Last week, Congress reached a bipartisan agreement to increase our statutory debt ceiling and make about $2.2 trillion in budget cuts spread over the next ten years. The agreement has been generally characterized as a triumph for the ‘radical right wing’ of the Republican Party, namely the ‘Tea Party’ wing, because it did not include the tax increases requested by President Barack Obama (D) and many Democrats, and because it included more cuts than many on the ‘left’ (or even ‘center’) wanted to see.
The absurdity of this is that the ‘radical right wing’ plan was actually far less than we needed to do. Like the budget plans flying around Congress back in April, our two political parties were fighting to the death between plans that all fell far short of actually solving our problems. The math is pretty simple: the approved plan makes $2.2 trillion in cuts to our national budget over ten years when we run over-1 trillion dollars in deficit spending annually. In other words, we are still careening toward the cliff . . . we’ve just let off the accelerator a little bit. I don’t call that success. I’m not even sure we can really call it progress, although this faux-radical plan was nominally better than any proposed alternative. We’re still careening toward the cliff. We are still in the midst of a very serious debt crisis.
The international rating agencies—Moody’s and Standard & Poor’s (S&P)—estimated that we would need to make about 4 trillion dollars in cuts to ensure that we could keep our AAA bond rating, the highest possible, which we have enjoyed since 1941. The ‘radical’ Republican debt ceiling compromise was for $2.2 trillion in cuts—a bit more than half of what the agencies wanted to see. Obama and the Democrats wanted to do even less! Both Moody’s and S&P warned us over and over for months and months that we were at risk of a downgrade, and told us exactly what we needed to do to avoid it. Our government chose to ignore that guidance. As such, S&P has downgraded our rating to AA+ with a negative outlook (indicating another downgrade is possible within 12-18 months). Moody’s has chosen to let us keep our AAA rating for now, but has also lowered our outlook to negative (indicating a likely downgrade within 12-24 months).
While I am saddened by the S&P downgrade, I’m not surprised by it. Indeed, the most surprising thing about this debacle is that that Moody’s chose not to downgrade us and that S&P only downgraded us by one level. Last week’s debt compromise was terribly insufficient. An honest review of our national finances would indicate that we are not a safe investment. It is clear that only one relatively-small faction of our Congress has even a passing interest in solving our debt crisis, and even they are not as clear-headed about it as they ought to be. A default on our debt obligations—either in the traditional way of missing payments, or the alternative of debasing the dollar the wipe out the real value of the debt—is more likely now than it has ever been.
It is obvious that our government has so-far done far too little to stave off an unprecedented fiscal disaster. The important questions now is this: Is it too late to fix it? I’m starting to think that maybe it is.
