In the golden age from the mid-1950s to the mid-1970s, the growth rate of western economies was five per cent per annum. The ratio of non-military public spending relative to military expenditure rose, and the income inequality declined.

However, in the early 1980s, when Ronald Reagan opted for neo-liberal economic policies, a drastic increase in military expenditure and a reduction in tax rates on higher incomes was witnerssed. The resulting large budget deficits were paid for by cuts in non-military expenditures.

George W. Bush followed suit, raised military expenditure, while at the same time, decreased taxes on the rich, thereby exacerbating income inequality. With the advent of 9/11, George Bush Jr. hiked military expenditure tremendously, while reducing the tax rate on higher incomes.

The resulting increase in income inequality can be summarised as follows surge in income share of the wealthy because of increase in (a) military expenditure; (b) disposable income due to cut in tax rates; (c) reduction in income share of the lower and poor classes due to cut in non-military expenditure. (d) fall in the real income of the poor as expenditures on health, housing, education, etc. dropped due to tax rate cut for the benefit of the rich.

Hossein-zadeh in his book, `The Political Economy of the US Militarism` states that in the 17th, 18th, 19th and early 20th centuries imperialism brought significant gains to Britain, France, Holland , and other European powers as gains from imperialism helped develop their economies, and improved the standards of living of ordinary citizens.

However, the US `parasitic imperialism`, he says, has not expanded the empire`s wealth beyond the existing levels. The lion`s share of these adventures have been appropriated for the military establishment, especially for the war-profiteering Pentagon contractors.

The author states that `parasitic imperialism` redistributes national income from the bottom to the top. The US military spending is now the largest item in the federal budget. As a result of supplementary appropriation to pay for the wars in Afghanistan and Iraq, proposed military expenditure for FY 2008 increased to $647.2 billion-- the highest since the end of World War II.

He states that the skyrocketing Pentagon budget has been a boom for defence contractors. This is reflected in the continuous rise in the value of contractors` shares in the stock market “Shares of the US defence companies, which have nearly trebled since the beginning of the occupation of Iraq, show no signs of slowing down. The feeling that makers of ships, planes and weapons are just getting into their stride has driven shares of leading Pentagon contractors Lockheed Martin Corp., Northrop Grumman Corp., and General Dynamics Corp. to all-time highs.”

The official US data shows that over the past five decades government expenditure at the federal, state and local levels as a percentage of gross national product (GNP) remained constant—at about 20 per cent. Increases in military expenditures have almost always been accompanied by corresponding declines in non-military public expenditures, and vice versa.

While the Pentagon contractors` share in public money is increasing sharply, low- and middle-income Americans are squeezed out in order to make up for the resulting budgetary shortfalls. As the official Pentagon budget for 2008 fiscal year was projected to rise by more than 10 per cent, or nearly $50 billion, 141 government programmes were to be eliminated or sharply reduced to pay for the increase. These include cuts in housing assistance for low-income senior citizens by 25 per cent, home heating/energy assistance to low-income people by 18 per cent, funding for community development grants by 12.7 per cent and grants for education and employment training by eight per cent.

Hossein-zadeh states that at the same time when George Bush was planning to raise military spending by $50 billion for the next fiscal year, he was also proposing reduction in tax rates for the wealthy at a cost of $1.6 trillion over 10 years, or an average yearly cut of $160 billion. Simultaneously, “funding for domestic discretionary programmes would be cut a total of $114 billion” as a result of reduction in the tax rate.

The projected cuts include over 140 programmes that provide support for the basic needs of low and middle income families such as elementary and secondary education, job training, environmental protection, veterans` health care, medical research, Meals on Wheels, child care, low-income home energy assistance, etc.

Substantiating his assertions from data released by the Congressional Budget Office (CBO), Hossein-zadeh states

* The average after-tax income of the top one per cent of the population almost tripled, rising from $314,000 to almost $868,000— showing a total increase of $554,000, or 176 per cent.

* In comparison, the average after-tax income of the middle fifth of the population rose modestly by 21 per cent, or $8,500, reaching $48,400 in 2004.

* The average after-tax income of the poorest fifth of the population rose only by six per cent, or $800, during the period, reaching $14,700 in 2004.

Similar ideas have been expressed by Klein (2007) in `Disaster Capitalism` where the author describes how the US companies have profited from disasters and conflicts. She brings to the fore how the US personnel have been moving from security-related posts in the government agencies to lucrative positions in corporations. She calls it Halliburtonization of US treasury.

As a result of neo-liberal policies undertaken by Ronald Reagan from the early 1980s and increased militarisation of the US economy after 9/11 by George Bush Jr., the income inequality in the US has increased. So the increase in interest rates by the Federal Reserve acted as the proverbial last straw on the camel`s back. The massive transfer of resources from the middle/poor classes to the wealthy increased the vulnerability of the poorer segments of the society.

Strategy to deal with the crisis The developed countries who had been great champions of the free market model abandoned liberalisation and privatisation policies almost overnight, and adopted interventionist policies. Although they had been opposed to the role of the state in economic matters, in order to save their economies and companies from collapsing, several banks and financial companies have been nationalised.

Trillions of dollars are being injected into the economies to provide stimulus. The major thrust of the stimulus packages is on increasing liquidity of the banking sector so as to increase their lending. Similarly huge amounts have been injected in Britain and other European countries along with increasing government stakes in banks and companies.

Writing in the Guardian, John Hillary says what we are witnessing today is the chaos caused by financial deregulation on a massive scale. And in spite of the fact that there is consensus on the need for re-regulation to correct these errors, western leaders continue their efforts for rapid conclusion of the Doha round of trade talks aimed at opening up and deregulating financial markets in the emerging economies still further.

These deregulatory measures include the removal of prudential regulations which protect many developing countries from suffering greater fallout from the financial crisis. While neo-liberal policies have been abandoned overnight by the developed countries, there appears to be deliberate moves by these developed states to induce the less developed countries` to continue these policies.

The greatest criticism of the US strategy to tackle the crisis is that tax payer`s money is being used to bail out banks and big businesses, while the small investor has been left to fend for itself. The collapse of the global financial system can be explained with Hazrat Ali`s dictum that a secular system is sustainable, but one based on inequality is unsustaina ble. The Anglo-American capitalist model continued to bring wealth and prosperity to the western world, but when the system became inequitable, it melted.

The strategy to deal with the crisis should focus on the malaise that caused the melt down in the first place. The most important element of such a strategy would be equitable income distribution, both within and across countries. The strategy should not be based on greed, making some filthy rich and others poor and destitute. In view of the environmental hazards afflicting the world, the strategy should be environmentally-friendly.

Militarism is not a solution for bringing prosperity to the developed world. While in the past militarism might have brought prosperity to the citizens of the developed states, in the 21 century it is having negative consequences in both the developed as well as the developing countries.

The Rand Corporation`s suggestion that the United States start a war with a large country in order to get out of the recession will not only bring death and destruction on a massive scale, it will, by increasing income inequality make a bad situation even more horrendous.

The suggestion appears to be a blackmailing tactic on the part of the Americans to secure a Chinese bailout from $2 trillion reserves held by China. The strategy to deal with the financial crisis should be based on ethics and morality. It should not bring death and destruction to a vast majority of the peoples in order to increase the wealth and prosperity of a few.

The writer is Research Professor at the Applied Economics Research Centre, Karachi. wizarat@cyber.net.pk