The U.S. Government Debt Downgrade
Readers of recent Ways of the World articles will not be surprised to see that we are most upset by credit-rating company Standard & Poor's downgrade of U.S. Government debt from AAA to AA+, which they announced Friday night. Regular readers will probably also know that it's not Standard & Poor's that we're upset with. We have watched with increasing dismay as our elected officials in Washington toyed around the edges with an agreement to rein in the size and scope of the federal government and restrain its borrowing. Their lack of cooperation in the Debt Ceiling negotiations brought the Government to within hours of running up against cash constraints that would have meant somebody wouldn't get paid on time, whether it was a bondholder or an employee or the recipient of federal grant moneys – or a soldier or a social security beneficiary.
The agreement that was finally hammered out yielded fuzzy terms that increase the Debt Ceiling enough to last until after next year's Presidential election and call for minimal spending cuts in the meantime. A bi-partisan select committee of Congress will convene between now and November to draft more substantive spending cuts and possibly some revenue enhancements. This plan, which authors said is meant to reduce the deficit by $2.1 trillion over the next ten years, was not enough for Standard & Poor's, which had stated previously that its rating would be based on a $4 trillion cut. When that did not result, S&P's Sovereign Rating Committee voted a cut of its own, from a AAA rating for U.S. Treasury debt to AA+. Some argue that S&P made a $2 trillion error in their calculations, and while this may be true, their decision is based on a number of factors within a broad picture, not just a set of far distant numerical projections.
What's Really Bi-Partisan? Our Criticism
Recriminations came fast during the weekend, and were followed by a 600-point plunge in the Dow Jones Industrial Average stock index during Monday's trading. Our own criticism extends to both political parties. Some Republicans seem not to have understood the basics of the Debt Ceiling issue at all; they seemed to think that a vote to take on more debt could be a decision independent of the condition of the federal budget. They didn't realize that the mere existence of a deficit of any size demanded an increase in the Debt Ceiling so the shortfall could be financed. They seemed to scoff at the notion of default, even though it was mere hours away by the time of the final votes. But some Democrats also voted against the final bill, apparently because it contains no mandated tax increases; their votes indicate that they were not really aware of the urgency either. A person who was aware and whom we admire in this regard is Gabrielle Giffords, who made her first appearance on the House Floor since her shooting, and quite publicly cast her vote in favor of the Debt Ceiling plan.
Further, the Administration didn't really help. The Treasury could have announced that, of course, if cash were constrained, it would pay bondholders first, thereby sustaining the debt covenant with lenders. But they did not and in fact refused to make public any list of priorities in the payments they would make in the event the legislation failed. The President himself only acceded to a plan as it was shaping up on the Sunday, just two days ahead of the deadline.
S&P Named Brinksmanship as a Major Ingredient
So there's much blame to go around. This "brinksmanship" had an explicit part in the Standard & Poor's decision. The plethora of argumentation that followed S&P's announcement only serves to make their point more pointedly. Democrats argue that spending cuts will hurt the economy, and Republicans argue that tax hikes will hurt the economy. And none of this addresses the fundamental questions of what the American people really want the priorities of government to be. Further, we've heard how important it is to extend expiring unemployment benefits and the reduced rate of payroll tax payments in order to help the economy along. But in the short-term, these act like spending increases and tax cuts in their impact on the deficit, hardly the direction any policy move should take in order to reduce said deficit.
The Economy Doesn't Know What It's Doing Either
With all of this negativity, it's little wonder the stock market dropped like a stone on Monday. The economy itself is sending off mixed signals. Some companies have maintained very good profit growth, but they seem to be squirreling away the resulting cash surplus, even in regular bank accounts, rather than investing in liquid financial market instruments, much less in new facilities or other kinds of expansion. The latest employment report was mildly better, with 117,000 new jobs in July, including 154,000 private-sector positions. But a decrease in the unemployment rate from 9.2% in June to 9.1% last month resulted from a decline in the number of people looking for work, so the baseline labor force shrank, hardly an expression of confidence from would-be workers.
