Business negligence in the debt-ceiling crisis

Imagine what would have happened if Ron Paul libertarians and Progressive Democrat factions  in Congress decided to treat the results of the 2006 mid-term elections as a mandate to block any further increase in the debt-ceiling until George Bush pulled out of Iraq or raised taxes to finance the war. Of course, the moderates would have shaken their heads in disdain. But, more important, American big business would have gone crazy.

CEO’s would have flown to Washington, probably with big labor along for emphasis, to talk sense to legislators in both parties. They would have summoned their Washington lobbyist, media spinners, and think-tanks and read them the riot act: “American capitalism, and its global playground, will not tolerate playing politics with the credit of the United States. Superior credit facilitated the rise and dominance of the United States. When we think the credit worthiness of the US is in jeopardy, we’ll call you. In the meantime, play with the hot buttons you play with now.”

What happened this summer when first-term Republicans—and their leaders in Congress—declared over and over that they wouldn’t raise the debt-ceiling without securing $trillions of dollars in spending cuts and a balanced budget amendment to the constitution?

Business leaders crossed their fingers and did nothing.

Instead of worrying about creating a dangerous and very costly precedent, they pretended that this new form of blackmail could provide a timely national learning opportunity. The American Chamber of Commerce, right into July, advised everyone to relax: the crisis is just “political theatrics.”

The truth is they panicked last week.

After months of allowing the Tea Party and primary-driven sound-bites to undermine the executive, monetary authorities, the dollar, the stock market and potentially, the credit rating of the US government, all of a sudden they insisted that the moderates take command of the situation and end the lunacy.

Clive Crook nicely identified the damage this economic blackmail may inflict over long-term:

“Preventing default is good, but lifting a threat that should not have been made in the first place is little to boast about. It is worth stressing that the history of the past few months cannot be unlearned. Will this farce recur every time the debt ceiling needs raising? That question is a new risk factor in its own right.”

Click on:  www.ft.com/cms/s/0/4ef4d786-bb9d-11e0-a7c8-00144feabdc0.html#ixzz1TmswI1Qc

Now that everyone feels safe again, the airways are bristling with shots against Obama’s negotiating tactics and “diminished” presidency.

 Liberals argue that he was free to bluff Republicans and make demands as well. This is pie-in-the-sky delusional. The President is trustee of America’s economic recovery and can’t change the subject after a game of economic chicken turns into a tragedy.

The isolation of the President and the uneven distribution of lethal weapons around the debt-ceiling negotiating table had as much to do with the negligence of America’s private sector than the spines of moderates in Washington.

America’s capitalist consensus has survived populist revolts before. Previously, however, the principal beneficiaries of mainstream economic policy bothered to ally themselves with mainstream leaders and stand up to demagogues on both the left and the right.

The Californication of America’s finances

Last week, rating agencies and global financial analysts laid out the choice: fix your public finances or prepare to surrender America’s unique source of growth and competitiveness: its ready access to exceptionally cheap credit and its reputation as the safest haven in the world for nervous capital. What sounded too ambitious a few months ago now appears to be eating your peas.

“S&P says that there needs to be $4,000bn of consolidation over the medium term to stabilise the US fiscal position. That is the extent of the largest deal proposed by President Barack Obama, one that includes revenue increases and cuts to Social Security, but which no longer seems to have much chance of getting through Congress.”

Click on: www.ft.com/intl/cms/s/0/c7f14374-b092-11e0-a5a7-00144feab49a.html#axzz1SSYPI4Yp

This week, the House of Representatives’ Republican majority will parade their weaponry for next year’s election: the Cap, Cut, and Balance plan. It would reinforce Paul Ryan’s Medicaid and Healthcare cuts and bolster the Republican Party’s pledge to oppose any new taxes by literally making budget deficits unconstitutional. Their proposals will not only provide cover for their sell-out next week when they agree to raise the debt ceiling they will also give both presidential and congressional candidates powerful issues to mobilize their supporters in 2012. For the sake of a parade, however, Washington gridlock will persist and America’s recovery and reputation will falter.

Over one media cycle, the Republicans will both trivialize and radicalize American politics.

By ruling out any significant immediate compromise to narrow the deficit for the medium-term or any measure to stimulate jobs now, the Republicans will set Obama up as an ineffectual president. (On the mischievous extreme, Newt Gingrich would only give the President debt-ceiling increments on a month-by-month basis up to the election.)

However, even if the Republicans nominate a “man of action” uncontaminated by the emasculating politics of Washington, they’ll find themselves running on a platform that can be caricatured as unworkable and dangerous. Something like having a VP candidate during the Cold War say “We should nuke Hanoi.”

Without California’s exceptional human and natural advantages, the Republican balanced budget constitutional amendment would bring the most important Western government down to the level of a near-bankrupt subnational jurisdiction. Standards & Poor’s hasn’t granted California a triple-A credit rating since 1986.

Click on: www.treasurer.ca.gov/ratings/history.asp

California’s dynamic economy, many argue, was a decisive factor in winning the Cold War and in out-innovating Western Europe and Asia over the last three decades. Nevertheless, it hasn’t been strong enough to carry California’s financially incredible state governance. By passing a series of small “popular” constitutional amendments to make politicians behave, California is left with a representative democracy that cannot make tough decisions without teetering on bankruptcy.

That is the agenda of Washington Republicans. They would effectively require super-majorities to raise taxes, to run counter-cyclical deficits, and to finance major new initiatives domestically and abroad. Their constitutional medicine would either add hundreds of $billions to the cost of financing the American government or handicap its ability to act decisively internationally and to provide any measure of leadership over the future health of America domestically.

It would even make it difficult to laugh about how hard it is to get the European Union to make decisions.