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Debt ceiling talks: dysfunctional political class on display

There are two economic crises roiling the markets: the Eurozone rescue and the US debt ceiling negotiations. Although ostensibly economic in nature, both are essentially political crises as well. Of the two, it is more understandable why the European nations face difficulties: the Eurozone is a monetary union, not a fiscal or political union, and there are the interests of many countries to take into account. The US crisis, in contrast, is largely a self-inflicted one.

The news today is that talks broke down acrimonously between President Obama and John Boehner, the Republican house majority leader. "Deep pessimism had settled over Washington on Friday" according to The New York Times. If the US congress cannot agree to raise the debt ceiling by August 2nd the US government will, for the first time in its history, default and will not be able to pay its bills. Such a result would be likely to have a widely damaging effect on financial markets, and could send the economy back into recession. As August 2nd will arrive in about a week, the negotiations are likely to go down to the wire, and there is an increasing chance that they will fail.

An aggregate limit or ceiling on the amount of debt that the US federal government can take on can be traced back to the Public Order Acts of 1939 and 1941. Since 1979, it has been incorporated into the agreed budget. That makes sense, since the aggregate debt is implied by the agreement on spending and revenue contained in the budget. But this past spring the Republicans in Congress did not accept including the passage of the debt ceiling as part of the budget agreement, and they are now using the occasion to try to obtain more spending cuts. So this is situation that would not normally arise.

The question is, why are the Republicans being so intransigent? The answer is, because cutting spending is now at the core of the party's new, post-2008 identity. The loss of both the White House and congress to the Democrats in 2008 was not just a blow in electoral terms to the Republicans; it also led to Republicans to question what they stood for. The George W. Bush admininstration focused on anti-terrorism and pursuing the Iraq War; in fiscal matters, Bush and the Republicans slashed taxes, spent billions on the wars in Iraq and Afghanistan and turned a budget surplus into a deficit. In the disarray following 2008, the Republicans were adrift. Along came a small, rag-tag group that became known as the Tea Party, which claimed that the Republicans had lost their way and abandoned what made them great during the Reagan years - a focus on small government. This was entirely mythical, as Reagan both increased spending and deficits.

In retrospect, it is quite amazing that a major party would latch on to the ideas of relatively few protesters. But that's what happened. It's not that the Tea Party grew in strength: for example, despite constant references to the Tea Partiers among the House Republican freshmen elected in the 2010 midterms, actually relatively very few were explicitly Tea Party-backed. What's happened is that the Republicans - even many of the long-timers - have incorporated Tea Party ideology.

Most importantly, the Republican obsession with deficits and debts is not about those topics per se: there is no deficit problem in the short to medium term. The immediate growth in deficits is primarily due a reduction in revenues due to the recession and the Bush tax cuts; and, to a much lesser extent, a temporary increase in spending related to dealing with the recession (such as the stimulus and additional benefits). In the longer term, the rising costs from spending on health (Medicare, Medicaid) and social security will cause problems if not addressed, but they are not burning issues that require immediate attention.

To put it another way, the US is not drowning in a sea of debt due to Obama, as Republicans claim. Instead, their focus on debt is really a way of trying to build political support on the back of fear and anxiety about US economic decline. The debt is just a symbol of worries. 

It is also a way of putting the Democrats on the defensive. Republicans have been successful in using this approach, as it has now become mainstream Democratic Party opinion - from Obama on down - that deficits are an urgent matter, requiring severe cuts in spending. Indeed, Obama has reportedly offer trillions in spending reductions during the negotiations.

That the political class is now so focused on debt shows how removed their are from people's concerns. A recent CBS News/New York Times poll found that only 7 percent thought that deficits were the main problem Americans face; the top response was the economy and jobs, cited by 53 percent.

It was remarkable how far the Republicans have moved. A revealing indication was provided just last week, when Boehner brought a deal he reached with Obama to fellow Republicans in the house, which combined massive spending reductions with some revenue-generating measures, including some tax increases. For Boehner to go as far as to present the deal, he would have to be confident of getting majority support. In the event, however, he was shot down. It appears that even Boehner did not realize the extent to which his party members in the house had become intransigent, and it showed him to be out of touch.

While the debt ceiling issue helps to consolidate the Republicans' small base, it really is backfiring for them politically. A poll earlier this week from CBS News found that 71 percent of Americans disapprove of the Republicans' handling of the debt ceiling negotations. Even a majority of Republican party affiliates are opposed to them. Democrats do not fare well either - 58 percent disapprove of them as well. If the so-called "unthinkable" happens and there is no agreement, it is pretty clear that congress as a whole will be blamed, but more will pin the problem on the Republicans rather than the Democrats.

This is an unnecessary debate over a debt level that was already implied by the budget agreement, and over an issue that should not be considered an immediate priority. The American people should not have been subjected to this bad political theatre. Default or no default, the American political class has already shown itself to be dysfunctional and out of touch.

If anything, the US political class has caught a break from all the attention on Greece and the Eurozone. Their luck may not last long.

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