The Debt Problem

There’s been a lot of finger pointing concerning the recent downgrade of the U.S. credit rating from both sides of the isle. While it is true that over the years both sides have contributed to our economic problems that have led to the downgrade, I find it amazing and not at all helpful that many Democrats are placing all the blame on the Republicans, especially those associated with the Tea Party. Even more problematic is the media just seems to accept their accusations as true with no challenge to prove their point.
Rachel Maddow on Meet the Press (Aug 7) encapsulated a distorted view that I have seen expressed by many on the Left. She said:

“They (S&P) absolutely indicted the fashionable intransigents of the Republican Party right now in Washington. And there’s a question about whether or not there will be a change in fashion, whether or not that will be a sort of wakeup call that the parties need to work together rather than the Republicans’ fashion right now, which is that any deal is a bad deal.”

She misquotes the S&P as saying: “The downgrade was motivated by all the debate about raising of the debt ceiling. It involved a level of brinksmanship greater than what we had expected.”

Then commenting on this quote that doesn’t exist she adds:

“That’s why they say they downgraded us. Not because there’s too much debt, but rather that Washington is not working,… They said they did this because of brinksmanship over the debt ceiling. They did not say they did this because there’s too much government spending.”

This is just flat out wrong and the disconcerting thing is that many Democrats are following her lead.

Let us look at the facts so we can assess the true situation.

S&P and other ratings services haven’t just become concerned about our credit rating at the beginning of the debt ceiling crises. They have been concerned for some time and their original concerns had nothing to with an impasse in raising the ceiling, but that we were raising it too much and going too deep into debt without the means to climb out.

Reuters reported on Aug 26, 2010 that John Chambers, the sovereign-ratings committee chief of S&P, told the wire service in an interview – how Congress responds to the commission’s proposals on soaring U.S. deficits will significantly influence the ratings company’s outlook on the U.S. credit rating.

The Wall Street Journal had this headline back on Jan 14, 2011

S&P, Moody’s Warn On U.S. Credit Rating

“The United States’ AAA credit rating may be at risk sooner than previously thought as the nation fails to deal with its growing debt…”

On April 18, 2011 Reuters published this headline:
S&P threatens to cut U.S. credit rating on deficit

The article stated: “Standard & Poor’s threatened Monday to downgrade the United States’ prized AAA credit rating unless the Obama administration and Congress find a way to slash the yawning federal budget deficit within two years.”

Here is a quote from Standard & Poor’s site from April 18:
“We therefore think that, assuming an agreement between Congress and the President, there is a reasonable chance that it would still take a number of years before the government reaches a fiscal position that stabilizes its debt burden. In addition, even if such measures are eventually put in place, the initiating policymakers or subsequently elected ones could decide to at least partially reverse fiscal consolidation.”

Then on April 25 CNN’s money site made this statement:
“There’s been a lot of hand-wringing and posturing over Standard & Poor’s announcement that it has changed its outlook for the U.S. Treasury’s long-term debt to “negative” for the first time since it began rating Uncle Sam’s securities 70 years ago. To many people, it feels like a judgment from on high about our government for spending so much more than it takes in.”

Moody’s and private financial experts have also issued warnings about the debt over the years. Here’s a headline from Reuters from way back in 2009

U.S. likely to lose AAA rating
Jun 15, 2009 “Technical analyst Robert Prechter on Monday said he sees the United States losing its top AAA credit rating by the end of 2010, as he stuck by a deeply bearish outlook on the U.S. economy and stock market.

“Prechter, known for predicting the 1987 stock market crash, joins a growing coterie of market heavyweights in forecasting the United States will lose its top credit rating as the government issues trillions of dollars in debt to fund efforts to bail out the economy.”

So, what is the common thread in all these warnings? Is there any word about nasty Republicans holding the debt ceiling hostage?

No. Until recently no one knew a debt ceiling impasse would be a problem

Instead the danger that threatened our credit rating was the debt, plain and simple.

And what has been the central message of the Tea Party?

To cut spending and live within our means. In other words, the Tea Party is not the problem as Maddow and others claim but they are working in the direction of the solution suggested by S&P over the years.

S&P doesn’t care how we manage the debt as long as we put our house in order. In their latest release they point out two ways to do this. The first is to increase revenue though tax increases and the second is spending cuts. They believe spending cuts is the most efficient but Maddow makes a big deal over the fact that they mention the word “revenue” three times in their comments. What she overlooks is they make references to out “debt” 28 times.

It is true that in their latest release that the impasse was a factor in lowering our rating at this time. Because this illustrates the difficulty of Congress in dealing with the debt through added revenues or cuts our risk factor has increased. They’ve warned us of a downgrade for years now. It appears the impasse just speeded it up a few months.

S&P is especially concerned about our debt ratio to the GDP. It said that if $2.1 trillion in cuts materialize then by the end of the year our debt will equal 74% of the GDP. By 2015 it will equal 79% and 2021 it will be 85%.

If the Bush Tax cuts were to expire the percentages would be 74%, 77% and 78%

On the other hand, if a second round of $1.2 trillion in spending cuts does not occur the figures will be 74%, 90% and a whopping 101%

S&P believes that tax increases would increase revenues and help a little with the debt, but all this would be much more than offset if spending cuts do not materialize.

If I had my way I would not raise taxes but cut spending. A Republican plan goes like goes like this.

We freeze spending for seven years and also cut a mere 1% in spending during each of those years. The claim is that we could balance the budget in 7-10 years.

That sounds like about as painless a way to set our house in order that is possible.

Unfortunately even this is too huge of a spending decrease for the Democrats to accept and they are insisting on tax hikes as part of the deal and fewer spending cuts.

I think we have dug such a deep pit for ourselves that we will have to increase revenue as well as decrease spending. Any tax hike should expire within seven years and then we can reassess the situation.

Also, the spending cuts need to be written in stone. Time and time again we’ve been promised spending cuts that did not materialize. Congress can talk about spending cuts in 2013 but we’ll have a whole new group by then that may seek a way around the cuts.

This time the spending cuts will need real teeth if we ever want to get our AAA+ rating back as well as the confidence of the world.

Copyright 2011 by J J Dewey

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