A stunted America

DOWNGRADED CREDIT RATING

Finally, a deal was done and yet America lost its prized credit rating. Credit agency Standard & Poor’s downgraded the US credit rating from AAA to the next lowest level, AA+. The US political system might not be as broke as some thought but the deal came a bit too late to allay apprehensions about the ability of the American political establishment to think seriously about the multiple economic crises facing the world’s most powerful economy. Approval last week by the US Senate sent the measure to president Obama and immediately granted the treasury $400 billion in additional borrowing authority, just hours before a midnight deadline of last Tuesday.

Yet no one seems to be happy with the deal that has been struck. House Speaker John A. Boehner (R-Ohio) won over more than two-thirds of his caucus by assuring the lawmakers that few GOP priorities were in the line of fire and that Obama had retreated on his demand for higher taxes. Angry Democrats largely shared that assessment. But after withholding their votes for most of the roll call, they split evenly for and against the proposal, which would cut at least $2.1 trillion from projected borrowing over the next decade without any immediate provision for new taxes.

A gruelling battle that had consumed Congress for most of the spring has come to an end but a bigger war lies ahead. The attention as well as pressure will shift to the new super-committee whose mandate is figuring out how to save $1.2 trillion to $1.5 trillion more. The first round of cuts, spread among domestic and military programmes, will total $917 billion over the next 10 years, including savings from lower interest payments, according to the Congressional Budget Office. The second round will be the harder bit.

The debt-limit deal, which strained and nearly snapped American politics, was the easy part. The compromise involved no reforms of Medicare or Social Security, and it had no tax increases. Once again, the president and Congress targeted discretionary spending — about a third of the federal budget. Given the severity of previous discretionary spending cuts, this strategy will not work the next time around.

The bargain addresses a liquidity problem; it does not resolve the debt crisis. Yet this exertion has left Democrats and Republicans exhausted and bruised. An honest debate on controlling Medicare costs — a prerequisite for meaningful debt reduction — is uncomfortable for both parties. Democrats support price controls in an ever more repressive system that tends toward rationing. Republicans want to limit costs by increasing out-of-pocket costs for the middle class. Neither side has a political interest in preparing Americans for unavoidable pain.

Sharp relief

As the 2012 presidential elections draw nearer, the contrast between the two parties seems certain to be drawn in sharp relief. The Republican vision is of a dramatically smaller government and of a budget that is balanced without raising taxes. Democrats argue for what Obama describes as a balanced approach, one that includes new revenue and treads cautiously around Social Security, Medicare and social programmes that provide a safety net for the poor. Both parties insist that theirs is the only path back to what voters say they want most: a stronger economy.

With the debt deal, the US has prevented a much harsher downgrading of its credit rating but its reputation is in tatters. It is already being suggested that the Chinese model might be a more efficient one. Among foreign leaders and in global markets, the political dysfunction in Washington as the nation moved to a default have eroded America’s already diminishing aura as the world’s economic haven.

And Obama himself is aware of this change. He has all but acknowledged as much in recent weeks, as he paired his decision to withdraw the ‘surge’ troops from Afghanistan by next September with a repeat of his declaration that “it is time to focus on nation building here at home.” His decision to commit few new American financial resources to supporting the Arab Spring and his insistence that Nato allies must bear the brunt of operations in Libya were deliberate reminders that times have changed, and that America can no longer afford either new Marshall Plans or new wars.

But acknowledgement is not leadership. And it is Obama’s leadership that is under scanner now. A politician who was elected on the promise of a different kind of leadership is having difficulty in projecting any kind of leadership. The US economy remains in doldrums and Americans are blaming Obama now. He can no longer blame George W Bush.

The global balance of power is changing rapidly and the recent crisis in Washington has merely underscored the shifting power dynamic. Japan is in political gridlock and the European Union can’t seem to get its act together. This makes China as the most credible global alternative and it has already asked the US to put its house in order.

It is important to acknowledge that the decline of America has been much talked about in the past too. The difference is that never before the gap between American capabilities and its ambitions has been this stark. Adm. Mike Mullen, the departing chairman of the Joint Chiefs of Staff, has been very vocal about the national debt being the greatest threat to US national security.

The world is taking note and it will reconfigure accordingly. It is for the US political establishment to get its act together if it wants to retain American supremacy in this century. Otherwise, be prepared for Pax Sinica!