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President Obama’s Debt Deal

Tags: Obama , Public Debt , Fiscal Policy , Political Party , Congress

Saunders, Paul J.

August 09, 2011

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Standard and Poor’s decision to downgrade America’s long-term sovereign debt rating after a political compromise to increase the US government’s borrowing authorization and to cut at least $2.1 billion in spending seems premature. After watching the country’s often superficial and ideological debates, and waiting until the final hours before a potential default to see a deal, it is easy to understand the firm’s view of “America's governance and policymaking becoming less stable, less effective, and less predictable.” Nevertheless, the August 2011 debt agreement is more likely to be the first step in grappling with US deficits and debt than the last.

American politics is indeed dysfunctional in many respects. Policy debates are increasingly polarized and ideological, and politicians are encouraged in this by a media establishment focused on entertainment through political theater rather than informative discussion of key issues. At the same time, members of Congress often appear more interested in winning reelection and giving their party control of the legislature than in responsible policy. As a result, some major components of the US deficit problem—including taxes and entitlements—can seem untouchable.

Nevertheless, intense and even destructive partisan political infighting is nothing new for the United States. This is nowhere clearer than in George Washington’s Farewell Address, the powerful speech America’s first president delivered on stepping down from office in 1796.

Reacting to the rapid formation of parties within Congress and even inside his own administration, Washington decried “the spirit of party” as the “worst enemy” of elective governments. “It agitates the community with ill-founded jealousies and false alarms” and “kindles the animosity of one part against another,” Washington said, which “serves always to distract the public councils and enfeeble the public administration.” Moreover, while agreeing that “parties in free countries are useful checks upon the administration of the government and serve to keep alive the spirit of liberty,” Washington expressed concern that “the alternate domination of one faction over another, sharpened by the spirit of revenge . . . is itself a frightful despotism.” He concluded by warning that while partisan sentiment was “a fire not to be quenched, it demands a uniform vigilance to prevent its bursting into a flame, lest, instead of warming, it should consume.”

And, in fact, the early formation of political parties in the United States was also driven by the issue of public debt. Washington’s treasury secretary, Alexander Hamilton, ardently championed the formation of a government-sponsored central bank, believing that access to credit was essential to economic growth and also that expanding the federal government’s debts would strengthen the union. (Politically, he sought to mobilize Revolutionary War veterans—to whom the early federal government, and the states, owed substantial unpaid wages and pensions—to support his plan.) Hamilton also fought vigorously to establish the principle that the federal government should never consider defaulting on its debt.

With this in mind, while Standard and Poor’s analysts are likely very competent economists, their political assessments appear flawed. American politics has been dysfunctional for well over two hundred years and, despite this, the United States has many great accomplishments to its credit. Ultimately, as Winston Churchill memorably said, “you can always count on Americans to do the right thing—after they've tried everything else.”

More specifically, the S & P analysis expresses skepticism that the United States will succeed in further trimming its deficits and debt because of growing partisanship. This represents a fundamental misunderstanding of the political dynamics that led to the debt deal in the first place.

It has been the conventional wisdom to blame Tea Party activists in the United States for the difficulty in reaching a debt agreement and for the extreme partisanship of the negotiating process that produced it. With this in mind, it is easy to assume that because the first deal was so difficult, further compromise could be virtually impossible.

However, this ignores several important considerations. First, the Tea Party exists largely because of growing public frustration with America’s deficits and debt. Without pressure from the Tea Party, the issue of tackling the debt, and particularly the issue of cutting spending, would probably not have been so high on the agenda in Congress or in American politics in general. The House and the Senate might have routinely increased the debt ceiling as they have in the past—avoiding a sharp partisan battle, but also avoiding significant reductions in the federal budget. It is difficult to imagine that S & P analysts would view this as a better outcome.

Second, many Tea Party activists—and many Republicans elected to the House of Representatives with their support in 2010—are new to politics. Over the long term, it is an important and positive development that hundreds of thousands of Americans who had not previously participated actively in the political process have decided to do so. In the short term, however, they lack experience. This explains widespread Tea Party support for an amendment to the US Constitution to require a balanced federal budget—a process that would take years to complete—as a pre-condition for raising the debt ceiling. These activists and their allies in Congress have learned a great deal over the last few months and will continue to learn.

Finally, and probably most important, the United States is beginning to have a serious public discussion of federal spending and revenue. US political leaders have misled the American people for decades by simultaneously promising stable or increasing government benefits and services and decreasing taxes. Politicians are no longer able to pretend that higher spending isn’t a problem or that tax cuts have no impact on what the federal government can and cannot do. As a result, like Tea Party supporters but on a larger scale, the American public will also learn about the country’s fiscal realities.

The political process that results from these dynamics will probably be painful and highly contentious—particularly the additional spending cuts to be proposed by the “Super Committee” established under the agreement between the White House and Congressional Democrats and Republicans. The fact that the “Super Committee” will finish its work (and that Congress will vote on its product) just a few weeks before the first primary elections of the 2012 presidential campaign virtually ensures that highly partisan budget debates will continue for at least a year. In fact, the debate is likely to last well beyond the election—Americans will expect the president taking office in January 2013 to have a comprehensive agenda for economic recovery.

American politics is definitely a mess and it does not always generate the best solutions to national challenges. But it is a mistake to assume that the recent debt deal was the end of the process rather than the beginning.

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