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Of Debt Ceiling Debates, Non-Denial Denials and Non-Default Defaults

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MOODY DOWNGRADE

In 1980, Republican presidential nominee Ronald Reagan asked the American people: "Are you better off than you were four years ago... Is America more respected?" Fast forward to the cyber era of 2011, where anything less than real time is considered "so two weeks ago," and weeks seem like dog years: are you feeling better now than you did four months ago? Do you believe that America is more respected in the world after our debt ceiling smack-down?

After weeks of histrionics and political brinksmanship that terrified consumers, roiled the markets and bemused and befuddled the rest of the world, our leaders have proclaimed that fiscal calamity has been averted and the budget debate has been altered forever.

How's that working for you?

In the opinion of many friends and colleagues, we have just witnessed a circus that diminished our image on the world stage and, among the folks I have spoken with on all sides of the political spectrum, didn't do a hell of a lot to improve their impressions of the American political process

And while we're on the subject of the American political process, do you remember All the President's Men? If you read the book by Washington Post investigative journalists Bob Woodward and Carl Bernstein, or saw the movie starring Robert Redford and Dustin Hoffman, the political drama of the past few weeks may bring back vivid memories of our dark and relatively distant past.

All the President's Men
chronicled the downfall of the Nixon administration from the botched 1972 break-in at the Democratic National Committee offices in the Watergate complex, to the elaborate and distracting White House cover-up, to the first resignation of an American president in August of 1974. There was intrigue, countless plot twists, shadowy foreign and domestic operatives, a slew of unforgettable vignettes and several turns of phrase within the story. The one that keeps coming back to me these past few weeks is the "non-denial denial."

The term "non-denial denial" was coined by Woodward and Bernstein to describe what most officials of the Nixon administration did when confronted by an awkward question or compromising fact: they didn't deny it -- and they didn't admit it, either. They simply deflected the question by talking about some related aspect of the inquiry that could be framed in a positive light. They would then refuse to answer any other questions. This happened so often during the Watergate era that the "non-denial denial" has become a part of American political lexicon, though these days they are not as elegant as they once were. In recent years when confronted with a difficult question, many politicians routinely, lamely, and unabashedly... lie. It is as if decorum no longer requires any effort to sidestep an awkward fact -- it's become politically correct to let loose with an unblinking prevarication to score political points or reply to a tough question. If you have any doubt, just take a look at Politifact.org's ever-growing list of falsehoods.

These past few weeks, however, we have witnessed a throwback to the halcyon days of the Nixon era and its parlance. What just happened in Washington was a non-default default.

OK, so we all know that there wasn't an actual default. The United States will continue to fund Social Security, Medicare and pay interest to its largely foreign investors. But we also know that there was never a real chance that the debt ceiling would remain in a state of suspended animation. The only question was whose blood would be spilled during the course of a pathetic tug-of-war that would ultimately lead to the ceiling being increased.

There are a great number of things one could say about the latest Potomac two-step. The deal itself is labyrinthine and the Republicans outmaneuvered the Democrats by convincing them -- with the help of many of the media -- that Tea Party partisans would never agree to anything in violation of "The Oath." Funny, I always thought that federal lawmakers took an oath to "support and defend the Constitution of the United States," as opposed to pledging allegiance to a group like The Americans for Tax Reform, which convinces our legislators to sign a pledge stating that they will never raise taxes, on anyone, for any reason (unless of course, those tax increases are accompanied by equal or greater tax reductions).

As there will be countless opportunities to read about every excruciating detail of the debate and the compromise, let me focus on one. Although there wasn't a default in terms of America's payments, there was a gaping, unprecedented, and embarrassing default in our political process, Democratic philosophy, and the social contract of the United States. And it will most likely cost us all money.

Over the past couple days, three small, yet respected, rating agencies downgraded the U. S. credit rating. We heard very little about that. Shortly after the president signed the compromise bill, Moody's announced that it wouldn't downgrade the United States' debt rating, but had changed its outlook to "negative." Our financial North Star -- the stock market -- continued its slide for an eighth straight day, dropping most precipitously after the announcement that the deal had been done, and the details were released. As usual, the smart money knows. We may be waiting with bated breath for an official word from S&P, but the writing is on the wall.

