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July 31, 2011

American greatness can be maintained

Posted by Charlie Laderman
Did you ever think that making a speech on economics is a lot like pissing down your leg? It seems hot to you, but it never does to anyone else.
Listening to the interminable debate over raising the debt ceiling in Washington over the past few weeks brought to mind Lyndon Johnson's timeless quip. But among the partisan bluster and mud-slinging, President Obama succinctly summarized the bitter irony at the heart of the crisis; that the United States is confronted with losing its sterling AAA credit rating
not because we didn't have the capacity to pay our bills. We do. But because we didn't have a triple-A political system to match our triple-A credit rating.
The American economy isn't on the verge of bankruptcy. Banks are still willing to lend to the government at very low interest rates, $2 trillion is collected in tax revenues annually and many of America's largest corporations are thriving. Yet if the U.S. Congress fails to raise the debt ceiling by Tuesday, the United States faces default on its financial obligations with potentially catastrophic implications for the American and global economy.

It seems ludicrous to the rest of the world that the United States is beset by a debt crisis that it has the economic capacity to resolve. Yet this is an exceptionally American predicament. The United States is unique among the large, Western democracies in having a debt ceiling (Denmark, the only other democratic nation to have one, has its ceiling fixed so far above the level of outstanding gross debt that it has no real effect on government policy.) The debt ceiling was previously dismissed as an anachronism, retaining merely symbolic value, with the U.S. Congress voting to raise it over seventy times in the last half century. But now failure to adjust the ceiling risks bringing down the whole structure. As the American financial journalist, James Suriowecki, remarked

for the U.S. to default now, when investors are happily lending it money at exceedingly reasonable rates, would be akin to shooting yourself in the head for failing to follow your diet.
Why then is the United States sliding, seemingly inexorably, towards default for the first time in its history?

To a certain extent, gridlock is a consequence of the American political system, with its separation of powers between executive and legislature. Bills must follow a treacherous legislative path to secure majorities in both houses of Congress, and survive a presidential veto, inevitably leading to amendments and compromise. As Ronald Reagan, whose fiscal legacy has been invoked by both sides in this debate, mused,

I have wondered at times what the Ten Commandments would have looked like if Moses had run them through the U.S. Congress.
The potential for compromise is further complicated when control of government is divided between two parties motivated by contrasting philosophies and conflicting visions of the desired size of government, as is the case today. For the most part, Republicans abide by Thomas Jefferson's purported principle "that government is best that governs least", while Democrats retain a greater faith in the power of government to advance the common good. But the Republicans and Democrats are far from homogenous parties, each being a coalition of disparate members, with competing interests and priorities. It is these internal tensions, particularly within the Republican Party, that have exacerbated the crisis and hamstrung the leadership of both parties.

The Republican leadership is confronted with an insurgency from within its own ranks, led by the roughly sixty-member strong Tea Party Caucus. This group of largely freshmen congressmen arrived in Washington after the 2010 Congressional elections determined to curtail government spending and shrink the federal government. They have insisted on a balanced budget amendment to the constitution, establishing a limit on federal spending as a percentage of GDP and requiring a two-thirds majority in both houses to raise taxes, before agreeing to any deal on raising the debt ceiling. This stance has exasperated Republican moderates, including the partys 2008 presidential nominee, Senator John McCain, who attacked the proposal as "foolish" and "bizarro", and the Republican House leader, Speaker John Boehner, who ordered recalcitrant Republicans to "get your ass in line". Boehner invested his personal credibility in securing an all Republican majority for his plan to reduce debt and increase borrowing, warning insurgents that
I didn't put my neck on the line and go toe to toe with Obama to not have an army behind me.
He urged them to recognize that while a balanced budget amendment enjoyed support in the Republican-controlled House, it had no chance of passing the Democratic-controlled Senate; removing it would increase their bargaining power with Senate Democrats and the White House. Yet the Speaker was unable to convince sufficient Republicans to support his proposal. He was forced to re-insert the balanced budget amendment to ensure passage of the bill from the House to the Senate where, as predicted, it was swiftly rejected.

If the Republican leadership failed to rally its troops to support their own desired debt plan, what chance is there of mobilizing members to support a compromise agreement with Senate Democrats? A number of dissenters, most notably Representative Joe Walsh, have scornfully dismissed the gravity of the crisis, accusing President Obama of lying about a default on the national debt. Others appear mindful of Tea Party favourite Sarah Palin's warning, posted on her Facebook page, not to ignore the "little people" who secured their election and to beware "everyone I talk to still believes in contested primaries".

The Tea Partiers may be responsible for risking a devastating, and wholly avoidable, default in order to satisfy their dogmatic principles but the Republican Party leadership is equally to blame. David Frum, a former economic speechwriter to George W. Bush, has condemned

every Republican who joined in this attempt to use the threat of bankruptcy as a tool of politics.
Nor is partisan posturing likely to benefit Republicans at the next election, with polls indicating that the American public hold them more responsible for the current impasse than President Obama.

Regardless of their future electoral prospects, or popularity among the American people, the Tea Party have succeeded in changing the conversation in Washington. Both the Boehner plan and the proposals advocated by Democratic Senate Majority leader, Harry Reid, accept that raising the debt ceiling must be linked to spending reductions; neither advocates raising taxes. This has infuriated the left flank of the President's coalition, with Obama's approval rating among liberals plummeting to the lowest point in his presidency, according to a CNN poll.
When has Obama given progressives any reason to believe they can trust him?
asked the economist, Paul Krugman, in his New York Times blog, while the independent Vermont Senator, Bernie Sanders, called for candidates to come forward to offer a "progressive" alternative to the President's agenda.

Obama has shown a greater willingness to override discontent on his left than Republican leaders have on their right, but his determination to push another confrontation on the debt ceiling beyond the 2012 election reveals growing anxiety about his weakening political position. It also reflects the White House's concern that any proposal to temporarily extend the debt ceiling, as the Republicans propose, would force the U.S. to again confront the threat of default within six months and do little to allay the fears of credit ratings agencies. Even the Reid plan doesn't come close to slashing the $4 trillion in debt that has been suggested is necessary to prevent a downgrade in America's AAA credit rating.

Nevertheless, a compromise between the Reid and Boehner plans, while imperfect, is not only possible but essential. The rival plans were products of bipartisan discussions last weekend: both propose deep cuts to the federal budgets and entitlement provisions over the next decade, with additional cuts left to a new twelve member committee of legislators. And America's credit rating, above all else, is threatened by political risk - the perception that a broken political system undermines fiscal competence. Only an agreement on raising the debt ceiling can restore faith, at home and abroad, in America's capacity to reform itself.

Alexis de Tocqueville, the most perceptive observer of Democracy in America, observed that

the greatness of America lies not in being more enlightened than any other nation, but rather in her ability to repair her faults.
To have any hope of maintaining her greatness, and her AAA credit rating, let us all hope de Tocqueville is proved right.

Charlie Laderman is Visiting Fellow in International Security Studies at Yale University and PhD candidate in History at the University of Cambridge.


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