The US is at risk of losing its top-notch triple-A credit rating within a decade unless it takes radical action to curb soaring healthcare and social security spending, Moody’s, the credit rating agency, said yesterday.
The warning over the future of the triple-A rating – granted to US government debt since it was first assessed in 1917 – reflects growing concerns over the country’s ability to retain its financial and economic supremacy.
It could also put further pressure on candidates from both the Republican and Democratic parties to sharpen their focus on healthcare and pensions in the run-up to November’s presidential election.
I have a great idea. Let’s enact a massive government-funded, single-payer health care program. That should put us on a sure financial footing. Also, I vaguely recall a certain President who recently proposed reforming Social Security, saying that the program will eventually face insolvency, but was thwarted by a certain political opposition that claimed “all is well” there.
This is bunk.
bl
For “bunk” [#2], see comment #1—a nice example of short-sighted and gratuitous partisanship.
President Clinton balanced the federal budget and shrank the government’s publicly held debt. At the end of his administration, that debt stood at $3.3 trillion. Had the Clinton Administration’s fiscal policies remained in effect, we would have paid off that debt by the end of this decade. Instead, the debt now exceeds $5.1 trillion.
But why trouble oneself with facts? Preconceptions are cozier than facts.
“I vaguely recall a certain President who recently proposed reforming Social Security…but was thwarted by a certain political opposition that claimed ‘all is well’ there” —Steven in Falls Church [#1]
The current President expended his Social Security reform capital on a private-account proposal that would done nothing to strengthen Social Security’s financial prospects. Indeed, by the administration’s own admission, the proposal would (by directing money away from the retirement fund) have deepened the retirement fund’s projected deficit. Bush could have rallied broad support for a proposal to fix Social Security by phasing in modest increases in the age at which one begins to receive benefits—increases that would take some slight account of how longevity has increased since the 1930s.
Opponents of Bush’s proposal did not say “all is well.” They voiced disagreement with the private-account proposal and rightly pointed out that it would do nothing to reduce the projected deficit in the retirement fund.
PS: Although I don’t support a governmental single-payer approach to health case, I’d note that as long as revenues balance expenses, such an approach would not worsen the budget picture.
#3, when you say “President Clinton” balanced the budget, I assume you mean that as a shorthand for the tech-field 90’s economic expansion and the Republican Congress? Sort of the way President Bush made it rain last night at my house?
I voted for Bush the first time round in ’00 (mea culpa mea culpa). I have regretted that decision ever since. Bush is the worst president on fiscal policy in at least the last half century. There is nothing conservative about this administration’s spend and borrow policies. I am frankly surprised that our credit rating has not already been lowered.
Where to begin?
Where is my comment partisan? I noted that Bush had “political opposition,” which was intentionally worded; members of his own party in fact came out against his reform proposal, and he had support among some Democrats. At any rate, the President’s proposal had a bipartisan provenance as it came from the recommendations of the bipartisan Social Security commission, co chaired by former Democratic Senator Daniel P. Moynihan:
You also state:
And I suppose John Kerry would have rushed to join him:
Maybe I am not enough of a procrastinator, but saying that a problem does not have to tackled until the 2040s is coming pretty close to saying “all is well.”
The ability of the US government to pay its debts in dollars which it can print at will is not in question. This article is written as if it was. Instead, the issue is whether anyone will buy those debt instruments. But the self correcting mechanism here is that if federal deficits could not be funded using sales of debt, then there would be no authorization to fund the deficit by simply minting/printing dollars or writing checks over the Treasury Secretary’s signature. Therefore the deficit would be unfunded and the executive branch would not have the authority to spend its appropriated budget. So, why would US debt become unsalable?
This is where
“Moody’s did once threaten to cut the rating of some of the US Treasury’s debt when Congress refused to pass the president’s budget in the mid-1990s. Other large economies, notably Japan in the 1990s, have had to suffer the symbolic blow of losing their top-notch credit rating.”
came into relevance. If there is no budget, then there is no authority to repay the existing debt due. Congress simply was goofing off not doing their job, and the financial community wanted to get paid on time, ergo the threat of ratings reduction. The Japanese case was more subtle. With interest rates in Japan going near zero on government debt due to deflation, nobody wanted to buy Japanese sovereign debt, so Japan’s systemic deficits could not be funded until the rates rose, due in part to the ratings reductions. This is not a legitimate comparison to the US case today, so the article is calling up false analogs. The last time the US Treasury had that problem was in 1932, coincidently at the last general US deflationary period.
What the article should have discussed is why investors buy sovereign debt and why that might change in the US case in the future. As the article didn’t scratch that issue, and instead dwelt on a cornucopeia of social and economic issues only saliently related to the intrinsic value of US debt instruments, I don’t think that this article is of particular value.
The FT ought to research how Alexander Hamilton put the US Treasury’s debts on a AAA basis: he simply paid what was due on time (to include all the overdue debts from the Articles of Confederation Congress).
