Political India: Engaging America

From The Hindu

Although Democrats and Republicans were no closer to agreeing on a deal to extend the United States’ debt limit at the end of this week, political leaders across the board appeared to acknowledge the severity of the radioactive fallout of the potential sovereign default that could occur on August 2.

In particular Governors of numerous states lamented the almost certain federal expenditure cuts that would come out of the ongoing negotiations in Washington, arguing that such any such funding shortfall could further cripple the recovery at the state level and hobble job creation.

Martin O’Malley, Governor of Maryland and a Democrat, was quoted saying, “If I can use a whitewater analogy here, the two rocks we need to shoot between is, on the one side, being needlessly driven into default, which will kill the jobs recovery... The other rock is massive public sector cuts, by whatever name, that would also kill the jobs recovery.”

Mr. O’Malley was speaking at the National Governors Association in Salt Lake City, along with others such as Republican Governor Haley Barbour of Mississippi, a Republican, who described the prospect of the U.S. defaulting on its debts as “terrible” for states. “No matter what happens, states are going to get less money from the federal government,” Mr. Barbour reportedly said.

After a series of week-long, intense negotiations, President Barack Obama on Friday reiterated his message calling for a “balanced approach” that would include not only spending cuts but also higher revenues from taxes on the wealthiest Americans.

If a deal was not reached, he warned, another serious consequence of default would be that all American households would anyway face higher borrowing costs that were tantamount to a tax. “We could end up with a situation... where interest rates rise for everybody all throughout the country, effectively a tax increase on everybody...” he said.

While Republicans have advanced numerous proposals to agree a debt limit hike Mr. Obama argued that such short-term solutions were not as desirable as a deeper reform of the U.S. deficit-accumulating tendencies.

Even as rating agencies such as Moody’s and Standard and Poor’s put the U.S. on notice this week, warning that the failure to break the negotiations logjam would lead to a credit rating downgrade, Mr. Obama appeared to reject proposals by House Republicans Senate Minority leader Mitch McConnell to pass an emergency measure allowing three short-term increases in the debt ceiling.

Distancing the White House from Republican calls for a balanced budget amendment, or a change to the constitutional debt limit rule, Mr. Obama said that the U.S. was not the same as Greece or Portugal.

He said, “Our problem is we cut taxes without paying for them over the last decade; we ended up instituting new programmes like a prescription drug program for seniors that was not paid for; we fought two wars, we didn’t pay for them; we had a bad recession that required a Recovery Act and stimulus spending and helping states — and all that accumulated and there’s interest on top of that.”