Sunday, August 7, 2011

The Talking Points Are Out

Friday, Standard & Poor’s, one of the largest credit rating agencies, downgraded America’s credit rating from AAA to AA+. This was the first time in history that America’s credit rating has been downgraded. Downgrades are a sign that the credit rating agencies are losing faith in a nation’s ability to repay its debts. It didn’t take long for the Democrat Party to cobble together talking points and protect President Obama either. By Sunday the Democrats were on message and blaming the downgrade on the TEA Party. Both David Axelrod and John Kerry were out publicly calling this a TEA Party downgrade on the Sunday talk shows.

For the last few months, the Democrats, President Obama and the Republicans (led by the TEA Party Freshmen) have argued over raising America’s debt ceiling. Democrats and Republicans battled over the actual debt ceiling increase while the TEA Party freshmen focused on lowering the actual debt numbers instead of increasing the borrowing limit. Marco Rubio implored the Congress to focus on lowering the debt instead of raising the debt ceiling and the TEA Party Republicans put forth a Cut, Cap and Balance plan that called for $4 Trillion dollars in cuts to the more than $14 Trillion national debt, a cap on future spending and a Balanced Budget Amendment to the U.S. Constitution. 

S&P issued the following statement with its downgrade of the U.S. credit rating:

– We have lowered our long-term sovereign credit rating on the United States of America to ‘AA+’ from ‘AAA’ and affirmed the ‘A-1+’ short-term rating.

– We have also removed both the short- and long-term ratings from CreditWatch negative.

– The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.

– More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.

 – Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government’s debt dynamics any time soon.

 – The outlook on the long-term rating is negative. We could lower the long-term rating to ‘AA’ within the next two years if we see that less reduction in spending than agreed to, higher interest rates, or new fiscal pressures during the period result in a higher general government debt trajectory than we currently assume in our base case…

We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process. We also believe that the fiscal consolidation plan that Congress and the Administration agreed to this week falls short of the amount that we believe is necessary to stabilize the general government debt burden by the middle of the decade.
As you can see, S&P plays the fence on the exact answer to the debt crisis but their focus is in fact on the debt burden and not the borrowing limit. They suggest a need for “progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues”. Now, each of us has to make a decision on whether we believe that raising taxes or cutting spending is the right answer but for those who look objectively at all of the facts, the best course of action is clear. We’ve absolutely GOT to reduce our spending and reform entitlements. Interestingly, the CBO released a report this weekend that shows that Social Security outlays already exceed collected revenues and in fact, without major reforms, our Social Security system is in jeopardy of complete collapse within the next 30 years or so. For current recipients, this means nothing at all if ones view is only of what directly affects them. If you look at it more broadly, that means people who are 30 years of age today and who have paid and still pay into the Social Security system may not see the fruits of their labors. Raising revenues instead of reforming entitlements or cutting spending is a feel good discussion. Sticking it to those who have more than we do is always more palatable than reducing our own comfort levels but if life teaches us anything, it’s that the easy way is hardly ever the right way. Even the most extreme of revenue increase plans does absolutely nothing substantial in the long term. 

Check out this video from Bill Whittle and then you tell me, address spending or “raise revenues” (a.k.a increase taxes, especially on the rich)?


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