After America’s credit downgrading and the spectacle of deadlocked Congress, Alex Spillius in Washington argues that the US still has the power to solve its problems.
Did the American empire end last week? It is tempting to say yes.
Standard & Poor’s decision to remove the world’s economic superpower from its list of risk-free borrowers was a somehow fitting climax to a sorry chapter that exposed Washington’s paralysis for all to see.
As much a political critique as a financial judgment, S&P’s statement condemned the “effectiveness, stability and predictability of American policymaking”, and indicted the gridlock that made a credible deficit-reduction deal impossible.
The agency had agreed with the Obama administration that $4 trillion needed to be saved from the $14.3 trillion debt over ten years. But the 11th hour deal to raise the borrowing limit and reduce the deficit that pulled the US back from the brink of a first ever default saved “only” a minimum of $2.1 trillion.
Mr Obama has yet to comment, and is spending the weekend at Camp David. The Treasury Department’s only response was to accuse the rating agency of bad mathematics, saying they got their sums on deficit reduction over ten years wrong by $2 trillion, whatever that means.
The agency stated plainly that it did not trust Congress to make the agreed upon two-stage process to reach the savings work.
The deal agreed debt reductions of $900 billion, but the rest will have to be thrashed out by a special committee of Congress in the autumn, when the arguments of the last two months will be revisited all over again, causing more uncertainty for investors.
The world is one collapsed southern European economy away from disaster and crying out for American leadership, and Washington gave us another committee.
Republican deficit hawks in Washington – whom S&P singled out for failing to tolerate revenue-raising of any kind – like to disdain the mismanaged Mediterranean states as the PIGS – Portugal, Italy, Greece and Spain. But given the way their own country is coming apart at the seams, it could be called the Untied States.
Nearly one in six Americans is living on government food subsidies averaging $282 a month per family. The official unemployment rate is 9.1 per cent, but is much higher if the long-term jobless are included.
House prices have collapsed by 33 percent from the market’s peak, more than the slide during the Great Depression. Despite Mr Obama’s best efforts at stimulus spending, American infrastructure was awarded a grade of D by the American Society of Civil Engineers, with one in five bridges classified as “structurally deficient”.
Larry Summers, until recently leader of Mr Obama’s economic team, puts the odds of the US economy returning to official recession (it still feels like recession in most places) at one in three. Others would call that optimistic.
The debate of the past few weeks was so fractious because Americans are scared.
The Tea Party is terrified spending will bring the country to ruin. The Democrats dread that their cherished benefit schemes for the elderly and poor will be cut to pieces.
Underlying both outlooks is foreboding and fear that America’s time as number one is up, that the continuous path of growth that transformed the country from the late 19th century onwards has come to an end.
Middle class wages have been stagnant for 15 years and the housing and credit boom that put some fizz into ordinary lives have dried up. Entrepreneurship, the prized and nation-defining quality, is in a long term decline – the theory is that a deregulated and expanded Wall Street sucked up too much business talent. The BRICs – Brazil, Russia, India and China – loom as a threat to US dominance, which was built on a manufacturing base that is steadily moving overseas.
The country has some major mental adjustments to make. It will have to accept a weaker military – one that doesn’t outspend the rest of the world combined. Americans will have to accept that there are half a billion middle class people around the world who can do a lot of the jobs they can, and think of new ones.
Both people and politicians may have to settle in the long term for being first among equals, rather than towering above the rest.
The America of today has been compared to Britain in 1914 or Rome at the peak of their might, before their rapid falls from supremacy.
Unlike the British however, the Americans have not assumed control of large parts of the world from which they must inevitably retreat. For all their involvement in every foreign policy issue, their global commercial enterprise has few strings attached, while withdrawing from both Iraq and Afghanistan within a few years will be a boon.
The country leads in industries vital to the 21st century and, for all its gloom, remains hard-wired to strive to improve. As the preamble to the US constitution says, the people’s goal is to “form a more perfect union”. There is still nowhere on Earth that compares for creativity, experimentation and drive.
Perhaps S&P’s decision could be the shock that Congress needed. The downgrade may well raise interest rates for consumers, which could make both sides think again about being so intransigent and finally bring the compromise so clearly needed and which has been a hallmark of the country’s legislative history.
As they resume battle after their summer break, Democrats and Republicans should recall the words of Bill Clinton, who said: “There is nothing wrong with America that cannot be cured by what is right with America.”