U.S. Credit Downgrade by S&P Highlights Four Winners and Losers in the Debt Ceiling Deal
President Barack Obama on Tuesday signed into law a last-minute compromise plan to raise the nation's $14.3 trillion debt ceiling, narrowly averting what could have been an unprecedented default with calamitous economic consequences.
The compromise allows the debt ceiling to increase by as much as $2.4 trillion dollars in total, while cutting about that much in government spending over the next 10 years. The debt ceiling would not need to be raised again until 2013.
The entire debt crisis was an ugly, messy affair, exposing some of the worst parts of the democratic process. Friday night’s S&P downgrade of the U.S. debt was a consequence of this chaos. It is difficult to declare any real winners in this ordeal, but I shall do my best to identify the four winners and losers of this mess.
1. Big Government
The proposed 2.4 trillion dollars in cuts (over ten years) will not slow the massive trajectory of government spending that started getting out of control under President George W. Bush and has great accelerated under President Barack Obama.
After government spending soared by 28 percent from 2008 to 2011, the debt deal only starts cutting a meager $22 billion next year. That is an incredibly trivial cut -- just 0.6% of expenditures planned for next year. The cuts agreed on are heavily back-loaded towards the end of the 10-year budgeting cycle, when President Obama and many members of Congress will be out of office.
Short of a constitutional amendment mandating balanced budgets, there is unfortunately no way that the current Congress can force future Congresses to make those cuts if they don't want to do it. Even if all the hoped-for cuts are made over the next ten years, the $2.4 trillion reduction in the deficit amounts to just 5 percent of the $46 trillion that President Obama had planned to spend over the next decade.
2. Deficit Spending:
Deficit spending will continue on almost as recklessly as before. Under President Clinton, the national debt increased 547 million dollars a day. Under Bush, it increased 1.6 billion dollars a day. Under Obama, it increased 4.1 billion dollars a day. That means, at that rate, it only takes the administration about 250 days to add another trillion dollars to the debt.
As I said earlier, this compromise will not slow government borrowing—in ten years, the federal government’s debt will rise from $14.3 trillion to "only" $22.2 trillion rather than to $24.6 trillion. That is over $71,000 for everyone who is alive in the United States today, or $286,000 for every family of four. And the amount taxpayers will owe in the future will compound-- just look at the graph above!
Think about all the wasted money made on interest payments. That’s billions less to spend on quality things like defense, entitlements, infrastructure, or cancer research. In 2010, our interest expense on the debt was 414 billion. By way of comparison, the national government spent 92.9 billion on the Department of Education. In 2050, there will only be a “Department of Interest Payments” because our government won’t have any money to spend on almost anything else.
3. David Wu
Who? David Wu, the congressman who was photographed wearing a bizarre tiger suit.
On Wednesday, the embarrassed congressman submitted his official resignation letter. Wu felt pressure to resign after allegations surfaced that the Democratic congressman had an unwanted sexual encounter with an 18-year-old woman who was the daughter of a friend and political supporter. The exiting Oregon congressman may be the only House Democrat who was somewhat happy with the headline-grabbing debt standoff. Has a member of Congress forced to resign amid a sex scandal ever drawn less media attention, especially one who dresses in children’s Halloween costumes? Somewhere, Anthony Weiner is thinking, “What the heck…. how does Wu avoid public humiliation so easily?”.
4. The Tea Party
The Tea Party is the biggest winner in the debt deal, but you would not know it by listening to its members or by paying attention to public opinion polls, and some Democrats like Vice-President Joe Biden who called the Tea-Party “terrorists” for their disciplined stand against federal spending.
Their so- called “extreme” position on federal spending appears to be vindicated based on the S&P downgrade that occurred Friday night. The S&P cut in the U.S. long-term credit rating by a notch to AA-plus resulted from concerns about the nation's budget deficits and climbing debt burden. The move is likely eventually to raise borrowing costs for the U.S. government, companies and consumers.
By calling the outlook "negative," S&P signaled another downgrade is possible in the next 12 to 18 months.
All along, the Tea Party felt that raising the debt ceiling and was a mistake that would do more damage to the economy than not raising it. Most economists were saying that if the ceiling would not be raised than the USA would face a downgrade in our credit rating.
Even before this downgrade, the Tea Party has dramatically changed the conversation about federal spending. Even after the Democrats suffered major defeats at the hands of the Tea Party in the 2010 midterm elections, Obama was still talking about the need for more stimulus spending. Plus, as late as April, Obama was asking Congress for a “clean” (no spending cut) debt ceiling increase.
By the end of the debt ceiling debate, the Tea Party had Obama agreeing with it that there should be spending cuts, and the cuts should be at least as big as the debt ceiling increase. Future presidents will be unlikely to ask for a clean debt ceiling increase again.
Though many of its members rejected the compromise because there was no balanced budget amendment and the cuts were not deep enough, their accomplishment is considerable since they only number sixty members in the House and four in the Senate; moreover, the Republicans only controlled one-half of Congress, while the Democrats controlled the Presidency and the Senate.
Yes, the rate of spending is out of control. But at least the American people are talking about it.
1. The Pentagon
Some analysts say the Pentagon is the biggest loser in this compromise. Under the deal, the Department of Defense immediately endures $350 billion in spending reductions over the next decade. And if the special commission—dubbed the “Super Congress”—doesn’t find another round of cuts, the Pentagon loses $600 billion more.
