It’s risky to lend money to a guy who might not be able to pay it back. It’s also risky to lend money to a guy who might decide on a whim not to pay it back. The debt showdown, in which Republicans are threatening to force the Treasury into default unless Democrats agree to their budget priorities, has turned the U.S. into that second guy. That’s why Moody’s is threatening to downgrade the U.S. bond rating. David Von Drehle helpfully quotes the agency’s explanation: “The heightened polarization over the debt limit has increased the odds of a short-lived default.”
Somehow, this leads David to conclude that the U.S. is that first guy. That’s perplexing. Meanwhile, the irresponsible Republicans who have just turned the U.S. into that second guy—and have tried their best over the last decade to turn the U.S. into the first guy as well—are making similar arguments. That’s infuriating.
Let’s start with the good news: We’re not yet that first guy.
Oh, we’ve definitely got fiscal problems. In the medium term, as this chart shows, those problems are predominantly the result of President Bush’s tax cuts, the economic downturn, and the wars in Iraq and Afghanistan.
In the long term, as these charts show, those problems are predominantly the result of escalating health care costs.
ObamaCare should help alleviate those problems, if Republicans don’t gut its cost controls; still, they’re serious problems.
But we are not broke. Our debt-to-GDP ratio is worse than it should be, mainly because our GDP is worse than it should be. Our recovery is way too slow, which is keeping our revenues way too low and our spending on unemployment insurance and other safety-net programs way too high. But even in the depths of the financial crisis of 2008, when we weren’t sure we’d have an economy in the morning, global investors fled to Treasuries as the safest investment around. Nothing has happened since – substance-wise in Washington or perception-wise in the bond markets – to change that. We can still be an excellent credit risk if we want to be. I suppose there is “rising pressure for credible action on the long-term debt picture now,” as David writes, but that’s because Republicans have found that blaming President Obama for the deficits they created during the Bush years is a winning issue. As today’s jobs report makes clear once again – note the continuing contraction in public sector jobs during the Socialist Age of Obama – our big short-term economic problem is unemployment, not debt; trying to fix that problem with short-term austerity is like trying to cauterize a wound with a hatchet.
Our other short-term problem is that Washington Republicans have realized that they can hold our credit rating hostage to try to force Obama to accept massive long-term spending cuts without revenue increases. Basically, they’re saying that unless the Democrats who control the White House and the Senate pass a Republican budget plan, they’ll force a default that will damage the economy and Obama’s reelection prospects. Moody’s is starting to worry that they’re serious. And even if they eventually agree to a deal, they’ve sent a message that raising the debt limit – formerly a formality – is now subject to politics.
I’ve called for blowing up the ratings agencies, which helped cause our current problems by slapping Good Housekeeping seals of approval on worthless securities, but they’re right to worry about U.S. creditworthiness. Our fiscal problems are nothing that couldn’t be solved by a strong recovery and a few tweaks to our tax policies, spending policies and foreign policies. But our political problems are real. Who wants to lend money to a guy who might get taken hostage tomorrow?