Congress and President Ignore Warning from S&P, Pass Meaningless Debt Package Anyway

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On 14 July, Standard & Poor’s explicitly warned Washington that passage of meaningless legislation would likely result in a sovereign downgrade.

From a creditworthiness perspective, we believe that failure to formulate a fiscal consolidation plan, even if the president and Congress were to agree to raise the debt ceiling in time to avert a potential default, would be materially less optimal than hypothetical scenario 1. Such a partial solution would essentially put before American voters in the 2012 presidential and congressional election the spending vs. revenue debate. Meanwhile, debt would continue to mount and the results of the election might not, in any event, resolve the issue.

Under this scenario, we might lower the U.S. sovereign rating to ‘AA+/A-1+’ with a negative outlook within three months and potentially as soon as early August.

Agreement on raising the debt ceiling without making any tough budget decisions would not be shocking, in our view, given the number of times Congress has done so in the past.

So Washington was warned and Washington ignored said warning.  The budget package failed to cut the minimum $4 trillion S&P felt was needed to begin getting our fiscal house in order.  Essentially, the Budget Control Act is meaningless.  It makes only $917 billion in cuts (but over the next ten years) and leaves an additional $1.5 trillion in cuts to be determined by an ad hoc bipartisan committee with far too much power.

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About Jeremiah Dow
I have a B.S. in Politics, Philosophy, and Economics with a minor in Economics. I finished school in 2010 and am currently working on independent research in various areas including political and economic philosophy, government, and history. I am also currently looking for work in research, particularly the social sciences dealing with public policy work. I aspire to a top-level graduate institution, but would first prefer some professional research experience. Some of my primary influences are Ayn Rand, Noam Chomsky, and Howard Zinn among others.

9 Responses to Congress and President Ignore Warning from S&P, Pass Meaningless Debt Package Anyway

  1. Ben Hoffman says:

    The Democrats had a plan to reduce the debt by $4 trillion but Republicans would have none of that since it included revenue increases. This is purely on the shoulders of the Republicans, as is our enormous debt.

    • Jeremiah Dow says:

      I appreciate the input, but I am not interested in the blame game. That is what has gotten us here to begin with. The fact is that uncontrolled spending has occurred beneath both parties. I view them as equally flawed and equally worthless. Consequently, my aim with this post, and all others, is to take a non-partisan view on developments coming out of Washington.

      Thanks for reading.

      • I appreciate your spirit of non-partisanship, but Ben is absolutely right. Until 2001, the blame could have been shared equally, but it was Bush and his rubber-stamp republicans that got us into the mess we’re in. The solution must include an increase in revenue and the current republicans’ cuts-only stance is reckless. If you don’t blame the guilty, you’re essentially encouraging their bad behavior.

      • Jeremiah Dow says:

        The fact that I follow current events and attempt to reach out to the American public via this blog is testament to the fact that I do not ignore the behavior of the guilty. You and I and probably many other Americans disagree on who is to blame, and I repeat that I will not play the blame game as it is played in Washington. Nothing will ever get resolved that way. It turns the American people into a bunch of rabid dogs chasing their tails while their owners steal their food from under their noses.

        The blame game as it should be played in accordance with a true Republican system is that of the people holding their leaders accountable for their decisions, decisions that date further back than Bush Jr. Spending has been increasing for decades with little account of the long-term consequences. The fact is that Washington has the people divided. Washington’s blame game and finger pointing resonates out into the American people. Indeed, our system of partisan politics is so overgrown with a constant lack of accountability that the people don’t know who to blame, so they look to the only thing familiar to them, their ideology. Unfortunately, the ideologies of both parties, while different on the surface, are very similar in their end results. Consequently, the people remain divided. Notable historian Howard Zinn examines this phenomenon throughout American history and posits that our political system upholds the tenets of democratic politics only to the point that it channels the people’s political energies into the system, where it evaporates within the halls of Congress.

