Tuesday, April 19, 2011

Don't Just Do Something; Sit There


Standard & Poor's rating service yesterday issued a report (text, here) which had all of Washington atwitter and the stock market plunging. Its summary:

-- We have affirmed our 'AAA/A-1+' sovereign credit ratings on the United States of America.

-- The economy of the U.S. is flexible and highly diversified, the country's effective monetary policies have supported output growth while containing inflationary pressures, and a consistent global preference for the U.S. dollar over all other currencies gives the country unique external liquidity.

-- Because the U.S. has, relative to its 'AAA' peers, what we consider to be very large budget deficits and rising government indebtedness and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable.

-- We believe there is a material risk that U.S. policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013; if an agreement is not reached and meaningful implementation is not begun by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer 'AAA' sovereigns.


The hysteria extended to Rush Limbaugh, though it's often difficult to tell if he's really panicked by something or merely exploiting it for right-wing effect. He claimed

I told you they're scared to death by this. They're scared to death. They think this is Standard & Poor's telling the world that Obama is a disaster. That's what this is. This is purely a rating based on the Obama debt.

Actually, Rush is only half-wrong here. Standard and Poor's did not maintain "Obama is a disaster." Or not. Nor did it suggest that House Republicans are to blame. Or not. Instead, it (namelessly) spread the blame around, its credit analyst maintaining

More than two years after the beginning of the recent crisis, U.S. policymakers have still not agreed on how to reverse recent fiscal deterioration or address longer-term fiscal pressures.

Nor did the agency, in its fearsome analysis, shrink from praising the major players- President Obama and "key members in the U.S. House of Representatives," including Paul Ryan. Boldly, it "takes no position on the mix of spending and revenue measures the Congress and the Administration might conclude are appropriate."

Standard & Poor's argued "for any plan to be credible, we believe that it would need to secure support from a cross-section of leaders in both political parties." Given that the House, under John Boehner, is controlled by the GOP, the Senate is "controlled," under Harry Reid, by the Democratic Party, and the President (so we are told) has the power of veto, it is sage to assume that any plan adopted would have "the support from a cross-section of leaders in both political parties."

As the response from leaders of the two parties indicate, though, the report suggest a strategy of sorts for the federal government: don't just sit there- do something.

Except.... that is bad advice. According to Rush, "this is about the debt that Obama created. That's what that rating is all about." Not unless Barack Obama created the recession which began before he was nominated for President, initiated the wars in Iraq and Afghanistan, and lowered the 38.60% marginal tax rate for the very wealthy in 2002 while George W. Bush was head of state. (Yes, he extended them a few months ago but that hardly is what Limbaugh was thinking of.) The Center for Budget and Policy Priorities, from CBO data, illustrates it:






Our political culture, The New York Times' David Leonhardt has explained

has made most tax increases, even to pay for benefits people want, unthinkable.

This is where the Bush tax cuts come in. They have created a way for inertia to be fiscally responsible.

They are scheduled to expire on Dec. 31 of next year, not long after the 2012 election. If Republicans win the White House and both houses of Congress, they will probably extend all the tax cuts, come what may for the deficit. If Mr. Obama wins re-election and Democrats control Congress, they are likely to extend the cuts on income below $250,000.

But if Mr. Obama wins and Republicans control the House, the Senate or both — an outcome that many analysts, at least for now, consider the most likely one — things could get interesting.

Republicans have said that they will not extend only part of the Bush cuts. Late last year, when the cuts first expired, Mr. Obama yielded to Republican demands to extend all the cuts (while insisting that they expire again after 2012). He was right to do so, in my view, given the fragility of the economic recovery.

Next year, however, the economy should be stronger. When the economy is in good shape, modest tax changes often have little effect on growth. Look at the 1993 Clinton tax increase, which didn’t prevent the 1990s boom. Or consider the Bush tax cuts, which were followed by the slowest decade of economic growth since World War II.

If Mr. Obama wins re-election, he could simply refuse to sign any budget-busting tax cut for the rich — who, after all, have received much larger pretax raises than any other income group in recent years and have also had their tax rates fall more. Republicans, for their part, could again refuse to pass any partial extension.

And just like that, on Jan. 1, 2013, the Clinton-era tax rates would return.

This change, by itself, would solve about 75 percent of the deficit problem over the next five years. The rest could come from spending cuts, both for social programs and the military.


Congressional Republicans not only supported the Bush 43 tax cuts- they still defend them, notwithstanding the budgetary consequences. Grover Norquist claims 247 members of the House of Representatives and 41 (all but one a Republican) members of the Senate have signed his Taxpayer Protection Pledge, vowing to oppose any increase at any time for any reason the marginal income tax rate for individuals and/or corporations and any "net reduction or elimination of deductions and credits." They are not serious; sincere, perhaps; serious, not. Paul Krugman notes

whatever they may say, Republicans are not concerned, above all, about the deficit. In fact, it’s not clear that they care about the deficit at all; they’re trying to use deficit concerns to push through their goal of dismantling the Great Society and if possible the New Deal; they have stated explicitly that they want to reduce taxes on high incomes to pre-New-Deal levels.

There may be several reasons Standard & Poor's won't commit to a particular "mix" of spending cuts and revenue increases. Among them would be that advocacy by a nonpartisan organization of even a slight tax increase- which would spark opposition, and no support, from Republicans- would force an acknowledgment that one party has no interest in responsibly addressing the national debt.





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