In the final hour, Congress managed to strike a compromise and raised the debt limit at the last minute. What are we to make of this entire episode?
First, the standoff was unnecessary and made no economic sense. There was a good deal of political "sense" though, as various political factions battled to position themselves for 2012 and discredit each other. The Republicans fought to create an image of themselves as serious about the debt. Democrats fought to create an image of themselves as caring about the American people, particularly by insisting entitlements be left untouched. The Tea Party faction in Congress fought to create an image of themselves as principled deficit hawks. It was all illusion -- every one of these factions showed themselves to be irresponsible and ignorant of economic reality.
Second, the compromise does essentially nothing to fix our debt problem. Fundamentally, the debt problem stems from the growth of entitlement spending -- especially Medicare and Medicaid, but also Social Security. The share of retirees in the population increases over the next decades as baby boomers age, and so too the expenses on these programs. At the same time, it appears that an increasing share of Americans is financially unprepared for retirement, making entitlements a difficult issue to address. The compromise avoids this difficulty by entirely evading the issue.
Third, the irrationality and hostility levels in our political discourse were both ratcheted up. I suspect this will make real solutions in the future even more difficult to achieve. Democrats insist entitlements cannot be touched, even though it is inevitable that they will be. Republicans insist there must be no revenue increases, even though the Bush tax cuts (EGGTRA and JGTRRA) are demonstrably contributing to deficits and appear to have done next-to-nothing in terms of stimulating growth, and -- even worse -- some Republicans are now suggesting that cutting things like the wasteful ethanol subsidization of ethanol would be a tax increase -- simply because the misbegotten program includes tax credits. A rational tax reform must get rid of social engineering, and this means eliminating deductions. A rational entitlement reform involves cuts, which should be phased in sensibly so that citizens can prepare themselves financially for them. How are we to get either from this kind of debate?
The deal that ultimately resulted was apparently predicted by Senator Harry Reid a month before it was struck, based on his calculations of political reality. Our political reality is that our "leaders" are living in economic unreality. A prime example of this is Rep. Michele Bachmann's insistence in Friday night's GOP presidential debate that Congress should get our AAA credit rating back, and also that Congress should not have raised the debt limit... mutually exclusive propositions. Our politicians are speaking incoherent nonsense, and so long as we let them get away with it, their policies and our future will be full of incoherent nonsense as well.