How the U.S. can move past its budgetary dysfunction

After the default scare

House Speaker John Boehner (Alex Wong/Getty)

House Speaker John Boehner (Alex Wong/Getty)

Once again the United States walked right to the brink of the precipice but then stepped back. The latest deficit showdown ended with a deal that suspends the debt ceiling until Feb. 7 and funds the federal government until Jan. 15. President Barack Obama insists this isn’t just another temporary respite before Washington drives the country, and the rest of the world, to the edge of financial catastrophe once again. But is he right?

Strictly speaking, he might be. Congress has given itself until Dec. 13 to reach a deficit-reduction agreement that will keep the government open, and there’s reason to believe Democrats and Republicans can work out a modest compromise by then. It could be just enough to “turn off the sequester,” the second tranche of across-the-board cuts that will take effect in mid-January if Congress doesn’t act, says Steve Bell, a former staff director of the Senate Budget Committee now at the Bipartisan Policy Center. Besides, Tea Party Republicans must now shelve the idea of using budget deadlines to extract concessions on the president’s health-care law, which went into effect on Oct. 1, notes Jamie Carson, a professor of political science at the University of Georgia.

As for the debt limit, the true red line lies not in February but likely somewhere in March, when the U.S. Treasury will, yet again, run out of wiggle room to keep paying the country’s bills without new borrowing. Even then, though, if history offers any guidance, the risks of actual default will be low.

Still, Standard & Poor’s estimates this latest fiscal fiasco lopped US$24 billion off America’s GDP and, analysts suspect, undermined business confidence in Canada. Beyond another shutdown, a bigger question now looms for credit-rating agencies, bondholders and equity investors: Is America becoming a politically ineffectual country? Is it hereafter condemned to slow growth and unsustainable boomer-driven debt because the government can’t pass sensible reforms?

default-chartFew expect the next two months of congressional negotiations to produce a broad shake-up of America’s underfunded Medicare scheme for the elderly and the country’s loophole-laden tax system. Of course reform wouldn’t seem so out of reach if the Democrats managed to reconquer the House during the midterm election in November 2014, says Thomas Mann, a congressional expert at the Brookings Institution. In that scenario, a single party would control both the White House and Congress—stuff would get done. But the odds of that are low.

A likelier scenario is that Republicans keep the House and reclaim the Senate, where a number of Democrats face re-election in toss-up states. President Obama, nearing the end of his second term, would then have more latitude to reach across the aisle and seek a grand bargain to consign to the history books, says the University of Georgia’s Carson. But a similar deal collapsed at the last minute in the summer of 2011, and Republicans probably won’t trust the president enough to return to that table.

Still, not all hope is lost. Some of the country’s largest business groups are considering retooling their campaign finance strategy to torpedo intransigent Tea Party members during primary races. And there are signs that the pragmatic old guard of the GOP might be starting to lose patience with the radical rookies who joined the party’s ranks in 2010, says Mann. The Republican leadership might finally step in to “take the weapons of mass destruction away from the crazies,” as Mann puts it, refusing, for example, to allow another debt-ceiling crisis. Eventually, the party might be able to tame its uncompromising wing.

“We still have a bumpy road ahead,” says Mann, but the country seems to be taking “some small steps to sanity.”