With Tax Day comes the unwelcome news that Standard & Poor’s has downgraded the long-term U.S. credit rating from “stable” to “negative.”
“We believe there is a material risk that U.S. policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013,” S&P said in its report, adding, “if an agreement is not reached and meaningful implementation does not begin by then, this would, in our view, render the U.S. fiscal profile meaningfully weaker than that of peer ‘AAA’ sovereigns.”
It is important to remember that the S&P is something of a lagging rather than leading indicator. The Wall Street raters, still recovering from the stings they suffered when the mortgage-backed securities bubble burst all over us, are not likely to be aggressive in their analysis of the long-term U.S. debt picture. In sum, today’s downgrading likely means that things are worse than they look—which brings us back to the vote on raising the debt ceiling. [Read the U.S. News debate: Should Congress raise the national debt limit?]
There are some in Congress who are opposed to raising it, saying that such a move would only give cover to the tax-and-spend crowd that refuses to be serious about cutting the long-term U.S. debt. There are others, mostly in the tax-and-spend crowd, who are insisting that Congress pass a “clean” debt ceiling bill—that is, a measure without any encumbrances that reduce spending—as a positive signal to the global financial markets.
The idea that a clean debt ceiling bill can pass Congress is a foolish one. Congress needs to raise the debt ceiling—in order to preserve confidence that the U.S. will honor its obligations—but do so only as part of an agreement to address the coming crisis head on.
Writing Monday for Reuters, Wall Street analyst Chris Whalen, cofounder of Institutional Risk Analytics, opines, “Voting against raising the debt ceiling is a valid mechanism for forcing political change in Washington. No nation can call itself a democracy if it is not willing to reject the demands of convenience and use an occasional revolution, to paraphrase Thomas Jefferson, to cleanse the nation’s financial and political life.” [Check out a roundup of political cartoons on the budget and deficit.]
As Whalen sees it,
The debate in Congress over the debt ceiling is as much about the political fate of the United States as the financial solvency of the Treasury. Members of both political parties in Congress should put aside the cowardly counsels of convenience, take their time, and demand their price from President Obama before voting yes on even a temporary increase in the debt ceiling. It is time for Congress to stop hiding behind the Fed and to address fiscal issues head on—like the governments of every other industrial nation. If we have to default on the national debt, even briefly, to get this done, so be it. At the end of the day, the political principle involved here is more important than the financial issues involved.”
Whalen is right. Congress needs to show that it has the courage to act—and President Obama needs to work with it rather than against it—to come up with a workable plan to address the problem without more borrowing and without more taxes.