Heading off another U.S. credit downgrade means tough choices

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America was shocked two years ago when Standard & Poor’s rating agency downgraded U.S. credit for the first time in its history. The top U.S. credit analyst for S&P says that, lacking a deficit solution, America’s credit rating is likely to be downgraded again.

Fortunately, just a few weeks before this bad news, former Republican U.S. Sen. Alan Simpson and Democrat Erskine Bowles released a new deficit reduction plan, updated from their original plan of two-and-a-half years ago.

S&P has defined the problem, and Simpson-Bowles have provided a solution.

AS IN S&P’S 2011 downgrade, a lower credit rating would not be based on economics, but on political dysfunction. According to Nikola Swann, S&P’s top U.S. credit rating analyst, “The negative outlook primarily is about
the risks we see that U.S. policymakers may not reach an agreement … .”

To avoid a downgrade, S&P “would have to see a reasonable basis for believing that a (deficit reduction) plan would actually be implemented. The best proof would be if a substantial share of the lawmakers from both parties agree on a plan.”

Could there be a clearer statement calling for a broad bipartisan tax and spending compromise?

Not surprisingly, there are no easy solutions or quick fixes. For example, Swann says recent legislation passed by the House to avoid a downgrade by prioritizing debt payments would not work. Prioritizing debt payments would indicate such political chaos that a downgrade would likely occur regardless.

The Congressional Budget Office announcement that the 2013 deficit will be $200 billion less than expected is good news, but it is not a prediction of future deficit reduction. This is a largely temporary effect not expected to be repeated. In the absence of structural changes, the long-term debt to GDP ratio will continue to increase and our debt will be downgraded.

The updated Simpson-Bowles plan meets S&P’s requirements and then some. It would reduce the deficit by an additional $2.5 trillion over 10 years and would significantly lower the critical debt to GDP ratio.

MARGINAL TAX rates would be reduced, and tax deductions would be eliminated or reduced. These tax changes would increase total revenue, which would then be directed to deficit reduction, not more spending.

The plan would repeal 70 percent of the mindless sequestration cuts, and make more thoughtful, and less extreme, cuts in discretionary domestic and defense spending. The chained CPI would be used to reduce inflation rates for Social Security, government pensions, and tax brackets. Medicare eligibility age would be raised, and major efficiencies made to government health programs.

Spending cuts would account for 72 percent of the deficit reductions.

The entire plan can be reviewed online at MomentofTruthProject.org.

The original Simpson-Bowles plan was ignored by President Obama, even though he had commissioned it. It was soundly defeated in the House by both Republicans and Democrats, and never came to a vote in the Senate. This bipartisan rejection does not mean it was a bad plan, but rather it is nearly impossible for politicians to ask voters to do difficult things.

Simpson-Bowles’ current plan requires compromise and sacrifice just as the original did. If anyone believes a viable deficit reduction plan will not affect them individually, they are mistaken. In fact, one of the virtues of the Simpson-Bowles plan is that everyone is affected, making it easier for politicians and citizens to accept the impact.

Simpson-Bowles may not be perfect, but it’s an excellent place to start. Does America have the political will to take the correct, but difficult, action this time? Will we choose the “hard right” or the “easy wrong”?

FORMER REPUBLICAN U.S. Sen. Phil Gramm co-authored a recent op-ed in The Wall Street Journal titled “The Debt Problem Hasn’t Vanished.” He addresses the devastating impact to the federal
deficit that will occur when interest rates return to historical norms.

Gramm concludes: “Sadly,
nations generally discover the truth of Albert Einstein’s dictum that ‘compound interest is the most powerful force in the universe’ – not through the happy accumulation of wealth, but through the agonizing enslavement of debt.”

America needs to make the difficult choices, embrace compromise, and avoid the agonizing enslavement of debt.

(The writer is a retired U.S. Navy officer. He lives and writes in Savannah.)

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deestafford
23589
Points
deestafford 06/09/13 - 07:56 am
2
1
The solution is obvious but won't be implemented because it

takes away the drug of the politician--power.

Go to the Fair Tax. Get the government to do only those things it is supposed to do as laid out by the Constitution and let the states and local governments do the things they should be doing. A good start would be abolishing many agencies in the federal government that are doing the functions Congress is responsible for. Just look at the IRS, EPA, and many of the other agencies interfering with our lives.

The solutions proposed do nothing to really correct the fundamental problem...too much government.

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