econscius

Death By A Thousand Increases: S&P Lowers USA to AA+

In Economy, Federal Deficit on August 5, 2011 at 11:45 pm

No American can be pleased with tonight’s announcement Standard & Poor’s is lowering America’s credit rating, for the first time ever, from the gold standard “AAA” to “AA+”.  I refer readers back to my July 28 post on why an S&P downgrade has been looming for years: https://econscius.wordpress.com/2011/07/28/us-aaa-credit-rating-downgrade-was-expected/.  There is no joy in being proven right.

We Americans see ourselves as a “shining city on a hill”.  We developed a continent and built an economic empire.  America quite literally saved Europe from itself in WWI and we saved the world in WWII.  American economic might powered our own military and supplied our Allies in Britain, China, the Soviet Union and de Gaulle’s Free French.  The United States bankrolled international organizations like the IMF and World Bank.  Wall Street was the center of world finance.  Hollywood was the center of entertainment.  America’s corporations ruled many industries.  So many people loved the very idea of America they crossed oceans and deserts to immigrate here.  The USA’s economic wherewithal made possible large garrisons in Europe, Japan, Korea and elsewhere to initiate Pax Americana and win the Cold War. 

This downgrade is a hit to our very self-image of America as #1.  Canada is now more highly rated than the USA.  Sure, the Canadians are really nice people, play great hockey, and provided us with cool rock bands like Rush and Night Ranger, but it is an affront to our American psyche to think of Canadians being a better credit risk.

How will the nation respond?  Will we waste our time name-calling and angling for partisan advantage?  Will Republicans only blame Obama and will Democrats only blame G.W. Bush?  Even a cursory look at the Public Debt graphs below shows the deficit grew in fits and starts since WWI, but exploded the past 12 years through two recessions and under Presidents and Congresses of each party.  I assure you arguing about Bush vs. Obama will not get us back to an “AAA” rating.

People will disagree about whether taxes should go up or spending should go down.  When asked if you support a program: ask yourself if you would personally pay more taxes for it?  In some cases, I would give an unequivocal “yes”.  In many others, it is not worth it.  The problem is how we too often have said “yes, I like high-speed rail and I like the idea so much I would be willing to spend $500 billion of SOMEONE ELSE’S MONEY for it.” 

How did we get here? 

This downgrade to AA- has been death by a thousand increases.   It is the result of literally thousands of programs – big and small – mostly well-intentioned… but not fully funded.  It seems many Americans perhaps took our nation’s greatness a bit too much to heart.  We let our seemingly ever-increasing prosperity allow us to be overly optimistic about paying for today’s bills.  We could pay it tomorrow because things always get better in America!  Or perhaps we weren’t really paying attention and our politicians skipped the tough choices and punted the costs to the future. 

America looked to Europe and copied many European social programs.  But we did not copy European levels of taxation.  We wanted to have our welfare state and eat it, too.  We spent for a War on Drugs.  We subsidized our farmers, exporters and college students and all manner of other things, some useful, some not so much.  We dipped deeply into the public till for generous mortgage interest deductions.  Some of us probably borrowed more than we otherwise would – and more than we knew we should – because Uncle Sam sent us a bigger tax refund check each spring if we borrowed more.  Besides, homes always go up in value, right?

We borrowed to cover our wars.  WWI and WWII were extremely expensive in terms of GDP.  Korea, Vietnam, Cold War, Gulf War, Iraq, Afghanistan and many lesser military adventures like Grenada, Lebanon, Panama, Kosovo, Libya all have been costly.   Military strength meant fiscal weakness.

Looking at the $14.3 Trillion Public Debt is seeing only part of the problem.  A sobering look is provided by considering the “off the books” debt.  As discussed by bond investor Bill Gross of PIMCO, the present value of the future liabilities of the United States is a staggering $66 trillion. [1]   Divide $66 trillion by 308 million Americans and the per capita share is a sobering $214,300 per person.  Think about that!  If you have a family of four, your family’s share of the Public Debt is about $186,000 but your share of future Medicare, Medicaid and Social Security is $857,000.  That is over a million dollars per family.  We have made promises – which should be kept – to elderly Americans.  Paying for these promises is tough now and will not get any easier as more Baby Boomers retire.

It is up to you: do you want to cut spending or do you want to pay more in taxes?  Or both?  Whatever we decide, we have to decide on something.  We need big, serious changes.  We need to get our spending under control or S&P will someday lower us again… to “AA”, “AA-” and so forth.

The full text of S&P’s downgrade is available here: http://www.standardandpoors.com/servlet/BlobServer?blobheadername3=MDT-Type&blobcol=urldata&blobtable=MungoBlobs&blobheadervalue2=inline%3B+filename%3DUS_Downgraded_AA%2B.pdf&blobheadername2=Content-Disposition&blobheadervalue1=application%2Fpdf&blobkey=id&blobheadername1=content-type&blobwhere=1243942957443&blobheadervalue3=UTF-8

[1] http://www.pimco.com/EN/Insights/Pages/Kings-of-the-Wild-Frontier.aspx

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