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The Big Deal? The Big Distraction.

By: /
2 August, 2011
By: Jennifer Welsh
Professor in International Relations at the University of Oxford and a Fellow of Somerville College

Phew. Republicans and Democrats managed, at the 11th hour, to compromise on a deal to raise the U.S. debt ceiling, and thereby avoid a default. Catastrophe has been averted.

But has it? The fine print reveals that the deal only postpones further, more fever-pitched debate. The next round of the boxing match will occur in November, just around the time of American Thanksgiving. And if agreement cannot be reached – well, the U.S. government might just have to shut down. Not a bad time of the year for such a “catastrophe” (indeed, the last time the U.S. government shut down was over Christmas, when not a lot seems to go on anyway).

All of this political theatre would be entertaining, if it weren’t hiding the real crisis: the alarmingly poor state of the U.S. economy. The behaviour of bond markets over the past week was interesting to watch; they never really seemed to doubt that some kind of deal would be reached. But those same markets are ruthless with respect to real economic facts. And the sad reality is that Washington’s best and brightest aren’t doing a whole lot to address them. At some point, interest rates are going to go up. When they do, the cost of debt will rise still further, and the pressures on U.S. lawmakers will mount. Their hands will be forced. At that point, one hopes, a more realistic recovery plan will emerge.

Meanwhile, back in the “cloud cuckoo land” that is Washington, each side proceeded to do its own victory lap. But it’s clear that with no concrete possibility of tax reform, the Republicans are the big winners. In the process, they have transformed President Barack Obama’s winning smile into gritted teeth. Some of his high-profile Democratic Senators felt compelled to break ranks and vote against the bill, claiming that it bore no resemblance to a compromise.

For their part, Republicans like to say that this latest crisis wasn’t fuelled by political posturing, but by an honest, “philosophical” debate about how to promote America’s economic recovery. While Democrats warn that deficit cutting in a time of such low growth could tip the U.S. into recession, Republicans retort that smaller government will give “oxygen” to the private sector, and enable it to take over government functions. They also claim that tough action on the budget will somehow reassure business-owners and consumers, thereby encouraging them to spend more.

The problem with these arguments, however well-rehearsed, is that they are just hunches. They have never had a fact base to support them, whereas the evidence for the worries of Democrats – the concern that aggressive cutting in the wake of the global economic crisis could harm rather than help – is clear and present. One need look no further than to the sluggish economic figures in the U.K. (where the coalition government has also embraced the austerity philosophy).

In 10 years’ time, what will historians say about this sordid episode in U.S. politics? It’s always hazardous to make such predictions, but somewhere in the synopsis is likely to be something about fiddling while Rome burned. Given the globalized nature of the economy, and the status of the U.S. dollar as everyone’s reserve currency, we will all bear the effects of this big distraction for some time to come.

Photo courtesy Reuters.

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