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Standard & Poors Got It Right
Aug. 9th, 2011 11:41 amLast week, Standard & Poors downgraded the US' credit rating from AAA to AA+. There has been much wringing of hands about how S&P got it wrong, how they had a $2 trillion math error and such. Math errors aside, I think they got it right.
S&P downgraded the US because of its political unwillingness to address its deficit and debt issues, not its theoretical ability or inability to pay. The US has the financial ability to maintain its accumulated debt. Please remember though that the months-long political farce on the debt ceiling issue wasn't even about the future: it was about whether Congress was going to allow itself to borrow the money to cover the spending Congress itself previously authorized. If ever there was a demonstration of administrative immaturity, incompetence and childishness, this was it.
Credit worthiness is about the likelihood of a lender being repaid the money they lent. In my lifetime, there was never any question the US would pay its legal obligations. That doubt has now been introduced, gone mainstream and even made into a political platform within the very institutions which are supposed to safeguard that credit worthiness. How could the US not be downgraded at least a notch?
In my humble opinion, the US doesn't have a spending problem: it has an income problem. We're already paying the lowest income taxes since the 1950s, especially if one is very wealthy: religious fervor in reducing taxes even lower and thus creating an even larger deficit isn't the answer. Signing ideological pledges to avert a primary run-off demonstrates a further lack of maturity.
I'm optimistic in an odd way though: this latest circus demonstrates clearly that the US is not a reliable trading partner and that it's time for a major shake-up on how we do international trade & finance. Since World War II, the US has been the big gorilla at the international table; these days, not only has the gorilla been decidedly disinterested in anything but grooming itself, it's actively flinging its feces at others. Change is necessary.
The US can't cut its budget to prosperity: if it is very, very lucky, additional cuts may only cause a mild recession. Closing tax loopholes and possibly higher rates on extreme incomes will help balance the budget; economic growth can close the gap too. Personally, I'm OK with letting the Bush tax cuts expire, even though I've profited from it over the years they've been in place. I'm willing to give up my mortgage tax credit too --or at least capping it. All I ask is that any expense cutting be done evenly: no blanket exclusions for the military or supposed non-entitlement programs.
If we're unwilling to deal with this in a sane & balanced approach, there are two other options: stay the course which leads to death by a thousand paper cuts, or allow inflation to rise to whittle away at the pile of debt. The inflation option is discussed in market circles every 15 years or so, usually by conspiracy theorists and wingnuts. It's the economic equivalent of destroying the country in order to save it, but as we rule out saner choices with Norquist loyalty oaths and Jesus-told-me-no-new-taxes faith-based pseudo-economics, using this kind of napalm becomes the last option on the table.
S&P downgraded the US because of its political unwillingness to address its deficit and debt issues, not its theoretical ability or inability to pay. The US has the financial ability to maintain its accumulated debt. Please remember though that the months-long political farce on the debt ceiling issue wasn't even about the future: it was about whether Congress was going to allow itself to borrow the money to cover the spending Congress itself previously authorized. If ever there was a demonstration of administrative immaturity, incompetence and childishness, this was it.
Credit worthiness is about the likelihood of a lender being repaid the money they lent. In my lifetime, there was never any question the US would pay its legal obligations. That doubt has now been introduced, gone mainstream and even made into a political platform within the very institutions which are supposed to safeguard that credit worthiness. How could the US not be downgraded at least a notch?
In my humble opinion, the US doesn't have a spending problem: it has an income problem. We're already paying the lowest income taxes since the 1950s, especially if one is very wealthy: religious fervor in reducing taxes even lower and thus creating an even larger deficit isn't the answer. Signing ideological pledges to avert a primary run-off demonstrates a further lack of maturity.
I'm optimistic in an odd way though: this latest circus demonstrates clearly that the US is not a reliable trading partner and that it's time for a major shake-up on how we do international trade & finance. Since World War II, the US has been the big gorilla at the international table; these days, not only has the gorilla been decidedly disinterested in anything but grooming itself, it's actively flinging its feces at others. Change is necessary.
The US can't cut its budget to prosperity: if it is very, very lucky, additional cuts may only cause a mild recession. Closing tax loopholes and possibly higher rates on extreme incomes will help balance the budget; economic growth can close the gap too. Personally, I'm OK with letting the Bush tax cuts expire, even though I've profited from it over the years they've been in place. I'm willing to give up my mortgage tax credit too --or at least capping it. All I ask is that any expense cutting be done evenly: no blanket exclusions for the military or supposed non-entitlement programs.
If we're unwilling to deal with this in a sane & balanced approach, there are two other options: stay the course which leads to death by a thousand paper cuts, or allow inflation to rise to whittle away at the pile of debt. The inflation option is discussed in market circles every 15 years or so, usually by conspiracy theorists and wingnuts. It's the economic equivalent of destroying the country in order to save it, but as we rule out saner choices with Norquist loyalty oaths and Jesus-told-me-no-new-taxes faith-based pseudo-economics, using this kind of napalm becomes the last option on the table.
