Investors woke up Monday to a world in which America is seen as a greater credit risk than anytime in recent history, and they didn't like what they saw.
John Wayne
The conversation around why we were downgraded can get as wonky as we want, but let’s not get caught up in the weeds. We are where we are because the problem is simple: Our country spends far more than it takes in—trillions more.
While your net worth burns, Congress and the White House continue to burn valuable time pointing fingers and trying to discredit the messenger. We can spend hours bashing S&P for its myriad poor calls over the past few years, but let’s not. What’s done is done. S&P isn’t going to reverse the downgrade and it’s time to fix this mess.
Sadly, the biggest hurdle we face to solving the problem is that politicians of both parties lack the courage to tell the American public exactly what the problem is. Even the most conservative member of Congress doesn’t dare utter what most adults no doubt already know: We either cut spending on the programs that cost the most, or we raise taxes on everyone to pay for the spending.
There is a third option, of course, that growth might rescue us. But it’s clear that we aren’t going to get economy-shifting growth anytime soon, perhaps not for a few more years. Even adding 250,000 jobs per month—which we're still galaxies away from—won’t bring us to what economists consider full employment for at least a decade.
This leaves us with current income and spending.
Though the Federal budget is a lengthy beast, the Center on Budget and Policy Priorities neatly lays out the spending breakdown: 20 percent of spending goes to Social Security, 21 percent goes to Medicare & Medicaid, 20 percent goes to defense, about 6 percent goes to interest payments on our debt and another 14 percent to so-called “safety net” programs. The remaining 20 percent is spent on veteran’s benefits, medical research, education, infrastructure and other smaller programs.
But outside of a few nominal haircuts here and there, or programs such as the aggressive Ryan Plan which were summarily discarded by members of Ryan’s own party, few in Congress are actually talking about real spending cuts.
Here’s an extremely unscientific account of the recent spending debate:
Real cuts to Medicare or Medicaid? Nope, say the Dems.
Cuts to defense? No-can-do, says the GOP.
Slice Social Security? Heck no, say both parties (they know who votes).
Cut safety nets? Of course not, unemployment is still above 9 percent.
I’m not going to make a political, moral or ethical judgment on what should or shouldn’t be cut from the budget, but some quick math tells the fiscal story of the above debate:
20 percent + 21 percent + 20 percent + 14 percent + 6 percent = 81 percent
Outside of a few percent here or there being offered up in the debt ‘compromise,’ 81 percent of federal spending has been deemed politically untouchable.
Worse, not only would cuts to the remaining 19 percent do little to balance the budget, it’s actually this little pod of spending on things such as infrastructure, science and education that can actually help the country. Having top-notch students, airports and scientific breakthroughs keeps America competitive.
The other side of the balance sheet is income—the view there isn’t much prettier.
Republicans oppose any tax increase, while President Barack Obama wants to only raise taxes on the top 2 percent of the population. That may sound good in a sound bite, but what the Obama doesn’t tell you is that projections show raising the top-end back to Clinton-era rates would only bring in about $60 to $70 billion more per year, or less than 5 percent of the deficit.
The only real boost to the Treasury would come if tax rates on everyone went up, but we know that’s the third rail no sane politician seeking reelection will mention. And it would probably send us back into recessionanyway because consumer spending makes up two-thirds of our economy. Higher taxes would likely pull back that spending, which would hurt businsess, lead to layoffs and more unemployment and, well, start the spiral anew.
So, this is where we are.
Higher taxes on the rich won’t cut it, higher taxes on the majority of Americans aren’t happening, and Congress won’t cut spending enough to get close to balancing the budget at current income levels. This is what S&P pointed out in the downgrade, and this is what most of the real world outside the D.C. beltway has seen coming like a freight train for some time.
So until Congress comes together and has the guts to make real cuts—cuts that may cost its members their reelection—we'll be stuck right here, mired in the weak economic growth 800 years of history says we’re likely to face, and saddled with a stock market that’s clobbering confidence as hard as retirement portfolios.
To quote the 2003 Boston Red Sox, it's time for Congress to "cowboy up!" America can’t win in the future without showing grit and toughness right now.
