Reason...
Two Types of
Crazy
The downgrade of America’s credit
rating reveals the nation’s long-term fiscal insanity.
By Peter Suderman
August
10, 2011
Creditors
don’t like risk. And when a
nation acts a little crazy, creditors—and the credit rating agencies
that
decide which sovereigns are risk-free borrowers—are bound to notice.
That’s
what happened last week, when credit rating agency Standard &
Poor’s
downgraded America’s credit rating from its risk-free AAA status.
S&P’s downgrade
notice observed two types of erratic behavior from America’s political
system.
And the Obama administration is ignoring the one that matters.
The
first was short-term and charged
by contemporary partisanship—a sort of temporary political insanity.
Debt limit
brinkmanship from both parties revealed exactly how difficult it would
be for
America’s political system to resolve even the most basic fiscal policy
disputes, much less make substantial fiscal changes. When debt deal
talks
began, S&P announced that it expected Congress to work out a
deal worth a
minimum of $4 trillion in deficit reduction—the minimum necessary to
stabilize
the country’s debt over the medium term. But after months of bickering,
Congress only managed to come up with about $2.5 trillion in cuts—and
only at
the very last minute. Which explains why S&P now believes that
“the
effectiveness, stability, and predictability of American policymaking
and
political institutions have weakened at a time of ongoing fiscal and
economic
challenges.”
The
showdown’s gridlock antics
provided the proximate cause of the reduced credit rating. But the
S&P’s
downgrade notice also pointed to a more fundamental form of crazy: the
long-term build-up of federal debt scheduled to come from America’s
entitlement
system—and the broad refusal to do anything about it. It’s not just
that the
deal failed to knock the minimum dollar-figure off the deficit. It’s
that it
failed to address its root cause: “The plan envisions only minor policy
changes
on Medicare and little change in other entitlements, the containment of
which
we and most other independent observers regard as key to long-term
fiscal
sustainability.” Entitlements—and their unsustainable financing
systems—in
other words, are the core of the long-term problem.
Yet
in the days since the downgrade,
the White House has focused almost entirely on the question of how to
calm the
political system’s temporary behavior, or at least assign blame for its
current
intensity. In a statement on Monday, President Obama grumbled that “we
didn’t
need a rating agency to tell us that the gridlock in Washington over
the last
several months has not been constructive, to say the least” and that
“we knew
from the outset that a prolonged debate over the debt ceiling…could do
enormous
damage to our economy and the world’s.”
At
the same time, the president
brushed off worries about Medicare’s prospects. While administration
officials
promised not to touch benefits in any way whatsoever, Obama declared
that the
country needed only “modest adjustments to health care programs like
Medicare.”
With insolvency on the horizon—even the most optimistic projections
suggest the
program won’t be able to fund its full obligations by 2024—and total
unfunded
liabilities pushing past $36 trillion, or almost three times America’s
total
current annual economic output, it’s clear the program will require
more than
modest changes. It’s just as clear that the Obama administration
doesn’t want
to face this reality—or ask the public to do so either.
That’s
too bad. Because eventually the
bills will come due. The crude political shenanigans of the debt-limit
showdown
may have provided the reason to downgrade America’s credit today. But
political
moments and the legislators who make them happen eventually fade; the
Congress
of 2013 will not be the same as Congress today. The debt build-up, on
the other
hand, isn’t going anywhere without legislative action. And it is the
lousy
state of our entitlements—and the failure to deal with their long-term
problems—that ensure the nation’s fiscal outlook will be burdened by
the threat
of debt and risk for years to come. And as the S&P’s new rating
suggests,
it’s more than a failure. It’s nuts.
Peter
Suderman
(peter.suderman@reason.com) is an associate editor at Reason.
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