At a moment of renewed financial market turmoil, a historic downgrade of US government debt and gathering signs that the recovery has stalled, the capacity of Washington to act with deliberation has seemingly collapsed. This convergence is no accident. Washington’s performance in recent months – reaching its nadir in the phoney resolution of the debt-ceiling fiasco – is one reason why confidence is so depressed. Can this circle of anxiety and incapacity be broken? Yes. Bad as the position may seem, it is not hopeless.
In a way it will be puzzling if the S&P downgrade–despite all the blather about its historic significance–changes anything at all. Certainly, the news should not have come as a surprise: the agency has been talking about it for weeks and the rating for US government debt had been under formal negative review before the announcement. If there is a surprise, it is mainly that the agency had the nerve to go through with it.
More fundamentally, what new information did the downgrade and the analysis supporting it provide? None. After their performance of the past few years, rating agency analysts have, or should have, little credibility in any case. Reports of the initial $2 trillion misunderstanding in S&P’s examination of the Treasury’s books (they used the wrong CBO baseline) lend a tragicomic note, and run their reputational capital down even further. And all this would be true even if US Treasuries were arcane instruments that few investors could afford to monitor carefully, forcing them to rely on the agencies for lack of anything better. In fact, of course, US Treasuries are the most widely and intensely analyzed obligations on the planet. What does S&P know about them that you and I don’t? The informational content of the downgrade is precisely zero.
The global beating shares just took had many causes, no doubt. Still disgusted by the US debt-ceiling fiasco, I am apt to give that masterclass in malice and incompetence more of the blame than it really deserves: the talk in markets today was more about signs of stalling growth in the US and mounting anxieties over Europe than about US fiscal impotence. Still, it can’t help to know at such a time that the US government is clueless and paralysed–or that any US fiscal policies one might recommend (extended payroll-tax relief and unemployment benefits) would have to be taken up by the US Congress. Once it gets back from vacation.
That leaves the Fed and quantitative easing. Weeks ago I said I thought the case for QE3 was strong. At that point, there seemed little chance of it: inflation hawks on the FOMC were asserting themselves. The bad growth numbers for the first half surely ought to be changing their minds. QE3 looks like necessary insurance against a second dip and possible deflation. Now, unlike then, you can accept most of the inflation hawks’ way of thinking and still be in favour of QE3. The facts have changed, sir.
Perhaps today’s financial-market news has put you in mind of the need to square accounts with your Maker. Or perhaps not. In any case, I warmly recommend Religion in America: A Political History by Denis Lacorne. The author is French and his book, as I explain in this FT review, is a dual history. Its main theme is religion’s role in American politics and culture, but Lacorne is also very interested in the way the French have considered that question over the centuries. Don’t think this makes the book too academic: Lacorne’s approach is illuminating and entertaining. From my review:
The French don’t know whether to find the US admirable or appalling; dementedly religious or godlessly devoted to mammon; a modern secular democracy or a backward Anglo-Protestant theocracy. It was ever thus. Lacorne finds the roots of the confusion in two rival narratives of America’s national identity.
The first comes down from the Enlightenment, the Founding Fathers, and the founding documents of the American project: the Declaration of Independence, the Constitution, and the Federalist Papers. This is the creation story (forgive the expression) of a secular republic that self-consciously overthrew established religion, and built a “wall of separation” between church and state.
The second narrative, which Lacorne calls “Neopuritan”, denies the radical break and sees the American project as “the climax of a continuous progression of freedom starting with the Reformation and culminating with the first New England Puritan colonies”. This is America as the “City upon a Hill” – a biblical phrase used in a sermon by John Winthrop to the first Massachusetts colonists, and co-opted by John F. Kennedy and then by Ronald Reagan more than three centuries later. It sees the American creed as an indissoluble blend of Protestant and republican values.
Then again, Kennedy was a Catholic and Reagan was not religious. Lacorne’s point – and it is surely correct – is that both stories are true. This is what makes America so perplexing, not just to Voltaire and Sartre, but to Americans as well.
It’s a splendid book.
The United States’ fiscal emergency will not be over until a bill to raise the debt ceiling has passed both House and Senate and President Barack Obama has signed it. This can still be done by Tuesday’s deadline. As this column went to press, a deal looked within reach.
Paul Krugman and EJ Dionne agree that too much centrism is what ails the United States. What the country needs is fewer moderates and more people ready to stand firm on principle come what may. (Actually Dionne draws a distinction that eludes me between moderation and centrism–they are not just different but opposed–but let that pass.)
