Sunday, July 24, 2011

Damage Accumulating in Debt Ceiling Meltdown

As of this writing Sunday evening, there is no unified plan for raising the debt ceiling and the stock market is likely to open without one. We'll see what kind of signal Wall Street will send to Washington.

Republicans and Democrats are working on their own separate paths, which ultimately will have to be merged in the next eight days to avoid calamity. Plenty is being written elsewhere about how this might occur.

But even if last minute heroics occur, and even if the so called "grand bargain" is pulled off (which now seems extremely unlikely for now), the casulaties from this entire episode are already mounting like a pileup on a freeway. No last minute deal will allow them to disappear like a bad dream. Here are some of them:

** We have damaged our global economic leadership: Whether we default or not, having the world discussing the prospect of a U.S. default is in and of itself damaging. Regardless of whether our credit rating is downgraded, again, the mere prospect of U.S. debt being rated anything but AAA, has injected doubt into the safety of U.S. bonds as an investment. When you owe $14.3 trillion to other countries and institutions -- the last thing you want to do is shake their confidence in your creditworthiness. Even a small increase in interest rates due to this debate will cost us hundreds of billions in increased interest costs over the next decades.

** We have undermined the credibility of the American political system: All countries experience and understand political disputes. But the linkage in this debate between politics and creditworthiness of the United States has elevated this political dispute to global dimensions. Our inability to address this reasonably simple problem (that we must borrow more money to run our government and pay our debts) undercuts our stature. To be a great nation, you must have a political system capable of addressing great challenges. Raising the debt ceiling is not a great challenge - it is one of the basic requirements of governance, yet we are failing even this minor test. The debt ceiling fiasco is exposing to the whole world the depth of our government's dysfunction.

** We have futher damaged Americans' confidence in government: Confidence in government has been tanking for years. But this episode will bring it to brand new lows. There are many reasons why a compromise solution has not been achieveable, but this doesn't matter to the average American. And there is also the deep disconnect between what is happening in Washington and what Americans really care about. We are suffering from a devastaing recession and an anemic recovery. The debt is still an abstract concept to most, the debt ceiling is d0ubly abstract, and the prospect that an impasse could inflict more damage on an already weak economy is simply inexplicable. The public's distaste for bickering combined with the sense that Washington is not dealing with the nation's highest priority problems is a toxic combination.

Whether this brings the dawn of true centrist politics - as Tom Friedman and former Senator Chuck Hagel are both predicting, who knows. But deep public cynicism, distrust in political leaders and institutions, and a public that tunes out due to deep disgust with politics as usual are unhealthy, corrosive forces for our democracy.

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