3 Ways the Debt Deal Fails America

The short-term agreement to raise Washington's borrowing limit overlooks bigger and tougher problems.

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What's up with those grinning politicians in Washington? What are they acting so happy about?

Sure, they "solved" a huge impasse over the national debt, raising the government's borrowing limit in the nick of time so that Washington can keep on functioning. The deal between Republicans and Democrats will make some modest cuts in government spending, adding up to about $2.4 trillion over a decade. That's a tiny portion of all government spending and a far smaller cut than government-loathing Tea Partiers wanted. But it's a meaningful step toward reining in the nation's debt, which will overwhelm the economy eventually if not reduced. It helps that the immediate spending cuts will be modest, because the economy can't handle much more right now without dipping back into recession.

[See who to blame for the debt fiasco.]

But the awful spectacle of threatening the world with a U.S. government default made Washington look petulant and dysfunctional. It's worth keeping in mind that the whole fiasco was man-made: If we had a rational set of leaders, they would have made a deal to raise the government's borrowing limit and chip away at the debt months ago, without the brinksmanship that hog-tied financial markets for two weeks. The debt deal fails America in other ways as well. Here are three:

It shows total disregard for the jobs problem. Surveys repeatedly show that Americans' No. 1 concern isn't the national debt. It's unemployment. And they're right about that. The lack of hiring is the biggest single problem in the economy right now. There are still 14 million Americans out of work, and perhaps an equal number who have stopped looking for work. The unemployment rate is stuck more than four percentage points higher than it was before the recession. The weak job market is the biggest reason the housing bust persists, spending is weak and the whole economy has been going sideways this year.

Washington has now spent the entire summer obsessed with a deal that does absolutely nothing to address the jobs problem. Politicians will return from the traditional August recess with no jobs agenda. There are still things the government can do to help, without spending billions on stimulus programs or bailing out anybody. But they would take more creativity than simply throwing money at the problem, and legislators on both sides would have to hammer out compromises on issues that might be controversial, like allowing more immigrants to stay in America and start businesses, or finding a pragmatic way to help distressed homeowners. Compromise takes time, so it might have been a good idea to get started earlier this year on a few fresh ideas for creating jobs. But Congress has been too busy fighting over a debt problem that it never needed to fight over.

[See how Washington is killing jobs.]

There's no vision in it. It has become painfully obvious that America needs some creative and aggressive action if it's going to bounce out of its economic rut. Traditional stimulus spending hasn't worked. Several rounds of tax cuts—costing at least as much as the stimulus spending that's so controversial—haven't created a vibrant economy, either. The most effective policy tools have been unconventional moves by the Federal Reserve, and those have merely prevented a weak economy from getting worse. Besides, the Fed is nearly out of tricks. Some policymakers think it's now up to the private sector to fix the economy, except that many private firms have found new ways to prosper without hiring—or without hiring Americans, anyway. So that solution tends to lock in high joblessness.

The best cure-all for the jobs problem, the national debt, and most other economic ailments is strong growth. Washington could help, by finding new ways to encourage innovation, building the kind of physical and digital infrastructure that the private sector can't build itself, and letting global investors know that the United States is the best possible place to invest their money. But Washington seems like it's not interested. The debt deal will trim here and there, while offering nothing new to kick-start the economy. And the suggestion by some of the debt negotiators that it would be no big deal if the U.S. government ran out of money makes astute investors around the world think the world's leading democracy is captive to a faction of economic illiterates. If we get subpar growth and declining living standards over the next several years, we deserve it.

[See 11 countries with worse problems than America.]

It shows that Washington is as out of touch as ever. The debt deal won't create a single new job. It may even kill a few jobs, on account of spending cutbacks. It does nothing for the business community either. Many business leaders pleaded with politicians to get a deal done sooner, without the brinksmanship that forced many companies to put aside normal planning and prepare for a worst-case scenario. Even now, the deal seems like a "stay of execution," as Bank of America Merrill Lynch recently called it, with future threats of similar disruptive brawls instead of a single-minded focus on growth and prosperity. And instead of showing that the United States has the world's most vibrant and adaptive economy, the debt negotiations showcased politicians fixated on pet ideas—such as the Tea Party's insistence on cutting taxes to record-low levels, regardless of the consequences—that are out of step with mainstream economics.

But that won't stop the politicians from congratulating themselves for their heroic efforts to halt a crisis that wouldn't have existed if they hadn't created it. Maybe, if Congress can stop creating problems, it could find the time to address the ones that already exist.

Twitter: @rickjnewman

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