Tony Sobrado writing for thegrapevine.com
In any political game of poker all players want an ace up their sleeve. A bargaining card that dramatically reweighs the scales in their favour. The limit of the U.S debt ceiling has to be one of the most significant, if not dangerous, in recent times.
With such a weapon at their disposal who wouldn’t employ such a manipulative arsenal. The Republicans, dominant in the House of Representatives, blended their strategic demands with political theatre: Slowly burning the middle night oil, incrementally rejecting proposals, adding new stipulations and dragging the saga ever closer to the deadline.
In an astute way this served two purposes for the Republican’s agenda. Primarily it brought acute focus to an already polemic issue. In turn this highlighted the incompetency of Obama’s rule, illustrating that the Democrats had failed in both leadership and economic competence.
At the heart of the negotiations, both parties’ political agendas were overtly on show. The possibility that the world’s long standing economic power house would default on its debt was never an option, even for hard-line Tea Party sadists who would like nothing more than to illustrate the pit-falls of Big Government and its subsequent spending. What was evident in the political shoot out was the Republicans bargaining prowess, holding strong playing cards as a consequence of their majority in the House of Representatives and thus cancelling out the Democrats control of the Senate.
The republicans played the part of subtle conductor perfectly. In order to give the Democrats the raised debt ceiling they required, the Republicans would use their own legislative muscle to ensure that this eventuality came at a heavy price. In order to raise the borrowing limit by 2 trillion dollars, the demands made by the republicans compose of a cut of 2.4tr from the deficit over the next ten years with a simultaneous freeze on the taxes that cover the richest in society.
This plays perfectly into the Republicans’ hands. It constrains Obama ability to enact the “wheels of change”; a political PR machine that nevertheless was a corner stone of the social welfare policies that motivated a substantial proportion of his mandate. At the same time it allows the Republicans to pander to their grass roots supporters, where the issues of taxation and the curtailment of Government expenditure are the magnum opus.
This could signal a watershed moment in American politics. If we are talking about legitimate mandates then the Republican’s control of the House comes as a consequence of popular vote. With U.S unemployment the highest for a quarter of a century coupled with a staggering budget deficit, mainstream America is not ready for social interventionist prgrammes based on a European style of Governance.
As austerity is currently the international norm, Americans will have to stick to what they know best – the Chicago School of Economics’ model of Free market policies as the only efficient means of Economic stability. This means stimulating economic growth and increasing GDP through lower taxes that increase disposable income. The budget deficit is then controlled by reducing Government expenditure – the antithesis of Keynesian demand side policies.
So what are the political and economic consequences of such confrontational discussions between the Republicans and the Democrats over the raised debt ceiling? Firstly although the Democrats have agreed to cut 2.5 trillion in expenditure over the next decade, this will be done gradually – no too much too soon! I’m sure that Miliband and Balls are secretly thinking “I told you so” aimed in the direction of Cameron and Osborne.
However the economic anxieties that encapsulate the debt ceiling probably mean that the cuts will be both deeper and sooner. This is because Congress is still to meet in December to decide how to cut an additional 1.5 trillion dollars from the deficit. This future discussion is likely to be shaped considerably by the impact America’s debt level has had on its financial reputation. Standard & Poor’s has downgraded American status form triple A to double A plus. Apart from sounding like the size of batteries what this entails for the U.S is that it will be cost them more in interest rates repayment when borrowing, which currently sits at 250 billion a year in interest payments.
Then there is the potential social and economic fallout of reduced Government expenditure, especially in areas of health and welfare. This may create pockets of entrapped poverty where certain social groups that are unemployed have their problems compounded by welfare cuts and the freezing out of medical coverage. This will lead to a demoralising interlocking cycle. These are the concerns faced by progressive Democrats but Republicans have their own worries Too. These largely concern cuts in the national defense budget and general Government debt that is now over 15 trillion dollars.
To add to the woes, there are the further economic problems regarding the best ways to stimulate the economy. Again through either relaxing taxation or increasing Government spending in the short term. This is a fine and meticulous balance act; and seeing that the U.S has opted for the former fears of a double dip recession abound.
Perhaps most tellingly, for the future, in geo political and economic terms is a shift in the balance of power. China has, for several years, been waiting in the wings. It is the single largest foreign holder of U.S Treasuries, already owning 1.2 trillion which helped to fund the previous U.S bailout. This came as a slight embarrassment for the Americans and a gain in International prestige and influence for the Chinese in the Asian domain of power. It is not surprising that China have seized the opportunity, calling this seek for a new and secure global reserve currency which signals their own dismay at the risk posed by America’s economic instability.
With increasingly volatile stock markets around the world and European leaders uncertain about Eurozone bailouts, the remainder of 2011 will see balanced budgets and interest rates taking an immediate precedence of economic growth. Potentially this could dramatically alter the political landscape of tomorrow.