The rocky road to US reform

And… breathe. The craziness in the US Congress has abated, for now at least. The debt ceiling issue has technically only been deferred, not solved, even though senior Republicans have indicated that they don’t intend to fight a second round, the first having been so damaging to their party’s standing.

But now that the moment has passed and catastrophe has been avoided, what can be said? What are the consequences for the US of this economic near-death experience? The ratings agency Fitch indicated that it had put the United States’ debt on “negative watch,” and the Chinese ratings agency Dagong Credit, downgraded US debt from A to A minus.

But as one senior analyst told the Prospector, “I'm not sure anyone gives a stuffed monkey about Fitch, let alone a Chinese rating agency”.

Much more serious is the effect that this will have on trust—international investors will see the sclerotic goings on of recent weeks and wonder whether the US is a safe bet for their money. There may be a moment of hesitation, but there is no real alternative to the US dollar—its reserve status is not in question. Comments by Chinese officials about the “de-Americanisation,” of the global economic system, are excessive, in that the dollar will retain its core position within the global economy. However, the debt ceiling debacle will certainly make investors more open to investing in non-dollar assets and this may well drive up the cost of borrowing for the US government.

But America’s threatened default was of an unusual kind. Unlike Argentina in the 1990s, or Russia’s default in 1998, the US was never unable to pay its debts. It has always been understood that the US was able to meet its obligations, meaning that the crisis was one of “won’t pay” not “can’t pay”.

The question now is whether the US is capable of political reform. Much is made of the checks and balances that are built into the American Congressional system, and these are held up as an integral part of the US method of government. But it is a feature that now looks terribly out of date. The Parliamentary spirit that animated the great nineteenth century debates in Congress, as during the Reconstruction period, has gone. The era in which conservative Democrats could work with Republicans, in which Lyndon Johnson could talk terms with ultra-conservative Senate Republicans such as Richard Russell of Georgia and Harry Bird of Virginia—and not only talk terms but do deals with them—is also gone.

Now, the very notion of discursive, conciliatory debate, the essence of the Parliamentary ideal, is vanished from the Capitol, swept from the Hill by a torrent of vested interests, crass ideology and excessive campaign finance. The notion of checks and balances has been replaced with the practice of “fingers in ears” which has in turn come close to delivering the most shattering political failure imaginable.

America’s path to economic stability is long and runs through Congress. Unless campaign finance laws are reformed and more moderate Republican voices can suppress the party’s insurgent radical wing, then that road will become ever longer and America’s long-term outlook will surely darken.