Despite Debt Deal, Much Damage Already Done in World’s Eyes

Washington – With the deal reached Sunday night, the United States has a good chance of escaping the debt limit showdown with its credit rating intact.

The United States government may not be so lucky with its reputation.

Even before negotiations went down to the wire on Sunday night, the bitterness, division and dysfunction that resounded around the world in recent weeks as the United States veered toward default did more than just fuel a perception that Washington is approaching Japan-like levels of political gridlock. Among foreign leaders and in global markets, the political histrionics have eroded America’s already diminishing aura as the world’s economic haven and the sole country with the power to lead the rest of the world out of financial crisis and recession.

It has chipped away at the global authority of President Obama, who was celebrated abroad when he came to office as a man who would end an era of American unilateralism. Now the topic of discussion in other capitals is whether the Age of Obama is giving way to an Age of Austerity, one that will inevitably reduce America’s influence internationally.

Mr. Obama has all but acknowledged as much in recent weeks, as he paired his decision to withdraw the “surge” troops from Afghanistan by next September with a repeat of his declaration that “it is time to focus on nation building here at home.” His decision to commit few new American financial resources to supporting the Arab Spring and his insistence that NATO allies must bear the brunt of operations in Libya were deliberate reminders that times have changed, and that America can no longer afford either new Marshall Plans or new wars.

But the brush with default has added a new dimension.

It has left America’s creditors and allies alike wondering what had changed in American politics that a significant part of the country’s political elite was suddenly willing to risk the nation’s reputation as the safest place for the rest of the world to invest.

It raised questions about whether the United States now faces brinkmanship over a variety of issues between an emboldened conservative movement and a president whose authority is under challenge. And for all the talk on the right about “American exceptionalism,” especially among members of the Tea Party, it put doubts in the minds of many about whether America’s military and economic dominance is something the country is still willing to pay for — and will always survive.

The new head of the International Monetary Fund, Christine Lagarde, seemed to give voice to that concern when she noted on CNN that in the past there was always “a positive bias towards the United States of America, towards Treasury bills.” The events of the past few weeks, she said delicately, are “probably chipping into that very positive bias.”

Jeffrey Garten, a professor at the Yale School of Management and the author of several books about American power in the era of globalization, said on Sunday that the challenge for the United States will not end with this crisis.

“Even if the deal passes muster with the credit rating agencies, there is still a huge problem,” he said.

“The problem is that we need both a fiscal strategy and a growth strategy,” he said. “And what you hear around the world is that no one is convinced we do — that we have a pathway to making the debt sustainable and to dealing with everything from our infrastructure to our education system. It seems obvious to everyone that we haven’t done anything, but veer around to avoid catastrophe.”

Warnings about American decline are nothing new of course — they have permeated American politics since Vietnam, save for a brief period in the mid-1990s after the fall of the Soviet Union, when America briefly enjoyed its status as the world’s only superpower.

The fears may be premature today as well. With Europe consumed by its own economic crises, from the long-running drama in Greece to new fears about Italy, and with Japan inwardly focused on recovering from the earthquake and tsunami, investors found that there were few other places for the world to go. That helped explain why there has been no real run on the dollar, or on American debt — there is no place to flee.

“The lucky thing for us is that we are in a race with Europe and Japan for ‘most financially irresponsible superpower,’ ” Walter Russell Mead, a professor at Bard College and author of many works on the waxing and waning of American power, said on Sunday. “And right now, the Europeans and Japanese have substantial advantages in that race.”

That leaves China, which emerged the fastest and healthiest from the financial crisis of 2008 and 2009, as the only credible alternative on the world scene.

Leaders there have done everything they can to exploit the deadlock in Washington. They have used their official Xinhua news service to criticize the United States for “dangerously irresponsible” conduct that risks strangling the fragile economic recovery of not only the United States but the world as a whole. (The statement may sound patronizing, but it echoes criticism the United States issued to Mexico and Asia in the 1990s and to Europe more recently.)

It is all part, of course, of a Chinese campaign to advertise their own economic model as a superior one. But many global investors fear that the Chinese themselves are hardly immune from the kind of pressures that have frozen the Greek Parliament and the United States Congress from confronting underlying problems.

Part of the problem in the debate over the relationship between America’s debt and its power is that there are at least two camps — and the Obama administration (and many Republicans) have a foot in each of them.

One camp repeats versions of the argument put most bluntly by Adm. Mike Mullen, the departing chairman of the Joint Chiefs of Staff, who reminds interviewers regularly that “the most significant threat to our national security is our debt.”

Over time, he fears, cuts in the defense budget could hollow out the military and leave little for the development of a range of new technologies like advanced drones and cyberweapons that are needed for modern-day confrontations.

Traditional hawks in the Republican Party, chief among them Senator John McCain of Arizona, agree with him. Many in the Tea Party — a more populist bunch who contain a strain of isolationism — do not, arguing that just as America needs smaller government at home, it needs a smaller military footprint abroad.

There is another argument, though, which has less to do with American hard power than American soft power. Mr. Obama and his secretary of state, Hillary Rodham Clinton, came to office arguing that one way to avoid wildly expensive wars like those of the last decade was to invest in the remaking of failed societies. But a decade after the Sept. 11 attacks, that concept — that America must invest abroad for its own safety — is losing support fast. Mr. Obama has made clear that he has no enthusiasm for “nation building” projects in Afghanistan that go on for years or are unsustainable. They may be well intentioned, he has told aides, but they are too expensive.

Similarly, many inside the White House and Congress question whether the United States can afford to play its traditional role as the lender and spender of last resort in global financial crises. The idea of putting together a global package to spur the world economy — as Mr. Obama did just two years ago in London, with European and Chinese help — seems to be a huge stretch in today’s environment of austerity.

As Mr. Garten puts it, “the lesson of the debt limit crisis is that if there is another financial calamity, we’re operating without a safety net. Get used to it.”

This article, “Despite Debt Deal, Much Damage Already Done in World's Eyes,” originally appeared in The New York Times.