Standard & Poor's decision to change the nation's long-term credit outlook from stable to negative should be seen as a wakeup call to Congress and the White House that we simply must find a credible solution to the fiscal crisis, and soon.
This is not strictly a domestic issue. Our government's credit worthiness underpins the world economy. Foreign governments invest trillions in U.S. debt instruments because they believe our credit is good. The mere possibility that Congress will not extend the debt limit is enough to send shivers throughout the world financial system. The prospect of losing our credit worthiness in the not too distant future is even more disconcerting.
Our ability to borrow vast sums of money at reasonable rates -- and the acceptance of the U.S. dollar as the world currency of choice -- confers upon us innumerable advantages. If we let these advantages slip away, the cost of credit will be higher, economic growth will be slower and our standard of living will be reduced.
The reason for S&P's change in outlook is not hard to understand. Our government is spending much more money than it takes in. Roughly 40 cents of every dollar that Uncle Sam spends is borrowed. We have had back-to-back deficits of $1.5 trillion and have almost reached our self-imposed debt limit. In the absence of a credible debt reduction plan, Congress may not be able to summon enough votes to raise the debt limit. If that happens, no one will need S&P to question our credit worthiness. It will be gone with the wind.
The budget plan offered by Rep. Paul Ryan (R-WI), Chairman of the House Budget Committee, was politically bold in that it proposed real reductions in entitlement spending. There is no question that is where the real problem is. Spending as a percentage of GDP has grown from 19 percent in 2000 to 25 percent of GDP in 2010, and almost all of that was due to the growth of Social Security, Medicare, Medicaid and Defense. Any viable solution will of course include increased revenues, but there is not enough money in the world to plug that hole. Spending is the central problem that must be dealt with.
Two bi-partisan deficit commissions, including the one created by President Obama, also made serious recommendations to reduce the deficit. One can quibble about specifics, but they did put everything on the table. Instead of criticizing Ryan, President Obama should focus on the recommendations of his own deficit commission. We need leadership to define the tough decisions that must be made and bring us all together to do what must be done. We urge the President to provide the leadership the country so urgently needs.
Jerry Jasinowski, an economist and author, served as President of the National Association of Manufacturers for 14 years and later The Manufacturing Institute. You can quote from this with attribution. Let me know if you want to talk to Jerry.