Sean O'Grady: America needs to get real before it is humiliated at the hands of the market

Economic Life: Debt is a hot topic on the US news channels but there is no sober expert taking you through how the US came to be where it is and what its options are
Click to follow

You don't have to spend much time in the US, or, more particularly watching American TV, as I have recently on a trip to the IMF, to realise what is wrong with the place.

Click HERE to upload graphic (205k jpg)

What you see and hear on the news channels offers grounds for despair. I have to say that I like individual Americans, a terrible generalisation I know, and there is much to admire - many of her companies still lead the world, Hollywood dominates global popular culture, her armed forces protect the rest of us in the free world gratis, and Americans enjoy an enviable quality of life, whatever the stats say. But America's politics, and especially the management of the economy, is one the least appealing aspects of the American way, and, as Standard and Poor's and the IMF have warned in recent days, it threatens to undermine that way of life in a petty, humiliating fashion.

It's difficult to know where to start but we might as well take a look at the immediate problem of the federal debt ceiling. In a way this ceiling is a good idea, and a laudable attempt at self-discipline, a bit like having a bank manager who you tell not to allow you increase your overdraft limit under any circumstances, or a heroin addict who issues similar instructions to friends, family and dealer. So it is with the US debt ceiling, currently set at $14,294bn.

The United States has almost reached at that stock of national debt, and the fact that technical default might follow a refusal by Congress to nudge it upwards is one hot topic of debt on the US news channels. I say "news channels", but they are really rant channels, as if every newspaper was just one long opinion piece. You search in vain for the sort of explanation and analysis offered routinely on British television. There is no sober-sided expert taking you through how the US came to be where it is and what its policy options are.

This is not European snobbery; US papers are much better, but they are a declining market. No. American TV debate is indefensible. It's a bunch of talking, yelling conservative heads going on about how Obama secretly wants to turn the US into a European "socialist" state or liberal heads scornfully ridiculing Republicans.

Bill O'Reilly (Fox) and Rachel Maddow (MSNBC) seem to be the leaders of their respective packs. Now, I happen to agree with Rachel and disagree with her condescending view of Republicans as congenitally stupid, and, like O'Reilly, I can also see how President Obama has painted himself into a terrible corner by ruling out some policy options – but I doubt he's a socialist.

Anyway, the Tea Party are the ones baulking at increasing the debt ceiling, and the best estimate is that the American government will run out of room somewhere between 16 May and 8 July, in which case it will be in no better a state to honour its obligations than Greece, Ireland or Portugal.

OK, the Tea Party Republicans are being unduly stubborn, but you can see their point. The ratchet on the US debt is in one direction only, and a firm unbreakable ceiling might conceivably force policy makers to trim spending immediately. (The graphic shows just how flexible their overdraft limit has been since it was started in 1940.) Surely, you might wonder, the administration can find some corner of the empire of spending that they could trim and keep within what is after all a pretty generous overdraft. It would be nice if the White House gave some sort of nod to that, but they will not. Hence the stalemate. When push comes to shove no one expects the US to default on rolling over its debt – this is not Greece. Yet the failure by Congress and administration respectively to show flexibility and that sprit of cross-party co-operation that was once so hopefully invoked by President Obama is already raising the cost of servicing America's debt. Even a few basis points on a $14trillion debt costs many millions of dollars – a type of waste in itself.

So why, apart from a media that offers more heat than light, does America find it so difficult to control its borrowings? Again TV offers some clues. Every voice aired is filled with terror and resentment at "$4 gas", when much of the rest of the developed world would regard that as wonderfully generous price.

If America's fundamental problem is that it consumes too much, and especially foreign oil, why not levy a tax on that very foreign oil, phased in so that Detroit would have time enough to accelerate its production of greener cars (where it is making progress). A small federal sales tax would also offer a very quick fix to plugging the hole in the public finances, as it has in the UK and Europe with VAT. Income taxes would probably have to rise too, regrettably, but maybe not so radically if other measures were implemented.

Yet ordinary Americans regard any tax hikes with horror, arguing that they are depressed enough as things stand and the last thing America's faltering recovery needs. Welcome to the real world, America. It is simply the price you pay for consuming far too much on borrowed money. Cuts in "entitlement" programmes are also fiercely resisted; raising the retirement age or reducing the Medicare or Medicaid bills is regarded by the President as a betrayal of the bonds that tie Americans together.

Yet these are Americas biggest single liability, being both expensive and fast-growing obligations. When every second ad on TV is for type 2 diabetes treatments and the other is for fast food, you get the message that this country's physical and economic health are intimately connected. Or, to give a prime example of being just plain "spoilt", Americans also still enjoy tax relief on the mortgage bills. That was once sacrosanct here – until chancellors Norman Lamont and Kenneth Clarke slowly eroded it in the name of deficit reduction (and it worked). But no one is going to take that away form Americans, and certainly not when their real estate market is still on the floor.

Everywhere you turn, in other words, sectional interests, well defended by the administration or Congress act as trip-wires in any deficit reduction journey, roadside bombs that will obliterate any brave souls who attempt compromise (and some have tried, and have failed, in recent months).

Some, though not all, of this could be addressed by constitutional change, lengthening congressional terms for example, or just raising the level of debate and lowering public expectations. But Americans need to do something for themselves, otherwise they will be forced to do so by markets. Due to their vast indebtedness to foreigners (see chart), including the likes of China and the Gulf states, the rest of the world will soon be able to order America around, and America will not like that.

Something, perhaps , for Bill and Rachel to agree on?

Hamish McRae is away