I give you points one and two but I have my doubts about the third. In my view (which is - full disclosure - a European one), there is something deeply disturbing about a political environment which apparently provides members of Congress with an incentive to sign a pledge (!) not to raise taxes no matter what. It's like playing chicken and throwing the steering wheel out of the window. It seems like the growing influence of the tea party together with a two-party political system provides enough incentive (well, probably a powerful lobby plays its role, too) to renounce every notion of compromise.

So, in my opinion, your article lacks an explanation for why the positive incentives outweigh the negative ones (simply stating that recent electoral victories on a tea party platform are overrated does is not an explanation but a claim). I do not deny that positive incentives for non-craziness exist in democracies but I do not see - at least judging from your post - why they should be stronger than the powerful incentives for craziness that exist in US politics today.

I hope you're right about the coming election being an incentive to act reasonably. However, to the extent that most Congressional seats have become predictably safe in general elections (owing to gerrymandering or what-have-you), the only real electoral threat to many sitting rmembers is a primary challenge by a "true believer." In such a situation, the incentive is to be ideologically rigid rather than to appeal ot the uncommitted average voter.

Thankyou Professor Drezner. This is the first article I have seen post debt deal, that rationally, and realistically takes stock of our situation. This is not the end of the American experiment, the world just kinda wishes it was.

A cursory look at defense spending won't do.

The Chinese now spend upwards of $100 billion a year on defense in nominal exchange rate terms. But if you believe the US dollar is overvalued by 3-23% as the IMF suggests I have some nice East St. Louis property to sell you.

East St. Louis, IL has a per person GDP three times higher than Shanghai. Anyone who has been to Shanghai will immediately sense that there is something very strange going on here. E. St. Louis is a hell hole - Shanghai has fantastic subways, people drive Audi's and BMW's -- some of the exterior apartments look old and grungy, but once you step inside you find fantastic refurbished 2 and 3 story apartments with all the amenities: hardwood floors, imported Italian marble kitchen table tops, new fridge, washer, dryer, etc. etc. etc. PLUS the inhabitant has very little debt and typically a thriving business, medical practice, etc etc.

Few people really understand what it means that 75% of the demand for US dollars in USD-RMB exchanges comes from Beijing's daily purchase of 1-2 billion dollars of US debt.

What would the exchange rate be if 75% of the demand for dollars were removed? It would probably lose at least 75% of its value (vs. the RMB, not necessarily vs. all currencies). It most likely would fall further as other market actors reacted. It could easily return to the 1981 exchange rate (1 USD = 1.7 RMB) or it could fall further --- 1 RMB = 2, 3, 4, 5 USD.

If 75% of the demand for a product or service vanishes, does the price really only fall 3-23%? (There's considerable intellectual slippage going on here -- IMF or Peterson look to long term equilibrium exchange rates or try to determine what changes are necessary to prevent a complete US economic collapse, which really are somewhat different from what I think the general public's interpretation of the statement: the RMB is overvalued by 25% is thinking of).

At any rate, the counterfactual world in which Beijing doesn't buy 1-2 billion dollars a day, would effectively quadruple or quintuple nominal Chinese defense spending -- making China both the world's largest economy and it's largest military spender. Only if the PRC govt. stops buying US debt will we have a sense for how large the Chinese economy is and how much it spends on defense in a way that is comparable to the USA.

People will be caught off guard because of their inability to accept that the US economy is only 1/2 to 1/3 the size of China's --- today.

If you don't believe this I have a number of nice bungalows in a beautiful wealthy bedroom community across from St. Louis I'd like to sell you.

I wish I could share your trust in the good judgement (I thought of writing "rationality") of voters. My worry is that, in this case, it's precisely politicians who don't act in crazy ways will be punished at the voting booth.

On the other hand, while this episode certainly creates concerns about deadlock as a risk in the US presidential system --which seems suicidal in such critical episodes.. I wonder what's the judgement for European parliamentary systems: such systems seem not to have helped Spain, Italy or Greece from falling into fiscal chaos.

There's a lot of instability right now -- we may even look back at this as a transition period. We're seeing what may be the end of the social welfare state model in Europe, simply because its unsustainability is finally becoming obvious. And any futurist writing about a hopeful US-led, Western-dominated 21st century envisioned a strong Europe at the US's side; so, as Europe (which could be seen as our client states) weakens, so do we.

