US debt crisis: The folly of politicians. Don’t they ever learn?

If anything demonstrates the shortsightedness of politicians, it’s the US debt crisis.

America’s credibility and credit rating and with it the health of the global economy is at risk because of the short-term petty interests of politicians.

It’s evident that a last minute deal will be made to at least temporarily raise the United States’ debt ceiling. Both President Barack Obama and Republican leader John Boehner agree that the United States is too big to fail.
Both parties will claim credit for averting a national disaster, but by then the damage will have been done. It will be evident that instead of finding a solution, a Band-Aid was applied. Concern about the health of America will remain as the United States’ structural problem deepens. The Band-Aid will be tough sell when it comes to convincing rating agencies that the country should retain its AAA rating.

Messrs. Obama and Boehner would do well to couple short-term emergency measures with some long-term thinking of how to put the US economy back on track.

One place they could look for lessons is Britain, which already has at least a year of experience with what the Obama administration has been discussing for some time.

The British formula is straightforward fiscal tightening accompanied by a loose monetary policy that has led to an economy that is contracting and stalling.

The lesson is that no matter how loose monetary policy is, fiscal tightening is likely to work on the Verelendungs theory of Karl Marx: it has got to get worse to get better.

The solution is, whether Mr. Boehmer likes it or not, that some sort of stimulation is needed when the private sector is unable to absorb cuts in public-sector employment and depressed earnings means reduced consumption.

As a result, the Bank of England is looking at further quantitative easing with another round of monetary stimulus designed to raise rates. In doing so, the bank has the support of the government, which is willing to accept the inevitable: higher inflation.

That’s a tough nut to crack for the United States, not only because the dollar is the world’s reserve currency, but also because Mr. Boehner will oppose it in Congress.

And that is another example of short-term thinking. Mr. Boehner may not want to be held responsible for a US default but he could end up being the one to blame for a policy that fails to produce results.


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