Posted by: SWL | August 8, 2011

US Credit Downgrade is Fault of Total Debt, Not Debt Ceiling Deal

It’s not a surprise that Standard & Poor’s downgraded the US government’s credit rating from AAA to AA+ on Friday. S&P’s main focus, even weeks ago, is that the amount of US debt compared to our gross domestic product is too high. In their announcement Friday, they also cited the difficulty of the two main political parties to work together on fiscal policy, as shown in the recent debate over spending cuts and the debt ceiling.

That latter point has led many Democrats to blame Tea Party Republicans for the entire downgrade. Please, let’s be realistic! Gridlock cannot happen with resistance from only one direction. The impasse was just as much the Democrats fault. Republicans of all stripes put out at least three different plans, but early in the talks the White House refused to consider anything that did not include increased tax revenue. There have been Democratic claims that President Obama put a large amount of spending cuts “on the table”, but that was never reported by the news media pre-deal (as the other plans were), making me skeptical that there really was a concrete plan or offer.

When the President announced the debt deal on July 31, he said the process had taken too long. That’s true, but he did not take responsibility for his role in that. He had summoned Congressional leaders to the White House for “talks”, but was so adamant about what he wanted that the talks ultimately broke down. Congress went back to negotiating without the President, and in a few days came up with a plan. I agree with Senator Mitch McConnell who said last week that the debt deal negotiations were not gridlocked – that although messy, it was government at work.

Neither side was able to get all the elements they wanted into the plan. There were more spending cuts than most Democrats wanted, which, of course, were far less than most Republicans wanted to see. The Democrats gave up tax increases for now and Republicans gave up any changes to entitlement programs. If you look at the deal without any partisan rhetoric, it seems like a pretty fair compromise. (That is not an evaluation of how good or bad the plan is for the country, just an analysis of how each side fared in the negotiations.)

Earlier this year, S&P repeatedly said that the US needed to cut at least $4 trillion in spending to show we are serious about lowering our deficit. That did not happen in the debt deal. Tea Party Congressmen wanted more than the $2.4 trillion in cuts the deal is supposed to produce. That puts them more in line with S&P than Democrats or other Republicans. Whatever your opinion of the political parties or factions, they should be given credit when they get things right.

Stock markets around the world are jittery. Asian and European markets were down 3-6% today, our three stock exchanges down 5.4-6.6%. But it looks like they are more concerned about the overall world economic outlook – and maybe total US debt, than just the downgrade in US credit, since the sale of US securities was up today.

This is not the last difficulty we will see in the economy in the next year. Gasoline prices may go down, but food and clothing prices will continue to creep up. If Democrats get some of their wishes from the new Congressional Super Committee, you might see a modest increase in your overall federal income tax bill. No matter what your political leanings, no matter which economic theory you favor, it would be wise to be a bit thrifty, pay down debt and stock up on household staples when you find sales.



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