A Crisis in Democracy: Are We Going Bankrupt?

By John W. Whitehead

“Our country is insolvent, and bankruptcy will come.”
—Congressman Ron Paul (R-Tex.)

I’ve never seen our country in worse shape—culturally, constitutionally or financially. Marriages and families are falling apart, our liberties are being eroded and the U.S. economy is in serious trouble. We are, as author Robert B. Reich noted in a recent New York Times editorial, “totally spent.” All we’re managing to do now is keep our creditors at bay.

The U.S. trade deficit has reached record highs in recent years. Gas prices, which have largely contributed to trade deficit woes, have led to higher prices in transportation and other goods. The bursting of the home price bubble has triggered a crisis in U.S. housing finance. This has led to a sharp spike in foreclosures, as well as heavy losses at major banks, a pull-back in the market for securitized debt and a credit crunch worldwide.

With the value of the dollar plummeting worldwide, America is, in effect, now on sale at discount prices to foreign countries. For example, a record $414 billion was invested by foreigners in the U.S. economy in 2007, with much of it coming from sovereign wealth funds, vast pools of money controlled by anti-democratic governments from China to the Middle East.

The fact that our nation is nearing bankruptcy has become what David Walker, comptroller general of the United States, calls “the dirty little secret everyone in Washington knows.” Most politicians, says Walker, are aware of the impending financial crisis but reluctant to do anything about it. After all, it is not politically expedient to increase taxes or trim spending, but this is exactly what needs to be done.

Walker also argues that health care, a political promise rolling off every candidate’s tongue, is by and large the most prominent issue, five times bigger than Social Security. And Walker calls the 2003 measures that included Medicare prescription drugs “probably the most fiscally irresponsible piece of legislation since the 1960s.” This bill, Walker says, was “eight trillions dollars added to what was already a 15 to $20 trillion under-funding.”

Walker, who recently resigned after serving as the government’s chief internal watchdog for a decade, concludes that the nation’s “current standard of living is unsustainable unless some drastic action is taken.” But, as usual, when we leave the problem-solving to the politicians, what we end up with is bigger government, more bureaucracy and a larger federal deficit, which is projected to total $410 billion for 2008. (The national debt, which is the total amount of money owed by the government, is currently estimated to be over $9.2 trillion.)

We are living in a house of cards that’s on the verge of crashing around us, and yet most Americans remain oblivious and continue to spend beyond their means. But, as Reich notes, “That era is now coming to an end. Consumers have run out of ways to keep the spending binge going.”

Hoping to continue the spending a little longer, Congress passed a $168 billion stimulus plan made up of personal tax rebates and business tax cuts. While some Democrats criticized the plan, fiscal conservatives expressed grave doubts that the measure is too little and will reach consumers and businesses too late. Former congressman Jack Kemp asserts that “rebates haven’t worked in the past…and won’t work in the future,” as they reward past production. Other critics have voiced the concern that such a costly measure merely serves to increase the already burgeoning national deficit.

While the nation’s financial woes are grave, a recession will impact more than Americans’ pocketbooks—it will impact our very freedoms. After all, economic security and freedom go hand in hand.

In his book, A Free Nation Deep in Debt, James MacDonald, an investment banker, discusses the relationship between democracy and economic development: “Democracy (even in its most partial and imperfect form), is a system in which the citizens control the state. As long as democratic states borrow from their own citizens, their good credit is simply a reflection of the virtual identity of borrower and lender.”

Unfortunately, as economist James Galbraith explains, “The American citizenry has lost its pride of place as creditor of the American state. Today, financial intermediaries hold about 37 percent of U.S. public debt; Japan and China, along with other countries, now hold about 30 percent. The proportion of U.S. debt owned directly by Americans has fallen to below 10 percent; in 1945 (when the debt was more than twice as large in relation to GDP as now) citizen-creditors just about held it all.” But that is no longer true, and “for all practical purposes, the venerable marriage between public credit and democratic government, so vital a factor in the history of the world, has been dissolved.”

Galbraith concludes: “If MacDonald’s thesis is right, the disappearance of the citizen-creditor forces a question. Can democracy survive when its financial roots have been cut? The scale of public debt is not the issue, but its ownership is. Can a country—whether the United States or any other—be truly democratic if it is in hock to banks and foreigners? ...To put it bluntly, are we still a democracy? And, if not, what would it take to bring democracy back?”

We know what must be done.

First, we need to elect fiscally responsible representatives with the backbone to resist political pressure to spend what is not there. We also need to stop putting ourselves in hock to foreign banks and nations. And we need to put a stop to the financial hemorrhaging related to the Bush Administration’s war on terror. For example, over the past six years, the U.S. has disbursed to the corrupt government of Pakistan about $80 million monthly, or roughly $1 billion a year. Yet according to the Washington Post, few receipts are provided to account for how the money is used or where it ends up. That’s just the tip of the iceberg when one considers that we spend at least $1 billion a week in Iraq on military operations alone. Just imagine how those dollars could be put to use in our own ailing economy.

Second, we need to show some personal discipline. This will mean reining in our binge spending, nationally and individually. It will also mean getting back to work. We need to bring the manufacturing jobs back to the United States and re-inject ourselves into the economy, even if it means Americans taking on jobs that are usually done by illegal immigrants.

Finally, we need to do a better job of protecting our freedoms. This means resisting the government’s attempt to amass greater authority and centralize power in the executive branch. It also means electing representatives who will abide by their oath of office to protect and defend the Constitution.

If we value our freedoms at all, we have to sober up—and fast—or we will certainly find ourselves facing an even more dangerous crisis in democracy. Yet beware: this will not be a sudden coup but a gradual transformation into a more authoritarian regime. As former presidential advisor Bertram Gross points out in his book, Friendly Fascism: “Anyone looking for black shirts, mass parties, or men on horseback will miss the telltale clues of creeping fascism. In America, it would be supermodern and multi-ethnic—as American as Madison Avenue, executive luncheons, credit cards, and apple pie. It would be fascism with a smile.”


Constitutional attorney and author John W. Whitehead is founder and president of The Rutherford Institute. He can be contacted at johnw@rutherford.org. Information about The Rutherford Institute is available at www.rutherford.org.