American Empire

by Joshua Freeman

  To the extent that global military power had once served Americans well, its worth became less clear as its cost in lives, dollars, and international standing mounted. The Bush administration wars, especially Iraq, dissipated the worldwide goodwill toward the United States evident after 9/11. The United States proved itself to be a can’t-do imperial power, an incompetent, blustering, sometimes brutal nation, whose hubris and carelessness caused enormous harm to its allies, those it claimed to be helping, and itself. Yet empire had become so interwoven in the fabric of American life that even as public support for the Iraq and Afghanistan wars diminished, issues of war and peace and foreign policy remained subsidiary notes in national politics and discussion.

  Reaganism Redux

  During the dark days after 9/11, few Americans anticipated the kinds of hardship their country would go through when the economy plunged into a severe recession in 2008. The quarter century after World War II had been a period of exceptionally robust growth and shared benefits, laying the basis for a democratic revolution in politics and culture. The next quarter century saw slower growth, stagnant income for most Americans, growing inequality, and a shift of power to the private sector. But only on the fringes of political discourse did suggestions arise that the American system of political economy might not be sustainable. The free fall after 2008 changed that, making it painfully obvious that the economy no longer served most Americans as well as it once had.

  In domestic policy, the Bush administration in many respects amounted to a rerun of the Reagan years. Like Reagan, Bush believed the country would prosper if the government reduced its role in the economy, giving free rein to market forces. Like Reagan, he gave top priority to tax-cutting, especially for the well-off, and loosening of government regulations. Though the bitter partisan battling that characterized the Clinton years continued and fights over so-called social issues like abortion rights, embryonic stem cell research, and gay marriage raged, few significant changes in public policy occurred. Instead, the major transformations in daily life largely resulted from developments in the economy, especially the financial sector, continuing the pattern since the 1970s that increasingly put the power to shape society in private hands.

  When Bush took office, the federal government was well on its way toward paying off the entire national debt for the first time since 1835, having run budget surpluses for four consecutive years. Bush wanted to distribute excess federal funds through tax cuts, arguing, “The surplus is not the government’s money; the surplus is the people’s money,” a Reaganite formulation that did not see government, as Abraham Lincoln did, “of the people, by the people, for the people,” but in opposition to them. The recession that began in March 2001, following the collapse of the stock market bubble, led the newly inaugurated president to shift his argument for lower taxes to the need for an economic stimulus. Congress gave him most of what he wanted, a $1.3 trillion tax cut that reduced both the top and bottom income tax rates and increased the amount exempt from estate taxes (“death taxes,” Bush called them).

  The 9/11 attacks hurt an economy already in trouble, leading to a 20 percent drop in stock prices and a jump in unemployment. Bush sought to boost the weak economy with another tax cut, heavily skewed to the rich. With the federal government already having gone from running a surplus to running a deficit and the cost of the war on terror soaring, the second round of tax cuts faced more opposition than the first. But with the vice president casting the deciding vote in a deadlocked Senate, in May 2003 Congress accelerated the implementation of the previous tax cuts, lowered the top rate for capital gains and dividend taxes, and increased depreciation allowances for small businesses. Most taxpayers ended up with only slightly smaller tax bills, but wealthy payers got very substantial reductions.

  The Bush administration seemed at ease with the rising tide of red ink created by its tax policy. Cheney reportedly said, “Reagan proved deficits don’t matter.” Bush took no steps to increase revenue even as the national debt ballooned over the course of his presidency from $3.3 trillion, representing 33 percent of GDP, to $5.8 trillion, 41 percent of GDP.

  While the United States had gone through periods of high deficits in the past without lasting damage, Bush broke all precedent in not seeking new taxes to finance the wars the country was fighting. Afghanistan and Iraq had immediate fiscal consequences, accounting for about a third of the deficits run up between 2004 and 2006. Their long-run cumulative costs (including expenses that would continue for decades, such as medical care for injured soldiers) were staggering, by one estimate reaching roughly $2 trillion by 2011, $17,000 for every household in the country. One of the president’s few successful domestic initiatives, a prescription drug plan for senior citizens approved by Congress in 2003, also proved costly.

  The drug plan and the 2001 education law, No Child Left Behind, reflected Bush’s willingness to support some expansion of the welfare state, especially if market mechanisms were employed. But more broadly, especially in economic regulation, the Bush administration displayed hostility to government action. Like Reagan, Bush used funding cuts, administrative action, and staffing decisions to undermine or diminish regulatory standards and enforcement. Though as a candidate he had acknowledged the problem of global warming and pledged to address it, once in office he reversed course, refusing to ratify the UN Kyoto Protocol on global warming and challenging the scientific consensus that human activity was altering atmospheric conditions.