Incidently, in 1932-4, one of FDR’s bank reforms was to require banks which were members of the Federal Reserve system to own a set % of their loan reserves in the form of US Treasuries. At that point these were paying next to nothing in interest and the banks wailed at essentially being forced to tie up assets in non performing vehicles, but the long term effect was to ensure a steady market for US debt, of an involuntary sort.
Andrew [#5]: President Clinton was the key to balancing the federal budget. All 12 budgets enacted under Presidents Reagan and Bush Sr. had huge deficits. This was so even though those presidents, as they often reminded us, presided over the longest peacetime economic expansion in American history—an expansion that lasted until 1992.
Clinton took office in 1993 pledging to cut the federal deficit in half within four years. He persuaded the Democratic-controlled Congress to enact a package of spending cuts and tax increases designed to achieve that goal. This was not an obvious or politically popular step to take. The economy was still very weak. We know in hindsight that the recession had ended, but recovery was not obvious at the time (and when economists ultimately did verify it, they called it a “jobless recovery”).
Every single Republican in Congress voted against Clinton’s budget package. Republican leaders repeated likened the budget to the 1930 Smoot-Hawley Tariff Act, which deepened the Great Depression. The budget squeaked through the House of Representatives by one vote.
But the results validated the Clinton-Rubin position: that slashing the deficit—and thus allaying fears of inflation—would lower long-term interest rates and thereby promote investment and sustainable economic growth.
That is exactly what happened. Inflationary fears raise real interest rates and also encourage people make nonproductive investments in gold, collectibles, and other tangible assets. High interest rates discourage equity investment. Why take the risk of buying stock—including stock in start-up technology firms—if you can make a big, safe profit buying government or blue-chip corporate debt? Clinton’s policies effected a huge, lasting reduction of long-term interest rates and inflationary expectations. Those policies also drove down the price of gold. (I sure which I’d bought gold mining shares back then; since Bush took office they have posted a compounded return of some 30% a year.)
Clinton also played a decisive role in restraining tax cuts by the Republican Congress. For Republican leaders like Gingrich, Armey, and DeLay, fiscal responsibility took a sorry second place to tax cuts. Those Republicans settled for deficit reduction because Clinton wouldn’t let them fund tax cuts for the affluent by running up the debt saddled on future generations.
Clinton was the key. He stood for budget balance at a time when many said it didn’t matter or couldn’t be done. If you look at the budgets enacted since 1980, you’ll see 11 years of fiscal irresponsibility—the budgets enacted under Reagan, Bush Sr., and Bush Jr. You’ll also see 8 years of fiscal responsibility—the budgets enacted under Clinton. Remarkable coincidence, eh?
Budgets are passed by Congress, not the Executive branch, but it’s a common mistake.
To engender another discussion. Clinton didn’t have to grab more money fo fight a war in fact he did the opposite..he cut and ran from Vietnam. The real thing that saved Roosevelts “tail bone” was the US being attacked and jerked into WWII. The US financed its share by war bonds and war stamps and issuing other paper securities. 800 milion dollars or more of deficit financing. In 2008 dollars this could easily amount to trillions of dollars–more than what Pres Bush has been accused of spending. Compare $3.00/hr for skilled auto workers at the start of WWII to the $25.00/hr being earned before the economic downturn began. 25/3=8.33 8.33×800 million~6.9 trillions not to mention the financing needed for Soc Sec et al. Now I’ll go back to my trench and wait.
“Budgets are passed by Congress, not the Executive branch but it’s a common mistake”
Budgets can be enacted only with the President’s signature or by overriding his veto.
Budgets are originated in the executive branch and presented to Congress annually, as well as the projections for out years’ requirements for the line item programs.
Congress can totally revise those budgets, but for the most part they do not. A good example of not doing so, even when they really wished to do so, was the DoEnergy budget this year. Totally revising the nuclear weapons programs stalled out on the opposition of the NM congressional delegation and DoE itself.
After Congress passes the budget, it then writes and considers the Appropriations Bill (which actually ‘appropriates’ a slice of the Treasury’s funds) in order to pay for the passed budget. The two numbers, budget and appropriation, might not be the same thing. An example is how the border fence enhancement was budgeted but not appropriated last year, or any number of DoD projects are budgeted and no moneys are appropriated due to the perception of underperformance (TSAT, STSS for examples) or (heavens forbid) the perception of pork barrelling.
Finally, the Authorization bill is passed which gives authority to the executive branches to actually spend the money. This is where the deficit must be funded, somehow. The Treasury must balance inflows and outflows of dollars, otherwise the Authorizations will not equal the Appropriations, let alone the budget.
If this sounds complex, it is. There are people whose careers are centered on tracking who is budgeted, appropriated, and authorized what money and what the differences are. The intent of the byzantine structure is to give Congress, the Executive Branches, and the financial markets/Treasury input to the process on how and what funds will be spent each year.
sorry Executive Agencies, not Branches, in the last para. of 14