The Downgrade Blame Game

I figured that if a credit downgrade happened, the liberal response would be that Republicans were squarely to blame for blocking any new tax revenues.  As if on cue, Paul Krugman accused anti-tax Republicans of preventing long-run solvency:

On one hand, there is a case to be made that the madness of the right has made America a fundamentally unsound nation. And yes, it is the madness of the right: if not for the extremism of anti-tax Republicans, we would have no trouble reaching an agreement that would ensure long-run solvency.

FYI, if you’re wondering what’s on the other hand, let me assure you that Krugman didn’t lay any blame on the Democrats for blocking entitlement reform.  No, it was just a freebie talking point that ratings agencies are incompetent and that we shouldn’t pay any attention to them anyway.

Krugman’s assessment provides the Democrats and the media a narrative to follow but it doesn’t exactly jibe with S&P’s rationale for the credit downgrade.

In reality, S&P doesn’t particularly care how the sausage is made.  All that really matters is the likelihood that the Treasury will pay its creditors.  Notice in the following excerpt from the S&P report that the agency only cites the political gulf between the two parties and that the final deal was way too small:

We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process. We also believe that the fiscal consolidation plan that Congress and the Administration agreed to this week falls short of the amount that we believe is necessary to stabilize the general government debt burden by the middle of the decade.

It’s no surprise that Krugman would cut and paste what he found politically useful in the S&P report.  But it lays out the strategy for Pelosi and the Democrats over the next few months.  They have shown their hand and will double-down on raising taxes to cut the deficit.

Sure, they’ll probably rack up some political points painting themselves as the righteous guardians of Medicare and Social Security.  But they can no longer avoid reality.

The gig is up.  A critical mass of investors and analysts understand that our entitlement obligations can’t be met by soaking the rich with higher taxes.  It’s a mathematical impossibility.

If we hope to restore our AAA credit, we can’t just focus on the current deficit or the $14 trillion debt.  We must address the massive unfunded obligations that stretch into the future.  I’ll wrap it up with former Reagan economist Laurence Kotlikoff, who identifies how we went wrong with the current compromise:  “We’re trying to balance the wrong books.”

“We have all these unofficial debts that are massive compared to the official debt,” Kotlikoff tells David Greene, guest host of weekends on All Things Considered. “We’re focused just on the official debt, so we’re trying to balance the wrong books.”

Kotlikoff explains that America’s “unofficial” payment obligations — like Social Security, Medicare and Medicaid benefits — jack up the debt figure substantially.

“If you add up all the promises that have been made for spending obligations, including defense expenditures, and you subtract all the taxes that we expect to collect, the difference is $211 trillion. That’s the fiscal gap,” he says. “That’s our true indebtedness.”