One more note, and something a stock trader referred to in the middle of Monday afternoon's market debacle, following a public statement by the President about the debt downgrade. Mr. Obama mentioned again that taxpayers at the upper end of the income structure don't pay enough income tax. The need for them to pay their "fair share" has become a mantra for the Administration. It's hard to know what share is really fair. IRS data for 2008 (latest available) show that the top 10% of earners paid 69.9% of the total income tax collected that year. The bottom 50% of the income distribution paid just 2.7% of the income tax. Further, in the wake of the much maligned Bush tax cuts, the portion of total taxes paid by that top 10% rose from 65.7% in 2002 to the 69.9% in 2008, and the share paid by the lower 50% decreased from 3.5% to 2.7%. What would it mean to tax the rich more? They in fact pay a lot of the freight now.
What Does It All Mean?
We wish we could say more about where this will all go and what it might mean to you. Part of the problem is simply that it's August and many people in decision-making positions are on vacation, Congress included. The debt downgrade might be expected to raise interest rates on consumer credit, mortgages and the like, because of increased risk suggested by the new rating on the Government's debt. But in the midst of the stock market's drop, Treasury rates fell, showing that even with that rating, they are still the "safe haven" investment for many investors. Perhaps how it matters to you is that stock market plunge; as we watched one cable TV business network's coverage of the market Monday afternoon, traders they interviewed were ambivalent about whether the day's blowout would herald a quick rebound or whether it marked a major turn. Ah, stay tuned. The only thing constant is change.
The agreement that was finally hammered out yielded fuzzy terms that increase the Debt Ceiling enough to last until after next year's Presidential election and call for minimal spending cuts in the meantime. A bi-partisan select committee of Congress will convene between now and November to draft more substantive spending cuts and possibly some revenue enhancements. This plan, which authors said is meant to reduce the deficit by $2.1 trillion over the next ten years, was not enough for Standard & Poor's, which had stated previously that its rating would be based on a $4 trillion cut. When that did not result, S&P's Sovereign Rating Committee voted a cut of its own, from a AAA rating for U.S. Treasury debt to AA+. Some argue that S&P made a $2 trillion error in their calculations, and while this may be true, their decision is based on a number of factors within a broad picture, not just a set of far distant numerical projections.
What's Really Bi-Partisan? Our Criticism
Recriminations came fast during the weekend, and were followed by a 600-point plunge in the Dow Jones Industrial Average stock index during Monday's trading. Our own criticism extends to both political parties. Some Republicans seem not to have understood the basics of the Debt Ceiling issue at all; they seemed to think that a vote to take on more debt could be a decision independent of the condition of the federal budget. They didn't realize that the mere existence of a deficit of any size demanded an increase in the Debt Ceiling so the shortfall could be financed. They seemed to scoff at the notion of default, even though it was mere hours away by the time of the final votes. But some Democrats also voted against the final bill, apparently because it contains no mandated tax increases; their votes indicate that they were not really aware of the urgency either. A person who was aware and whom we admire in this regard is Gabrielle Giffords, who made her first appearance on the House Floor since her shooting, and quite publicly cast her vote in favor of the Debt Ceiling plan.
Further, the Administration didn't really help. The Treasury could have announced that, of course, if cash were constrained, it would pay bondholders first, thereby sustaining the debt covenant with lenders. But they did not and in fact refused to make public any list of priorities in the payments they would make in the event the legislation failed. The President himself only acceded to a plan as it was shaping up on the Sunday, just two days ahead of the deadline.
S&P Named Brinksmanship as a Major Ingredient
So there's much blame to go around. This "brinksmanship" had an explicit part in the Standard & Poor's decision. The plethora of argumentation that followed S&P's announcement only serves to make their point more pointedly. Democrats argue that spending cuts will hurt the economy, and Republicans argue that tax hikes will hurt the economy. And none of this addresses the fundamental questions of what the American people really want the priorities of government to be. Further, we've heard how important it is to extend expiring unemployment benefits and the reduced rate of payroll tax payments in order to help the economy along. But in the short-term, these act like spending increases and tax cuts in their impact on the deficit, hardly the direction any policy move should take in order to reduce said deficit.
