S&P, the Debt Limit, and Political Risk

By :: April 21st, 2011

So it has come to this: The biggest short-term risk of the U.S. defaulting on its sovereign debt is not that big spenders will have their way. Rather, it is that a relative handful of self-styled fiscal conservatives succeed in throwing the country into financial crisis by refusing to raise the nation’s debt limit.

It is curious that Standard & Poor’s well-publicized threat to downgrade U.S. debt if a budget deal is not reached by 2012 never quite got around to recognizing this far more urgent problem (more on S&P in a minute). But notwithstanding the rating agency’s silence, the coming game of debt limit chicken will obsess Washington through at least June. I suspect this ridiculous squabble will further delay, and not enhance, any serious deficit debate.

Make no mistake: the debt limit battle is about nothing more than naked politics. President Obama tours the country raising campaign funds and ripping Republicans for their fiscal irresponsibility. GOP uber-strategist Karl Rove lays out a plan for Republicans to  “win” the debt limit fight. And, of course, congressional GOP leaders declared months ago that their top priority is defeating Obama in 2012. Fiscal prudence (as opposed to spending cuts) may be somewhere on their shopping list, but it is surely not at the top.

And finally, there is the American public. Firm in their belief that deficits are too high, Americans are equally firm in their insistence that their favorite federal programs remain untouched and that only rich people pay higher taxes. Oh, and they also overwhelmingly oppose increasing the debt limit.

Nonetheless, and not to put too fine a point on it, any lawmaker who voted for the budget deal that funds the remainder of this fiscal year or who opposed the measure because it cut spending by too much ought to be impeached if he does not also vote to increase the debt limit. That politician has voted for a budget that will result in about $3.7 trillion in spending and about $2.2 trillion in revenues. In other words, that pol has voted to add $1.5 trillion to the debt (or at least that fraction of $1.5 trillion necessary to get the government through the remainder of the budget year). Having voted to run up the bill, it is utterly irresponsible to prohibit the government from borrowing the money to pay it.

More importantly, there is no fiscal plan now on the table that would balance the 2012 budget, and thus stop adding to the debt. There is no such plan for 2013, or, for that matter, for 2020. The House-passed budget resolution, for instance, would add $1 trillion to the national debt next year and $6 trillion over the coming decade. Obama would add even more. This money must be borrowed. There literally is no alternative. But that can’t happen without first increasing the debt limit.

As dozens of new lawmakers are beginning to learn, governing is tough stuff. It is certainly harder than pandering to voters who firmly believe the budget can be balanced by eliminating foreign aid and government waste.

S&P says there is a one-in-three chance it will downgrade U.S. debt if Washington can’t figure out how to fix its fiscal problems in two years. The bond market barely noticed—perhaps remembering the stellar job S&P did in rating mortgage securities during the housing bubble.

S&P described the nation’s fiscal problem as almost entirely political, and not based on economic fundamentals. In this, at least, it is correct though it hardly deserves credit for the insight. It is painfully obvious that the public doesn’t want to lose government programs or pay higher taxes. And in that environment, politicians much prefer jockeying for political advantage than doing the dirty and likely unappreciated work of seriously addressing the deficit. Thus, we face the prospect of months of irresponsible but politically fruitful pandering over the debt bill.

Until Mr. Market begins demanding higher interest rates, there will be no serious fiscal progress—not now and not in 2012, S&Ps concerns notwithstanding.

12Comments

  1. Michael Bindner  ::  4:39 pm on April 21st, 2011:

    First, lawmakers cannot be impeached. They can be expelled.

    Second, the Fourteenth Amendment says that “The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.” so the debt limit can likely be declared unconstitutional by executive order authorizing the Treaasury to continue to borrow to fund interest on it.

    Third, if gridlock reigns, the Clinton era tax policy goes back into effect on January 1, 2013. I suspect this is what the rating agencies and Wall Street fear the most – not a debt that can’t be paid but one where high income individuals have the responsibility of paying it.

    Finally, I suspect that the new Biden effort and Gang of Six will be combined, after bipartisan negotiations to add enough Republicans, into a new Fiscal Commission charged with coming up with legislative language, this time with adequate staffing, with an up or down vote scheduled on a date certain.

  2. A White  ::  8:20 pm on April 21st, 2011:

    Thank you. Well said.

  3. Sid F  ::  8:55 pm on April 21st, 2011:

    This is a very well written commentary, absolutely on target. I am sure the term “impeached” was used in the methophorical sense and not the constitutional sense.

    Also, it does not make sense that a rating agency would be negatively concerned that all of the Bush/Obama tax cuts would expire, since in the absence of a recession this would cause the deficit to fall. It is only if all of the Bush/Obama tax cuts are extended without a massive decrease in spending on social/retirment/health programs that the deficit would continue to spiral out of control. And, as the post here excellently describes,that is exactly what is likely to happen.

  4. Ralph H  ::  9:41 am on April 22nd, 2011:

    On target. Legislators risk going down for voting the right way (al la those who voted for TARP).

