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Friday, December 9, 2016

The United States and France are not the only sovereigns whose credit ratings are in jeopardy these days. Until this week, bonds issued by South Carolina, Maryland, New Mexico, Tennessee and Virginia, normally rated AAA, were in similar jeopardy – not because of mismanagement by state governments but because their economies are propelled by federal spending. Political leaders in those five states sighed with relief when Moody’s announced that their ratings had been spared, at least temporarily. But as Congress considers drastic cuts in defense and domestic budgets, the underlying problem remains critical. And many of the politicians in charge of states like Virginia and South Carolina, who still talk incessantly about Washington spending too much, seem to have almost no understanding of what that problem actually is.

“The negative outlook for the federal government has spilled over to the states and is a wake-up call that government must not spend more than it has,” said South Carolina state treasurer Curtis Loftis, a prominent example of this syndrome. Like so many Republican elected officials, in Washington and elsewhere, Loftis doesn’t seem to understand that if the government spent no more than it takes in during an economic downturn, his state’s economy and credit ratings would plunge disastrously.

As Moody’s noted in reaffirming the AAA credit rating of the five Southern states, they have all been assigned a “negative outlook” – meaning that their future ratings are still in danger. That’s because the ratings agency regards these states’ bonds and their financial condition as “indirectly linked” to the status of the federal government, owing to their dependence upon various kinds of federal aid and spending. Obviously Virginia and Maryland, neighboring the nation’s capital, rely heavily on federal agencies, contractors and employees for their tax base; South Carolina, like many other Southern states, benefits enormously from Medicaid, Social Security, defense and other federal programs. So do New Mexico, long home to federal energy and nuclear laboratories, and Tennessee, which was literally built by the Tennessee Valley Authority.

In short, these states all possess certain “shared characteristics,” to use the discreet description favored by Moody’s.

If the federal government had gone down the Tea Party path, failed to raise the debt ceiling, and created a new budget that only spent the diminished revenues available in the current feeble recovery, the economies of those states (and many more) would crater – and their credit ratings wouldn’t recover for many years.

“In order to have a stable outlook, an issuer will need to have credit quality that could be expected to remain higher than that of the U.S. government in the event that the sovereign [i.e., U.S. Treasury bonds] were downgraded from AAA,” said Moody’s, without adding how unlikely the states are to achieve that level of fiscal credibility. (Unlike Standard & Poors, Moody’s decided not to downgrade Treasury securities in the wake of the debt ceiling agreement.)

Those states’ ratings are certain to be endangered again very soon, in fact, when the Congressional “super committee” attempts to find $1.5 trillion in new spending reductions – or imposes $1.2 trillion in cuts equally distributed between the domestic discretionary and national security budgets. For any state whose economic foundation rests on defense industries, the prospect of such cuts is ominous.

Republican leaders across the South may pander to anti-government sentiment among their constituents, railing against Washington and pretending that their states can survive without federal money. But the cold hard facts are clear enough to Rep. Randy Forbes (R-VA), who sits on the House Armed Services Committee and voted against the debt ceiling deal simply because he fears the effect of defense cutbacks on his home state. Expecting that defense spending will be cut by as much as $900 billion over the next decades, Forbes told a local newspaperthat Virginia is in a “danger zone,” if only because the state currently enjoys “the highest per-capita expenditure of military of any state in the country.”

Realistic conservatives like Forbes can be expected to protect their states’ interests, without undue concern for balanced budgets or deficit financing. And there will be no way to protect the interests of the rest of the country without the tax increases and defense cuts that Dixie cannot abide.

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Copyright 2011 The National Memo