        My concern is that any tax increases coming out of the new “Super Congress” come this November will likely bypass the elite, those who should be paying higher taxes (along with American-based corporations who set up tax havens overseas). The tax increases, I suspect, will hit those making above $250,000/yr., but will they hit those making over $1 million??? This is a legitimate concern, a question that hasn’t even been proposed by the media. I do not however, ignore the fact that revenues will have to be increased. This is not debatable. Simply stated, I am concerned about the manner in which tax increases will be imposed.

        What concerns me more however, is when American will wake up and begin examining these issues from outside the mainstream political debates, for they render the American people nothing more than spectators at a tennis match. My point is this, in order for America to recover from a broken political system, it must look outside the confines that that system imposes. This means we must look beyond the partisan divide in Washington and examine the issues from a non-partisan stance. This is why I do not play the blame game. Rather, I hold every elected official equally responsible. These, after all, are the burdens they take on when they enter office.

        Thanks for reading.

      • I appreciate your lengthy reply and I don’t disagree with anything you said. I only question how we are supposed to change anything from outside mainstream politics. The only arrows in our quiver are our voice and our vote. I vote, even thought I know that my vote makes no difference. I speak out on my blog, even though I’m probably just preaching to the choir. As long as we have a predominance of uninformed extremists who are blinded by hateful, racist party rhetoric, we have no choice but to get into the pit with them and hope we can somehow beat some sense into them. Sadly, we have been reduced to operating within the rabid dog-fight version of party politics that we have been given. George Washington warned us against parties because one’s allegiance to party would be trump one’s allegiance to the country. We ignored his warning and here we are. You seem to have the utopian view of politics that I used to have before the extremists took over and ruined America. I wish there were a way to get back to that, but I don’t see it. Nowadays it’s “eat or be eaten.” It’s so sad.

      • Jeremiah Dow says:

        It is sad, I agree. Unfortunately, the only way I see at affecting change is to hit the issues at where they start, mainly restoring the public perception of what government is versus what its should be. Your point concerning George Washington is duly noted, and to my knowledge Jefferson shared Washington’s beliefs on party loyalties overshadowing loyalty to the country’s best interests. Indeed, this is what we see everyday now. Just the fact that Republicans were willing to threaten default in order to push their side is testament to the dangers of what each party has become. But I am confident that Democrats would do the same thing. The structure of Washington politics necessitates it. This is what must be changed.

        The only solution I see is a long and arduous one, educating the public. But I believe this will first take a meltdown of the government. Given the projection of our economy, the solvency of the government, and the erosion of the dollar via inflationary policies of the Federal Reserve, this is not far off. The key thing is not whether America will fall, but how the people perceive the fall itself. If we cannot grasp that our political system is the cause, then we will fail to perceive any lasting solutions when the time comes. The people must be educated if we are to pick up the pieces and build a new road that doesn’t lead us back from where we came.

        I too feel like I’m preaching to the choir. It is disheartening on most days, but there truly is nothing left to do but keep preaching. If done right, preaching is teaching. And teaching is the only safe haven to ignorance.

  2. Ben Hoffman says:

    Well, Jeremiah… what do you see as the best policy?

    • Jeremiah Dow says:

      In a way, some of the policies proposed by Congress sound reasonable. For example, cutting spending and increasing revenue are no-brainers; both must occur in a fiscally prudent way. By fiscally prudent I mean in a way that aids an economic recovery. Unfortunately, I don’t see our Congress nor our Executive branch being capable of achieving either. I don’t doubt that revenue will increase. What I doubt is that the government will successfully increase its revenues in a way that strengthens the economy. Tax increases are inevitable, but if misdirected in a way that by-passes our nation’s top-earners while targeting those “making above $250,000 a year” will only impede small business growth. While Obama’s tax rhetoric sounds good, I am dumbfounded as to why no one has questioned where the ceiling on these tax increases resides. That is, will tax increases hit those making over $1 million a year, over $5 million? I doubt it. I believe any tax increases will simply act to redistribute wealth from the middle class and small business owners to the top socioeconomic echelon, thereby further strengthening the elite while weakening the economy. These are my initial thoughts on tax reform that will undoubtedly come out of the “Super Congress.”

