America's independent, non-partisan advocate for overburdened taxpayers.

 

Blog Contributors

Brandon Arnold
Vice President of Government Affairs 

Dan Barrett
Research and Outreach Manager 

Demian Brady
Director of Research 

Christina DiSomma
Communications Intern 

Timothy Howland
Creative Content Manager 

Curtis Kalin
Communications Intern 

Ross Kaminsky
Blog Contributor 

David Keating
Blog Contributor 

Douglas Kellogg
Communications Manager 

Sharon Koss
Government Affairs Intern 

Richard Lipman
Director of Development 

Joe Michalowski
Government Affairs Intern 

Diana Oprinescu
Communications Intern 

Austin Peters
Communications Intern 

Kristina Rasmussen
Blog Contributor 

Lee Schalk
State Government Affairs Manager 

Pete Sepp
Executive Vice President  

Nan Swift
Federal Government Affairs Manager 

After the Downgrade, Decline or Fall for America?


Pete Sepp
August 7, 2011

The fallout from late Friday’s downgrade of the U.S. sovereign debt rating has only begun to settle on the global economic landscape – and the pundits are busily sweeping their analytical Geiger-counters over the scene to determine the extent of the damage as well as the prospects for clean-up. But even before S&P dropped its bomb, the protective measures that just might have kept us out of the mess were self-evident. Look no further than earlier that day, when markets reacted positively to the “somewhat stabilizing news” that debt-riddled Italy would more aggressively pursue fiscal consolidation through entitlement reforms and a Balanced Budget Amendment to its constitution.

At least one chamber of the U.S. Congress understood the importance of such an approach earlier in July, when the House passed the NTU-backed Cut, Cap, and Balance plan and later a bill that required passage of a BBA before a medium-term increase in federal borrowing could occur. When House Speaker John Boehner released the first version of the Budget Control Act, which did not contain the BBA enactment clause, we cautioned that, “What should really terrify Members [of Congress] … is the very real prospect that even enactment of the Boehner plan, which may prove a career-ender for lawmakers who promised bolder action, will not be enough to fend off a downgrade in our nation’s credit rating …”

In the end, lawmakers balked at a mandatory BBA provision, a major reason behind NTU’s opposition to the final version of the Budget Control Act that President Obama signed into law. But our warning was hardly gifted insight: as many other scholars have shown, successful fiscal adjustments in other nations are largely marked by a reliance to tackle spending (especially benefit programs) rather than raise taxes, and to institute solid budget-process reforms.

So now America’s era of fiscal exceptionalism is over. Welcome to the ugly new reality. Am I being a doomsayer? All right then, here are the obligatory caveats:

  • Only one agency has reduced our rating so far, and the immediate impact on U.S. debt-service costs and other borrowing sectors may not be huge;
  • Rating agencies certainly don’t have an unblemished record when it comes to handicapping the fiscal stability of governments;
  • Market analysts and financial planners say “the fundamentals are still there” for investment in the U.S.;
  • Other countries have, over time, recovered their triple-A ratings; and
  • After initially reacting to S&P’s decision like a kleptocratic regime with its hand caught in the cookie jar, the Administration is now calling for a major, unified push on behalf of deficit reduction (which, from the White House’s perspective, likely includes punitive tax hikes).

Feel better now? Me neither. No matter what else happens, our leaders have irrevocably squandered the intangible but still valuable “confidence dividend” for investors that comes with an unbroken AAA rating. From this point forward, at best we can hope for an asterisk beside the name “United States of America” in the record books on countries’ fiscal stability. At worst … well, let’s not go there. And if indeed we don’t want to arrive there, Washington had best get serious about ways to avoid it. Harry Reid didn’t want to “waste time” on Cut, Cap, and Balance, but maybe now his colleagues in the Senate will see fit to clear their crowded recess calendars and give it the consideration it deserves.


 

Comment on this blog

Nickname
Comment
Enter this word:

User Comments