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Analysis: S&P's downgrade might be destructive and unpopular. Unfortunately, it wasn't entirely wrong.
God for economic analysis.
The U.S. Congress has long harbored a smattering of crackpots. This time around, they’re numerous, well organized, and blithely indifferent to mainstream economics. Republican House Speaker John Boehner learned this when forced to accede to a balanced budget amendment, a measure that would be far more economically destructive than the massive debt we already have.
It’s important to note that S&P’s gripe wasn’t with America’s ability to pay. There’s little doubt that the world’s most powerful economy, the custodian of the global reserve currency, can pay its bills. In a serious pinch, the Fed could simply print money to pay America’s creditors. This, of course, would produce long-term inflation consequences (essentially making everyone in the country poorer), and it would harm American prestige and credit-worthiness, but it would be less catastrophic than a default.
No, it’s not America’s accounts that are deficient, it’s the country’s gravitas that’s in doubt. It’s Congress’ willingness to make good on its obligations that are cause for pause. The message: After years of political insanity in Washington, the world has had enough. We’ve failed to safeguard our most treasured economic assets: trust, credibility and reason. And it's not hard to understand why. Just imagine if, say, France engaged in the kind of antics that we've seen in Washington lately. (Update: the situation has gotten so bad that nearly three-quarters of Americans lack confidence in lawmakers' ability to address the country's economic woes, according to an Aug. 11 Washington Post poll.)
In an interview with CNN, the man responsible for S&P’s downgrade, John Chambers, cited the events of August 2, when the country came within 10 hours of insolvency, as an example of the kind of brinksmanship that AAA countries simply don’t indulge in.
He also emphasized that Congress this summer has not been debating whether to spend more money; the spending decisions were made in April when Congress adopted the 2011 fiscal year budget (more than six months late). Instead, Congress was debating whether to pay the bills that it had already incurred. Among citizens, that kind of behavior can result in jail time or property seizure. As S&P has concluded, this is political lunacy, pure and simple.
Ironically, there’s no excuse for political lunacy in the world we currently live in. Solving America’s debt problem is within reach, just as it was under the Clinton administration when the country was actually paying down its obligations. These days, much of the data needed to understand the nation’s debt woes is literally at the finger tips of every citizen, in reports such as this one, from the hardworking nerds at the Government Accountability Office — a widely respected, non-partisan arbiter of federal facts and figures. The report lays out, in plain English, the causes and the size of the debt problem. Read it and you’ll learn, for example, that:
Elsewhere on the web, you’ll learn that America has one of the rich world’s lowest tax rates as a percent of GDP, according to the Organization for Economic Cooperation and Development. Only three upper-income countries – Turkey, Mexico and Chile — collect less tax revenue. Most collect far more. Germany, whose economy sizzles, collects over 50 percent more than the U.S. Meanwhile, U.S. taxes have dropped significantly, from 29.5 percent in 2000 to an estimated 24 percent in 2009.
When you look at the facts, suddenly, America’s fiscal problems don’t seem so dire after all — until you consider the political reality that most Republicans in Congress have signed a pact never to raise any taxes, even if it means destroying the nation's balance sheet in the process.
The problem is, America long ago abandoned its ties to a fact-based reality, in favor of facile and glossy truthiness. Who, after all, would spend a half hour reading a thoughtful document with numbers crunched by geeks when on YouTube, you can watch a Republican strategist's slick video showing Obama withdrawing trillions from an ATM, running up the national debt, never mind the facts?
Who would peruse the government's financial statements when you can watch camera-friendly Congresswoman Michelle Bachmann blame Obama for the “Standard and Poor” (sic) downgrade, saying that he “destroyed the credit rating of the United States through his failed economic policies, and his inability to control government spending by raising the debt ceiling.” Does Bachmann — currently a 2012 presidential frontrunner — understand the implications of her words? Does she understand that failing to increase the debt ceiling would have not only led to a downgrade, but also a default on America’s obligations, causing a serious global crisis and making everyone poorer?
Apparently not. Beginning in July, she ran TV ads vowing in no uncertain terms to reject the debt ceiling increase, regardless of the terms. That, even though two months earlier she had voted in favor of trillions in additional deficit spending — an impossibility without a debt ceiling increase.
There’s political lunacy for you. Unfortunately for anyone with savings, S&P and Egan-Jones had a point.
Follow author David Case on Twitter: Follow @DavidCaseReport