Second thoughts about the debt debacle

Posted By Daniel W. Drezner Thursday, September 1, 2011 - 3:43 PM Share

I was pretty dismissive of Standard & Poor's debt downgrade last month.  Re-reading that post, I stand by my political analysis of events going forward.  Furthermore, the recovery of U.S. equity markets, the sharp reduction of yields on U.S. debt, and the failure of the other ratings agencies to follow suit are further data points suggesting that the S&P decision was flawed. 

There's reality and perceptions of reality, however.  On that latter front, after a recent expedition to Washington, I've concluded that regardless of whether S&P was right, they've won the argument in terms of perception.  The summer debt debacle is, in many ways, the political equivalent of Hurricane Katrina.  Perceptions of the Bush administration never recovered from that event, even though one could plausibly argue that the policy outputs of Bush's second term were better than the first term.  Neverthelesss, Katrina was an inflection point that has caused a number of actors to reassess their perceptions about the political and policy competency of the White House and Congress. 

Something similar seems to have happened with the debt deal.  Politico's Ben White relays the dramatic effect on consumer confidence: 


The Conference Board this week reported the biggest monthly decline in consumer confidence since the height of the financial crisis in 2008, its consumer confidence index falling from a reading of 59.2 to 44.5, the lowest in two years....

“The debt ceiling negotiation is an extremely significant event that is profoundly and sharply reshaping views of the economy and the federal government,” Republican pollster Bill McInturff wrote in a presentation of survey work he has done recently that suggests the debt ceiling debate has led to a significant shift in public opinion.

The partisan struggle over raising the debt went on for weeks before Obama finally announced on the night of Aug. 1 that a deal had been reached that resolves the issue for now. But while Washington has moved on to its next drama — the deliberations of the so-called supercommittee agreed to in the deal — its psychological impact has resonated widely.

McInturff said the result has been “a scary erosion in confidence” in both the economy and the government “at a time when this steep drop in confidence can be least afforded. … The perception of how Washington handled the debt ceiling negotiation led to an immediate collapse of confidence in government and all the major players, including President Obama and Republicans in Congress.”

A recent Washington Post poll found that 33 percent of Americans have confidence in Obama to make good decisions on the economy and just 18 percent have confidence in Congressional Republicans to do so.

These are especially dangerous readings when Federal Reserve Chairman Ben Bernanke has essentially said it is up to politicians to help boost the economy now that the Fed has fired nearly all its monetary policy bullets.

Speaking of Bernanke, he had this to say at Jackson Hole last week: 

[P]erhaps most challenging, the country would be well served by a better process for making fiscal decisions. The negotiations that took place over the summer disrupted financial markets and probably the economy as well, and similar events in the future could, over time, seriously jeopardize the willingness of investors around the world to hold U.S. financial assets or to make direct investments in job-creating U.S. businesses. Although details would have to be negotiated, fiscal policymakers could consider developing a more effective process that sets clear and transparent budget goals, together with budget mechanisms to establish the credibility of those goals.

Ten days before Bernanke's speech, FP's Josh Rogin reported that Secretary of State Hillary Clinton had acknowledged the global ramifications of the debt fracas, telling a forum at National Defense University: 

I happened to be in Hong Kong a few weeks ago, and I said confidently that we were going to resolve this; we were not going to default; we would make some kind of political compromise.

But I have to tell you, it does cast a pall over our ability to project the kind of security interests that are in America’s interest. This is not about the Defense Department or the State Department or USAID. This is about the United States of America. And we need to have a responsible conversation about how we are going to prepare ourselves for the future

Clinton's statements were confirmed by officials I talked to while down in DC. 

So, can this perception be changed?  Here, I'm bearish in the short-term.  These kind of perceptions can be self-fulfilling.  Economic growth is a remarkable political palliative, but growth looks anemic for a good long while.  The Obama administration can try to change the narrative, but that's almost as difficult as Inception -- for the same reasons: 

As Reinhart and Rogoff have observed, the economic aftereffects of debt crises are long-lasting.  From here on out, the political effects of such crises will be on full display. 

As someone who studies global political economy, this is fascinating.  As a U.S. citizen, this is utterly depressing. 

EXPLORE:ECONOMICS, FLASH POINTS, CRISIS POLITICS, FINANCIAL MELTDOWN, PUBLIC OPINION, UNITED STATES, WORLD PUBLIC OPINION
 

BLUE13326

1:14 AM ET

September 2, 2011

I think this may be putting

I think this may be putting the cart before the horse. From a time perspective, at least from my look at the data (i.e., manufacturing, housing, employment, listeining to company's earnings conf calls, etc.), the economy kind off fell off a cliff at the beginning of the summer, or at least slowed significantly. So, the consumer numbers are just reflecting the reality of the beginning of the double dip as well as the rise of inflation, and maybe the realization that loaded down with all this debt, there is not all that much that we can do. It may be that the debt debate impacted some of these figures, but I don't think it played a big role.

Rather, consumers understand, even if government economists haven't gotten there yet, that we're undergoing stagflation, and that really really sucks...

