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The downgrading of the US credit rating from AAA to AA+ is significant, yet troubling.  That different political groups within the US are trying to make ?political hay? out of this is obvious.  But this nation cannot permit politics to determine our response.  This is serious but it is perhaps more of a symbol than anything actually that substantive.  Even last year, it would have been unthinkable to see the credit rating of the United States downgraded!  But, as I mentioned in last week?s Issues in Perspective, the US debt has grown enormously under the administrations of George W. Bush and Barack Obama.  Both Democrats and Republicans must accept equal blame for this disaster.  This is not something that just developed since Obama became president.  This crisis has been brewing over the last five years or so.  It is not an issue of who is more responsible?Bush or Obama??or even a debate over who has added more to the debt.  This supreme issue is that this is the fault of both parties, both of whom have placed politics over the national good.  Shame on both parties for this debacle.

Building on last week?s Issues, there are two additional thoughts:

• First, the debt-ceiling deal does not actually reduce federal spending.  By the end of the 10-year deal, the federal debt will be much larger than it is today!  Indeed, both the federal debt and the federal government itself will continue to grow faster than the US economy.  Economists disagree about the amount of debt a nation can safely carry relative to the size of its economy (i.e., gdp).  Nonetheless, the concern is clear if a national approaches a 100% ratio.  In other words, the weight of the debt suppresses economic activity.  Stabilizing the ratio of GDP to debt would require about $4 trillion in cuts over the next decade.  This is the target that S & P declared the nation must meet.  When it did not meet that, the downgrade resulted.  [The deal posits about a $2.1 trillion reduction.]  The reality of this debt-ceiling deal is that it did not address any entitlement program issues, the largest by far drain on the US budget.  The deal eliminated no programs, consolidated no duplicative programs, cut no tax earmarks, reformed no entitlement programs and did nothing to restructure the antiquated and counterproductive tax code.  For all of these reasons, S & P downgraded the US credit rating.  From my vantage point, my prayer is that this downgrade will motivate Washington to start serious analysis of our debt and seek to reduce it by, at the very least, $4 trillion over the next decade.

• Second, the economist, Robert Samuelson, observes that the debt-ceiling deal ?does reflect national priorities, for good or ill.  It is mostly a triumph of the welfare state over the Pentagon.?  He argues further that ?the defense cuts show how, contrary to conventional wisdom, the budget deal reflects liberal preferences.  The liberal agenda came in three parts:  First, raise taxes on high-income Americans to limit domestic spending cuts; second, protect the social ?safety net,? especially Social Security and Medicare; and finally, cut defense spending to spare (again) domestic programs.?  Therefore, as the debt-ceiling deal came down, the liberals got two out of their sacred three.  They failed on the tax issue because the Republican Party regards tax issues as their political litmus test.  Remember that retiree benefits constitute half of the non-interest federal outlays.  Therefore, the deal is not that hard on government spending.  Samuelson argues that ?the real budget story is how protecting these vast retiree benefits dominate policymaking.  If you shield almost half of spending and still want to cut, pressure intensifies on everything else.?  Defense spending is a major one of these!

The current American welfare state constructed in the 20^th century is based on three entitlements:  Social Security, Medicare (and Medicaid for the poor) and Obama has added national health care.  The result of these entitlements is utter dependency on the US government by the vast majority of its citizens.  More than anything else, these entitlements explain our level of debt.  When President Bush added the drug prescription program to Medicare and funded it with debt, we crossed a threshold on how we as a nation viewed entitlement benefits and revenue.  For the first time in our history, a benefit was added to the population without any revenue tax to pay for it.  The Social Security tax was not increased nor was the Medicare part of FICA increased.  This was a reprehensible act on the part of President Bush and set the stage for the even more egregious act of President Obama on the health care legislation.  As historian Niall Ferguson has observed, every major power began its decline when its debt became so cumbersome that the ratio to GDP and debt accelerated.  When that ratio becomes unsustainable, nations cut into defense and they are no longer able to remain a major power.  There are no exceptions to this paradigm.  The United States has just crossed that threshold.  It is very difficult to be optimistic about the United States and its role in the world over the next 10 to 15 years.

See Samuelson?s essay in the Washington Post (8 August 2011) and Binyamin Appelbaum in the New York Times (3 August 2011). PRINT PDF 2011_0813-0814