Here's what we just did: we cut spending in the middle of a recession (we all know there's still a recession going on, don't we?). This violates every principle of sound economics, and in my opinion will ensure that the arsenic ice cream cone of the American economy will get a double dip. We completely put off any rational discussion of what priorities will govern the cost-cutting efforts -- that, pursuant to the new bill, must add up to a total of $2.4 trillion by December 23, which will make for a very red Christmas, and keep Medicare beneficiaries wondering about what benefits they really will have come January. We just engaged in a deficit reduction effort without any increase in revenues -- a very Tea Party move, but not necessarily a very sound one.

Lest past lessons be forgot in the swirl of political rhetoric: When an urgent debt reduction bill was passed during the Reagan administration, the shortfall was made up by a mixture of 82% in revenue increases, and 18% in cost cuts; under Bush 41 it was 38% revenue increase and 62% cost cut; in the Clinton Era, it was 62% revenue increase and 38% cost cut. Today, however, the Friends of the Tea Party forced through a unilateral spending cut at a time when every major economist has opined that America's debt problem cannot be solved without a combination of both revenue increases and cost reductions.

Sadly, we have forever undermined our political will and the efficacy of our political process in the eyes of every alert American, and in the eyes of the rest of the world. This, of course, is the real problem. Our nation is fractured, and no longer has a unified voice.

And that is what will cost money. Whichever side you're on, you must appreciate that the chances of a new economic downturn (or, if you're an optimist, a break in the recovery) have increased markedly. Although it is unlikely that the major rating agencies will immediately downgrade our credit, the chance of that downgrade has been immeasurably increased by the bombast and theater that accompanied this compromise, along with the promise of a repeat performance in December. Rates may well go up, sooner than they should have or otherwise would have, making all of the problems that I have written about in this column -- such as the housing price and foreclosure crisis -- much more pronounced. Presumably the compromise was necessary in order to return stability to the economy and to the marketplace. But it didn't -- we know that T-bills will pay interest, but we don't know where we are going as a society.

Perhaps I am sounding more doom and gloom than I am about the future of the United States. While I truly believe that we will emerge from what has been, in my view, a period of tornadic uncertainty and trauma, I also believe that the underlying truth of our recent days is simple, and very disheartening. It's not a secret that Washington has been inefficient, overspending and regulating misguidedly for years now. The difference is that before the new realities of the 21st-century we could better afford our largesse. But somehow America is poorer now than it was before, and just like every household in this great country, we need to tighten our belts, without throwing the dinner plates at our spouses or kids.

And just in case the debt ceiling antics weren't absurd enough, here's a final tidbit of what Congress did -- or didn't do -- before it recessed for the month of August. For what would have been the 20th time since 2007, the FAA needed a temporary funding extension (naturally, why it needed 20 separate funding commitments in four years is another very long and very silly story). Heretofore, FAA funding extensions, like debt ceiling increases, had been strictly perfunctory. This time was different. It didn't get it, the story goes, because the slash and burn boys found $14 million in local aviation subsidies they didn't like (others point to an anti-union provision that was slipped into the bill by the right). This means that for the duration of the congressional recess -- about five or six weeks -- airport construction projects will be halted, 4,000 FAA workers will not get paid, while (get this) approximately $1.2 billion in airline and airport fees and taxes will not be collected. Well, maybe security and continued functionality of air travel in America isn't so important. But while the FAA hangs in limbo, the government has announced, thank goodness, that the investigation of DB Cooper -- the infamous hijacker who collected $200,000 in ransom and then parachuted into the Pacific Northwest woods in 1971 -- is ongoing, even though the principal suspect in the case has been dead for at least 10 years.

In other words, our government can find the money to go after dead hijackers, but can't find money to pay the people that keep us safe in the air -- who pay for themselves anyway.

To paraphrase a famous columnist, "Only in America, kids."

This post originally appeared on credit.com