S&P Tells Biggest Debtor Don’t Blow Final Act: Caroline Baum
Rarely has a credit rating company made such an astute observation of the human condition.
“We believe there is a material risk that U.S. policy makers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013,” Standard & Poor’s said on assigning a negative outlook to the U.S. AAA-credit rating Monday.
Any observer of the budget debate in Washington would have to believe there’s a material risk, too.
The U.S. Treasury, aware that any rise in interest rates from increased credit risk would further damage its fiscal position, was quick to counter S&P’s shot across the bow. The negative outlook “underestimates the ability of America’s leaders to come together” to solve the debt problem, Assistant Secretary for Financial Markets Mary Miller said.
Come together? Miller must be watching a different theatrical production than I am. Treasury Secretary Tim Geithner was shuttled off to TV business channels yesterday to tell us that, unlike S&P, his outlook on the U.S. fiscal situation isn’t negative.
Take a look at the first four acts of this drama, and you decide who’s right.
Act I: Dec. 1, 2010. Moment of Truth.
President Barack Obama’s National Commission on Fiscal Responsibility and Reform releases its report. The commission’s plan relies on tax simplification and spending cuts to increase revenue. It aims to save $4 trillion over 10 years, reducing projected budget deficits to 2.3 percent of gross domestic product by 2015 from an estimated 10.9 percent this year. It includes a rise in the Social Security retirement age, lower federal entitlement benefits, a three-year freeze on federal workers’ pay and the elimination of “tax expenditures,” or the estimated $1.1 trillion of revenue lost each year to tax exemptions and loopholes. Small-government conservatives are unhappy that outlays as a share of GDP would increase to 21 percent, above the long-term average. Most everyone else sees the commission’s report as a fine start.
Act II: Feb. 14, 2011. La-La Land.
Obama ignores the recommendations of the commission and submits his $3.7 trillion budget request for fiscal 2012 to Congress. The blueprint is long on generalities and short on specifics. It purports to return annual deficits to a “sustainable” level by mid-decade but fails to address entitlement spending on programs such as Medicare, Medicaid and Social Security. Obama’s budget looks a lot like the Congressional Budget Office’s baseline, or auto-pilot projection, over the next 10 years and is sustainable only to the extent that the current trajectory of spending and revenue is sustainable.
Act III: April 5, 2011. “Path to Prosperity.”
House Budget Committee Chairman Paul Ryan, Republican of Wisconsin, offers his plan to cut spending and simplify the tax code, lowering the rates and broadening the base. Ryan is applauded for his bold vision and reviled (by Democrats) for his bold vision. Ryan’s plan slashes government spending to below 20 percent of GDP and lowers the top tax rate for households and business to 25 percent from its current 35 percent. He claims to find cost savings by harnessing competition, allowing future retirees to choose a Medicare plan from private insurers while providing assistance for lower-income beneficiaries with greater health risks.
Act IV: April 13, 2011. Get Serious.
Obama tells an audience at George Washington University the U.S. has to live within its means and pay down its debt. Any serious plan to tackle the deficit has to address entitlements, he says. (See Act II for his unserious plan.) The president spends more time explaining how we got here (Bush’s fault) and trashing the Ryan budget than advocating for his own. His role in the debt binge is limited to emergency spending in response to the financial crisis he inherited. Obama proposes to reduce the deficit by $4 trillion in 12 years by cutting discretionary spending, finding savings in the defense budget, reducing the cost of health care via Obamacare and eliminating tax breaks. The president will protect seniors, the middle class and investments in education, medical research and clean energy by taxing the rich.
Act V: Sometime in the future. “Pray for the Gang of Six.”
In the final act of a Shakespearean tragedy, the conflict is resolved. In real life, the two political parties are on opposite sides of the stage separated by what President George H.W. Bush called the “vision thing.”
Former Senator Alan Simpson, co-chair of the president’s deficit commission, summed up the impasse after listening to Obama’s partisan speech last week, telling reporters to “Pray for the Gang of Six.”
The Senate’s bipartisan “Gang of Six” has yet to complete or release its deficit-reduction proposal. The fact that the three Democrats and three Republicans can be in the same room together offers the best hope for some kind of compromise. Obama has yet to invite Ryan to the White House even though the congressman has been teeing up budget ideas for a couple of years.
Some analysts viewed S&P’s surprise shift to a negative outlook for the U.S.’s long-term credit rating as a timely kick in the pants. If the warning of higher borrowing costs -- Treasuries rallied Monday -- creates some urgency to address these problems now, then it was a good thing.
Of course, there’s bad news too. As with earlier downgrades to companies about to go under, S&P may already be late.
(Caroline Baum, author of “Just What I Said,” is a Bloomberg News columnist. The opinions expressed are her own.)
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