Americans are mad as hell. Despite Treasury Secretary Geithner’s bland assurances that it couldn’t happen, we find our sovereign debt downgraded and our fiscal future in jeopardy.
Who’s to blame for this mess? Standard & Poor’s, the ratings agency that apparently can’t add, but that pretends to predict our country’s financial future?
Our legislators, who couldn’t agree to a more potent plan to rein in our deficit spending?
President Obama, who turned budget negotiations into yet another class-warfare-laced campaign stop?
The Tea Party that refused to allow higher taxes?
The liberal media, that continues to push for even more government spending?
Answer: all of the above.
Standard & Poor’s climbed out on a limb Friday and announced a downgrade to the AAA U.S. debt rating that has served as lynch-pin for global credit markets for decades. (This in spite of making a $2 trillion goof.) The agency argued that the debt ceiling deal failed to adequately cut our deficits; they also cited alarming “policymaking uncertainty…”
S&P, along with its competitors, desperately needs to rebuild its reputation. After helping to spur the financial crisis by green-lighting the creation of hundreds of billions of dollars in doomed mortgage-backed securities, the ratings agencies face increased oversight of their inherent conflicts of interest and their professionalism under the new Dodd-Frank legislation.
It isn’t the first time the agencies have failed at their jobs. They also missed the giant corporate scandals of the last decade, failing to unearth the chicanery at Enron and WorldCom, among others. Jumping ahead of the sovereign debt crises in Europe and in the U.S. was a chance to restore credibility.
By being first out the gate, S&P has achieved guru-status. Moreover, the company boxed themselves into a corner in mid-July, when they placed U.S. debt on a negative credit watch, and demanded legislators produce a $4 trillion deficit reduction deal to maintain our triple-A rating.
That was shortly after House Speaker Boehner had abandoned the “grand ($4 trillion) plan” he had negotiated with President Obama; perhaps S&P thought the compromise would ultimately stick. When the eventual bargain fell short, S&P was almost required to act.
In any event, the fault does not lie with those who proclaim the emperor naked. Many of us have been sounding alarm bells for years over what S&P calls our “fiscal trajectory.” Though our current debt to GDP ratios are not out of line with other triple-AAA credits, it is the inexorable rise in that ratio that is alarming, and that our leaders have consistently ignored.
Much of the crisis we face stems from our aging population and consequent explosion in medical costs.
In his eagerness to pass a legacy-enhancing healthcare bill, President Obama added to our future burden.
Writing last fall on this topic, S&P forecast that debt to GDP would rise to 415% by 2050. S&P warned that the U.S. either had to raise taxes sharply or cut health-related expenditures. Our political leaders are unwilling to purse either of these paths.
Democrats won’t countenance changes to our unsustainable entitlements programs, and GOP leaders have refused to allow any increase in tax revenues. It is an impasse that angers most Americans, who want taxes hiked for the wealthy. They cannot understand Republican intransigence on this front, which the president demonizes as self-interest.
The GOP counters that we will never rein in government spending if we paper over current excesses by raising taxes.
They are right. Spending programs become embedded. No matter what, government outlays will rise – even under the new debt ceiling agreement.
Also, Republicans argue that it is spending that is out of line, not tax collections. Using 2007 as a benchmark – before the financial crisis skewed both receipts and outlays -- tax collections amounted to 18.5% of GDP. That is comparable with most non-recession years and actually slightly above the historical average of 18% recorded since World War II.
Outlays at 19.6% of GDP were also in line with the historic average of 20.3% in 2007, contrary to those who claim that President Bush pushed spending far beyond what we could afford.
Only recently has spending sky-rocketed, climbing above 25% in the current fiscal year. Nearly all projections show outlays staying above historical levels. That is why Republicans resist raising taxes. They know a slippery slope when they see one.
Still, some compromise on taxes might have furthered GOP ambitions. Agreeing to raise taxes on those earning over $1 million per year ($250,000 is too low) might have convinced Americans that Republicans could be trusted to put our finances in order.
Americans are naturally confused and angry about these events. They have been told over and over by the liberal media that the way to combat the recession is to increase government spending and to raise taxes.
The New York Times, for example, refuses to admit that budget constraints exist, that it is possible to unwind some of the spending excesses of recent years or that hiking taxes might be deflationary.
We need an experienced manager to guide us through these rough seas, someone who can inspire confidence in our small business owners, who can talk common sense about cutting government spending and who can restore the pride Americans take in our country.
My bumper sticker for 2012: Hope for a Change.