The deal that has been reached in the US debt crisis grants the Republicans much of what they were demanding - should it be implemented, it will damage the weak US economy further, writes James Meadway.
The US economy is in dire straits. Unemployment, already high, crept up last month, while the numbers of long-term unemployed are at levels unprecedented in recent history. Growth is low, and liable to decline. And in the midst of all this, an esoteric debate erupted over the US’ national debt limit.
This is the boundary beyond which the US government could not legally borrow to meet its financing needs. It was due to be breached on Tuesday this week, threatening the US with the first default in its history.
For weeks, Republicans and Democrats, occupying different branches of the administration, were in deadlock over it. The deal that has now been reached grants Republicans much of what they were demanding, under pressure from the Tea Party: no tax rises – especially on the rich – and $2.5tr of cuts, spread over ten years. It is austerity plus, a wholesale assault on the Federal government: and, if genuinely implemented, it will damage the weakened US economy still further, crippling domestic demand. The Democrats, for their part, look set to avoid another damaging budget limit dispute this side of the 2012 Presidential election.
The US debt limit is just a number. Debt is real – it represents real transfers of wealth. Defaulting on or cancelling debt can have dramatic economic consequences. But the limit is an arbitrary administrative device. It has been raised 140 times since World War Two, attracting no controversy. It is, to all intents and purposes, economically irrelevant.
The US political system is increasingly dysfunctional, however. The Tea Party, Republicans of the hard right, vehemently pro-free market and anti-government spending, are the most obvious expression of this breakdown. But the feeble Obama administration is another. No-one has sufficient political authority to impose a solution.
The result is that what should be merely a technical, administrative question has become the site for deadlock. The two wings of the US political system could not agree over the precise balance of tax rises and spending cuts needed to justify increasing the limit. Narrow political concerns are dominating wider, ‘bipartisan’ ruling class interests. They are doing so not in a time of prosperity and US confidence, but in a period of weakness and decline.
A compromise has been reached, although it remains subject to the whims of Congress with both Houses required to pass the necessary legislation. But the damage has already been done. The US stock market had its worst week for over a year. The major credit ratings agencies have raised the possibility of future US debt downgrades – and one Chinese rating agency has already done so. The world’s largest economy is visibly in decline.
Old Capitalism – those nations that have been the core of the world economy for two centuries – has largely failed to recover from the financial crisis of 2007-9. The solution then, mobilising state debt to pay for collapsed financial assets, has merely shifted the location of the crisis: from finance, to states. Its political leaderships, whether in North America or Europe, have been unable to resolve this new crisis. Their authority is visibly weakened, perhaps most spectacularly inside the EU.
There is, in this crisis of authority, a potential for new, radical solutions to the wider crisis of capitalism. But a movement against austerity and the rule of finance has to be built. The Coalition of Resistance European conference against austerity on 1 October is critical to that. Campaigners from across the continent will be meeting in London, taking the first steps towards building a Europe-wide anti-cuts movement.
Radical economist James Meadway has been an important critic of austerity economics and at the forefront of efforts to promulgate an alternative. James is co-author of Crisis in the Eurozone (2012) and Marx for Today (2014).