military output as an ordinary economic product, even though it makes no contribution to either production or consumption.

Third, in our devotion to militarism (despite our limited resources), we are failing to invest in our social infrastructure and other requirements for the long-term health of our country. These are what economists call "opportunity costs," things not done because we spent our money on something else. Our public education system is falling apart. We have failed to provide health care to all our citizens and neglected our aging infrastructure, which is rapidly deteriorating. Most important, we have lost our competitiveness as a manufacturer of civilian goods – an infinitely more efficient use of scarce resources than arms manufacturing.

 

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