Guest Article - S&Ps Warning to the USA

America’s Spiraling Stock
by Rich Trzupek-Front Page Magazine

"Although additional evidence regarding the severity of America’s debt crisis should not be necessary, Standard & Poors provided some more, lowering its future outlook for United States creditworthiness from “stable” to “negative.” That move effectively amounts to a warning that the nation needs to put its fiscal house in order or face disastrous consequences.

Standard & Poors did not downgrade the United States’ actual credit rating, which remains at AAA/A-1+, Standard & Poors’ highest possible score. Instead, the agency is putting the nation on notice that if we don’t do something to start paying down our massive debt, our national credit rating could be downgraded in the future. The United States has never had a credit rating below AAA with Standard & Poors, and of the 127 nations that the agency rates, only nineteen have AAA ratings.

Losing that AAA rating would be a disaster for the country, meaning that the United States government would have to offer higher interest rates when selling its debt, which would in turn lead to even more government spending. In issuing its warning, Standard & Poors noted how the federal government’s debt varied between two and five per cent of GDP from 2003 through 2008. That, the agency said, is a higher percentage than it usually allows in the case of other nations that carry the treasured top rating.

In 2009, the first year of the Obama administration, the nation’s debt load exploded to eleven per cent of GDP and has yet to come down, prompting the Standard & Poors outlook warning. “The outlook reflects our view of the increased risk that the political negotiations over when and how to address both the medium- and long-term fiscal challenges will persist until at least after national elections in 2012,” said S&P credit analyst Nikola Swann.

The magnitude of our national debt, now in excess of $14 trillion, and our commitment to paying out entitlement programs is hard to fathom. According to economist Bruce Bartlett, meeting all of our unfunded Social Security and Medicare commitments would require an immediate eighty one per cent increase in federal income taxes, which would have to remain in effect forever. The gap between revenues to meet entitlement commitments and the commitments themselves stands at approximately $100 trillion today and the longer we do nothing, the bigger that chasm becomes.

Will conservatives be able to use the Standard & Poors warning to leverage some meaningful budget cuts out of the administration, like those contained in the Ryan budget? Maybe, but it’s probably a long shot at best. The deficit debate boils down to whether we use tax hikes and modest budget cuts to start closing the gaps, as the president has proposed, or whether we start making some really meaningful spending reductions like the Ryan plan lays out. As a credit rating agency, Standard & Poors doesn’t care how a government closes the gap between spending and revenue, so long as the gap closes. Over at City Journal, Nicole Gelinas cited the United Kingdom’s experience with Standard & Poors as an example of how the agency’s warnings can be used to send exactly the wrong message. Standard & Poors had downgraded the UK’s future creditworthiness outlook to “negative” under Gordon Brown’s regime, but the agency changed its mind after David Cameron’s government applied some leftist solutions to “fix” the problem:

The Conservative-led coalition government increased taxes on VAT earlier this year, from 17.5 to 20 percent, dampening retail sales. It also went ahead last year with former prime minister Gordon Brown’s plan to hike the top personal-income tax rate to 51 percent (compared with America’s top rate of 35 percent). Though Britain has promised spending cuts, those cuts remain mostly in the future. Yet the Conservatives have reaped a political reward. S&P last year returned their nation’s outlook to “stable.”

The left would very much like to see the same kind of “solution” applied here. A tax hike could possibly make a dent in the deficit, but no conceivable tax hike could do anything but delay the onset of the entitlement crisis for a few more years. The only real solution is for the government to make the kind of meaningful, painful spending reductions that will restore some kind of balance between what we spend and what we have to spend. That’s the point that lawmakers ought to take away from Standard & Poors warning, but history tells us that lawmakers rarely hear the messages that really matter."