How bad is debt showdown for U.S. leadership?

Harsh partisanship in American politics is not new, but it is taking a form that has markets and allies nervous.

Michael GreenThe author is CEO of the United States Studies Centre at the University of Sydney and Henry A. Kissinger Chair at the Center for Strategic and International Studies. [YONHAP]

The showdown between U.S. President Joe Biden and Republican U.S. House Speaker Kevin McCarthy over the debt ceiling gripped Washington and markets around the world. Critics of the United States chortled that this is why authoritarian China is likely to dominate Asia in the future, and even friends of the United States, like Peter Hartcher of the Sydney Morning Herald, lamented that “America’s restless struggle against the very concepts of governance and government threatens the survival of a normal, functional nation-state.

Did the debt crisis reveal a weakness in American leadership and the danger — as Hartcher puts it — that the “roof could come down” on the United States?

Let us begin with some background on why there was a political and potential economic crisis in the first place. Americans designed a divided system of government from the beginning of the country to ensure that no “king” would ever threaten individual liberty again. Core to that principle was placing control of spending and debt in the hands of the legislators rather than the president. As the United States began deficit spending again in the 20th century, the U.S. Congress passed laws requiring congressional approval before the federal government could raise the ceiling on federal debt. The United States has the enviable, if not unhealthy, ability to issue debt because the dollar is the world’s reserve currency, and treasury bonds remain safe and attractive investments.

However, when Republicans take control of congress, as they did by a small majority in the mid-term election last November, they tend to block Democratic Presidents (Clinton and Obama and now Biden) from their expansive spending on social welfare programs. That happened again this time.

The Republicans have a point that Biden’s budget plan was too generous, and the White House knew that they would have to eventually pare back plans to get their budget through congress. But Speaker McCarthy was also under pressure to use the debt ceiling to gain early leverage and force those cuts. In some ways, this is what the Founding Fathers of the republic might have expected. The truly dysfunctional part of the process was that a minority of right-wing Republicans — egged on by former President Donald Trump — demanded draconian and unrealistic cuts to the federal budget and were prepared to risk default rather than compromise. Defaulting on U.S. government loans would have created a financial crisis for the U.S. and world economies.

Last week, McCarthy and Biden reached a compromise that passed in congress with a combination of centrists from the Republican and Democratic Parties, with the progressive left and Trump-loving right wings probably opposed. Default was avoided, but markets and the world were shaken by what might have happened.

How much damage did this cause? First, Biden had to cut short his visits to Australia and Papua New Guinea to do the negotiations, which was disappointing to leaders in those countries and ammunition for those arguing the United States is not committed to the region.

However, Biden’s summits in Japan were big successes: the Group of 7 aligned on countering Chinese economic coercion; the U.S.-Japan-India-Australia “Quad” leaders were able to have their summit in shortened form; and the U.S.-Japan-South Korea summit moved forward. Agreements with Papua New Guinea and the Pacific Island leaders were concluded by Secretary of State Blinken, and those leaders, plus the Australian Prime Minister, all will get summits in Washington.

Confidence in American competence definitely took a blow. The fact that a minority of ideologically charged members of congress could have (and might still) caused default and global recession is unnerving for markets and U.S. allies. There is no way for the Biden administration to erase that thought when the whole impasse was so transparent for the whole world to see.

And while the structure of the divided American government makes this an old story, the partisan and almost nihilistic extremism of the right wing is more dangerous than before because those particular members of the legislature come from gerrymandered districts and perform in siloed “angertainment” ecosystems where extremism is rewarded at the expense of the national interest (the same phenomenon exists on the far left of the Democratic Party, though in less potent form). Donald Trump’s more extreme positions as he runs for president again are a manifestation of this dynamic, particularly his reckless call for Republicans in congress to let the country go into default just to punish Biden.

And yet political theater in the United States is always much more complex than the headlines can convey. As historian Robert Kagan argues, there is chaos in American political debates that often appears to outsiders like weakness when it is a process of messy renewal and regeneration. Kagan calls this the “American trap” — one that Tojo, Hitler, Saddam Hussein and Kim Il Sung all fell into when American democracy looked like disorder to their authoritarian eyes — with tragic consequences for their regimes when they challenged the United States.

The fundamentals of American power are still unmatched. The United States has 50 major allies compared to one for China (North Korea), and polls show that more Americans are committed to these alliances than ever. The American economy remains the most innovative in the world as measured by patents and successful start-ups, backed by energy production at home and dynamic capital markets. The American economy still accounts for one-quarter of the global economy as it did in the 1990s during the supposed period of American unipolarity. More recently, the U.S. economy has been growing by the size of Australia’s economy every two years.

There is also some encouraging news hidden in the painful theater of the debt ceiling crisis. In the end, Biden and McCarthy defied the extreme wings of their parties and are now working on a bipartisan majority to support a package of legislation that plays to the center and not the fringes. Some astute commentators are noting that the “Freedom Caucus” and “Progressive Caucus” may be growing louder but are actually losing clout because of their inflexible positions. McCarthy’s very narrow majority in the House means a vocal minority in the Republican Party can hijack politics for a period of time — but not indefinitely.

Harsh partisanship in American politics is not new, but it is taking a form that has markets and allies nervous. Nevertheless, democracy came out of this as the worst form of politics, except for all the other forms, as Winston Churchill once quipped. And the unnerving drama of the debt stand-off notwithstanding, the United States will clearly remain the indispensable superpower ally for the other democracies in Europe and Asia. One might even bend Churchill’s famous quote to say, “the worst kind of ally […] except for all the other options.”