    In correcting this problem we must see the trends that have lead us into the situation:

    1. Popular social programs like Medicare and SSI have been undone by demographics and the ever evolving medical technology change so that the expenditures outstrip revenuss. We can easily fix SSI with modest changes, but Medicare will require major changes – and at least Ryan started the dialog.

    2. It is too easy to initiate a war or new program which locks us into future expenditures that seem to be unending – Iraq, Afganastan, Lybia, the Balkans. These all result in a Military budget that can’t be cut.

    3. Social programs are added where the long term costs are seemingly not addrssed. Medicare drug coverage is one and Obama actually made it more costly by changing the doughnut.

    4. Taxes are easier to cut than increase. If the Democrats (who are most inclined to raise taxes to support social spending) would not do it when they controlled the 3 branches, how can we do it with a split congress?

    The Chinese and S&P will do us a favor if they force us to address these issues. There are too many “experts” who sweep the expanding debt under the rug, ignoring the risk that when intrest rates rise the short term debt load will explode. I believe it will take a series of compormises where all have to sacrifice (rich, middle income and poor). The resulting budget may result in increasing budgets, but they must increase at a lower percentage than our GDP increases —- hardly the case now!

  5. Items from Around the Web 04/23/2011 (a.m.) | GLOW Democrats  ::  9:31 pm on April 22nd, 2011:

    […] TaxVox » Blog Archive » S&P, the Debt Limit, and Political Risk […]

  6. Michael Bindner  ::  11:34 am on April 23rd, 2011:

    This would not cause a recession anymore than their original enactment under Clinton.

    The reason the ratings agencies don’t like taxes is more personal for them than concern over the economy.

  7. Michael Bindner  ::  11:43 am on April 23rd, 2011:

    Obama helped with Medicare by making non-wage income over $250,000 taxable under it. He did, however, wimp out on the doctor fix.

    Cutting provider rates will only cause people to go to the ER for primary care – and even then many of those bills will be attached to estates (so their heirs will pay). The reason for social insurance is to even out the demographic factors for individual families – so that large families or families with dead elders don’t get an undeserved benefit while small families or families with living seniors don’t pay an undeserved cost.

    The only thing to do is to raise Medicare taxes and possibly make the fee structure more progressive (although that gives it the stink of welfare). The tax rate is now 2.9% of income, including employer contributions. You could double that and no one would notice.

    Tax reform would help too, since you could conceivable craft a business receipts tax to fund all federal health costs, including those subsequent to health care reform, and leave employee collection out of the equation entirely. Because it is a flat tax, there are no equity concerns in doing so.

    This tax could also be the vehicle for the Child Tax Credit, which would be paid out in salary rather than at the end of the year – clearing the way to take most folks off the tax rolls. If some degree of visibility were still desired, a VAT could be enacted with the amount visible on the receipt.

    I would not show the BRT, however, since it should have deductions against it for both income distribution and employee and retiree insurance paid by the employer (rather than by the government).

  8. Pat Buchanan Blames Obama For Spooking the S&P  ::  3:02 pm on April 23rd, 2011:

    […] all the stops to do the one thing certain to compel S&P to follow through with their threat–defaulting on our debts. Seizing on S&P’s warning, House Majority Leader Eric Cantor continues to play chicken […]

  9. Evening Fix | Progressive Fix  ::  12:22 pm on April 25th, 2011:

    […] Howard Gleckman is not happy with the politicking of the debt ceiling: “S&P described the nation’s fiscal problem as almost entirely political, and not based on economic fundamentals. In this, at least, it is correct though it hardly deserves credit for the insight. It is painfully obvious that the public doesn’t want to lose government programs or pay higher taxes. And in that environment, politicians much prefer jockeying for political advantage than doing the dirty and likely unappreciated work of seriously addressing the deficit. Thus, we face the prospect of months of irresponsible but politically fruitful pandering over the debt bill. […]

  10. AMTbuff  ::  6:11 pm on April 26th, 2011:

    “More importantly, there is no fiscal plan now on the table that would balance the 2012 budget, and thus stop adding to the debt. There is no such plan for 2013, or, for that matter, for 2020.”

    Why is this not a much bigger risk than refusal to increase the debt limit in 2011? It seems to me that without a solid plan the debt bubble will only become bigger and burst more painfully. Why not let it burst now when the pain will be less? Isn’t that the most responsible response to politicians’ irresponsibility?

    This is like letting your teen spend the night in jail in the hope that he will be scared straight before he becomes a hardened criminal. Tough love. Maybe holding the debt ceiling can serve that purpose. Maybe not, but it’s worth discussing. We should demand that both sides put serious plans (not Obama’s metaplan) on the table before agreeing to another extension.

  11. Note to Rep. Bachmann: Hitting the Debt Limit Has Consequences  ::  11:02 pm on April 26th, 2011:

    […] other day, I blogged on the necessity of increasing the debt limit. And I got a remarkable response: The tea party and […]

  12. Abhs.zendesk.com  ::  2:58 am on June 28th, 2014:

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