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Debt Debacle Confirms What Many Thought of the U.S.

“Beclowned.” That was a characterization made by Washington Post economics columnist Catherine Rampell when commenting on the U.S. debt limit deal.

And that was one of the kindest assessments of the agreement I’ve found. The last-minute deal averted a genuine crisis, but it confirmed the ugliest assessments of U.S. politics and policymaking. Fortunately, those sentiments are already priced in: Its partners expect this silliness from the U.S. That isn’t license to continue such awful business as usual; it is an upsetting commentary on expectations of U.S. leadership.

A legislative quirk obliges the U.S. government to authorize issuance of new debt whenever the national deficit hits the existing ceiling. In other words, Congress has to pass legislation to pay bills already incurred when obligations hit the current debt limit.

For virtually its entire history, nearly 100 times, Congress passed that legislation automatically. The first exception was in 2011, when Republicans tried to use the threat of default — not lifting the ceiling and thus not paying some bills — to slow the growth of government spending. A few months ago, as debt approached the current ceiling of $31.4 trillion, Republicans again threatened default to try to get the Biden administration to roll back its legislative agenda and shrink the federal government.

Note in passing the rank hypocrisy of the maneuver. Republicans have no problem adding debt when they occupy the White House; concern over spending only surfaces when a Democrat is president. And while there are good reasons to worry about the size of the debt, the GOP’s refusal to consider raising taxes, closing loopholes or providing the means to better enforce the tax code is a damning tell about their priorities.

There is virtual unanimity that default would be a disaster. (A few holdouts insist that the dangers are exaggerated; there is good reason to dismiss them as cranks.) Debt reflects millions of checks written by the U.S. government for all sorts of services rendered or goods purchased: from agriculture to defense to medical care and weather forecasting. Default means many of those bills won’t be paid or great uncertainty about when and for how much. That alone will shock the U.S. economy, but it will spread overseas like a tsunami.

Estimates of potential job losses in the U.S. range from hundreds of thousands to several million, depending on the duration of the crisis. Stocks could shed up to a third of their value, a loss of $12 trillion in household wealth. When it first did this dance in 2011, the U.S. lost its AAA bond rating (which it has never regained), the stock market lost 17% of its value for more than a year. In addition, Moody’s credit ratings service concluded that heightened uncertainty from the crisis meant 1.2 million fewer jobs, a 0.7 percentage point higher unemployment rate and a $180 billion smaller economy than it otherwise would have. And that was without actual default.

Investors now must question the value of U.S. bonds, currently considered among the safest investments; doubts about their worth will raise interest rates (to entice buyers back), adding to the debt and undermining their status as a cornerstone of the international financial system. Global inflation could result along with global recession.

Most troubling is the damage done to images of U.S. credibility, capability and competence. President Joe Biden was obliged to cancel the second half of his Asia trip, skipping the first visit to Papua New Guinea by a U.S. leader — sadly, it had been declared a national holiday there with Washington sending Secretary of State Antony Blinken in his place, a poor substitute — and “the Quad” leaders’ summit, to have been held in Australia and instead shoehorned into an impromptu 47-minute sit-down at the Hiroshima Group of Seven.

The result was “disbelief and horror” among G7 finance ministers, reported the Washington Post. Christopher Chivvis, director of the American Statecraft Program at the Carnegie Endowment, warned that the crisis prompted questions about “how serious Washington is about leading the world. … In an era of global strategic competition, the United States will be entering the ring with one hand tied behind its back if its leaders can’t make progress on their domestic disagreements and moderate vicious political polarization.”

Few summarized the situation better than Evan Osnos, longtime China watcher, who observes U.S. political dysfunction up close for the New Yorker. He explained in a podcast that the crisis is “a big moment in which America’s domestic political psychodrama, a completely self-created crisis, has telegraphed to the rest of the world that we don’t have the capacity and the attention to deal with something as big and looming as the growing challenge from China.”

As Osnos and others made clear, China is the chief beneficiary of this nonsense. Doubts about U.S. trustworthiness spur governments to look elsewhere for leadership and stability. Marcus Noland, vice president of the Peterson Institute for International Economics, warned in a brief last month that default would have “a deleterious impact on the U.S. dollar’s key currency role and America’s standing in the world broadly and vis-a-vis China. … If the U.S. again falters and reveals itself to be an unreliable hegemon, China will not stand idly by … presented the opportunity, China would put itself forward as a benign, reliable leader.”

Daleep Singh, former deputy national security adviser for international economics for Biden, called default or even a near miss, China’s “dream argument, which is to say the U.S. is no longer acting as a faithful steward of the U.S. or global financial system and that other countries would be wise to accelerate their diversification away from dollars.”

Among Southeast Asian analysts, there was less alarm and more resignation. Pointing to former U.S. President Barack Obama’s failure to attend the ASEAN and APEC summits in 2013 or 2014, Renato de Castro from De la Salle University in the Philippines was nonplussed. He didn’t “think this would be a big deal for regional countries.” Shahriman Lockman, director at Malaysia’s Institute of Strategic and International Studies, was just as sanguine: “The messiness of U.S. politics is a sunk cost. You just have to deal with what comes. Trump taught us that.”

Lockman dismissed the naysayers, calling it “deeply unimaginative to react to this sort of circumstance by saying it shows that America doesn’t place enough importance on the region.” While sympathizing with Australia and the PNG, he explained that “expectations are measured enough in the policy communities in this region. They know that a trip to Asia for a U.S. president is a big ask. …. It’s time to stop this infantile analysis of presidential visits as being part of a tally in a game of the U.S. vs China in Asia. This is not to say that presidential visits are unimportant, but I think they matter less than headline writers would make us believe.”

Elina Noor, a senior fellow and Southeast Asia specialist at the Carnegie Endowment, agreed, calling the cancellation, “unfortunate but understandable and frankly, unsurprising. Understandable because he is, after all, president of the United States of America not of Asia or the Pacific and his first obligation is to domestic priorities. Unsurprising because for many in the region, if not the world, a cancellation like this has almost come to be expected given the political intractabilities of the United States.”

The Southeast Asian approach demonstrates a maturity that the U.S. seems to lack. Biden made the trip, attended the key meeting (the G7), joined important (albeit shortened) minilaterals, including the Quad, and the U.S. concluded important business with the PNG and other Pacific island states. Those are important achievements and shouldn’t be overshadowed by the political drama in Washington.

My Southeast Asian chorus grasps an essential difference between U.S. leadership and the readiness to protect core national interests. It’s heretical to say so, but the former is nice (even though it has been a structural feature of the international system for nearly 80 years); the latter is a necessity.

Regional allies and partners recognize and accept the difference. (This thinking shaped reaction to the Afghanistan pullout/debacle.) It is, I think, the 21st-century equivalent of Churchill’s reminder that the U.S. will do the right thing after exhausting all the alternatives.

This clear-eyed assessment of the U.S. is encouraging but it shouldn’t lead to complacency. There are long-term interests that require relationships and those take time to build. U.S. Secretary of Defense Lloyd Austin made that point in a 2018 interview: “Presence buys you influence, which is built on trust; you can’t surge trust.” Clownish behavior rarely helps.

Source: The Japan Times