National
Review Online
Thursday,
August 03, 2023
Rating agency
Fitch downgraded U.S. sovereign debt from
AAA to AA+. That’s only the second time any of the big three rating agencies
have downgraded U.S. debt. S&P did so in 2011.
Treasury
secretary Janet Yellen said she “strongly disagrees” with
the decision, and she’s free to do so. There is a certain amount of
arbitrariness in rating agencies’ decision-making, and it’s not the end of the
world. But policy-makers, including Yellen, should take seriously the federal
government’s spending problems, which left unfixed will lead to much more
severe consequences than this.
One of
the most damaging bipartisan beliefs in Washington right now is that the debt
is a second-order problem and entitlement spending is not in need of reform.
Democrats and Republicans have both spent irresponsibly, in recent years under
an assumption of low interest rates that no longer holds.
Why
Fitch chose this particular moment to downgrade the debt is unclear, but most
of the reasons it lists for its decision are sensible concerns. If anything, it
might be a little too nice.
“The
repeated debt-limit political standoffs and last-minute resolutions have eroded
confidence in fiscal management.” What confidence? The federal government has
run a deficit, whether the economy is booming or busting, in war or peace,
every year since 2001. Even before that, Congress rarely passed spending bills
on time in accordance with the law.
Government
by continuing resolution, where Congress rubber-stamps previous years’
appropriations, has become the norm. And that’s for the parts of the budget
that are supposed to be discretionary. The mandatory parts, which account for
most of the budget in absolute terms and most of the projected growth in the
budget in the future, aren’t debated at all.
Both
parties have agreed to not reform the bulk of mandatory spending: entitlements.
The rationalization for this agreement is political, not fiscal. There’s no
escaping the math.
CBO projections show that as a percentage of
GDP, discretionary spending is basically flat over the next 30 years. So is
mandatory spending outside of Social Security and health-care programs. Social
Security is set to increase, but not as much as Medicare, Medicaid, and
interest payments. The parts of the budget that cause U.S. budgetary problems
are the parts of the budget that politicians have refused to reform.
The
other part of what makes the CBO projections so alarming is that they forecast
a long-term decline in potential U.S. GDP growth. Slower growth makes all these
problems harder, by reducing the amount that the government can sustainably
spend without spurring negative consequences such as inflation, and by seeding
discontent among voters who might then demand more spending.
“Over
the next decade, higher interest rates and the rising debt stock will increase
the interest service burden, while an aging population and rising healthcare
costs will raise spending on the elderly absent fiscal policy reforms,” Fitch says.
The bill that fiscal hawks have been warning about will come due in the near
future if no changes are made.
The
massive spending during the Covid pandemic is not on track to be offset by
leaner budgets now. And it’s worth remembering that had Biden gotten his way
during the Build Back Better Act debate, the debt would be trillions larger.
Fitch
mentions tax cuts as well, but the federal
government set
a revenue record of $4.9 trillion — nearly 20 percent of GDP — in 2022 and
still spent $1.4 trillion more than it took in. Revenue only averaged 16.5
percent of GDP between 2002 and 2021, so 2022 was a great haul for the
Treasury, and it was still nowhere near enough. Spending is rising faster than
revenue, which the CBO projects to remain stable as a share of GDP over the
next 30 years, and politicians won’t be able to tax their way out of this mess.
Bond
ratings aren’t gospel, and Fitch could change its rating back to AAA in the
future. But policy-makers should beware the consequences of continuing to
ignore the federal government’s pressing fiscal problems. Interest rates aren’t
zero anymore, and the actuarial tables are what they are. The best time to
sober up was yesterday; the second-best time is now.
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