Arshad Mahmud

Despite debt deal, clouds hang over Obama re-election

August 3, 2011
Photo: Reuters

Photo: Reuters

As you have come to know by now that the United States Congress voted to raise the federal debt limit just hours before the deadline was to expire on Aug 2. Failure to do so would have led to the US treasury running short of cash to pay the nation’s bills.

The vote followed a last-minute agreement reached between the Congressional Republican and Democratic leaders on Sunday night to raise the debt ceiling that includes sharp spending cuts but no new taxes, breaking a partisan impasse that has driven the nation to the brink of a government default. It also brought to an end weeks of high drama that had consumed Washington, rattled global markets, and shaken confidence in the American political system at home and abroad.

The agreement would raise the $14.3 trillion debt limit in two stages by as much as $2.4 trillion. On the surface, it represents a victory for Obama, allowing him to avoid another gruelling fight over the debt limit in the heat of the 2012 presidential campaign.

President Obama said the agreement would allow US to avoid default and end the crisis that Washington had imposed. It also ensures that the US will not face this same crisis again in six months, or eight months, or 12 months. And it will begin to lift the cloud of debt and the cloud of uncertainty that hangs over our economy.”

But it is far from clear whether he would have an easy sailing in his re-election bid and recapture the White House in 2013. Many commentators have serious doubts about a positive outcome for Obama, in part because he failed to secure his other top priorities, including fresh measures to revive the flagging recovery and an end to tax breaks for corporations and the wealthy.

In fact, there is a palpable sense of outrage among the liberal Democrats, Obama’s most ardent followers. They believe the President betrayed their trust by capitulating to the Republican blackmailing. So much so that popular late nigh comedian Jay Leno lampooned Obama on his show Monday night mimicking his famous campaign slogan “Yes. We can” to “Yes. We cave”.

By contrast, it was the Republicans, especially the ultra conservative Tea Party faction, which emerged real victorious. They won severe cuts to agency budgets over the next decade and the prospect of deeper cuts to come, delivering on the campaign promises that helped them gain control of the House in 2010 Congressional elections.

The agreement would also cut agency spending by roughly $900 billion over the next decade and create a new legislative committee to come up with at least $1.2 trillion in additional savings by the end of this year. For days, the chief obstacle to a deal was the design of a mechanism to force the committee to act — or to make sure spending cuts were adopted if the committee failed.

In the end, negotiators settled on a trigger that would force automatic across-the-board cuts of $1.2 trillion to agency budgets over the next decade, split half and half between domestic programs and defence. Programs for the poor, including Medicaid and Social Security, would be exempted. But Medicare payments to providers could be hit.

It is this deep spending cuts that have most well-know economists worried about the future of the American economy. They contend that cutting spending in any form in a recession-like situation would further depress the economy instead of reviving it.

Paul Kruggman, a Nobel laureate and Prince University economist, said the debt deal was a disaster and not just for Obama and his party. In his regular column in the New York Times on Monday, he said the deal would damage an already depressed economy, it would probably make America’s long-run deficit problem worse, not better; and most important, by demonstrating that raw extortion works and carries no political cost, it would take America a long way down the road to banana-republic status.

“The worst thing you can do in these circumstances is slash government spending, since that will depress the economy even further. Pay no attention to those who invoke the confidence fairy, claiming that tough action on the budget will reassure businesses and consumers, leading them to spend more. It doesn’t work that way, a fact confirmed by many studies of the historical record.”

He argued that slashing spending while the economy is depressed won’t even help the budget situation much, and might well make it worse. On one side, interest rates on federal borrowing are currently very low, so spending cuts now will do little to reduce future interest costs. On the other side, making the economy weaker now will also hurt its long-run prospects, which will in turn reduce future revenue.

A weak domestic economy is most likely to have a profound impact on the global scenario as well. Even though the debt deal saved the United States, at least for now, from being downgraded by the rating agencies, the political histrionics that preceded the deal have eroded America’s already diminishing aura as the world’s economic haven and the sole country with the power to lead the rest of the world out of financial crisis and recession.

It has chipped away at the global authority of President Obama, who was celebrated abroad when he came to office as a man who would end an era of American unilateralism. Now the topic of discussion in other capitals is whether the Age of Obama is giving way to an Age of Austerity, one that will inevitably reduce America’s influence internationally.

Christine Lagard, the new head of the International Monetary Fund, seemed to give voice to that concern when she told CNN that in the past there was always “a positive bias towards the United States of America, towards Treasury bills.” The events of the past few weeks, she said delicately, are “probably chipping into that very positive bias.”

Jeffrey Garten, a professor at the Yale School of Management and the author of several books about American power in the era of globalisation, said the challenge for the United States will not end with this crisis.

“Even if the deal passes muster with the credit rating agencies, there is still a huge problem,” he told the New York Times.

“The problem is that we need both a fiscal strategy and a growth strategy,” he said. “And what you hear around the world is that no one is convinced we do — that we have a pathway to making the debt sustainable and to dealing with everything from our infrastructure to our education system. It seems obvious to everyone that we haven’t done anything, but veer around to avoid catastrophe.”

Warnings about American decline are nothing new of course — they have permeated American politics since Vietnam, save for a brief period in the mid-1990s after the fall of the Soviet Union, when America briefly enjoyed its status as the world’s only superpower.

While no one is predicting an imminent demise of America as a super power as long as it can maintain its vast military, but many are asking whether it would be able to sustain its hard power in the face of ballooning national debt, which now stands over $14.5 trillion and counting.

Even senior military leaders are less sanguine. Admiral Mike Mullen, the departing chairman of the Joint Chiefs of Staff, has publicly said that “the most significant threat to our national security is our debt.”

And with the American economy showing no immediate sings of a long-term recovery, the country’s national debt is simply going to go up and up.

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Arshad Mahmud is a Washington Correspondent for bdnews24.com.

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3 Responses to “ Despite debt deal, clouds hang over Obama re-election ”

  1. Golam Arshad on August 6, 2011 at 2:34 pm

    Arshad: It is most likely President Obama will be re-elected.

  2. Dilruba Azim on August 4, 2011 at 10:03 am

    I apologise humbly for my words but I cannot but point out that the article has been written mostly by taking different paragraphs from different reports.

    There is nothing new in here, all this has been reported in the international media many many times, and the writer has simply utilised the net to post such a writing as his own.

  3. Golam Arshad on August 4, 2011 at 12:02 am

    Arshad: The reverse swing will benefit the incumbent, no matter what! He is whisking away to the winning post, dazzled the crowd on the far right, chipping away the fangs of ideologues of the far left. As the American economy, coiling out from the frizzled crisis, sooner or later it will set the clock of momentum in breaking free recession to succession. The Republicans should return to basics, reach out to the minorities and delve in running the country from the centre of the power jiggle. Good write though! Keep up the good work!!

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