x Abu Dhabi, UAEMonday 24 July 2017

US debt crisis is only postponed based on politics

The debt-ceiling deal in Washington is a stopgap cobbled together, in a slipshod process, for purposes of political expediency. The underlying problem persists.

The Congressional melodrama is over, for now, and in Washington they are tallying up winners and losers, in the insiders' calculus of electoral opportunism.

The rest of the world, meanwhile, can only shake its head in dismay that matters so crucial to the global economy must be decided through such a slipshod process.

Despite the last-minute agreement on a debt-control plan, the AAA credit rating of the United States of America may still be reduced. This raises some serious questions about the role and influence of the rating agencies, and their apparent blindness to the enormous assets which can be put against the debts on Uncle Sam's balance sheet.

No matter what the rating agencies think, however, it is clear that the pact agreed upon in Washington at almost the last minute of this synthetic "crisis" owed more to political expediency than to fiscal rectitude or long-term planning. President Barack Obama wanted a deal that would endure past the 2012 presidential election date, now just 15 months away; Republicans in Congress wanted, for their own electoral purposes, to prevent even the slightest tax increase.

Both sides got their way, by agreeing to a convoluted deal which pretends to tie the government's hands for a decade. We say "pretends" because what Congress has done, Congress can undo. In the last 25 years two comparable efforts to impose medium-term spending controls were trampled underfoot as short-term priorities arose.

Even if this pact should actually take effect, it is at best a partial solution to a problem which demands a convincing resolution. Before the showdown, the conventional wisdom was that $4 trillion (Dh14.7 trillion) in cuts would be needed just to start the federal government back towards balance-sheet respectability; this deal provides a maximum of $2.4 trillion. Even that figure represents not spending cuts, but merely reductions in planned spending increases over time.

This week's Washington agreement, then, does not come close to solving the problem of deficit and debt. Both will be bigger, not smaller, on election day next year. The fundamental problems have merely been swept under the rug, so that politicians of both parties can get on with the business of wooing the voters for 2012.