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Tag: downgrade

Four Ways Congress Can Upgrade Our Credit Rating

Now that Standard & Poors has downgraded the U.S.’s AAA credit rating, it is important to respond boldly and, at the same time, lower expectations.

The first step is for our political leaders to frankly acknowledge the problems at hand: The U.S. economy will face a hard slog for an extended period; the political system is polarized; and, under current policies, the budget deficit will remain intractably large.

To respond to these challenges timidly or not at all would lead to such gloomy outcomes, we might as well think big.

What bold actions are legislatively feasible? A good start toward addressing our fiscal problem over the next decade would be to end all the 2001/2003 tax cuts when they expire at the end of 2012. And to give the economy a more immediate boost, Congress should triple the existing 2 percent payroll tax holiday and extend it for as long as unemployment remains elevated.

Here’s a more specific four-point plan that could be carried out within the political system we have. To those who will scoff that even these proposals are politically impossible, I’d note that the scope for constructive legislation has now become so narrow and the costs of doing nothing so high, we need to make ambitious proposals and hope that the legislative constraints can be adjusted.

First, use this S&P moment to reduce the deficit much more. The changes should be enacted now but not take effect immediately, as the economy remains weak. But we must get it done over the next decade, and we won’t be able to without substantial revenue.

Tax Cuts Expire

As I have written before, the most straightforward way to raise the needed revenue is to allow all of the 2001/2003 tax cuts, not only those for high-earners, to expire at the end of next year. That would lower the 10- year deficit by more than $3 trillion. (Democrats who bemoan the role of the tax cuts in driving up the deficit but then favor extending the vast majority of them are suffering from cognitive dissonance.)

In particular, we shouldn’t extend any of the tax cuts past 2012 unless every cent is offset through other measures. On this, the Obama administration, if it chose this course, would have the legislative upper hand. Since under current law all of the tax cuts expire, inertia is on the side of raising revenue. In combination with spending reductions imposed by the supercommittee created in the recent deal to raise the debt limit (or if that group fails, through automatic reductions), ending the tax cuts would restore a stable debt trajectory for the next decade even if economic growth is weak, as is likely.

We must also deal with the deficit problem beyond the coming decade, and in this case revenue will be a much smaller part of the solution. The most important driver of our long-term deficit is the cost of health care. The Affordable Care Act provides tools that can help contain cost growth; they should be used aggressively. Congress should expand them, too, especially by enacting medical malpractice reform.

In addition, and although it may be difficult, Congress should try to reform Social Security now. The economist Peter Diamond and I have put forward one variant of a progressive reform plan, which would, among other things, index the program to increases in longevity.

Expect Slow Growth

Second, in the aftermath of the recent recession, we can expect sluggish economic activity for years, not quarters, and we face the risk of another recession. Those who in January were predicting growth of 4 percent or more for 2011 did not sufficiently appreciate the evidence from the economists Carmen Reinhart and Kenneth Rogoff that what most often comes after a systemic financial collapse is a decade of weak growth.

So, to avoid overly hasty fiscal contraction and to promote job growth, we should triple the current payroll tax holiday of 2 percentage points. A 6 percent payroll-tax holiday would amount to about 2 percent of gross domestic product (and $3,000 for a family earning $50,000 a year), which could aid a stalling economy.

Rather than simply expand and extend the payroll-tax holiday, though, we should tie it to the unemployment rate. This would cause the break to automatically disappear as the labor market recovers and to reappear if the economy weakens again. By both canceling the tax cuts and revising the payroll-tax holiday, we would not only substantially improve the 10-year deficit outlook but also provide more support for the economy now and make the tax code more progressive.

Third, we must learn to live with structural gridlock and polarization by preventing legislative inertia from always leading to inaction. We need more mechanisms like the budget-balancing trigger that is pulled if the supercommittee fails, more entities like the Independent Payment Advisory Board whose recommendations for slowing Medicare costs take effect if Congress doesn’t act, and more automatic stabilizers (like the payroll tax holiday proposed above) that adjust to macroeconomic weakness without the need for further legislation.

At the same time, the Senate should amend its rules to require only 50 votes for any deficit-reducing legislation (not just changes made through the so-called reconciliation process) and a threshold even higher than 60 votes (perhaps something more like 75) for any deficit-increasing legislation unless it is an emergency response to a recession. That kind of super-majority rule would be vastly preferable to a balanced-budget amendment, since it would apply only to what Congress itself does.

Government’s Role

Finally, we should take this opportunity to reconsider what government should properly do. We need to invest more in roads, bridges, railroads and the like, and the best way to do this would be to scrap the present pork-barrel system and create a new infrastructure bank. We should also expand tolling and variable-rate pricing for transportation and water. This would allow us to use the infrastructure we have more efficiently and also raise money to invest in new projects.

