Two Types of Crazy



Tags: political, rating, america, credit, fiscal, downgrade, system, congress, reason, notice

Creditors don’t like risk. And when a nation acts a little crazy, creditors—and the credit rating agencies that decide which sovereigns are risk-free borrowers—are bound to notice. That’s what happened last week, when credit rating agency Standard & Poor’s downgraded America’s credit rating from its risk-free AAA status. S&P’s downgrade notice observed two types of erratic behavior from America’s political system. And the Obama administration is ignoring the one that matters.

The first was short-term and charged by contemporary partisanship—a sort of temporary political insanity. Debt limit brinkmanship from both parties revealed exactly how difficult it would be for America’s political system to resolve even the most basic fiscal policy disputes, much less make substantial fiscal changes. When debt deal talks began, S&P announced that it expected Congress to work out a deal worth a minimum of $4 trillion in deficit reduction—the minimum necessary to stabilize the country’s debt over the medium term. But after months of bickering, Congress only managed to come up with about $2.5 trillion in cuts—and only at the very last minute. Which explains why S&P now believes that “the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges.”

The showdown’s gridlock antics provided the proximate cause of the reduced credit rating. But the S&P’s downgrade notice also pointed to a more fundamental form of crazy: the long-term build-up of federal debt scheduled to come from America’s entitlement system—and the broad refusal to do anything about it. It’s not just that the deal failed to knock the minimum dollar-figure off the deficit. It’s that it failed to address its root cause: “The plan envisions only minor policy changes on Medicare and little change in other entitlements, the containment of which we and most other independent observers regard as key to long-term fiscal sustainability.” Entitlements—and their unsustainable financing systems—in other words, are the core of the long-term problem.

Yet in the days since the downgrade, the White House has focused almost entirely on the question of how to calm the political system’s temporary behavior, or at least assign blame for its current intensity. In a statement on Monday, President Obama grumbled that “we didn’t need a rating agency to tell us that the gridlock in Washington over the last several months has not been constructive, to say the least” and that “we knew from the outset that a prolonged debate over the debt ceiling…could do enormous damage to our economy and the world’s.”   

At the same time, the president brushed off worries about Medicare’s prospects. While administration officials promised not to touch benefits in any way whatsoever, Obama declared that the country needed only “modest adjustments to health care programs like Medicare.” With insolvency on the horizon—even the most optimistic projections suggest the program won’t be able to fund its full obligations by 2024—and total unfunded liabilities pushing past $36 trillion, or almost three times America’s total current annual economic output, it’s clear the program will require more than modest changes. It’s just as clear that the Obama administration doesn’t want to face this reality—or ask the public to do so either.

That’s too bad. Because eventually the bills will come due. The crude political shenanigans of the debt-limit showdown may have provided the reason to downgrade America’s credit today. But political moments and the legislators who make them happen eventually fade; the Congress of 2013 will not be the same as Congress today. The debt build-up, on the other hand, isn’t going anywhere without legislative action. And it is the lousy state of our entitlements—and the failure to deal with their long-term problems—that ensure the nation’s fiscal outlook will be burdened by the threat of debt and risk for years to come. And as the S&P's new rating suggests, it's more than a failure. It's nuts. 

Peter Suderman (peter.suderman@reason.com) is an associate editor at Reason. This column first appeared at Reason.com.

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Eduardo said... Rating: 0   Vote +   Vote -  

Idealistically, congress is sspopue to tax us and put all the tax money into a high interest bearing account. Then, they are sspopue to skim off the interest and give us back 100% of what we pay into the system annually, however, this system has never worked that way. So, instead, they set an amount of money (x) to represent how much you have to pay in taxes per dollars you earn. So, now you only get money back if you over pay. And again, they are only sspopue to spend exactly what they take in, and nothing more..However, congress gets a little greedy, and goes a little nuts with the check book, and writes checks they cannot honor-so we have to borrow money from other sources (i.e. Social Security, China, ect.,.) thus causing the national debt. Printing more of our own money to pay for this debt would not only devalue our dollar but cause inflation (which is the same as devalue).One thing to know and understand, no matter how high the national debt is, as long as there is income-we're okay, unless all the countries we owe money to comes to collect (which they won't because we're link into their economy) then we have little of nothing to worry about, with the execption of inflation.

11/6/2012 9:31:56 AM 

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