It is worth returning briefly to the agreement on the debt ceiling between U.S. President Barack Obama and Congress – and especially with the Republican leaders – which was clinched on July 31. Many political, economic, and social questions still remain unanswered, at least for the time being.
One has to stress at the outset that a significant fiscal disaster – a financial default by the world's largest economy – was only narrowly – at the last minute – avoided by the U.S. government.
It is also important to note that the agreement can be counted as a clear triumph for the Republican Party, or at least a tactical victory. In retrospect, it is clear that an hard line fringe of the Republican majority in the House of Representatives - the so called Tea Party - was attempting to hijack the U.S. economy (if not the whole world economy). At least it appeared to hold it hostage and threatened to finish it off, in the event if the Tea Party ideological agenda was not followed to (concretely, the dismantling of the state and various other checks and balances). Such actions came as a surprise to only a few. Conditions had been established where the Republican leadership has basically allowed the Tea Party to indulge in the methods of fiscal terrorism by giving it a free hand to make such maneuvers.
As for Obama, if he somehow managed to “free-the-hostages,” this was only because he was left with no choice but to negotiate with the kidnappers – which effectively justified their methods.
The agreement is disappointing in many respects.
The deal reached is basically an austerity plan which is likely to end government programs which mostly benefit the disadvantaged and most vulnerable, women, children and the elderly. The agreement will remove over ten years (between 2012 and 2021) $917 billion of what is referred to in financial doublespeak as “discretionary spending” – that part of the budget whose level of funding is determined on a yearly basis. Now ceilings will be set for various budgetary items which must not be exceeded.
However, many social protection programs - as well as military spending - are funded from this portion of the federal budget. At this point the agreement stipulates a “firewall” between welfare and defense spending which will make sure that one is not cut at the expense of the other. However, this mechanism will only be introduced in two years. Many fear that military spending will therefore be largely preserved and that any savings will be pulled from budget allocation for social protection. The program most likely to be affected are, among others, family planning, federal student grants, the Supplemental Nutrition Assistance Program (SNAP), food allowances for poor families (formerly known as the "food stamps" program), energy benefits, subsidies for housing, day care centers, etc.
The threat to the social protection safety net does not stop here. One only needs to recall that the flagship clause of the agreement is to raise the debt ceiling, in exchange for subsequent spending cuts in two stages. This means that a solution has not been found to the financial problems but things are being held in abeyance, as Congress must approve a second increase in the ceiling by the end of the year, and thus more eventual budget reductions. Obama and the Republican leadership have decided to link the increase in the debt ceiling to budget cuts which have the potential to come into effect automatically. When and if a bipartisan legislative committee fails to reach an agreement on reductions of approximately $1.5 trillion, the debt ceiling will have to be increased again to a much higher level. This will be done in exchange for a series of new cuts, including those automatically applying to discretionary and entitlement spending programs.
While it is true that Obama insisted that military spending be included (to encourage the Republicans on the bipartisan committee to have no choice but to conclude a preliminary agreement), it is also true that, even with Obama giving in on many fronts, some social measures will be protected (i.e., not at risk of reduction), including those which form part of the “compulsory expenditures” whose funding is steadily increasing, rather than those which must be announced and quantified every year. Among the measures protected for the moment we can count Social Security (federal retirement insurance) and Medicare (health insurance for seniors and the disabled). The fact is that this new “round” of cuts will undoubtedly be more severe for the average American than the latest, as deciding what cuts will be made will be based on a legislative committee or under the automatic trigger mechanism.
It is not just the threat of the reduction and loss of social protection which is a problem. The crux of the issue is that the Republicans have managed in a general way to impose their own vision of the world economic order. The agreement stipulates a reduction in public spending of $2.5 “trillion” over ten years ... with no tax increases. This comes at a time when the wealthiest Americans are paying less tax than at any time since the 1920s. Now the system’s political leaders – with the endorsement of Barack Obama – are reducing the deficit solely by cutting spending. The agreement is not only one budgetary measure among others, but one encased in a political and social project focusing on the elimination of governmental and public services.
Most economists highlight the fact that the agreement concluded is fundamentally an “anti-stimulus package.” At a time when the U.S. economy is on the edge of a second recession, the agreement is one to reduce costs, though this runs the inherent risk of further slowing the American economy. As noted by economist Paul Krugman, “those demanding spending cuts now are like medieval doctors who treated the sick by bleeding them, and thereby made them even sicker.”
In the final analysis, it is very unlikely that the agreement will ever find a solution to the problems it is supposed to solve, i.e. the budget deficit and the public debt crisis. The economic slowdown it will create will result in a further drop in state revenues, and these budget shortfalls will only increase social problems, especially those which state and city government s, centrally funded, are now burdened with.
The agreement between Obama and the Republicans will be costly for many Americans. However, it must not be forgotten that this is primarily a major political defeat for the Democrats. Without a controlling majority in Congress, the Republicans have still succeeded in imposing their policy on a Democratic President and Senate. Not only have they been successful on this level, they but have won in another way. When things start to go wrong with the program, the Republicans will be then totally correct in pointing out that it was the Democrats who were the actual co-authors of the agreement and that they should thus share the blame for it. Above all, the Republicans have learned a very important lesson for every hostage-taker: that victims are willing to negotiate and even to give into ransom demands if they are not thinking of the consequences.
The question remains whether this victory is a tactical or strategic one. If the anti-government discourse of the Tea Party is in tune with the mood of many Americans, specific measures - an absolute no to any tax increases, the partial privatization of programs such as the popular Social Security – will have to be taken. The Republicans’ ideological tension during the crisis may however have tainted all that remained of their reputation as the party of economic responsibility. The only thing Barack Obama has left in his hands – and it’s not a trivial one – is the card of moderation, which could be played against the extremis of his opponents. Unfortunately, however, neither he nor the Democratic Party appears capable of offering any real alternative to the new crisis the agreement is most likely to bring about.
Richard Rousseau is Associate Professor and Chairman of the Department of Political Science and International Relations at Khazar University in Baku, Azerbaijan and a contributor to Global Brief, World Affairs in the 21st Century (www.globalbrief.ca) and to The Jamestown Foundation.