In this country, we are seeing record levels of discontent with government, and as the rise of the Tea Party (the most vibrant and influential political movement of recent times) attests, this mainly hurts progressives, because a large intrustive federal government is the keystone to the progressive movement.* So, we may also be seeing the first steps of the rolling back of the progressive project (nd, to be fair, this was always unsustainable).

* the smart parts of my post were taken from a WR Mead column..........

The case for self-satisfied complacency is always somewhat redundant, as someone truly confident in his self-satisfied complacency would not feel it necessary to make a case. Unless he had a blog, maybe.

On the other hand, there hasn't been any shortage of commentators (and government officials) reminding us that decisive action prevented the 2007-08 financial crisis from causing a second Great Depression, and that the American military is still second to none in the world despite the Iraq fiasco and the Afghan quagmire. It's all good! -- because of the magic of democracy, and the genius of the American people. And don't forget Butler and Sumner and all the dark times we've come through, the second person plural being here a term of convenience, associating us with Americans who have been dead for more than a century.

I don't mean to mock. Dan makes the important point that elected officials don't, technically, have tenure; they may eventually suffer for acting as if they did. Although, if one were paying attention, one might have observed that the whole debt ceiling circus was a product of people more acutely conscious of the elections in 2012 than they were of anything else. Maybe they will be unprepared for them. Maybe not.

My point is only that recognizing a setback to our national fortunes when one happens is a useful thing to be able to do. That doesn't mean one has to believe the Apocalypse is nigh, and in perfect fairness to our current excess of commentators on public affairs I don't think most of them do. It's no more than common sense, though, to recognize that foreign audiences have expectations of the United States built up over many years, even generations, and that we suffer when those expectations are disappointed.

They don't need to understand American financial markets, but we need them to believe that money invested here will be safe. They don't need to mimic our investment in military power, but we need them to believe America knows how to finish a war it starts. They don't need to understand our political system, but we need them to believe that it works. Through that lens, it looks as if the United States has inflicted on its standing in the world several damaging blows in recent years. The latest one has been inflicted in Washington this summer.

Why is the central question of this article interesting? I mean...it's really super obvious that the US military is still the strongest in the world (by far), and it's economy is 3 times larger than China, as of today. So what?

Is that good enough? No. The self inflicted damage of recent events (1999 - 2011) is a trend that shows no sign of abating.

It's not just that things are worse now than 10 years ago. The crux of the matter is that there is *no rational reason* to expect the system of government America has to be any better in the foreseeable future than it has in the recent past. That needs to be fixed first.

If it's not fixed, the current status quo is irrelevant. America will cease to be the most powerful country in the world in *our* lifetimes.

Democrats want to make “smoke and mirror” cuts using accounting gimmicks relating to “future” cuts, fixing government fraud, reduced interest expense and making, unspecified reforms of some kind,totally about $2.4 trillon. This is the “Smoke and Mirros” Harry Reid plan.

Boehner Republicans want to make $2+ Trillion in actual cuts which is only half of what the credit agencies require to keep our AAA rating.

Tea Party Republicans and Paul Ryan’s Budget would cut $6 Trillion over the next ten years.

It’s only the Tea Party Republicans who are trying to save our credit rating and grow the economy. And, they are the ones being demonized.

Too many Americans are addicted to big government, social programs.

America does not have the capacity to make significant cuts. Therefore, the credit rating agencies will force us to do what we lack the capacity to do ourselves.

Interest rates will go higher, our government interest expense will go exponentially higher, mortgage rates, car loans and virtually every other kind of loan will have more interest expense.

Our US debt will go higher because of the spike in interest rates. Higher interest rates will throw another wet blanket on the economy.

It will cost us much, much to borrow the money we will need in the future. We currently borrow $.40 of every dollar we spend.

We will fall back into a second, chronic recession and possibly depression in the not to distant future.

The value of the dollar will take another dive as we print more and inflation increases.

QE3 is a virtual certainty by this fall or the first part of 2012. Inflation will be at or above 10%

All because we don’t have the ability to cut our addiction to gluttonous, government spending. Just like Europe or swtor

The value of the US dollar just took another dive in the last several hours. It is not far from the lows of the economic crash in 2008.

Got Gold and Silver?

