America Loses AAA Credit Rating
August 11, 2011
Well, it finally happened: Standard & Poor’s, one of the big three credit-rating agencies in the United States, has downgraded the United States’ credit rating. Specifically, S&P downgraded the federal government from AAA to AA+. “The outlook on the long-term rating” is also “negative”, meaning that S&P may lower our rating again “within the next two years” if we don’t shape up and get the national debt under control.
In other words, if the United States were a person, imagine that he has already maxed out several credit cards, and now he’s applying for another one so that he can keep on spending. Because he’s starting to look like a bad credit risk for lenders, his credit score has been lowered, and he’ll find it more difficult to take out loans or get approved for additional credit cards.
(It’s not exactly like that, of course. For a full explanation of what the downgrade means, see the current issue of National Review, Kevin D. Williamson, “Downgraded President”, August 15th, 2011, page 20.)
As the author of the Foxhole says, “You knew this was coming.” Except that if you don’t consume conservative media, you may not have known. Conservatives have been concerned for decades about the inexorable growth of government over the course of the twentieth century. Glenn Beck predicted this downgrade in February of 2008 (from about 3:25 to 4:35 on the video, or see block quote further down on the page). Kevin Hassett warned of the danger in National Review last February. Last month Mark Steyn said, “Downgrade’s a-comin’.” A writer at The American Spectator pointed out last month that Egan-Jones (one of the ten American credit-rating agencies, though not one of the “big three”) had already downgraded the United States, and that liberal newspapers like The Washington Post didn’t seem to think that was worth mentioning. Treasury Secretary Tim Geithner said in February of 2010 of a U. S. downgrade, “that will never happen”, and said last April that there was “no risk of that”. People who got all their news from The New York Times thought the national debt was no big deal. Mark Steyn remarked,
[Senate Majority Leader Harry Reid] and too many other Americans seem to be living their version of the old line: If you owe the bank a thousand dollars, you have a problem; if you owe the bank a million dollars, the bank has a problem. America owes the world $14 trillion, so the world has a problem.
I’ve said it before and I’ll say it again: If you want to know what’s going on, you really must consume a balanced diet including at least some conservative media.
It’s not known exactly what effect the downgrade will have, but it’s almost certain that the United States will start having to pay higher interest rates on its debt. (See the two Kevins cited above.) Interest payments on the existing debt already consume more than a tenth of the total federal budget, and that’s at historically low interest rates; in the natural course of things, interest rates were bound to swing back up sooner or later anyway, and the downgrade can only make our interest rates rise even more. This could make interest payments eat up an even larger share of the budget, which would make us less able to keep up with interest payments, which would in turn lead to further downgrades, in what could become a catastrophic debt spiral, or death spiral.
S&P mentioned that it downgraded the U. S. partly because we haven’t yet shown that we can “contain the growth in public spending, especially on entitlements”. The debt keeps getting bigger; we have to do something about that. S&P doesn’t necessarily favor spending cuts over tax increases as the means to make ends meet:
Standard & Poor’s takes no position on the mix of spending and revenue measures that Congress and the Administration might conclude is appropriate for putting the U.S.’s finances on a sustainable footing.
However, as I’ve pointed out before, no feasible amount of raising taxes would go more than a fraction of the way toward eliminating the deficit:
- Even if the federal government confiscated the entire net worth of every billionaire in America, that would amount to only $1.3 trillion—not even enough to cover this year’s deficit, much less eliminate the debt.
- Even if the top two federal marginal income-tax rates were doubled (a much greater increase than anyone is seriously suggesting at this point), to 66% and 70%, that would cover less than a fifth of the projected 2011 deficit.
Even if the income of everyone making more than $100,000 a year were taxed at 100%, it wouldn’t cover this year’s deficit.Correction (August 12th, 2011): As Suissecon points out below, The Wall Street Journal (same URL) has issued a correction: “An earlier version of this story incorrectly stated that the total taxable income of Americans earning over $100,000 in 2008 was $1.582 trillion. The correct figure is $3.4 trillion.” I stand by the point I was making, that no feasible amount of raising taxes would go more than a fraction of the way toward eliminating the deficit.
- A fairly sarcastic but fact-intensive video makes the point dramatically.
Importantly, such projections (perhaps necessarily) are also “static”, meaning that they assume all other things (other than the tax rates) would be equal; of course all other things are never equal, and raising the tax rates would almost certainly hurt the economy and thus depress tax revenues relative to these projections, making them even less able to cover the deficit. As even President Obama has agreed, “The last thing you want to do is raise taxes in the middle of a recession . . . .”
So raising taxes won’t do it. We need to cut spending, a lot.
Liberals, including in the Senate and the White House, responded to the downgrade by blaming, incredibly, the Tea Party, the people trying to cut spending and reform entitlements. The Democrats, and especially the president, have done a terrible job on both counts. The National Review editors offer an excellent review of the relevant recent history.
In other words, not to put too fine a point on it, if you don’t want to destroy America, please stop voting for Democrats.
For whatever it’s worth, since the downgrade, it’s been a crazy few days on the stock market. Follow the developments there, if you’re so inclined, at (appropriately named for a roller coaster) Yahoo.