The rating agencies are at it again. Moody's Investors Services says it's likely to downgrade U.S. government bonds if Congress and the White House don't reach a budget deal before we go over the so-called "fiscal cliff" on January 2, when $1.2 trillion in spending cuts and tax increases automatically go into effect.
Apparently the credit rating agencies can't decide which is more dangerous to the U.S. economy -- cutting the U.S. budget deficit too quickly, or not having a plan to cut it at all.
Last year's worry was the latter. In the midst of partisan wrangling over raising the nation's debt limit, Standard & Poor's downgraded U.S. debt -- warning that Republicans and Democrats didn't have a credible plan to tame the deficit.
Now Moody's is worried about the opposite: The spending cuts and tax increases in the Budget Control Act that will automatically kick in at the start of 2013 -- unless Congress decides on a better and presumably more gradual approach -- are so draconian they'll push the economy into a recession.
The ratings agency schizophrenia is understandable. Everyone in Washington -- and just about everywhere else -- knows the budget deficit has to be dealt with. But anyone with half a brain (including Washington) also knows that when unemployment is high and economic growth still painfully slow, cutting the deficit too much now would make a bad situation even worse.
Remember, the real problem isn't the deficit per se. It's the deficit in proportion to the size of the economy. Cutting too much too soon will tip the economy into recession because it would reduce overall demand for goods and services when private demand falls way short of what's needed. And if the economy goes into recession and begins to shrink, the ratio of deficit to the economy gets worse. That's the austerity trap Europe has fallen into.
Even if the deficit continues to grow in proportion to the economy, we're safe as long as those who lend money to the U.S. aren't worried about being repaid and therefore don't demand high interest rates in return for their loans.
By this measure, the American economy appears safer than ever. Despite all the harrumphing from the credit-rating agencies, the United States has never been able to borrow money more cheaply than it can right now. That's because no matter how bad the deficit situation looks here, it's worse in places like Spain and Italy. And no matter how deadlocked Congress becomes, the U.S. is still the most stable and reliable system in which to put your savings.
The fiscal cliff is a real worry. And it's a worry precisely because the budget deficit isn't -- at least not now. When unemployment is high and growth is anemic, we need as much fiscal stimulus as we can manage.
As long as the rest of the world is willing to lend us their savings so cheaply, we'd be wise to use it to rebuild our crumbling infrastructure and our schools and parks -- and thereby put more Americans back to work -- rather try to cut the deficit too much and too soon.
ROBERT B. REICH, Chancellor's Professor of Public Policy at the University of California at Berkeley, was Secretary of Labor in the Clinton administration. Time Magazine named him one of the ten most effective cabinet secretaries of the last century. He has written thirteen books, including the best sellers "Aftershock" and "The Work of Nations." His latest is an e-book, "Beyond Outrage," now available in paperback. He is also a founding editor of the American Prospect magazine and chairman of Common Cause.
Follow Robert Reich on Twitter: www.twitter.com/RBReich
A Balanced Budget Is Not the Answer
by Michael Johns
In its political toughness with the Clinton White House in recent months, the Republican leadership in Congress has elevated balanced-budget proposals to the top of America’s political agenda. Although at least nominal political differences exist over the means to arrive at this objective, the embrace of a seven-year balanced-budget goal by both Republican congressional leaders and President Clinton represents the most significant shift in the economic thinking of the political elite in perhaps two decades. The concept of balanced budgets has long existed as a weapon in mainstream political rhetoric, but only since the 1994 elections has this rhetoric run the significant possibility of becoming political reality.
There is, for instance, no historical data that would demonstrate that a balanced budget enhances gross domestic product (GDP) or any other indicator of economic productivity. Balanced budget advocates have long contended that the absence of a balanced budget opens the door to a “crowding-out effect? on interest rates, whereby government borrowing actually closes out private borrowing, thus raising interest rates on private credit and slowing the economy.
Without exception, on six consecutive occasions from 1817 until 1930 when government cut spending considerably without simultaneously seeking to stimulate the economy with equally deep tax cuts or other fiscal stimuli, depressions arose. The correlation is a shocking 100 percent. Balanced-budget efforts in America have always preceded national depressions.
1) Keep the MILITARY part of the sequestration cuts. Saves $50 billion / year.
2) Keep the part of the Bush Tax Cuts that applies to people making under $250K / year, and let the cuts expire for everyone else. That should add about $70 billion / year in revenue.
This scenario would be my ideal. It would keep unemployment reduction on track, would cut some spending (importantly, THE MOST USELESS part of our spending) and raise some taxes, but not so much to trigger a world-wide macroeconomic earthquake.
In fact, by reducing the UNCERTAINTY (a favorite buzzword of Republicans these days) about whether America might default on its existing debts, it might encourage lending, and thus nudge "job creators" to invest in growing their businesses.
Which would add jobs. Which would add additional Federal tax revenues. And hey, we could be looking at 1995 all over again.
How about it, Moody's? IS THAT ALL RIGHT WITH YOU?
A lot of nerve they've got, a private company holding so much power over a sovereign country's future...
Dean Baker wrote a column that said your idea of keeping the dollar strong has lead to some of our problems now. (That is if i read and interpreted it correctly.) Care to comment? We all could learn something i'm sure. thanks
The one constant is the basic request for a plan by the ratings agencies. There was never any doubt about whether the U.S. could pay its debts, but whether Congress would allow it to.
And on this issue, the blame falls squarely on a Republican party that's pledged to never, ever raise taxes, no matter what the circumstances. A party that, according to Romney reject a deal with $10 in spending cuts for every $1 in tax increases.
At the end of the day, the credit rating agencies have and will continue to carry water for those holding U.S. public debt, who want a guarantee the U.S. will continue to pay. Republican rigidity and absolutism make that impossible.
I believe this is the most consistent the agencies have ever been.
1) the previous downgrade named the polarization in Washington and the inability to create any solutions as the worst evil. It is still getting worse.
2) There is only one way to tackle a debt issue: you have to outgrow it. Another recession will create another spike in the deficit as the safety nets strain under the weight of millions more Americans in need and tax receipts decline.
We now have fundamental systemic problems with our economy. The Republicans want to double down on exactly what is broken. The dems want to stay the course. Will the dems ever tell the banks to suck up their losses and let the housing market heal? Will Americans ever figure it out? How is it that every 2 years Michelle Bachmann gets sent back to Washington? Or that Rush Limbaugh is still on the air when he spews nothing but ignorance and hate?
I see another ratings drop no matter what. We haven't even begun to admit we have problems.
Or, we could take the magic rainbow to the land of the unicorns and ask them to sprinkle magic happy dust on it.
"...my plan is to stimulate economic growth. The biggest source of getting the country to a balanced budget is not by raising taxes or by cutting spending."
I guess Romney is riding the rainbow.
Bernanke's new QE 3 to Eternity will be buying up $40 billion in MBS a month from various private banking firms. MBS (mortgage backed securities) are those same toxic instruments that started the 2008 crash. So, the Fed would rather clean the toxic crap from the private banks than invest all that printed from nothing money in US Treasuries. "Collateral transformation" is another ploy in which banks would rather have your toxic mortgage (which it can sell to the Fed) than hold US Treasuries.
What does that tell you about US government credit risk?
Here's the supreme irony: Where do you think a huge chunk of this money is invested.......that's right, treasury securities. In other words because the large corporations and super rich were not taxed enough in the first place, the government has to borrow.........and they are borrowing from the very ones who were not taxed enough in the first place!...paying interest on it and saying we need to cut money to the old and the sick because we have borrowed so much. What a racket!