07/31/2011 12:32 pm ET | Updated Sep 30, 2011

America Will Avoid Default But There's A Lot More to Do

Politicians have been busy this weekend negotiating a deal that would lift the debt ceiling and avoid the government having to prioritize its immediate payments and thus risk a debt default. This comes after a week in which macro policy uncertainties stood in stark contrast to solid corporate earnings, leading to losses of some 4 percent in all the major stock market averages.

As I write this on Sunday morning, indications out of Washington point to a "framework" that, once reflected in legislation passed by Congress and signed by the president, would allow the debt ceiling to be raised. It appears to include four key elements: enough of an increase ($2.4 trillion) in the debt ceiling to get the country beyond the 2012 elections; a first round of spending cuts ($1 trillion), though details are lacking; a second round of deficit reduction based on the work of a special congressional commission; and, failing this, a mechanism that would enforce additional spending cuts of over $1 trillion.

This compromise framework is likely to evolve into a political deal -- not because it is perfect (it is far from that) nor because critics will be silenced (they won't, as some Democrats lament the absence of tax measures and some Republicans regret the lack of entitlement reform). Rather, it is a compromise that enables everyone in this debt debacle to declare partial victory.

It is high time to remove the specter of a debt default by the most powerful economy in the world. But for the positive impact to be both significant and durable, the compromise must be assessed not as an end in itself but as a sustainable means to the more genuine end.

This end is defined in terms of robust economic growth, lower unemployment, less income and wealth inequality, and the restoration of household, corporate and international confidence in America's economic governance process. Three issues stand in the way:

First, it is not clear whether the evolving compromise is enough to satisfy the rating agencies, and S&P in particular. Indeed, if S&P were to stick to what it said on July 14 when it placed America's AAA rating on a negative watch, and it is far from certain that it will do so given recent developments, the possibility of a downgrade cannot be eliminated as yet.

Second, the compromise is not enough to offset the considerable economic damage already inflicted by the debt debacle, let alone restore confidence that the political system is able to respond to the serious structural challenges undermining growth and jobs (including malfunctioning labor, housing and banking markets). This is an acute concern given Friday's horrible GDP data.

Third, the open-ended component of the compromise does little to counter worries outside America. Foreigners have been watching Washington's dysfunctionality with a mix of bewilderment and concern. After all, they depend on America as the major provider of the global public goods that they use and pay for -- from the dollar as the reserve currency to this country's financial markets as the best place to outsource the intermediation of their hard-earned savings.

Politicians are taking an important step this weekend to remove the threat of a debt default and to focus more credibly on problems facing the economy. We should thank them for that. But we should also remind them that their work is far from done.

Rather than declare victory, Washington should waste no time in redoubling efforts to remove the multiple policy uncertainties and structural impediments that stand in the way of restoring America on the path of high growth and plentiful job creation. Anything short of that will imply further economic and social deterioration, and a greater erosion of America's global standing.

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