U.S. BUDGET & MARKET CORRECTION

The confrontation over the U.S. debt ceiling might have been resolved meantime, but there is nothing to prevent a repeat of the U.S. economic debacle when the government’s budget comes up for review again in January. Last week, after a wrangling spectacle that lasted several weeks, politicians in Washington slammed on the brakes at the last minute. For a long time, though, the differences between Democrats and Republicans appeared irreconcilable and seemed intent on driving the global economy off a cliff, by triggering a catastrophic default.

President Obama was quick to highlight that nothing has done more damage to America’s credibility in the world, or standing with other countries, than what we’ve seen over the past few weeks. Yet, any sense of relief is likely to be distinctly short-lived. For what will prevent this whole exercise being repeated in a few months? What was agreed on Capitol Hill was a stay of execution, rather than a reprieve. Congressmen still have utterly different views of the role and extent of government, and far less reason now than ever to trust each other.

Outside of America, the most important thing is to ensure that the risk of another global recession is eliminated because of the disaster that would follow a U.S. default. The world will expect that America’s politicians are mature enough to forge a long-term budget deal. In the likely absence of such bipartisan spirit, a partial fix would be to eliminate the need for Congress to approve each increase in the debt ceiling, and rely on the market to provide the necessary fiscal rectitude and discipline.

Market correction does not imply a recipe for unrestricted spending. The House of Representatives would still retain control of the purse strings, and could refuse to fund certain aspects of the government’s operations it was unhappy with. Otherwise, the U.S. will continue to bump up against the ceiling time and again, with the possibility and threat of a catastrophe unfolding. Given that the debt’s numerical value is bound to increase – even if it shrinks as a proportion of GDP – the market should be used as a rectifying tool, rather than politicians in Washington who have proved they are unfit to compromise on their conflicting (and perhaps even reticent) agendas.

AN IMPASSE THAT COULD BE BROKEN WITH MID-TERM 2014 ELECTIONS LOOMING

Following the deal to reopen the U.S. government, John Boehner, Speaker of the House of Representatives, said: ‘We fought the good fight. We just didn’t win.’ These words expressed by Mr Boehner, in theory the most powerful politician in Congress, disguises the fact that Republicans fought an ignoble and pointless fight that has inflicted deep damage on the United States. True, the U.S. government has averted the calamity of a debt default, but to suggest his Republican party did not win is putting it mildly. The Republicans achieved nothing of what it was seeking, most notably a postponement of President Obama’s signature health care reform. Instead, many will suggest it suffered a crushing defeat that might just bring the party to its senses.

That outcome, however, is far from guaranteed. Judging by reactions following last Wednesday’s Senate and House votes that ended the crisis, the ultra-conservative minority that has been holding America to ransom shows little sign of changing its ways.

America must now count the cost of this completely unnecessary exercise in futility. The $20 billion direct loss to the U.S. economy is just the start of it. The ‘good fight’ Mr Boehner refers to has further poisoned the atmosphere on Capitol Hill, and distracted America’s legislature from far more important issues – such as immigration policy reform and climate change. Then there is the damage to the country’s reputation and financial standing. The budget deal that has allowed the U.S. government to resume business has settled exactly nothing.

The government is being funded again, but only until mid-January; the U.S. Treasury is authorised to borrow, but only until early February. There is no guarantee whatsoever that the zealots, unchecked by Mr Boehner, will use these deadlines once again to provoke a repeat shutdown and a new round of brinkmanship on the debt ceiling.

Under the agreement, a bipartisan joint House and Senate panel is being set up, with instructions to work out by mid-December a blueprint to balance the budget, and thus resolve the arguments underlying all of the issues between Mr Obama and Congress. This may offer a glimmer of hope but few will give it much chance of succeeding where numerous attempts in the past have failed. To reconcile the vast differences between the parties on taxes and spending will require compromise on both sides not yet seen.

The best hope of averting a new crisis could lie in the approach of the 2014 midterm elections, because Republicans may fear a brutal backlash from voters. Ultimately, the impasse is not economic but political, and could be settled at the ballot box.

Pollsters clearly show that the majority of Americans blame Congressional Republicans for the folly that has ensued on Capitol Hill. If Republicans do bring about a repeat of the budget debacle early next year, then they will surely be heading for a fully deserved electoral disaster.