  Bush administration skepticism of government and expertise—a well-established conservative outlook—contributed to its catastrophic bungling of rescue and relief efforts during Hurricane Katrina in 2005 (much as it did to the failed occupation of Iraq). Bush’s first head of the Federal Emergency Management Agency (FEMA), his longtime aide Joe M. Allbaugh, told Congress that the agency had become “an oversized entitlement program.” Bush put political allies with no expertise in handling emergencies into top agency posts. Placed within the Department of Homeland Security in 2003, FEMA saw resources and attention diverted to counterterrorism.

  When Hurricane Katrina bore down on New Orleans, top FEMA officials received up-to-the-minute reports on the horrendous damage it was wreaking. But as levees gave way, flooding much of the city, FEMA did little to help overwhelmed local and state agencies, having failed to pre-position necessary supplies or mobilize federal assets. While television networks broadcast images of people stranded on roofs, floating on mattresses, and clinging to trees, as conditions at a domed football stadium being used as a mass shelter became hellish and looting broke out across the city, the federal government remained inert and oblivious, with the president congratulating FEMA director Michael Brown for a job well done, when in reality the agency had barely swung into action.

  An estimated eleven hundred people died in New Orleans as a result of Katrina. It is impossible to say how many could have been saved if the full resources of the U.S. government had been mobilized in a timely, effective manner, but surely the death toll would have been lower and the suffering less. Live television coverage of a major American city being essentially abandoned to its terrible fate shocked the nation and the rest of the world. Driven by an ideological aversion to government, cronyism, and a view of national security narrowly focused on terrorism, the Bush administration failed to protect the lives and safety of Americans when a predictable and predicted crisis arrived, a damning measure of how inept the world’s only superpower had become.

  Bubble and Bust

  Borrowed money fueled the economy during the Bush years, inflating an unprecedented bubble in housing prices. For a while, housing-driven growth masked fundamental economic problems, including stagnant income, growing inequality, declining manufacturing, and huge trade imbalances. When the housing bubble burst in 2007 and 2008, it brought down the financial sector, which had profited enormously from selling dubious mortgage-related securities, plunging the United States into its w
orst economic crisis since the Great Depression.

  Government policy helped create the debt-based post-9/11 bubble economy. The Federal Reserve responded to the 2001 recession by lowering interest rates to historically low levels and keeping them there, even after the economy began to recover. In 2003 and 2004, the Fed set interest rates below the rate of inflation, an extraordinary inducement to private borrowing.

  Over time, borrowing had become ever more important to keeping the economy going because of the stagnation of earnings, except for the wealthy, since the 1970s and the decline in personal savings. Consumer spending and the stimulus it provided to the economy depended on borrowed money. Federal deficit spending provided further stimulus.

  The Bush-era borrowing spree was possible because foreigners were willing to lend massive amounts of money to the government and consumers. By 2008, nearly a third of mortgage debt was owed to foreigners, as was two-thirds of federal borrowing. Some money flowed in from abroad because investors believed they could make good profits, for example by buying securitized mortgages. But with interest rates low, money came for other reasons as well. Foreign governments, institutions, and individuals saw Treasury bonds as extremely safe investments, a good place to park money even if the return would be negligible. Countries that exported goods to the United States, most importantly China, bought its debt to keep the dollar strong, which made it cheap for Americans to buy foreign-produced goods.

  For a while it seemed like sheer magic, a system in which everyone won: the U.S. government could cut taxes even as it fought expensive wars; consumers could borrow vast amounts of money at low interest rates to buy houses, cars, and other goods; foreign governments could keep their money safe and their factories humming; and the financial sector could profit handsomely from all the lending and borrowing, with its share of GDP rising to 8.3 percent in 2007, from 7.0 percent in 1998. But the growing mountain of debt eventually toppled, because real economic growth occurred at too slow a rate to support it.

  Even before the collapse, between 2000 and 2007 the United States lost three and a half million manufacturing jobs. Though some economic sectors shielded from international competition did well, including construction (which benefited from the housing boom), retail (which had lots of cheap imported goods to sell), and hospitality, overall economic growth was anemic. The GDP rose an average of 2.3 percent a year between 2000 and 2007, well below the rate in the previous decade, the decade before that, and the decade before that. The mighty economic engine, once based on making, growing, and processing things, which had propelled the United States to world greatness and transformed life at home, was slowly winding down.

  The housing boom accounted for much of the growth that did occur. Housing prices had begun to rise faster than inflation during the late 1990s and kept rising as the Federal Reserve drove down interest rates and new lending practices expanded the pool of buyers. Because median family income remained flat, even after the economy recovered from the recession of the early 2000s, the number of families eligible for mortgages did not rise. So financial institutions, with the backing of the government, lowered the qualifications and documentation needed for loans. The policy reflected the financial sector’s quest for robust profits in a slow-growing economy and the long-standing national belief in homeownership as a social good. Subprime mortgages that did not require borrowers to meet traditional criteria accounted for a quarter of all home loans by 2006 and helped push up the homeownership rate to a historic peak. In 2004, 69 percent of American families owned their own home.

