The Guest Blog

Chadwick: The Downgrade is Not the Problem — Congress Is

The markets around the world are rattled silly this morning by the first ever downgrade of the U.S. Government’s debt by Standard & Poors. That is understandable but not, in my mind, rational.

There is no way the U.S. Government is going to default on its debt obligations. Its debts are no less safe this morning than they were on Friday or one year ago or ten years ago. It is true that our country’s balance sheet is less healthy than it was a decade ago, but look what we have been through — a recession  the depth of which had not been experienced since the 1930’s while simultaneously engaging in two wars. Debt buildup and fiscal deficits were inevitable.

At the end of World War II, our debt as a percent of GDP was far higher than it is today. The Government spent huge amounts of money subsidizing mortgages and providing education through the GI Bill. The country emerged from that era into a sustained period of growth and prosperity which allowed the balance sheet to right itself.

Today we face more than a few challenging issues but they are not insurmountable if only our elected officials would work for the good of the people. There is a need first and foremost to get the economy revitalized. The reason that is proving so difficult to achieve is because the balance sheet of the consumer is still going through a downsizing. In addition, the banks are also continuing to downsize their own balance sheets. It is difficult to spend when you are trying to pay off debt.

Corporations are becoming the easy whipping boy for not hiring more of the unemployed. But they are not the culprit. They came through the recession in solid financial shape and they would like nothing more than to see good demand that would allow them to increase employment.

One thing is for sure — a massive tax increase will NOT be productive for the economy or as a means of reducing the debt levels of the Government. Such a strategy would be counterproductive. However, eliminating tax loopholes — the unfair tax treatments that allow large and profitable companies to pay nearly NO taxes — is an essential step in moving towards reducing the fiscal deficit.

The same is true regarding individual taxes — the wealthiest individuals should not be able to take advantage of tax loopholes that allow them to pay the lowest tax rates. It is appalling that Congress cannot agree in a bipartisan way to eliminate tax loopholes — genuine loopholes, NOT the very legitimate deduction of mortgage interest and charitable contributions.

Longer term there is no doubt that the issues of Social Security and retirement health care must be addressed. At least they are now being discussed. Only a decade ago, they were referred to as “the third rail of politics.” So progress has been made. At some point in the not too distant future, Social Security will be means tested — as it should have been all along. And individuals will be required to work longer before receiving their benefit. This is simple arithmetic that goes hand in glove with the increase in life expectancy.

A better solution would be to allow — no, to force — individuals to save for their own retirement. The money would be their own, not the government’s, and they would be able to pass it on to future generations if not consumed in retirement. Admittedly, such a program would need to provide supplemental support for those who could not save sufficiently during their working life. That would be the Social Security part, but it would be necessary for the few not the entire population.

I admit that none of these issues is really simple but what is disheartening, or perhaps better said, infuriating is to watch our lawmakers on both sides of the aisle engage in brinksmanship rather than productive dialogue and action.

Congress spared no words demonizing ‘Wall Street’ for the recession of 2007 and the precipitous decline in the markets, never admitting their own culpability in the debacle. Today the turmoil in the markets can be laid right at the feet of Congress. Let’s hope they understand the seriousness of their criminally inept behavior.

Patricia W. Chadwick has had more than 35 years of investment experience.  She is the founder and president of Ravengate Partners LLC, a consulting firm that provides advice on financial markets and global economics.