We have a deal, but Washington has also deeply damaged America’s brand

"I don’t think most people in Washington have any idea of the damage that has been done in the past few weeks to America’s brand around the world." So observed today one of the keenest observers of Washington I know, a major international figure who is regularly in touch with heads of state, finance ministries, and financial institutions worldwide. He says they are shocked and worried by what they have observed over the past several months.

While some in Washington are congratulating themselves for the debt-ceiling deal, they are failing to recognize the toll their debate has taken. Rather than restoring confidence in a United States returning to sound financial principles, they have revealed — both in their actions of the past few months and in the cynical, half-baked nature of the deal that has been struck — profound flaws in the character of our system and our leaders.

A downgrade may come or not. Certainly, if the ratings agencies stick to their guns and assess whether real progress has been made in controlling the growth of U.S. indebtedness, one is imminent. This deal, as has been noted by observers such as Gang of Six member Sen. Tom Coburn, a Republican respected by Democrats for his straight shooting on these issues, is less than meets the eye. It neither produces really meaningful savings nor does it actually lock us into a process that is certain to produce meaningful savings in the near future. There are too many accounting tricks and loopholes, too many hard choices sidestepped and pushed off to the future.

In fact, the deal is really an almost perfect manifestation of what might be considered the ultimate legislative form of double negative: the compromised compromise. Finding common ground is healthy. Providing both sides with cover but taking no real steps to advance either of our national necessities — promoting growth or reducing the deficit — is quite another matter. The result is much more of a muddle than it is, as advertised, a triumph for the middle.

The deal does none of the major things it was intended to accomplish other than avoiding immediate default on our debt (not a small thing, admittedly). It hardly ensures we will not see such deficit-related paralysis until 2013. While there may be no more debt-ceiling discussions, there will be budget debates, proposed budgets to vote on, continuing resolutions — a broad panoply of congressional activities that can and will trigger replays of this summer’s logjam. It does not produce any near-term real cuts, given that most of the modest cuts to which it commits are pushed off years down the road and many are not so much cuts as they are cuts to projected growth in spending. It does not even really involve a hard trigger because, as Coburn noted, there are many procedural routes around the rule requiring the trigger be invoked, emergency reasons to avoid it that can be declared, etc. In short, it does not do much beyond the minimum either side sought. More could have been achieved with a clean debt-ceiling extension and a little sincerity and trust on both sides to produce actual cuts and revenue enhancements in the next round of budget talks — which begin immediately. But no one trusts each other in today’s D.C.

While we avoided immediate catastrophe in international markets, however, the elected stewards of our nation did immeasurable damage to the United States’ reputation. If the Bush administration’s conduct of the war in Iraq and against terror undercut the world’s belief in the United States’ stated international principles and the 2008-2009 financial crisis undercut the world’s belief in American capitalism, this debacle contributed to a growing sense of doubt about the functioning of American democracy.

This serves our enemies and unnerves our allies. It will have would-be investors in U.S. government securities and dollar-denominated assets increasingly looking for alternatives. It will decrease U.S. influence in international financial institutions. It may increase the cost of U.S. capital, and should the economic situation worsen worldwide and the conclusion be that America will be unable to act swiftly to stop the bleeding, it may produce more abrupt, negative market reactions in the future. Capital is likely to come to cost more. That is likely to be a drag on growth. That in turn is likely to produce less revenue in our government coffers and almost certainly will prove that our current, bleak budget projections are overoptimistic.

While American political leaders may try to rationalize this deal away by saying it is the best that could have been struck, that’s nonsense. America could have done this without such unnecessary, confidence-shaking drama. America could have done this in a way that was consistent with sound economic principles. America could have done this in a way that was intellectually honest. But we did not. As a result, while this deal may have temporarily shored up market confidence in the U.S., the process leading up to it has almost certainly done much more severe lasting damage than we are easily able to calculate today.