Business Times - 02 Aug 2011
Junk grade for Washington over debt mess
The immature way Congress and the White House handled the process shows them both in a most unflattering light
By LEON HADAR
THE credit-rating agencies in New York had put the US government on notice that it might lose its 'AAA' debt grade unless Congress approved the extension of the debt ceiling by today. Now that the White House and the Republican congressional leadership have been able to reach a deal over the debt ceiling coupled with an agreement on a framework for cutting the federal budget deficit, US Treasury bonds will probably not lose their triple-A grade. The holders of these bonds including the Chinese central bank can breathe a sigh of relief - at least until the next political crisis in Washington.
But you don't have to be an analyst in a credit-rating agency to figure out the grade (based on the way they have been handling the budget mess in Washington) that Congress and the White House deserve: the lowest of the lowest 'junk' ratings from the American people.
Indeed, watching the White House and Congressional leaders engaging in nasty backbiting in the last few days trying to make a desperate, last-minute attempt at reaching some sort of a compromise on raising the nation's US$14.3 trillion debt limit and avoid a government default, one would have been reminded of a bunch of bickering kindergarten kids, wondering when the grown-ups are going to show up and establish some sense of order.
In fact, against the backdrop of a very weak economic recovery - the Commerce Department reported last Friday that the economy grew a sluggish 1.3 per cent in the spring - and with the US economy only hours away from facing its first-ever default, the performance of the Republicans and Democratic leaders made the kindergarten kids look like a profile in courage and competence.
So are the adults back in charge in Washington now? Well, that would probably be an overstatement. Here is what the White House and the Republicans have agreed on: The debt ceiling is raised by about US$1 trillion immediately. In exchange, the Democratic-controlled House of Representatives and Democratic-ruled Senate will approve a series of spending cuts worth about the same amount.
Next year, the debt ceiling will go up by another US$1.8 trillion while a so-called Super Committee of 12 members of Congress - half from each party - negotiates another US$1.8 trillion in deficit reduction.
If Congress fails to reach an agreement, an automatic mechanism would kick in to force deficit cuts in that amount. If Congress refuses to support the next extension of the debt ceiling, the president will be able to veto that congressional vote - and the lawmakers will not be allowed to override his veto.
So basically what the adults have agreed on is to put in place a legislative straitjacket that would force on them - and especially on the idealogues in both camps - major cuts in the federal budget and an extension in the debt ceiling in 2012. The kids won't have any choice but to shut up and start behaving - even if that is not in their nature.
The deal is expected to win the votes of more than 60 Democrats and Republicans in the Senate and will probably also pass the House with Republican and Democratic votes, even if many of the Republicans allied with the Tea Party vote against the legislation fashioned by the White House and Congress.
While it seems that the bitterly split Congress and the White House were able to strike a deal and have a vote before midnight on Monday (Washington time), they will probably not be able to change the depressed mood of the American people anytime soon.
In fact, results of public opinion polls suggest that the budget mess in Washington has driven down public confidence in the political system to new lows, which is bound to encourage populists and demagogues on the political extremes to exploit the anger of the voters to their advantage.
At the same time, the agreement between President Barack Obama and his Republican adversaries - which fails to provide a coherent strategy for cutting the deficit - is probably going to leave the financial markets as well as American and foreign businesses with a continuing sense of uncertainty about the ability of Washington to deal with the nation's economic problems.
There is growing recognition that neither the White House nor Congress is able to get their act together to start putting the US fiscal house in order. With the rate of unemployment remaining high and with no sign that the housing market is recovering, economic news is probably not going to get better in the near future.
But if you really didn't care very much about the fate of the American economy and enjoyed watching high political drama - and certainly if you are a Tea Partier hoping, wishing and praying for the decline and fall of the 'Kenyan-born Muslim' and 'socialist' occupying the White House - things in Washington were looking just great last week: Non-stop votes in the House and Senate, and back-to-back press conferences and photo opportunities as one side tried to out-spin the other. What more could a political junkie ask for?
At the centre of the debate were the competing Democratic and Republican fiscal economic agendas. The so-called Boehner Bill (named after Republican House Speaker John Boehner) called for US$915 million in spending cuts over the next decade - but would have expanded the government's borrowing authority only for a few months and would have required another vote early next year on further extension of the debt ceiling. That bill was approved by the House but rejected by the Senate.
The plan promoted by the White House and the Democrats - the so-called Reid Bill (named after Democratic Senate Majority Leader Harry Reid) would have saved US$2.2 trillion through 2012 in exchange for extending the debt ceiling until 2013. That bill was supported by the Senate but opposed by the House.
Ironically, there were really no major differences in the basic principles guiding the Republican and Democratic plans. Both Mr Boehner and Mr Reid refrained from proposing a strategy to control government spending on the two huge entitlement programmes that threaten to bankrupt the US Treasury: Social Security insurance (pensions) for America's retirees, and Medicare that provides health insurance coverage to people aged 65 and over. And neither the Republican nor the Democratic leaders have called for any tax increases as part of an effort to reduce the deficit.
In a way, what the compromise agreed to by the White House and the Republicans has done is to shift the responsibility of making the painful but necessary political decisions - cutting government spending on Social Security and Medicare (which Democrats oppose) and raising taxes (which Republican reject) - to the Super Committee.
So what happens if the committee fails to agree on these issues by next year? The expectation is that the automatic mechanisms that will be triggered in case of a deadlock in Congress will lead to cuts in so-called discretionary government spending - which the government can spend through an appropriations act and is optional - as opposed to the entitlement programmes for which funding is mandatory.
In short, no cuts in pensions or medical benefits for those over 65 and no tax increases before the 2012 elections - just more of the same partisan mud wrestling we have been watching last week. It's difficult to decide whether to cry or to laugh out loud at the prospect.
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