  Mortgage lenders were willing to make riskier loans because increasingly they only briefly retained them, selling them to other financial institutions, which bundled them into large pools—supposedly to lower the risk—and then selling securities backed by the income stream from those mortgage packages. To further reduce the risk, many buyers of such securitized instruments also bought credit default swaps, a lightly regulated form of insurance.

  Home prices rose on average 51 percent between 2000 and 2005. In some areas, especially in the South and Southwest, the increases were staggering. The average price of a home in Los Angeles went from $161,000 in 1995 to $228,000 in 2000 and $585,000 in 2006. Such valuations led to a wave of speculation—in 2004 nearly a quarter of homes were bought as investments, not for owner occupation—further fueling price hikes. Soaring home prices allowed millions of Americans to get cash for other purchases by remortgaging their homes or taking out home equity loans. As long as house prices kept increasing, homeowners remained confident that they could pay back their growing debt when they eventually sold their houses.

  It all worked as long as house prices kept rising, but at some point, as occurs with all bubbles, prices began to fall, at first slowly, beginning in mid-2006, then at a stomach-wrenching rate, down 10 percent during the second half of 2007 and 20 percent in 2008. As prices dropped, owners were unable to keep pulling money out of their homes, pushing down the increase in personal consumer spending to near zero in 2008. By the start of 2009, a sixth of houses with mortgages were worth less than their owners had borrowed, leading many families to simply walk away from their loans. More than one-fifth of homes being sold were in foreclosure, further driving down prices and effectively shutting down new construction.

  The housing crisis spread to the financial sector as mortgage defaults began leading to defaults on mortgage-backed securities, or the fear of default, which caused their value to plummet. Hedge funds holding such securities began to totter as investors tried to withdraw their money, forcing large asset sales, depressing prices even more. Banks facing huge potential losses became reluctant to lend money for any purpose at all.

  By the second half of 2007, the economy was sinking toward recession, with the Federal Reserve trying, unsuccessfully, to shore up the financial system. In March 2008, the giant brokerage firm Bear Stearns had to be bailed out. When in September 2008 Lehman Brothers went bankrupt, leading to something close to a worldwide credit halt, it seemed possible that the entire financial system would melt down. Federal Reserve chairman Ben Bernanke told congressional leaders and Bush administration policymakers, “We are headed for the worst financial crisis in the nation’s history. . . . We’re talking about a matter of days.”

  As the Bush administration drew to a close, Congress, scared into action, allocated $700 billion for a financial rescue program to be shaped by the Treasury, with few guidelines and little oversight. By pumping massive streams of taxpayer money into the banks whose poor judgment and lack of due diligence had driven the country to the edge of catastrophe, the federal government managed to keep the financial system afloat. But with the collapse of the housing market and the credit crunch, the country slipped into the most serious recession in over three-quarters of a century.

  The 2008 crisis had been a long time in the making. In its immediate aftermath, journalists, politicians, and pundits found plenty of proximate causes: Alan Greenspan’s refusal in the early 2000s to recognize that a housing bubble was developing from his low-interest policies; the fraudulent practices that riddled the mortgage industry; the hubris of the titans of finance, wielding ever more arcane mathematical models to claim to have created a risk-free world of pure profit; the incestuous ties between regulators and those they regulated. But the collapse had deep roots in the very nature of the political economy that had developed since the 1970s. The decline of manufacturing, deregulation, the financialization of the economy (the financial sector accounted for more than 30 percent of all corporate profits in 2004), globalization, and the grab of an ever greater proportion of national income by those already rich (by 2005 income inequality was at the level of the 1920s) had hollowed out the U.S. economy.

  Though differences in economic policy had existed between administrations since the 1970s, there had been a broad continuity of vision. The Reagan administration had encouraged the corporate revolution that restructured the eco
nomy. The Clinton administration had been at least as aggressive in promoting free trade and the growth and deregulation of the financial sector. Even after the financial plunge and the election of Barack Obama, the basic contours of public policy continued along lines established in the 1980s and 1990s.

  Obama’s election was a measure of how much the United States had changed since World War II. It was literally unimaginable to most Americans in 1945 or 1965 or even 1985 that an African American would be elected president of the United States. But his ascension also made clear—in spite of his campaign theme of “change”—the stubborn persistence of old ideas and old forces. In the decades after World War II, politics had become more formally democratic, but the political influence of business had so grown since the 1970s that meaningful democracy had become stunted. Deregulation, free rein for the financial sector, free-trade globalization, promotion of private homeownership, and the use of federal money to maintain an empire while physical and social infrastructure deteriorated were policies supported for a quarter century or more by both parties. The considered responses to the 2008 economic crisis all centered on preserving existing hierarchies of wealth and power. Obama signaled his restorationist economic agenda when he picked as secretary of the treasury Timothy Geithner, who as head of the Federal Reserve Bank of New York had been deeply involved in bailing out the banks, and as his chief economic adviser Larry Summers, who in the Clinton administration had helped spearhead the financial deregulation that made possible the massive economic problems of the decade that followed.