      As to where I would make changes, they would focus not so much on individual policies or policy-packages, but on fundamental changes to the structure and size of government. Policies aimed directly at the economy have, in the past, served only to enrich members of government and top business tycoons on Wall Street. Yet no one asks why.

      My contention is that we should implement policies that aim to shrink government. Why? Primarily because I believe (you may disagree) that government spending crowds out private spending. I would start by making government positions less attractive by cutting government pension packages, health care benefits, tax-payer funded business travel, and the like. The implication of such policies is to attract a different type of politician, one that enters office with ideals rather than expectations of what he or she can get. This my sound cynical, but it is a point worth noting. While on this topic, I would also greatly diversify the composition of Congress. That is, a legislature drowning in lawyers is bound to grow in power and size, and as I stated above, will smother any free economy. Congress needs more private business owners of all sizes, but particular emphasis should be paid to the small business owner, lest we fall back into the trap of a corporatocracy. Other professions that bear emphasis on our current economic troubles would include doctors, family practitioners, scholars, even those in the physical sciences, as their intellectual training is steeped in logic, something missing from most of Washington.

      As far as entitlements go, I acknowledge the delicacy of this topic. If I was in my sixties and had been paying into Social Security, I would expect a return on that investment. So what to do??? Unfortunately, while there is a feasible way to cut entitlement spending, there is no desirable way. This stems, again, from the structure of our government – not so much the composition of our legislature, but from the process and messiness of electoral politics. Considering this, any rational politician would not cut entitlements, lest he or she loose a large portion of his/her constituency in both votes and campaign funding. The issue of campaign funding as it distorts electoral politics applies to all policy areas from health care reform to financial regulation. This brings us to the issue of moral hazard. In short, the way in which campaigns are conducted and the degree to which special interest groups and large corporations are allowed to lobby Congress must be completely abolished. It has no place in a true Republic. It never has and never will. It makes the idea of representative government a joke that only applies to those who can afford to make their voices heard. That reminds me. A small, yet significant, change I would make is to abolish the electoral college. Why such a sham has been allowed to go on this long I will never know, but it too undermines the very essence of electoral politics in a representative government.

      I must concede that I have no answer for entitlement spending, except that it must be cut if the U.S. is to stay solvent long enough to see itself and the rest of the globe recover. I have no answer, because the rules that govern our political system do not allow one that is based on sound principles that govern reality. I am not in favor of the welfare state, nor any degree of it. FDR’s New Deal, in my opinion, ruined America because it changed our fundamental views on entitlement versus creating and earning wealth. It also ushered in a new era of “big government” that serves not the people, but itself.

      These are the changes I would make. While they are not aimed at specific policy choices, they would result in less government intrusion, less dependence of the people on government as a safety net, more economic freedom and growth, a stronger sense of self and self-reliance, and more prosperity for all. I know this sounds idealistic and many will refer straight back to the industrial revolution and the Progressive era to the Morgans, Rockefellers, and Carnegies. To this I say that even then government was subsidizing and making back door deals in an effort to narrow the competition and stabilize growth. A free market is not something America has ever seen, so to assert that it doesn’t work because big business crowds out opportunity and creates massive poverty is to ignore the fact that much of history dictates this to be a product not of big business, but of the marriage of big business with government. The offspring was a new era of big government and corporatocracy.

      I have listed some fundamental changes to our government, not its policies. The latter are a result of the former. To change them, one must change the source from which they spring. All other efforts simply muddy the waters.

  3. Pingback: What is it About Economics…The Debt Deal Examined « kapitalcon

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