Some have suggested that all the drama over the debt ceiling will be justified by the long-term benefit of forcing America to embark on medium-term plan for deficit reduction. Yet at this point, the benefits of a deal will be offset by how it was achieved.
I am confident that Washington will find a way, albeit very awkwardly, to compromise on a mini-deal, rather than a grand bargain, that raises the debt ceiling and avoids a debt default. They may even manage to evade a downgrade of the nation’s vaunted AAA credit rating, though this is much more uncertain.
But fiscal solvency is not merely a function of deficits and debt, interest rates and the profile of maturities. It is also highly sensitive to economic growth: The lower an economy’s growth rate, the higher a budget deficit is likely to be, the larger the debt accumulation, and the greater the need for yet another round of fiscal austerity to safeguard solvency. All are components of the much-feared debt trap.
The very vocal and visible recent bickering is causing more than transitory damage to U.S. growth and employment prospects. Remember, this debt crisis is not the result of an inability to pay; nor is it being forced on the United States by hesitant creditors. Rather, political posturing on what had been a relatively obscure and non-threatening legislative requirement — Congress gets to control the nation’s spending and taxes through other means each year — the debate on the debt ceiling has managed to bring forward in a very dramatic and disorderly manner fiscal challenges that lie down the road.
In this political mess, already-weak business and consumer confidence is being dealt a further blow. Companies with massive cash holdings now have yet another excuse to stay on the sidelines. Foreigners have been stunned by the political dysfunctionality of the country in which they have placed factories, whose financial instruments they buy with their savings and whose money serves as the global reserve currency.
It is a matter of days before analysts engage in yet another round of unfavorable revisions to their outlook for the U.S. economy. Already muted growth projections will be cut further. On the back of a weak second quarter, the much-hoped-for robust recovery will again be postponed. As the already subdued job-creation rate is undermined and the average duration of joblessness is lengthened, the unemployment crisis will deepen.
It is far from certain that, in forcing spending cuts, a resolution to the debt-ceiling debacle will materially improve the U.S. economic outlook. Indeed, because of the standoff’s detrimental impact on growth and employment, it could tip the United States closer to the very debt trap that reformers are seeking to prevent.
Yet all is not necessarily lost.
Washington’s squabbles have touched a national nerve. Americans are shocked by politicians’ inability to compromise and the absence of a common analysis. An increasing number of citizens are expressing deep frustration with our political process. Their main message is simple: The country deserves better, and it desperately needs more responsible economic governance.
When the debt ceiling is finally increased, our political leaders should lose no time in trying to channel this surge of popular activism into a force to improve prospects for the economy. This should be done through a more informed national dialogue about the structural impediments to growth and jobs. The president should chair a committee representing the two major political parties with members from labor, business and academia — a new “Gang of Six.” This panel should have a broader mandate than the president’s fiscal commission and the Senate Gang of Six, and it should be better hard-wired into the decision-making process.
Given how close we are to a self-inflicted financial meltdown, I suspect that there would be broad support for such an approach. In addition to a more coherent fiscal discussion, the explicit goal would be to produce coordinated steps toward improved functioning of the housing and labor markets, enhanced job retraining and retooling, strengthening education, overcoming uneven bank lending, and rebuilding critical infrastructure through thoughtful public-private partnerships. By working for a productive national dialogue, America would finally develop and communicate a clear medium-term framework to reverse the weakening of the U.S. economy and the erosion in its global standing.
President Obama was right when he said in January that America faces a “Sputnik moment.” But the scope of what is needed today goes well beyond what the president envisaged at the time of his State of the Union speech.
Our national leaders must find the courage and wisdom to overcome a highly damaging standoff on the debt ceiling. And the next step is equally important: to use the current political shambles as a catalyst for a renewed sense of common purpose and a better economic future. If this moment is not seized skillfully, the bickering of recent weeks will pale in comparison to what lies ahead as economic growth stalls further, unemployment increases, the burdens of debt and deficit worsen, income and wealth inequalities intensify, and foreigners reassess their confidence in the U.S. economy.
The writer is chief executive and co-chief investment officer of the investment management firm Pimco.