Moody’s Investors Service is one of three firms that assess national creditworthiness. Standards & Poors and Fitch are the other two. The system has five “A” ratings ranging from extremely strong capacity to pay debts down to adequate capacity to pay debts. Then, there are 8 “B” ratings and 5 “C” and “D” ratings. Last year, because of the inability of our Congress to reach a reasonable deal with the White House, S&P downgraded us from AAA to AA+, from extremely strong capability to very strong capability. Moody’s and Fitch’s retained our AAA rating at that time.
Today, Moody’s said that if we have a replay of the broken negotiations of last year, they would consider downgrading us as well. In an e-mailed statement, Moody’s told the press “If those negotiations lead to specific policies that produce a stabilization and then downward trend in the ratio of federal debt to GDP over the medium term, the rating will likely be affirmed and the outlook returned to stable. If htose negotiations fail to produce such policies, Moody’s would expect to lower the rating, probably to Aa1.” Moody’s “Aa1″ rating is equivalent to S&P’s “AA+” rating.
The U.S. dollar fell against the Euro because of that announcement.
Moody’s is not optimistic about our chances. They believe the current stalemate will continue through 2014 but they also warn of an economic shock. That shock would be the sequestration on January 1, when all our tax rates would go up and billions of dollars of automatic budget cuts would begin. “Moody’s would then need evidence that the economy could rebound from the shock before it would consider returning to a stable outlook,” the agency wrote. The sequestration would, according to the Congressional Budget Office, result in a 2.9% loss in our GDP during the first six months of 2013. The CBO says the consequence would be a new recession and the loss of up to two million jobs.
But House Speaker John Boehner responded that he doesn’t believe Congress can reach a good budget deal and avoid a downgrading. He said, “I’m not confident at all.”
At issue are the same things the Republicans and Democrats have been fighting over for the past four years. The Democrats want a combination of increased revenues and across-the-board spending cuts while the Republicans want reduced taxes on the “job creators” and cuts only to social programs. Boehner shifted all the blame to the Democrats, saying that the House had passed legislation to prevent the automatic cuts next year and renew the Bush era tax cuts once again. The Senate refused to retain the tax cuts for those earning over $250,000 a year. “Listen, the House has done its job, both on the sequester and the looming debt fights that’ll cost our economy some 700,000 jobs. On both of these, where’s the president? Where’s the leadership?”
The President is where he has always been, calling for sweeping reforms of the tax code, making it fairer for everyone, spreading the pain of spending cuts. The Republicans will not negotiate anything that involves raising taxes, even by eliminating the tax breaks that make it possible for General Electric to pay no taxes and Mitt Romney to pay a lower tax rate than I did in 2010.
Moody’s emphasis that the ratio of debt to GDP is their method of determining credit worthiness is the important thing about this story. That ratio is what matters, not the amount of the debt in dollars. Truman and Eisenhower did not significantly reduce the actual national debt and the administrations that followed them until 1980 didn’t lower the actual debt at all, yet Truman lowered the ratio and all the administrations from Eisenhower to Carter saw that ratio flatlined. It wasn’t until the Reagan era, the reintroduction of supply side, trickle down economics into America, that our debt ratio started to rise. It fell slightly under Clinton, only to rise again under Bush 43. The rise has slowed, but not reversed yet. It won’t reverse as long as the Republicans block those things best guaranteed to increase our GDP – investment by government, investment in our infrastructure, investment in innovations, investment in education, investment in housing, all the things Truman and Eisenhower invested in.
Our debt to GDP ratio today is just over 101%. In 1946, it was 126%, the highest in our history. It makes no sense whatsoever for the Republicans to deny the efficacy of the proven way to increase our GDP and reduce our debt to GDP ratio.
John Boehner is right. He cannot negotiate a deal. He’s proven that already. He has no control over his own caucus. There was a deal last year that crumbled. There are two versions of why. In the version Boehner told to Bob Woodward for Woodward’s new book, the President raised the ante and demanded more taxes than Boehner could agree to. But at the time, there was no mention of this. What we saw with our own eyes was Boehner going to the Republican members of the House with the deal he had cut with the Senate and the White House and having it rejected by the Tea Party wing of the Republican Party.
Lawrence O’Donnell of MSNBC has a novel idea for the sequester….let it happen, go over the cliff. He has been running the “over the cliff” scene from Thelma and Louise to make his point. In O’Donnell’s view, if we allow the sequestration to take effect on January 1, at noon on January 3 when the new Congress convenes, they could immediately vote to lower taxes on those earning under $250,000 a year, retroactive to January 1. It would release the Republicans from their Norquist pledge because they would not be raising taxes, but lowering them. It would be a short-term solution to the automatic tax increases that will most hurt the 99%.
A better solution is to vote Democratic in House and Senate races. Give us a Congress willing to scrap our quintuple-Celtic knot of a tax code, give us a simple one and approach the budget in a fair and balanced manner.