Correction Appended: August 4, 2011
In narrow economic terms, the debt deal is actually not a big deal, neither as good as its advocates claim nor as terrifying as its opponents fear. The actual cut to the 2012 budget, the only budget over which this Congress has control, is $21 billion out of total expenditures of $3.7 trillion a pittance. Everything else can and will be changed by future Congresses. What the deal does is kick tough choices down the road, this time to a congressional supercommission that will have to come up with a larger plan to reduce debt. And it does nothing to spur growth, without which the debt will expand well above projections. That's why the usually circumspect Mohamed El-Erian, head of Pimco, the world's largest bond fund, grades the deal somewhere between an incomplete and a fail. "Other than eliminating default risk emanating from a self-manufactured crisis," he writes, "there is nothing good about America's debt ceiling debacle."
The deal's largest impact will be political, and there it has been a disaster. The manner in which it was produced added poison to an already toxic atmosphere in Washington, making compromise even more difficult. Democrats now feel they need to mirror the Tea Party's tactics and are becoming unyielding on any cuts to entitlement programs like Medicare. Republicans, emboldened by the success of their bullying, have closed ranks more solidly around a no-tax agenda. But the only solution to America's debt dilemma will need to involve both cuts to entitlement programs and higher tax revenues. Even if the besmirched ratings agencies don't downgrade America, we've downgraded ourselves. The system did not work.
Evidence of a working system would have been the adoption of a grand bargain almost forged between President Obama and House Speaker John Boehner to reduce the budget deficit by almost $4 trillion over 10 years, a plan that might actually have been enforced, because both parties would have been invested in it, each having contributed to shaping it. The system would have worked if it had adopted some version of the Bowles-Simpson plan, which reduces the national debt by the same amount, with pain on both sides of the aisle, but in an even smarter way. This is how Congress used to work: grand bipartisan bargains to solve difficult problems with compromises by both sides. This is not nostalgia. It is how the system worked in the 1980s and '90s to save Social Security, reform the tax code, rationalize immigration policy and close hundreds of military bases.
Instead, we have demonstrated to ourselves, the world and global markets that our political system is broken and that we are incapable of conceiving and implementing sensible public policy. What we have instead is the prospect of more late-night cliff-hangers, extreme tactics, budget guillotines, filibusters and presidential vetoes. It makes for good TV news specials, but it is a sorry picture of how the world's leading country governs itself.
There is one silver lining. The sword of Damocles that hangs over Congress (steep reductions in defense and Medicare if the two sides can't agree to a basket of other cuts) is supposed to make legislators act more sensibly. Actually, it might provoke something more important: a national debate on the role of government. This might well have been Obama's calculation and his purpose in accepting the debt deal that it would end the crisis, in which the Tea Partyers held the country's creditworthiness hostage to their agenda, and force a broader national discussion, one he is comfortable leading. If so, such a debate is long overdue. For more than a generation, Americans have delayed it, at incalculable cost to the country.
The modern seesaw about the role of government began with Ronald Reagan, who rode to the White House in 1980 on a tide of frustration with high taxes and big government. He promised to cut both down to size. He succeeded with taxes, reducing rates across the board and closing loopholes. Although he raised taxes several times during his presidency, by the time he left office in 1989, taxes were at 18% of GDP, down from about 20%.