What did military officials do to deserve this deal? The answer--they are important to conservatives. With congressional Republicans refusing any tax increases of any kind, the bargaining chip for Democrats became defense spending, a longtime conservative sacred cow.
Now the military, for better or worse, will have to tighten its belt like the rest of America.
Already held in perennially low regard, Congress looked more inept and less in tune with Americans than ever before. The impact was evident in a CNN poll released Tuesday, which showed that three out of four Americans believe their elected leaders acted like "spoiled children." Another poll, released Thursday, claims that a record 82 percent of Americans disapprove how Congress is handling its job.
Making it worse for Congress is that one tool lawmakers have used in the past to repair their image with voters—bringing home the bacon with federal projects to local districts—has been weakened by the spending cuts and a new public scrutiny on federal spending.
The S& P downgrade is another indication how inept Congress appears to be. While S&P's ultimate concern is financial – the prospect that the national debt could expand out of control – the reason for the downgrade was congressional dysfunction. In other words, S&P suggests that the US has the financial ability to head off a debt crisis, but doubts whether it has the political will to do what is necessary.
3. The Economy
According to many Democrats, large government spending is the key to economic growth. So how is that Keynesian economics really working for you?
The chaos created by the massive growth in government, spearheaded by Obama’s stimulus spending, has only prolonged and worsened the recession. Just look at the gloomy numbers: For the first half of this year, GDP has grown at just 0.4% (0.8% at an annual rate).
Economists and pundits have been preaching for weeks that the debt ceiling must be raised at all costs to avoid a complete economic collapse. True, the deal did relieve the immediate threat of an economic collapse. However, the problem of how to address our $14 trillion-plus national debt was kicked down the road.
And that is making investors and credit rating agencies like Moody’s and S&P nervous. This is why S&P downgraded our credit rating. There is so much uncertainty and there is a lot tough work remaining to fix the economy. That’s not encouraging for an economy that, after some progress out of recession, is showing signs of faltering. High unemployment rates stubbornly persist. Thursday’s 513-point stock market drop is a good indicator that Wall Street (and investors) hates the debt deal.
And still with us are the biggest problems: Rising health-care costs and an aging population that are pushing Medicaid and Medicare budgets to levels that are unsustainable. The most difficult revenue and spending decisions have yet to be addressed. Can you say, “Double Dip Recession”?
Just as Big Government is the winner, the economy is the loser.
4. President Obama
Despite the administration’s claim of a great bipartisan deal for America, the president got schooled. He blinked several times in the debate, giving up the possibility of a clean debt-limit increase, and then taking tax increases off the table that his own party wanted.
And then he allowed social programs like Medicare and Medicaid to face cuts in round two of the debt deal. The entire episode took Obama off his job-creation message, and the cuts will tie his hands from spending much more money to try to revive a still-lagging economy.
Some of his supporters claim he remained too distant, too aloof from the debt talks. And he failed to provide leadership. "I am just sorely upset that Obama doesn't seize the moment," Sen. Harkin (D-Iowa) said as the final deal was coming together. "That's what great presidents do in times of crisis. They exert executive leadership. He went wobbly in the knees."
The far left is outraged by Obama’s performance. Let's face it; this deal is "an abject surrender on the part of the president," says Paul Krugman in The New York Times. And the GOP will surely be emboldened by the way "Obama keeps folding in the face of their threats." Any way you slice it, this is a disaster for Obama, his party, and the economy on which their political survival hangs.
Of course, showing a willingness to stand up to the liberal base is not necessarily bad - if it pays off in increased support from the Independents who often determine the outcome of elections.
But there is no sign that Independents approve of the president's handling of the debt issue. Obama clearly damaged his standing with liberals, without (so far) picking up any support from independents. This potentially toxic combination of a depressed base and a disillusioned center would ruin Obama’s reelection hopes.
America is losing faith in the ability that the President can lead the nation through these difficult economic times.
For most of his administration, members of Team Obama seemed to take their cues from the likes of New York Times columnist Paul Krugman, who argued that Obama’s $826 billion stimulus was too small. They vehemently opposed budget proposals by Rep. Paul Ryan (R-WI) that prescribed changes in entitlements in order to save them from insolvency.
Despite warning signs, Team Obama seemed blind to worsening economic conditions. Do you remember Obama and Biden declaring an economic victory called, “Recovery Summer” last year? They continued to argue that Obama had saved the economy–while the economy teetered back toward recession.
The S& P downgrade may be yet another indicator that Team Obama is clueless on economic matters.
In April, when Standard & Poor’s first warned of a possible downgrade in the U.S. credit rating, the White House reacted with denial. President Barack Obama’s chief economic adviser, Austan Goolsbee, said that S&P’s warning was a “political judgment” that didn’t deserve “too much weight.
But Team Obama refused to pay attention. So instead they proposed a 3.7 trillion dollar budget last spring that neglected the plaguing economic crisis facing the nation. The proposed $3.73 trillion would have served as the biggest one-year debt jump in the history of mankind, $2 trillion.
Fortunately, his fellow Democrats in the Senate had more sense than Team Obama. The Senate rejected Obama’s budget 97-0. That is a sign the President is clueless.
This is the first time in American history that our national credit was downgraded. And President Obama was the person on watch when this happened.
Obama promised to be a historic President.
Well, that’s one campaign promise he'll keep.
Contact Erik Uliasz at email@example.com
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Photo credit: AP
Graph Credit: Heritage Foundation