The United States got a wake up call Monday from ratings agency Standard & Poor’s. Standard & Poor’s, while acknowledging that monetary policy has sustained America’s growth while keeping inflation low over the past two years, revised its long-term rating outlook from stable to negative.
While this does not mean that America’s actual credit rating was revised (it’s still AAA), it does mean that Standard & Poor’s sees problems a couple years from regarding our ability to meet our debt obligations as a result of our debt and budget deficit. The rating agency stated in its report Monday that there is a material risk policymakers might not reach agreement on the medium and long-term budget challenges facing the U.S. government by 2013.
If there is going to be an agreement between the White House and the Congress, it probably won’t happen until after the 2012 elections.
It’s not like we are beyond hope, according to Standard & Poor’s. The Obama Administration and the House Republicans are in the same neighborhood when it comes to how the deficit should be reduced. For example, while the Obama Administration wants to reduce the deficit by $4 trillion in 12 years, the GOP want to reduce the deficit by $4.4 trillion in 10 years.
Then again, it’s one thing to live in the same neighborhood. It’s quite another to be neighborly. What is separating the administration and the House Republicans is approach. The Obama Administration would like to see some cuts to programs, but not to the holy grail of Medicare, Medicaid, and Social Security. President Obama has made clear his position that he wants no changes in the way we have become familiar with how these entitlements are delivered.
The GOP, on the other hand, wants to see reductions in non-defense spending including a reduction in the scope of Medicare and Medicaid. Republicans would also like to see a reduction in the top individual and corporate tax rates, while increasing the tax base.
Adding to the lack of neighborliness is the lack of a statement on the Standard and Poor’s report by most Congressional leaders. For example, while House Minority Leader Nancy Pelosi (D-CA) issued a statement on the report that asked for Democrats and Republicans to “ participate in the process initiated by President Obama last week to demonstrate our commitment to reducing our deficit through shared responsibility,” no similar statements were issued by leading members of the Congressional Black Caucus. The GOP leadership did not chime in either.
This is peculiar behavior on the part of the CBC, especially given the ripple effect the threat of a future rating revision may have on access to credit by black homeowners and entrepreneurs and our retirement and investment accounts. Should the rating on the bonds issued by the federal government be given a lower rating in the next two years, it would mean that the value of these bonds fall while the interest rates on these securities rise. It would mean that credit becomes more expensive.
If credit becomes more expensive, businesses will refuse to expand; foregoing the purchase of capital stock and hiring of new workers. For individuals who attempt to mitigate the lack of employment opportunities by going the entrepreneurship route, getting start up funding would be much harder and with higher interest rates.
It’s hard to get too partisan when Standard & Poor’s is telling policymakers that both sides have to get it together on debt and deficit reduction.