The Economy Doesn't Know What It's Doing Either
With all of this negativity, it's little wonder the stock market dropped like a stone on Monday. The economy itself is sending off mixed signals. Some companies have maintained very good profit growth, but they seem to be squirreling away the resulting cash surplus, even in regular bank accounts, rather than investing in liquid financial market instruments, much less in new facilities or other kinds of expansion. The latest employment report was mildly better, with 117,000 new jobs in July, including 154,000 private-sector positions. But a decrease in the unemployment rate from 9.2% in June to 9.1% last month resulted from a decline in the number of people looking for work, so the baseline labor force shrank, hardly an expression of confidence from would-be workers.
One more note, and something a stock trader referred to in the middle of Monday afternoon's market debacle, following a public statement by the President about the debt downgrade. Mr. Obama mentioned again that taxpayers at the upper end of the income structure don't pay enough income tax. The need for them to pay their "fair share" has become a mantra for the Administration. It's hard to know what share is really fair. IRS data for 2008 (latest available) show that the top 10% of earners paid 69.9% of the total income tax collected that year. The bottom 50% of the income distribution paid just 2.7% of the income tax. Further, in the wake of the much maligned Bush tax cuts, the portion of total taxes paid by that top 10% rose from 65.7% in 2002 to the 69.9% in 2008, and the share paid by the lower 50% decreased from 3.5% to 2.7%. What would it mean to tax the rich more? They in fact pay a lot of the freight now.
What Does It All Mean?
We wish we could say more about where this will all go and what it might mean to you. Part of the problem is simply that it's August and many people in decision-making positions are on vacation, Congress included. The debt downgrade might be expected to raise interest rates on consumer credit, mortgages and the like, because of increased risk suggested by the new rating on the Government's debt. But in the midst of the stock market's drop, Treasury rates fell, showing that even with that rating, they are still the "safe haven" investment for many investors. Perhaps how it matters to you is that stock market plunge; as we watched one cable TV business network's coverage of the market Monday afternoon, traders they interviewed were ambivalent about whether the day's blowout would herald a quick rebound or whether it marked a major turn. Ah, stay tuned. The only thing constant is change.
posted by Carol S. | 8/08/2011 10:39:00 PM
6 Comments:
Carole - thanks for a well-written piece. This is the second time in as many days that the percentages on wealthy tax payers has been shared with me. What I find troubling is that in scaling back, the person of wealth gives up a ski weekend at Mammoth Mountain (CA) and the poor choose between cheese or milk as they shop for food. What the percentages really show is the massive imbalance in wealth in this country.
Carol,
Thank you for your comments. I'm so very discouraged with what has been happening in Washington. More than enough blame to go around to be sure. We need both sides to come together and be reasonable but I'm afraid the struggle for power and big money speaks louder than the good of the country.
Great article. The poor aren't poor because the rich are rich. People are desparate for strong leadership that can guide & inspire people to embrace individual responsibility in order to prosper in this great free nation. The only thing politicians seem to care about are votes so we continue down the road of decline. There is great hope in our future, we just have to decide where we stand & which road we want to take for the future of America.
Wonderful article. God bless you and thanks for your smart words.
Well written article and you raise many good points.
When people talk about the "rich", just exactly whom do they mean? One definition is, "Rich" is anyone with more money than I.
For decades, middle class American has been bearing the brunt of taxes yet, rarely, is anything said about the 47% of the US population who do not pay any income taxes.
We haven't had strong leadership in the USA in a while. We send Congressional reps to DC and they make sure they...and their families... have FULL benefits even if they serve ONE term. In one example, Medicare has close to $200 million in fraud but that problem has never been addressed.
Graft and greed have shaped our nation and the bill has come due.
Unfortunately, that same graft and greed ensures the bill will never be paid because we keep electing the rascals and sending them to DC to do it all over again.
We deserve the "representation" we have because it's the representation we elect. Until we're sick and tired of the way things are, we'll always have rascals in DC.
Great article! Enjoyed it very much!
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