As the August 2nd debt ceiling deadline looms ever closer, President Barack Obama has asked congressional leaders to work through the weekend. The hope is for agreement on a "grand bargain" that avoids disorderly disruptions to government payment obligations and creates, quoting the president?s remarks of yesterday, "an environment in which we can grow the economy and make sure that more and more people are being put back to work". The likelihood is that the disruptions will indeed be avoided but, unfortunately, only through a "mini deal".
To address its economic woes, America desperately needs to transition from a series of ad hoc measures to a more holistic policy approach. The notion of a grand bargain can be a critical enabler in this regard, especially if four conditions are met.
First, a grand bargain can serve as the catalyst for unifying diverse policy actions into clearer, more comprehensive drivers for growth and medium-term fiscal sustainability.
Vital areas include tax and spending reforms, much greater emphasis on growth enablers (including infrastructure, education and retraining), and meaningful steps to restore a more normal functioning of the housing, labour and credit markets. To be effective, they must be implemented as a package of reinforcing measures and not a series of standalone announcements.
Second, the grand bargain itself ? especially if centred on the urgent need to address the country´s growing unemployment crisis ? can help overcome the repeated difficulties that the administration has faced in outlining a credible economic vision. This is central to unlocking the considerable idle capital that is waiting on the sidelines for a medium-term roadmap before being committed to investment spending.
Third, it would help counter increasing nervousness among America?s foreign creditors. With the Federal Reserve completing its purchase of treasuries under QE2 last week, these creditors now hold the key to maintaining the low interest rates that are so critical for limiting the deterioration of the country?s debt dynamics.
Fourth, it would intensify pressure on other systemically-important parts of the world ? particularly Europe and China ? to join the US in striking their own grand bargains.
In Europe, this would take the form of a more credible and effective approach to the peripheral debt crisis, including opting for either greater fiscal union or proper debt restructuring and a meaningful improvement in competitiveness.
For its part, China needs to place greater faith in its consumers, allowing them to influence policy formulation as much as producers do.
All this is what should ? indeed, must ? happen if the US, and the global economy more broadly, are to put in place the conditions for high growth and financial stability. However, I worry that what is likely to occur in the coming days could be insufficient.
Aided by President Obama´s personal and highly visible involvement, American politicians are likely to meet the August 2nd deadline. The bad news in that this may only result in a mini-deal that repeats the bipartisan agreement that overcame the threat of a government shutdown on account of the continuing budgetary problems, though involving more meaningful commitments.
Such a disappointing outcome would fall short of what is required to energise America?s economy, accelerate job creation and enhance medium-term fiscal sustainability. Also, it would contribute very little to improving the outlook for the grand bargains needed elsewhere in the global economy.
Let us therefore hope that, if it indeed materialises, the mini-deal is only a means to a grand bargain down the road. It would be a tragedy if, instead, it were an end in itself.
