Five Lessons the World Will Take From U.S. Economic Policy Gridlock

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President Barack Obama speaks with Speaker of the House John Boehner during a meeting in the Cabinet Room at the White House in Washington, DC, on July 23, 2011. (Photo: Jewel Samad / AFP / Getty Images)

Washington may have cut an unlovable deal to avert a default on its debts, but U.S. and global stock markets are tanking anyway. That’s because the measures agreed Tuesday can’t reverse the slide of the U.S. economy — its fundamentals, to use a phrase beloved by politicians, are less than sound. So, what the world sees in America’s current plight is a superpower on the skids, and with it comes the inevitable dimming of the unrivaled global influence Washington has enjoyed since World War II.

Consider: With 22 million Americans un- or under-employed, GDP growth in the first half of this year was less than 1% — pretty much stalling speed, at which unemployment is more likely to increase than to decrease. And growth could shrink even further if cuts in government spending take more money out of the economy. America’s economy depends, for two-thirds of its growth,  on consumer spending, which fell last month for the first time in two years. Depressed demand is at the center of the economy’s slump.

Laying off teachers, firemen and police officers to cut public spending further shrinks Americans’ buying power, taking money out of the economy and further suppressing demand. Consumers are not spending more because they don’t have jobs or fear losing them, and have seen the value of their homes and savings depleted. And businesses won’t invest and create jobs to expand output for which demand is shrinking. That’s why many economists warn that cutting government spending right now actually increases the chances of an even deeper recession.

If so, the resulting fall in government of tax revenues  will see the national debt actually increase.

So what lessons will  the geopolitical ‘stock market’ take from Washington’s summer of discontent?

1.  ‘Nation Building at Home’ is Going About as Well as Nation-Building in Afghanistan

The very nature of the deal struck to avoid a debt default has set up a recurring series of ambushes, skirmishes and full-blown pitched battles over government spending for the remainder of President Obama’s first term, with Washington appearing increasingly ungovernable. Former CIA operative Paul Pillar compares the struggle over the debt default to a classic hostage situation, warning that by allowing a minority of Tea Party conservatives to set the national policy agenda by threatening to blow up the U.S. economy, President Obama has broken a cardinal rule by giving extremists much of what they want,  effectively inviting his enemies to strike again, and again, and again.

For the next 15 months (and possibly long beyond), Washington will remain incapable of providing decisive leadership to chart a way out of its domestic economic crisis, much less on global challenges. And its plain to see, for both rivals and allies abroad, that a political system in thrall to the shibboleths of free-market fundamentalism will not allow itself to make the massive investment in infrastructure, education and industrial policy necessary to restore long-term U.S. competitiveness.

2. If Pummeling Obama Worked for the GOP, Why Not for Foreign Government?

To a foreign observer, the debt showdown — and the two years of partisan brawling that preceded it — would suggest that much of the opposition barely accepts Barack Obama’s legitimacy in the presidency. Pillar warns that the Cold War ethos that “politics stops at the water’s edge” has given way to a politics that deems it advantageous to diminish the political authority of the president — a lesson that will be taken on board by foreign leaders. Indeed, his handling of the Republican debt challenge will have suggested to foreign leaders that President Obama is politically weak, and  appears to approach conflict as if he were a mediator rather than a protagonist. That impression of weakness and indecision has already been established by the Administration’s confused and ineffectual responses to everything from Iran’s nuclear program and Israel’s settlement program to the Afghanistan-Pakistan theater and the Arab Spring.

It has long been a cliche in Washington that foreign adversaries like to test an incoming U.S. president to take his measure; President Obama is not a new President, but it ought surprise nobody if in the months ahead seek to emulate the GOP and go toe-to-toe with him.

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