 

FDA

2:27 AM ET

September 2, 2011

good web

look love—[[ w w w - (wholesalecheapclothes )- c o m ]]
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ALEXANDERDDMUIR

2:33 PM ET

September 2, 2011

Brazil

I was listening to This American Life a few months ago. They had a whole story about how inflation in Brazil was running out of control, until a group of economist came up with an idea to "trick" people into becoming more confident about their currency. Did you listen to that one? Any thoughts on the program? Do you think similar techniques might work here and with the economy in general?

http://www.thisamericanlife.org/radio-archives/episode/423/the-invention-of-money

 

ARVAY

9:44 AM ET

September 4, 2011

Zero plus zero is zero

. . the latest jibs report underlines the collapse of our economy.

I wonder -- will American soldiers fire on their fellow citizens, or will the government need to employ foreign mercenaries? There are many, many people out there who hate Americans, thanks to our misguided foreign policies.

 

ROMAN GIL

2:00 PM ET

September 4, 2011

Soldiers will fire on people as long as they are paid

The members of the present military are not fellow citizens, they are doing a job for money. Only desperate people are willing to subject themselves to 3 or more tours in phony wars. These people are essentially doing time in military prisons called bases. The new soldiers are not freemen, they are not serving because they believe in the wars or out of patriotism, nobody is that stupid except for journalists that never saw a shot fired in anger and would run from a firecracker bang.

In 10 years and after $5 trillion, where are the enemy body counts? How many victories? In 10 years the total American casualties are less than 8 months during the Vietnam War. The military cannot defeat puny bands of terrorists that kill them with roadside bombs and refuse to fight.

Instead of just financing the wars with borrowed Chinese money, we should borrow Chinese troops as well. They are cheaper and it goes along with the globalist idea of cheap labor being good.

Roman Gil
http://roman-gil1.blogspot.com

 

ROMAN GIL

2:14 PM ET

September 4, 2011

It takes Powerful Opiates to Induce Economic Optimism

In the past 10 years, the DemoPublicans enabled globalists to ship out 57,000 industrial plants and over 6 million jobs to China and other cheap labor places so that they could profit from monthly wages of $100 a month.

The American economy is now just 9% industrial and much of this are mere assembly plants for foreign parts. 51% of American households are too poor to pay income taxes. The bottom 50% of American households own just 2.5% of national assets. The top 1% income group receives 36% of national income and owns over 90% of national assets.

The total value of all stocks listed in American stock exchanges is just $15.3 trillion and going down. this is not enough to pay off the national debt.

We are dependent on begging and borrowing over $1 trillion annually and depend on imports even for basic necessities of life. The total value of all national assets, public and private is just $77 trillion and we are losing over $700 billion annually.

America is now a bankrupt, dependent, rapidly failing state.With a mostly poor and ignorant population. This is reality until you get high on opiates or crack.

The politicians have no ideas other than status quo. In my blog, I discuss why we failed and offer a 28 point program to rebuild America before we become another Haiti or Somalia.

Roman Gil
http://roman-gil1.blogspot.com

 

UMESHGEETA

3:26 AM ET

September 5, 2011

Prof. Your are Right

"As someone who studies global political economy, this is fascinating. As a U.S. citizen, this is utterly depressing."

This is reality Prof. At least you are one of the few ones who is pointing it out explicitly.

What Americans think is if S&P down grade was so consequential, where was President Obama? Why did he not insist on $4Trillion deal (say $1Trillion as Taxes and $3Trillion as cuts) and why did he settle for some paltry deal of $1.5 Trillion? From a test of leadership perspective Obama failed miserably - especially considering that S&P had warned that they were looking for $4Trillion Deal. It was not that Obama fought challenging that assertion, rather he had accepted the validity of S&P' assertion; howsoever invalid that may be. That is the crucial test Obama failed.

Well ramifications are clear. On Saturday Morning I woke up saying that there is no way this President can win the second term. By Evening you had Dowd's OpEd 'One Term and Done'. Well, I am not claiming much in one lay person's opinion nor of one columnist. But it is in 'air'. At the end of the day you need someone who wants to 'lead' and who can get things done with Congress - by force or by any other means.

When a senior journalist like James Fallows feels like passing along this - http://www.theatlantic.com/politics/archive/2011/09/a-harsh-case-against-obama-and-his-opponents/244512/ - we know that we are in trouble.

Can Obama do anything to change this? Yes, he can. But chances of he failing miserably here are very high. Just look at the stupid risk he took in trying to clash his Congressional Speech about Jobs with GOP Presidential Debate. Not for nothing DeMint is saying that he is so bored to attend his speech. Well, that is about the reaction of whole America.

Basically, America is preparing itself to 'write off' this President. He and Daley are intent on following some foolish path and they will in all likelihood endure the Carter fate. And by the way this is from some one who campaigned for Obama against Hillary in CA - when we only knew 'fighting' but defeat!

 

Daniel W. Drezner is professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University.

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