Four ways to return to AAA

[LSN80]

American government debt is no longer one of the world's safest investments according to ratings agency Standard & Poor's, which last night stripped the world's biggest economy of its top credit rating for the first time.

S & P had threatened the move in July if the government didn't present what it judged to be a serious and succinct plan to tackle the country's deficit. After several discussions with administration officials last night,the agency followed through. With the country being 14 trillion dollars in debt, the US government's rating was cut to AA+ and the outlook for the debt was kept on negative. The moce was done in an effort to keep and further pressure on Capitol Hill to go further than it has in addressing its $14trillion of debt. S & P issued the following statement last night:

"The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed falls short of what, in our view, would be necessary to stabilise the government's medium-term debt dynamics," S&P said.

And it could only get worse from here. Because of the "negative outlook" S&P
spoke of, the rating could grow lower within the next 12-18 months if drastic changes aren't made. This has to be a major embarrassment for Republicans, Democrats, and the President himself. Unfortunately, our current state seems to be of one where Republicans are more interested in ensuring Obama is not re-elected, rather then working with their Democratic counterparts on fixing this right away. S &P commented on this issue as well.

"We're pessimistic about the capacity of the White House and Congress to stabilize the National Debt. We've changed our opinions, in a negative way, over the ability of both political parties to bridge the gap over the deficit."

The "good", if there's any to be found, is that these situations allow for the possibility of new solutions to be presented. The four steps for how to get back to AAA are not mine, but that of CNN writer Maya MacGuiness. My comments on each are below each.

1. Pick a fiscal goal: We know where we need to get. The rating agencies have made it clear, as have other outside groups, where that line is. I wish I could say this was about balancing the budget, but stabilizing the debt is a much more realistic ideal. It would be best to get it back to about 60% of theGDP(Gross Domestic Product) Right now, it is below 40%. But that might be tough in the next decade. The outer limit should be 65%, and that will take at least $4 trillion to $5 trillion in savings over the next decade.

I couldn't agree with MacGuiness more. We need to generate enough savings to stabilize the federal debt so that it is no longer growing faster than the economy. The truth of the matter isn't pleasant, but its obvious. We are so far from balance it will probably take decades to get there, so we need to set reasonable expectations on how to stabilize first, and implement them right away. If it means calling the House back from vacation to do so, then so be it.

2. Put a multiyear plan in place: Congress must pass and President Obama must sign a plan this year that generates these trillions in savings. Not next year when more downgrades may have come. And not after the election when politicians will have dug themselves deeper into unworkable promises and a full-blown market crisis could have kicked in. This year.

These next few years are going to be incredibly fragile, so a multi-year plan is paramount. The plan should not just cut spending in the next few years. It must phase in medium-term changes, ones that won't so front load the cuts so that the the recovery from debt is derailed after a few years. A multiyear plan, the longer the better, would help the economy. Stability would be added for households and businesses, while at the same time not threatening things in the next few years.

3. Address the toughest pieces of the budget: The debt ceiling negotiations were about taking things off the table. The result was a small deal that didn't fix the big problems. And thus the downgrade. Social Security needs a decision to be made, once and for all. We need a muti-layer health care reform plan. Discretionary spending needs to be addressed, and revenues must be considered as well.

I like all of these ideas. Benefits for senior citizens need to portioned relative to need, and we need a fixed component for how to determine this. Regarding health care, a flexible budget for spending needs to be eliminated and replaced with a concrete one. The government must be willing to include support premiums, and open up traditional Medicare as well. There's not a need to cut discretionary spending altogether, but the need is there for the adoption of performance measures so that unnecessary programs that are failing to work are eliminated. Tax reform is a must as well. Billions of dollars in tax breaks are given out per year, and getting rid of these altogether in the long term fiscal plan will eventually will generate quite a bit of revenue that will close the deficit.

4.Enact real spending caps and triggers: Putting in place a multiyear budget plan that tackles entitlements and tax reform won't be enough. There will still be the risk that promises of future savings won't materialize. We also need spending caps and trigger mechanisms. So far, though, the Balanced Budget Amendment or Cut, Cap and Balance plan recently bandied about have been suggested as replacements for specific policy reforms -- they allow lawmakers to sound tough without doing any of the real work of getting specific. Instead, such budgetary limits should be used to enforce a deal and make sure it stays on track: Cap spending, threaten across-the-board cuts if the full savings don't materialize and build in a mechanism so new revenues are only included if all the entitlement reforms are enacted.

Not only this, but budgetary limits need to be used to enforce any deal as well as keeping it on track. If it comes to it, threaten across-the-board cuts if the full savings don't materialize, all-the-while building in a mechanism so new revenues are only included if all the entitlement reforms are put into place and operated successfully.

This isnt going to be a short-term issue, nor is there any easy fix. But there needs to be signs of good faith from both parties that they're willing to get this done. The Dow didnt plunge 630 points today because things are near being resolved. I believe MacGuinesses' ideas are all rational, realistic ones, and if implemented, could bring about a change over time.

What do you think about MacGuinesses' ideas for helping to fix the deficit?

Do you have any ideas for how to help fix the deficit?

Who do you hold responsible for the economic state were currently in?

 

[Davi323]

For the record, Standard and Poor has not exactly had an exemplary record of their own...

We are holding them up to some ridiculous level of perfection, as if they were the end all, be all of judging credit worthiness. Nevermind the fact that they gave outstanding credit ratings to most of those banks that collapsed on Wall Street, they completely failed to see the trouble brewing at Enron, it encouraged the very subprime mortgage lenders that created the Fannie/Freddie blow up, and there are other miscalculations they have made too.

I don't pretend to be an economist, I don't have enough knowledge to know whether or not the US really deserved to have its credit rating downgraded...but some are holding up S&P as some magical golden standard, that they are infallible almost, when the reality is, they are anything but. They might be wrong to have downgraded the US, they might have been right. But lets stop pretending that they are incapable of mistakes, because they have been egregiously wrong in the past.