Other jobs the federal government currently does could be shifted out of the public sector. Many other nations, for example, have successfully sold their postal services and their air-traffic-control systems to private operators. (Airline regulation should remain a public function.) Shedding these operations would allow the government to better focus on key areas such as infrastructure and education.

Rahm Emanuel, the former White House chief of staff and now mayor of Chicago, once famously remarked that one should never let a serious crisis go to waste. We also shouldn’t let wasted opportunity lead to a serious crisis. Let’s double down on support for job creation now and, after an appropriate lag, reduce the deficit more.

Peter Orszag is vice chairman of global banking at Citigroup and a former director of the Office of Management and Budget in the Obama administration.

China Worried About U.S. Default

As House Republicans continue to hold the United States hostage over raising the debt limit, China is using Standard & Poor’s and Moody’s (relatively empty) threats to downgrade the United States’ credit rating as a pretext to issue stern warnings on honoring our more than $1 trillion in debt to that country.

China’s State Administration of Foreign Exchange, or SAFE, issued a statement on its website urging action to raise the debt limit this week.

“We hope the US government will earnestly adopt responsible policies to strengthen international market confidence, and to respect and protect the interests of investors,” it said on its website. Foreign Ministry Spokesman Hong Lei echoed the sentiment at a briefing earlier this month.

There’s finally a deal on the table, though, with the Senate Gang of Six unveiling a proposal to slash spending and increase government revenue, and if it passes with a debt limit increase China will presumably resume buying up our bonds without reticence. After all, we at least have begun to bend the cost curve on healthcare, something that has worried the Chinese quite a bit over the last few years:

And yet, there was budget director Peter Orszag rushing to a lunch with Chinese bureaucrats on a Monday in late July. To his surprise, when Orszag arrived at the site of the annual U.S.-China Strategic and Economic Dialogue (S&ED), the Chinese didn’t dwell on the Wall Street meltdown or the global recession. The bureaucrats at his table mostly wanted to know about health care reform, which Orszag has helped shepherd. “They were intrigued by the most recent legislative developments,” Orszag says. “It was like, ‘You’re fresh from the field, what can you tell us?'”

As it happens, health care is much on the minds of the Chinese these days. Over the last few years, as China has become the world’s largest purchaser of Treasury bonds, the government has grown increasingly sophisticated in its understanding of U.S. budget deficits. The issue has become all the more pressing in recent months, as the financial crisis and recession pushed the deficit to record levels. With nearly half of their $2 trillion in foreign currency reserves invested in U.S. bonds alone, the Chinese are understandably concerned about our creditworthiness. And this concern has brought them ineluctably to the issue of health care. “At some point, if you refuse to contain health care costs, you’ll go bankrupt,” says Andy Xie, a prominent Shanghai-based economist, formerly of Morgan Stanley. “It’s widely known among [Chinese] policymakers.” Xie himself wrote a much-read piece on the subject in 2007 for Caijing magazine–kind of the Chinese version of Fortune.

A reminder that for all the Republican calls to cut spending, the only major piece of deficit reduction legislation passed in the last decade was Obama’s healthcare law, which reduces federal deficits by nearly $150 billion by 2020.

Follow National Correspondent Matt Taylor on Twitter: @matthewt_ny

Ratings Agency: We Might Downgrade U.S. Credit

Yesterday, the credit ratings agency Moody’s Investor Service warned that it will have to review the U.S. government’s AAA credit rating and possibly downgrade it, given fears that the U.S. will fail to raise the debt ceiling and default on its debt.

Moody’s believes there is a “very small but rising risk of a short-lived default,” due mostly to the refusal of Republicans to raise the debt limit unless Democrats dramatically cut spending on social welfare programs. The determination of the Republicans not to raise the debt limit without spending cuts seems to have taken Moody’s by surprise. “Although Moody’s fully expected political wrangling prior to an increase in the statutory debt limit,” according to a statement released by the ratings agency, “the degree of entrenchment into conflicting positions has exceeded expectations.”

The statement goes on to say that if Democrats and Republicans come to an agreement to raise the debt ceiling and avoid default, the U.S. will keep its perfect AAA credit rating. But they better come to an agreement soon. The U.S. has until August 2nd to raise the debt ceiling and avoid a default, but Moody’s says it will consider downgrading U.S. credit “if progress in negotiations is not evident by the middle of July.”

Moody’s also wants the U.S. to work on reducing its growing deficit and debt, and warned that the U.S. will not maintain a AAA rating in the future if it does not reduce its deficit and debt. Republicans have already demanded that any decision to raise the debt ceiling must be accompanied by a spending cut to reduce future debt. Obama has invited the Republicans to work on a compromise to reduce the debt, trimming some government programs while closing tax loopholes and raising taxes on the wealthy. So far, though, Republicans have refused any deal that includes tax increases. This latest warning from Moody’s, along with increasing pressure from Wall Street, may convince them to make a deal.