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S&P/ An alarm sounds for American politics

August Wed 10, 2011

(photo ANSA)  (photo ANSA)

“If the downgrade is a negative evaluation of US politics, there is plenty of blame to go all around, to Congress, the President and both political parties. No matter what the errors in their math, the message that S&P and all other rating agencies intend to send is that the U.S. needs to ‘get its act together’ or U.S. Treasurys will no longer be considered the ‘safest investment’ in the world” is the analysis of Diane Lim Rogers, the Head of Staff of the economists of the Concord Coalition, a politically bipartisan group founded by Democratic and Republican senators and that has reducing the government’s deficit as one of its primary objectives.


What do you think about Obama’s law, signed after an agreement with the Republicans, that raises the debt ceiling and cuts the deficit?

It was absolutely essential that the debt limit increase be passed to avoid default, so I'm glad they came to enough agreement to at least do that.  But the real problem was never the debt limit increase.  The Republicans tried to make it an action-forcing event to force policymakers to come up with large spending cuts, but the old disagreements about the major drivers of the unsustainable fiscal outlook persisted so that nothing of substance in the areas of entitlement or tax reform was achieved.  The cuts in the first round of the debt limit deal were only to discretionary spending, a relatively small portion of the budget and not at all the problem for the longer term.  And if anything, cutting fairly near-term discretionary spending in a recessionary economy is risky in terms of how it can choke off demand for goods and services.  (If they were to have agreed to longer-term cuts in entitlement spending and increases in revenues, on the other hand, that could have reassured markets that the U.S. has a plan to get back to sustainability, which could help, rather than hurt, the near-term economy by keeping interest rates low.)

Did the United States live beyond their capabilities in recent years, transforming the deficit into debt?
The deficit is just the annual difference between spending and revenues (a flow, or "current charges"); the debt is the accumulation of all deficits over time (the stock, or "outstanding balance").  So the deficit is like the growth rate of the debt.  The U.S. has almost always run a deficit, and deficits per se aren't bad (and the capacity to borrow is good) as long as the borrowing is kept at a sustainable level where income (the size of the economy) can keep up.  Because the U.S. economy has grown at a pace averaging 3 percent a year, deficits of 3 percent of GDP or less are considered "economically sustainable."  The problem is that over the past several years we've been running deficits in excess of what's sustainable ("beyond our capabilities" as you say), and it's not just due to temporary (cyclical) economic conditions.

Do you think that it will now be necessary to change the system of US consumerism, which is largely based on debt?



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