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Clearly, this week’s debt limit deal was better than the alternative — economic catastrophe — but it did not solve the nation’s debt dilemma and it will hurt economic growth and the jobs picture.
Failure to raise the debt limit would have meant the federal government couldn’t pay its bills, would have badly damaged the nation’s creditworthiness and probably would have collapsed the stock market and plunged the economy into a new, deep recession.
It also would have proved what the world already suspects — that the American political system is utterly dysfunctional, that the United States is in decline and that countries ought to start placing their economic and political bets elsewhere.
So Congress and President Barack Obama avoided taking the country over the precipice. But they are still leading the country downward — just more slowly.
Instead of a 777-point decline in the stock market like the one that greeted Congress’ initial failure to approve the Troubled Asset Relief Program in 2008, the market dropped only 365 points in two days as the House and Senate voted on the debt limit.
The message of that is that any hoped-for “confidence stimulus” that a comprehensive, large and balanced debt-solving deal might have produced is not happening.
Why? Because cutting about $1 trillion in federal spending immediately — with an additional $1.5 trillion to come — is “fiscally contractive,” as the investment director of the bond-trading firm Pacific Investment Management Co. put it Tuesday.
PIMCO has downgraded its estimate of U.S. gross domestic product growth in the next year to 1 percent to 2 percent from
2 percent to 3 percent.
Faced with the prospect of slow growth, continuing high unemployment, falling housing prices and low consumer demand, employers are not going to hire. Banks are not going to lend. Corporations are not going to invest.
The danger of an immediate plunge into a second Great Recession may have eased, but the prospect of a Japan-style “lost decade” of anemic growth has increased.
Signing the debt deal into law, Obama called for renewed attention to growth and jobs, but the ideas he put forward — an infrastructure bank, renewed tax breaks for job creators — have little chance of passing.
They smack of more “stimulus,” which the economy sorely needs in the short run but which now has a bad name because Obama’s previous efforts had no lasting effect.
Republicans, under the thrall of the tea party, have completely abandoned any “growth agenda” of the type once advanced by the late Rep. Jack Kemp (R-N.Y.) and President Ronald Reagan. They are interested only in slashing the size of the federal government and barring any increase in government revenue collection.
In the 1970s and early 1980s, when the top tax rate was 70 percent, Kemp and Reagan correctly saw that tax cuts would spur growth. But since then, cutting taxes has become a religion for Republicans — the answer to every economic problem.
And the tea party has made chopping government its religion. The “constitutionalists” were so inflamed that they advocated amending the Constitution to require a balanced budget every year with a limit on outlays — handcuffing the federal government even more tightly than state governments.
That was too much even for the anti-tax, anti-spending Wall Street Journal editorial page, which also chided the Sen. Jim DeMint (S.C.)-Rep. Michele Bachmann (Minn.) wing of the GOP for refusing to recognize the victory it had won.
In the meantime, the debt deal does not solve the debt problem. Unless the 12-member super committee it created performs miracles, there will be no systematic attack on the rising costs of entitlement programs and health care or an overhaul of the tax system.
An August crisis was avoided, but a Thanksgiving-Christmas mini-crisis is likely. That’s when the committee is likely to deadlock over entitlements and revenues, triggering mandatory across-the-board domestic and defense spending cuts.
But those cuts won’t take immediate effect and may well be undone by the new Congress and (perhaps) the new president elected in 2012.
The voters are legitimately not happy with the spectacle they’ve just witnessed. A CNN poll showed that by 77 percent to 17 percent, voters said politicians acted more like “spoiled children” than “responsible adults.”
That poll showed voters disapprove of the deal itself, 52 percent to 44 percent, and hold Republicans more responsible for it than Obama, 43 percent to 34 percent.
Forty-six percent approve of Obama’s performance in the debt negotiations, compared with 30 percent for the Republicans.
But Obama is likely to suffer if unemployment stays high — as seems certain — and he is being compared to failed President Jimmy Carter, even by some of his friends.
He could still win in 2012 — but only because the public distrusts the Republicans more than it does him.
With the economy mired in stagflation, Carter became mired in pessimism and lost in a landslide to an optimist with a plan — Reagan. Obama’s only hope may be that the GOP has no Reagan.