After weeks of partisan sniping that made one weepy for smoke-filled rooms, Congress ended the debt ceiling debate by kicking the can of fiscal discipline down the red-ink brick road. Lucky for us the rest of the world is as dysfunctional as Washington.
Half the eurozone has one foot in the default grave, with Greece, Spain, Portugal and perhaps even Italy poised to become wards of Brussels. China, in the throes of a leadership transition that appears to be making way for a team of well-groomed lightweights, has nearly depleted the goodwill of its trading partners by jailing foreign businessmen, threatening to halt production of scarce minerals, and menacing its neighbors militarily. The Arab world is struggling to transcend generations of corrupt autocracy while the Middle East "peace process" has revealed itself to everyone but blinkered American diplomats to be wholly imaginary. [See a collection of political cartoons on the turmoil in the Middle East.]
Global instability—not the flimsy debt-cutting plan squeaked out by Congress—is why the spreads on U.S. government debt are as narrow as they are. If America is still a safe haven for foreign investors, it is because a grass shack with a torn thatched roof offers better security than one with no roof at all.
Roofs can be repaired, of course, though it is possible that legislators have become so used to living at the pleasure of foreign governments that they are unable to fathom the price of real reform, to say nothing of the even greater cost of doing nothing. Congress' miserable squib of a debt-reduction bill was the inevitable result of opposing delusions: that a $14 trillion spending gap can somehow be plugged by cutting spending and taxes, as Republicans would have it, and Democrats' fanatical regard for the nation's unsustainable entitlement programs.
As burlesque goes, however, this was an asymmetric performance and the political price will be parceled out accordingly. For President Obama, it is probably a wash; by putting programs like Social Security and Medicare on the negotiating table, he antagonized much of his own party but he may have appealed to independents fed up with Republican recalcitrance. House Speaker John Boehner, though he managed to deliver a bill that was acceptable even to the attic-dwellers of his party, came off as a besieged orderly in an insane asylum. [Check out the new U.S. News Weekly iPad app.]
Speaking of which, the Tea Party caucus will no doubt claim victory, as none of the meager savings eked out by the legislation will come from increased revenues, but therein lies the rub: by resisting the obvious need for entitlement reform, Democrats denied themselves the moral authority that could have isolated the anti-tax cultists on the Republican side, which may have given Boehner the cover he needed to craft a respectable deal with the White House. Instead, they conceded the high ground to those in Congress who think a "triple A" rating has something to do with automobiles. As a result, it is inevitable that America and the world will be treated to yet another game of legislative chicken all too soon, which is why the nation will most likely lose its credit rating in the meantime.
Is that such a bad thing? While fears of massive dollar-dumping in the event of a downgrade are overstated, a reduction would most certainly increase borrowing costs, which would inhibit an already sputtering economic recovery and weigh heavily on the dollar. That would neutralize consumer spending, along with capital investment and construction, as viable engines of recovery, leaving export sales as the country's only source of growth. Sustained dollar weakness would stimulate demand for U.S. products overseas as well as cajole China, America's largest creditor, to lift its unofficial peg between the Chinese renminbi and its U.S. counterpart. A strong renminbi, in turn, would mitigate China's chronically high inflation while fueling its demand for American-made products. [Check out a roundup of editorial cartoons on the economy.]
Over time, the Sino-U.S. trade imbalance at the heart of global economic insecurity for more than a decade would slowly right itself. China would gradually convert its enormous and poorly performing foreign exchange reserves into foreign-built capital goods and new infrastructure, while the U.S. would finally draw down its crippling reservoir of debt. Equilibrium between the world's two largest economies will have finally been restored.
There's just one hitch: the rebalancing process would take a generation to complete and its costs in personal sacrifice would be even higher than what the country's beleaguered working classes have endured already. To insist they bear the burden alone by cutting government programs while exempting tax increases on the wealthy is both economically unsound and profoundly anti-American.