Initial reaction dealt mostly with the $2t error by S&P, something that should make the company blush a bit. But since math wasn’t the basis for their decision, I’m pretty sure there wasn’t much blushing in Toronto.
Reaction from the punditocracy ranged. Paul Krugman at the New York Times called it “outrage” because S&P was one of those who screwed up the Credit Default Swap stuff that led to our current global economic meltdown in the first place, not to mention the $2t mistake. Robert Reich echoes that sentiment. On the other hand Ezra Klein at the Washington Post believes the decision is pretty reasonable considering the political climate. The Economist, no liberal bastion, called the action a political downgrade, in one of the best articles I read all weekend. This was reiterated yesterday by Rachel Maddow on Meet the Press.
Now, nearly three days since the action, worldwide markets are down about 2%. That’s not surprising considering everything involved. In fact, none of this is particularly surprising. Quite frankly, as long as political leaders are more interested in winning the day instead of strengthening our economy and turning around our unemployment numbers, we can expect another downgrade soon.
Why? Because political leaders are bought in to their strategy of destabilizing our politics rather than solving the problem. All of this is about elections not patriotism. This is the “political brinksmanship” that S&P was talking about.
Despite the potential damage all of this manufactured drama may have caused, Senate Minority Leader Mitch McConnell announced it would “happen all over again” the next time the limit needs to be raised. This pronouncement, made before S&P issued it’s downgrade, is likely one of the very things that led the S&P to make it’s ratings change. McConnell, following a long-held practice of talking out of both sides of his mouth, has, in the past, stated we needed to “impress S&P” all while ignoring any and all compromise offers. I think they showed just how impressed they were through their actions.
Our largest foreign creditor, China, is none too happy. Nor are the people who hold the lion’s share of US debt, US citizens, 82% of whom disaprove of the job Congress is doing. We have a right to be angry. Despite the stronger than expected unemployment numbers last week, there’s a real fear that we’re staring down the barrel of a double dip recession.
While the political brinksmanship that led us here isn’t actually, you know, solving problems that regular Americans face, it is likely helping the political fortunes of those who have long sought political gain rather than national prosperity. The hard truth is, most folks don’t understand their own credit ratings, much less the factors involved in determining a credit rating for a country. They know that paying on time is good, and paying late is bad, and not paying at all is REALLY bad, but that’s about it. So when the time comes to actually hold those accountable that helped create this problem, well, how that plays out individually will be determined more by their personal world views rather than what S&P actually said. This is borne out in the reaction statements by political leaders around Washington and across the country, many of whom seem to have doubled down on the brinksmanship rather than make a generalized call for a real solution.
I’m pretty sure that, no matter what your worldview, you push the button in the voting booth for the person you think would do the best job at working to solve the problems you face, whatever those problems are. This can make the political calculus difficult to calculate on a district by district basis, but I’m pretty sure no one, including Tea Partiers, think that downgrading the US credit rating is good for the country, but I could be wrong about that.
I agree that we currently have significant structural deficiencies as it relates to our debt situation, politics being just one of these. The single greatest deficiency is that our national debt has been allowed to balloon over 250% in the past 10 years from $5.6t to over $14t. This was done, largely by a Republican Congress with a Republican President from 2002 to 2009. Don’t believe me? Here’s the chart from the New York Times:As you can see, the Bush Tax Cuts, and wars in Afghanistan and Iraq make up the lion’s share of the debt over the 8 years of the Bush White House. $3.3t of all debt spending is directly attributable to those two areas, accounting for nearly 64% of all the debt incurred during that period.
Further, the debt incurred by the Obama Administration, while on pace to surpass Bush over an 8 year period, could have been essentially erased had the Bush Tax Cuts not been extended at the end of last year. This is still an option and something that legislators should consider carefully.
Chances are, they won’t. Repealing the Bush Tax Cuts would make up about $285b in revenue a year. This additional revenue, over two years, would essentially cut Obama’s deficit spending by 1/3. However, Republicans in the House and Senate have no appetite for additional revenue, which is pure madness. All they want are cuts to anything other than Defense. This is not only unsustainable, but also just plain stupid.
Last week, while I was on vacation, Bruce VanWyngarden at the Memphis Flyer published a graph showing a rise in Food Stamp usage since 2007. Any cuts are, by necessity, going to hurt those people most, causing more and greater financial problems for ordinary people down the road, and essentially cutting revenue for the government going forward as these financial problems ripple through the economy. It would start a chain reaction that will likely make any recovery even more distant than it already is.
Recovery should be the focus of all of our legislators, regardless of party. That doesn’t seem to be the case. Winning the day and at the same time making the “other side” look bad is the focus. As long as that is the focus, no problems will be addressed, and the pain will continue its slow burn across the country.
In order to recover, we have to address the jobs issue. This is something that has been repeated over and over again by folks on both sides of the aisle. There is general agreement that we need jobs, the argument is over how to produce those jobs. One way to do this is to rewrite the Corporate tax code that encourages companies to keep more jobs stateside. Current corporate tax code encourages offshoring, something Democrats would do well to hammer over the coming months. This is not a “tax hike” per se, because it merely incentivizes domestic jobs growth. It would only be a tax hike for those companies who chose to continue sending work overseas.
This is actually a conservative strategy. Back in 1986, Ronald Reagan presided over one of the largest tax hikes in US history, pledging that “everybody and every corporation pay their fair share.” Since that time, new loopholes have found their way into the tax code, a problem that falls squarely on the shoulders of legislators of both parties.
Using this strategy will likely lead to additional revenues both from individuals and corporations as companies shift their strategy from offshoring to domestic growth, and individuals start working, and by extension paying taxes again. From my perspective it’s a win-win.
Of course there are plenty of other things that could be done. Will they be? Probably not.
As long as there are enough people hell bent on making the political environment toxic for our President, and in the process, toxic for our citizens, nothing good will come of anything that is passed in the Congress. So while we may have structural deficiencies in our revenues and spending, the single largest structural deficiency is that we’ve put politics above prosperity.
S&P was right to downgrade us under these circumstances. Until our leaders start working to solve problems for all of us, instead of create problems for their political opponents, no one will gain anything, and another downgrade is imminent.