There are several parts of the debt ceiling deal legislation that was passed that I don't like, but the worst is that it really isn't over. Yes, in theory, President Obama kicked the debt ceiling obstacle down the road enough to get it past the 2012 election, which was his bottom-line requirement of this debacle. But I don't think it's really a done deal.
There will be another crisis towards the end of the year, hopefully a little less dramatic but probably just as intractable, just as partisan. A "supercommittee of 12", three Democrats and three Republicans from each House, are required by the legislation to come up with recommendations on additional debt reduction--there is an understanding that their focus will be on tax reform and on entitlement reform. If the committee makes recommendations of sufficient magnitude by a majority vote, these are to be guaranteed straight votes in both houses of Congress without amendments. If they don't, a series of automatic cuts are supposed to come into effect, across the board reductions on discretionary spending, military spending, and Medicare payments to health care providers.
There are several potential pratfalls in this scheme, but I want to highlight just one now: the selection of the members of the supercommittee (the SC). There have been several of these kinds of improvised panels in U.S. history--one of the most momentous was in the 1876 presidential election. If the membership is chosen based on reliable partisanship, a deadlock is assured. It would be a great sign if a moderate Republican were chosen for one member, as it would if a moderate/conservative Democrat would be. Either of these would suggest that the powerbrokers in Congress want a deal.
The Tea Party members in the House who rejected the deal, even though it was a very favorable outcome for the Republicans, should be excluded from the negotiations on merit: they had a chance to contribute positively to the country's avoidance of misfortune, and they turned their backs. It would probably be more politic, though, to include one or two of them, though; otherwise, I could see a populist movement to politicize the SC's deliberations even before they start. If that were to happen, its success would be most unlikely, and I could even see an attempt to undermine the year-end schedule; a bill could be passed to undo the debt ceiling deal, in the form of a measure of disapproval, one to change the automatic cuts, one to preclude tax changes, one to override the protection of Medicare benefits envisioned in the deal...the list of possible partisan misadventures goes on and on endlessly.
My grades on the key players and their handliing of this unnecessary calamity: President Obama gets a C grade; he didn't oontrol the terms of the debate well, his leadership was late, and not successful in most of his stated objectives. Speaker Boehner gets a B: he could have lost his leadership post if he'd handled it badly; he got a decent number of his members to vote for the final agreement, and of course got most of what he wanted in the deal (whether what he wanted is what he should have wanted is another question). Majority Leader Byrd, like Obama, was fairly ineffectual and gets a C as well; Minority Leader McConnell came out relatively unscathed and actually contributed something positive to the deal, so he gets an A-. House Minority Leader Eric Cantor was in great danger at one point, as a point negotiator who was getting squeezed from all sides, but Boehner stood with him and they both survived, Cantor earns a shaky C+. The payback, for him, will be probably another thankless negotiating role on the SC.
As for the deal itself, it came short of what I expected, because there was no tax increase on the wealthy paying for a payroll tax reduction. The devil will be in the details of the automatic cuts, which I think are very likely to end up being the legacy of the deal: I'm confident our military can survive the squeeze, and it will probably be healthier for it (in the way our corporations have made do with less expenses); the cuts to Medicare providers worry me as they will weaken the program without reducing demand for it, and the cuts to discretionary programs are sure to be overridden by the priorities that will arise in the next 10 years, so a nuisance rather than a disaster. I'd give it a pass, a D-.
Don't Let the Downgrade Get You Down
In the immediate aftermath of the debt ceiling deal, the economy took a one-two punch, in the form of a huge stock market sell-off on Thursday--driven by new bad news from Europe as much as anything--and the announcement Friday evening that Standard & Poor's was downgrading U.S. sovereign debt from a AAA rating to AA+.
We should be able to get over both of these insults/injuries, though our immune system has been weakened by the events of recent weeks. AAA does not mean what it used to mean, partly because S&P itself contributed to the rating's debasement during the run-up to the financial crisis, bestowing it upon many doomed mortgage backed securities. Also, though, because many other institutions have survived downgrades fairly readily, and because of the way S&P did it, with shoddy care for the numbers it published (even if its arguments were somewhat undeniable), and going against the decisions of its competitors Moody's and Fitch to uphold the AAA for the moment means S&P will be the exclusive target for some sort of retribution from the U.S. Treasury--just you wait and see. Couldn't happen to a nicer bunch.
As a result of the S&P downgrade, there will be another bearish run in stocks, a discounting of the dollar, and possibly an increase in the ridiculously low interest rates for debt. I'm just hoping we won't be seeing 10,000 again in the Dow, as I've already tried to say goodbye to The Best Prediction I Ever Made.
Stock Market Aside...
This does seem to be a bit of a watershed moment in the way we look at our economy and its prospects. You could call it pessimism; I call it a realistic view of the end of the perpetual growth machine. I believe that there have always been limits to our ability to grow the economy endlessly; this is starting to become apparent to more, and I consider that progress.
For example, I recommend reading a provocative article by Andrew Sullivan in the Daily Beast on the subject. Sullivan doesn't really have much of a coherent view of the world (he's veered from Trotskyism to neocon and back, was a fervent Obama supporter in '08 and a persistent critic recently), but he does still have the ability to think creatively and write stylishly.
I think it is time for us to be a lot less vainglorious about our domestic economy, and a little more cognizant (and even proud) of the fact that the American economy is just a part--a very sizable part--of an integrated global economy. Americans ascribe much more influence over our economy to the federal government than it has--President Obama can do very little about unemployment by himself (though, by contrast, the Executive has a great deal of ability to control foreign and military affairs on its own), Congress is no better, and the Fed is a creature created by, and acting for, the banks and their creditors.
Obama's policies have actually been very business-friendly; this stuff about businesses requiring "certainty" to hire is nonsense--businesses always have to invest in a climate of uncertainty; they just see no necessity to invest, and especially, not in hiring in America. That is largely because there is a surplus of cheap labor all over the world. Simply put, enterprises do not need to employ all able-bodied Americans who want to work in order to produce all the goods and services we need--not even close.
There is little solution for the jobs problem in the middle-to-long term, except to restructure our economy so that it can survive and thrive with less full-time employment. That means making it possible for individuals or families to live on part-time work, and in particular it means inexpensive catastrophic health care insurance, convenient mass transit, and affordable housing.
In terms of the latter, I think there is something quite significant that we could do in these days to help get our domestic economy back on a track towards health. A public/private partnership to rescue our housing from vast foreclosure and decay could restore home values and the construction industry, two huge issues in the current doldrums. When banks can show legitimate ownership of the property they have confiscated, government-backed enterprise can help restore that housing; in return, the banks need to contribute to the restoration of the housing they have taken without proper documentation (numbering in the millions) and to the generous refinancing of those that they would seek to take with similarly improper documentation. I am certain the banks would sign up, if the government--and I mean the Administration, with backing from both parties--were to offer. If they did not, they should be subjected to harsh justice which would wipe out much of their largely-undeserved windfall profits since the 2008-09 crash.
Finally, I advocate some form of incentives to hire for small, private enterprises. Our tax code is a mess, full of old, outdated, and ineffective loopholes, but I don't advocate a flat tax: taxation can be a valid form of public policy, properly applied. With our debt problems, it is one of the few methods left to government to try to improve the job situation.