Because most of the world thought that he would change the foreign policy of George II. When he turned out to be just as bad, the disappointment was even greater.
What we are seeing right now I think is the consequence of globalization and the undervalued Chinese currency. Neither the US nor China has adapted so far, but now the necessary changes (whatever they are) will be forced upon them.
The decline to merely great power status (for the US) is by no means inevitable, but to prevent it the US voters needs to look a their long term interests. If we assume the US voters to be as informed and thoughtful as the voters in the average democracy this seems unlikely to happen.
Remember, democracy is the the least _bad_ system, not the _best_ system ;)

... quite a lot of things in plain sight. Among them:

1. Mr Norquist, his vast pool of secret money and his magical pieces of paper. Mr N appears before political candidates seeking office and invites them to sign a sheet of paper promising him and the American people that they will never allow any tax to be increased. Once the paper is signed, he signs over a large amount of cash to help them win election and arrive in Washington pre-bribed to run all other issues they come across in government by that single oath -- but not past it. Had there been a Norquist doing this in the 1930s, the US wouldn't have been able to enter World War II after November 7, 1941.

2. Members of Congress who sign that oath seem to hold true to it. Mr Norquist continues to circulate out there, and continues to disburse large amounts of campaign cash from undisclosed benefactors. Few things are more seductive to political hopefuls than large amounts of campaign cash. Following next year's elections, we can expect more of these low-tax adherents to have seats in Congress. Of course, none will ever accept that taxes can, under any circumstances, be low.

3. The recent outburst about the national debt produced this result: the debt is to rise. Amputations are presented as economies, which they can be, but amputations never pay off debt. The outcome of the last month of brinkmanship is an effective but unspoken agreement on all sides that the national debt can never be paid out -- and probably, not really reduced all that much.

4. The outcome also silently endorses the Bush II philosophy of fiscal management: when the government's bills rise sharply because of, say, war, or, say, two wars, it's better to borrow money to pay for them than raise taxes. This must lead to greater debt, and obviously doesn't matter -- since the pay-as-you-go tax alternatives are not to the pleasure of Mr Norquist's wealthy patrons and their house money launderer.

5. The quality of understanding among tax-cutters and debt pseudo fighters is on display at the nation's airports, where the government will lose $30 million in revenue (ah, taxes) today alone; and another $30 million tomorrow; and so on, to save $16 million a year from the FAA expenditure. This ain't sense. It's ideology. It seems that most of the nation's airlines could be stealing that tax money. Or are they holding it in escrow for the government at some future time, presumably without interest?

6. The FAA fuss is Cantor, writ large. The debt negotiations moved into terrorist territory when Mr Cantor pulled out of the discussion because it didn't please him, on Norquist lines. We now see that this whole discussion about the national debt has been a preview of coming attractions. There is to be another, much the same, around about January 2013 in the closing weeks of the current administration (regardless of who wins the presidential election). As well, the tax rebels can put a sleeper hold on the federal government and the national economy in many different pressure points -- as, for example, the FAA. Who has the list of all such possibilities?

7. Why the hell is the FAA budget reliant on Congressional approval?

Daniel, you and the US govt would do well to realize that the US is NOT the only game in town and playing with fire has indeed hurt our credibility.

In answer to "even if US power is downgraded from AAA, who else is even above BBB+?" - Well - it's not a huge field, but there are still some corporations as well as more than a dozen other countries rated AAA by Moody's, S&P, and others.

As far as our two-party democratic system - this latest episode makes us look no better at governing ourselves than any number of third-rate countries with five or a dozen or more parties constantly bickering and getting nothing done. One lasting harmful effect may actually turn out to be that the people of today's autocratic regimes lose any desire to work toward a democratic government for themselves. The alternative is just an endless series of abuses, revolutions, more abuses and then another revolution. But hey, at least a dictator can make a decision.

The decline to merely great power status (for the US) is by no means inevitable, but to prevent it the US voters needs to look a their long term interests. If we assume the US voters to be as informed traveling and thoughtful as the voters in the average democracy this seems unlikely to happen.

My point is only that recognizing a setback to our national fortunes when one happens is a useful thing to be able to do. That doesn't mean one has to believe the Apocalypse is nigh maria, and in perfect fairness to our current excess of commentators on public affairs I don't think most of them do. It's no more than common sense, though, to recognize that foreign audiences have expectations of the United States built up over many years, even generations, and that we suffer when those expectations are disappointed.