Wall Street was right. The US did not default. Despite the ravings of many Congresspeople, some minimal level of sanity eventually reasserted itself, and a deal was reached to raise the US debt ceiling by $2.1tr.
Bankers and investors knew the beast they were dealing with. They were so sure an 11th hour solution would be found that they disregarded the risk of a default and worried more about the US losing its triple-A ratings — a bizarre reversal of priorities.
The agreement, which should be approved by the Senate today, is welcome, and gives some slight cause for hope. The ceiling has been raised by enough to put off another default crisis until at least 2013.
That alone is an extremely valuable achievement, because the past two months of wrangling have arguably been more damaging to the US’s international reputation than any blunder since the invasion of Iraq. Try selling the benefits of democracy to a Chinese or Saudi interlocutor now and the first thing they are likely to raise is the Congressional wrestling match on the cliff edge of default.
The $917bn of spending cuts in the deal, to be phased in over 10 years, are a drop in the ocean. But they are a start. Most importantly, they represent an agreement that the deficit needs to come down, and that this will have to be done through a settlement negotiated between the two parties.
Yes, it’s wearying that yet another cross-party committee has to be set up to devise savings. But this time, there is a timetable with teeth. Automatic cuts to defence and domestic spending, as well as the expiry of the Bush tax cuts on January 1 2013, will squeeze the budget deficit even if politicians cannot agree on how to tackle the country’s real problems.
The 12-person committee, with its November 23 deadline, should also ensure that political and media attention remains focused for a few more months on reality.
There the encouragement ends, however. The US remains on a course that leads to self-destruction, and is radically divided, even over identifying the problem. The debt ceiling crisis has laid bare the dysfunctional nature of modern American politics. Even this week, 161 Representatives — 37% of the total — voted against the agreement.
Americans expect a European standard of social welfare for retired people, and support a healthcare system that already consumes 7.3% of GDP through the public purse and 7.9% from private pockets. Compare that with 7.2% and 1.5% in the UK, which has universal free healthcare.
For a nation with these political priorities, the US is chronically undertaxed — and more so than ever before. In 2009, 2010 and 2011, the government tax take was between 14% and 15% of GDP. Even in the most aggressive years of George W Bush, 2003-2004, Washington was harvesting 16%. Otherwise, since Ronald Reagan came in, the normal range has been 17%-20%.
Yet many Americans, whipped up by political demagogues and irresponsible media, believe their government is too big and taxes too high.
The cocoon of ignorance into which US voters have been lulled resembles the warm bath of comfort in which euro membership has enveloped Greece.
The dollar’s status as reserve currency has given the US a free ride. The world has thrown cheap money at it. In just the same way, capital markets have overlooked Greece’s weak economy and structural deficits and showered it with debt. In both countries, citizens look to the government to solve their problems, but pay too little in tax — and that, grudgingly. Market mechanisms failed to discipline both countries.
The US is not in as bad a mess as Greece. It has a dynamic economy with many world-leading companies. But long term, business as usual is just as unsustainable for the US.
That it is still rated triple-A is an anomaly that, as EuroWeek has previously argued, cannot be justified on analytical grounds. Forget analysis, then — let’s be pragmatic.
The rating agencies have signalled that they will downgrade if the US does not cut its budget deficit enough. To keep up the pressure on Congress, and to make the US feel even a little discomfort in a market that persistently refuses to wield the whip, they should now follow through and cut the ratings. Future generations will thank them.