August 6, 2011

Obama's trickle-down misery

Not wrong.
In an embarrassing turn of events, with the first time in history America's credit rating being down-graded from AAA to AA+, the added humiliation came with China scolding America on it's addiction to debt.
State news agency Xinhua said unless the US cut its "gigantic military expenditure and bloated welfare costs," another downgrade would be inevitable. 
But other countries, such as Australia, France and Japan, said they retained their faith in US bonds.
The downgrade ended a week of growing uncertainty for the world economy.
Fears that the US might be headed for a double-dip recession and the eurozone's debt problems were set to spread to Italy and Spain saw stock market sell-offs around the world.
The downgrade is a major embarrassment for the administration of President Barack Obama and could raise the cost of US government borrowing.
This in turn could trickle down to higher interest rates for local governments and individuals.
Could?  How about will?
Democrats always decried the idea of trickle down economics under Reagan (which was really supply side economics).  But under Reagan things went very, very well. What's happening now, is trickle down misery.  Joblessness, debt and now the inevitable interest rate increases and even more national debt will mean that the federal government must re-trench and will have far less room to maneuver going forward.  That means no bailout for California when it goes belly up.  It means even more need to reform entitlements and curtail spending

Standard & Poors may be the catalyst that brings the reality of leverage and some fiscal sanity back to Washington.  It certainly underscores the idea that the Ryan Plan, or Cut Cap and Balance were better than the taxless compromise the GOP settled for earlier this week.  

I'll come clean on this

The idea that a deal had to be made in order to prevent a credit downgrade, the liberal Democrat party line is now blown out of the water.  Those, including myself, who urged the Tea Party to settle for a smaller deal for now, now need to put up or shut up.  I argued that while the harsher plans were preferable, that a smaller deal and the opportunity to revisit the issue soon was still a win.  A small win, and we should be willing to settle for it in the very short term.  I also argued that we should go bigger than $4 trillion and give the Democrats a chance to vote down or veto real, meaningful cuts before agreeing to a smaller deal.  Get them on record as addicted to spending.  But it turns out, even short term has consequences.  I had assumed the September budget debate would bring more cuts and more certainty going forward and that those facts would be enough to keep us going.  Wrong.

Come the next budget debate or continuing resolution debate, it is now incumbent upon the GOP to stand firmer for big cuts.  And when it comes to a budget for 2012, they HAVE TO GO BACK to Cut, Cap and Balance plus tackle the issues of entitlement reform and tax reform.  Anything less will be a sellout of the American people.

Is this an over-reaction?  Perhaps the downgrade will not be a nation-killer.  In Canada we lost our AAA credit rating in 1994.  By 1997 we had regained it.
Moody’s downgraded the country’s credit rating on June 2, 1994. Approximately 36 percent of the government's revenue went toward servicing debt.  
Fundamentally, Canada was not producing sufficient growth to pay for the standard of living Canadians expected. As a result total government debt rose from 18% of GDP in 1974 to 70% in 1993.
But Canada took only three years to recover, and in the midst of the financial crisis of 2008-2009, S&P had this to say about Canada;
Standard & Poor's reaffirmed a top credit rating for Canada, saying the country should make only a brief foray back into deficits. 
Canada, with its triple-A rating, has a diverse economy, stable public policy and sound financial sector, S&P said in a report written by analysts in Toronto and New York City, and released Tuesday. 
"In our opinion, the Canadian financial sector has weathered the current global financial turmoil well to date."
S&P also said federal government spending deficits of between one and two per cent of gross domestic product are expected in 2009 and 2010 as the country emulates the actions of other highly rated governments to boost their economies. 
Regardless of which federal party eventually ends up controlling the reins in Ottawa, S&P believes the country will be back to a balanced budget by 2011.
"Like the other four 'AAA' rated G7 sovereigns [U.S., U.K., France and Germany], we believe that Canada has the political capacity and will to respond quickly to changing conditions, and it has a relatively diversified economy," S&P said.
"It also has a stable financial system, and is the only of the five that entered the current crisis in fiscal surplus on a general government basis.
So Canada recovered but there was a huge effort to do so, and it took three years. Everything is not lost for the U.S., but action is required and it has to start right away. I don't think taking a harder stance and wanting things to be taken care of in a much shorter window is an over-reaction.  President Obama was not wrong when he talked about the idea of the fierce urgency of now, what he was wrong about was the source of the problem.  He and Harry Reid are now the biggest parts of the problem.  Let's not let the GOP become a bigger part of that equation.

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