Lacking a Nobel prize, I find this theory odd. If only centrists would come over to the left and deplore Republicans more vigorously, all would be well? Right now, I would be willing to help out–but would this do much to reduce the House Republican majority? If centrist commentators only joined Krugman’s anti-Republican crusade, the country would see its mistake and put things right at the next election? It’s flattering, but surely we feeble soggy centrists have nothing to offer that would improve on the quality of the arguments already put forward by writers such as Krugman, Dionne, and many others. Surely they are refuting conservatism as effectively as anybody can.
House Republicans are dictating US fiscal policy not because centrists have given them a pass, but because voters have given them a majority. This is something that progressives tend not to mention, despite propounding the theory that “elections have consequences” for two years after 2008, and using that theory to justify, for instance, passing a health-care reform that the country was not sure it wanted. In Krugman’s view, of course, 2010 only confirms that more than half the country is evil or stupid. But in that case, what would centrists achieve by taking up arms with progressives? It won’t help. If Krugman is right, the idiots out there just don’t get it. We centrists might as well carry on saying what we think.
My column this week deplored the breakdown in Washington. I was having second thoughts, I said, on my previous optimism about the country’s prospects.
On one side you have the unrivalled energy and ambition of the American worker. On the other you have the unrivalled complacency, self-righteousness and bloody-mindedness of Washington. I never thought I would say this, but I am starting to wonder which will prevail.
Speaking of unrivalled complacency, self-righteousness and bloody-mindedness, you might be interested to read Paul Krugman’s response. He actually blames America’s plight on me, and on moderates like me. What can one say?
By the way, I don’t think that the blame for incapacity in Washington lies equally on both sides, certainly not in the debt-ceiling case. I think previous columns of mine (such as this one) have made that clear. But I do find it funny that Krugman is so appalled by the idea that, if positions were reversed, Democrats would be equally intransigent, and feel entitled to do whatever it took to frustrate what they regarded as a radical GOP agenda. I concede that this prediction on my part might be wrong. But one thing I’m quite certain of is that Krugman would be leading those who would say that the Democrats are not just entitled but morally obliged to stop the evil Republicans by any means necessary, and would be deploring and calling out all those who suggested, ugh, compromise, just as he is now.
If the test was likelihood of swaying the uncommitted, I saw no winner in last night’s broadcast contest. Obama and Boehner were both addressing mainly their own supporters. Neither rose above partisan talking-points.
The “balanced” approach advocated by Obama makes much more sense, though not because taxing corporate jets is a top national priority at the moment. Bearing in mind what is at stake, tirelessly underlining this point is ridiculous. The best thing about the White House’s approach is that it aims to backload the austerity (eg, by extending the payroll-tax cut). The GOP’s biggest mistake is to want to cut spending as much as possible as fast as possible: fiscally speaking, a self-defeating agenda.
So on the substance, Obama has the better plan–but his talk failed to make this clear. Presumably he thinks the argument for gradualism is already lost. Even if it is, though, his comments were odd. Almost in the same breath as “corporate jets” and “millionaires and billionaires”, he endorsed (admittedly without much enthusiasm) the Reid proposal, which includes no extra revenues. It was as though his remarks were written a week ago. Looking at where Congress stands at the moment, Obama’s main theme—we must have revenues as well as spending cuts–was simply beside the point. Congress is no longer even talking about this.
When I moved from Britain in 2005 to live and work in the US, I was a born-again admirer of the American people, the American project and the American system of government. I had no patience with the view that the country was entering its twilight years. I was a militant anti-declinist.
Robert Shiller cautions against concentrating too much on particular thresholds for debt ratios.
The fundamental problem that much of the world faces today is that investors are overreacting to debt-to-GDP ratios, fearful of some magic threshold, and demanding fiscal-austerity programs too soon. They are asking governments to cut expenditure while their economies are still vulnerable. Households are running scared, so they cut expenditures as well, and businesses are being dissuaded from borrowing to finance capital expenditures.
The lesson is simple: We should worry less about debt ratios and thresholds, and more about our inability to see these indicators for the artificial – and often irrelevant – constructs that they are.
The point about too much tightening too soon is especially important. The idea of fixed thresholds–debt is safe just below 90% of GDP and dangerous just above–is artificial and obviously wrong. On the other hand, the US is right to worry a lot about long-term debt projections–not because these cross some magic threshold, but because the ratio is already high by historical standards and is expected to keep on rising indefinitely. This, rather than debt in excess of 90% of GDP, or 110%, or whatever, is what makes the fiscal position unsustainable. There is time to fix the problem, and doing too much too soon will make matters worse. But that does not mean you ignore it.
Still, Shiller’s point is well taken. He is always worth reading.