Myths and facts surrounding the S&P downgrade of US debt
Part II of a list of popular myths and facts concerning the US economy and the implications associated with the debt, the deficit and the role of the government.
Obama Boehner 311(photo credit: REUTERS)ByAVI PERRYIn the wake of the S&P downgrade of US debt, there have been claims and counter claims as to why it happened, who was responsible and what could be done to remedy the situation. Many of the claims deserve a closer look, as the truth of the matter must be addressed and exposed for what it is. The following is Part II of myths and facts concerning the S&P downgrade, the US economy and the implications associated with the debt, the deficit and the role of the government.RELATED:Facts and myths about the state of the US Economy Myth Read MoreS&P downgrade of the American credit rating is due to the growing US government’s budget deficitFact Credit rating is a reflection or an assessment of the borrower’s probability of default. S&P downgraded the American credit rating because the risk of default on US government obligations has increased substantially due to the dysfunctional political environment in Washington. The US can always pay its debt and fulfill its financial obligations unless politics rather than economics prevent it from doing so. The probability of an American default on its government financial obligations has been shown to be positive due to the Tea Party’s suicidal declaration concerning their willingness to default should their demands become unfulfilled. MythThere is a serious risk of default by the US government if the long term debt is not reducedFact Not true! There are no economic scenarios other than self-inflicted political ones, which could prevent the US from tending to its financial obligations. All real economists (including Alan Greenspan) are in the opinion that a country can always pay its debt when the debt is in its own currency. It can simply print more money and devalue its currency and its debt in the process.MythThe S&P downgrade of the American credit rating has taken place under Obama’s watch. Consequently, it’s all Obama’s fault.Fact Had their demands failed to materialize, the Republican led Tea Party indicated that it was willing to default on US government’s obligation by refusing to raise the debt ceiling. The world was watching in horror as the Republicans took the American and the world’s economy hostage, held a gun to its head and threatened to kill it. It becomes problematic for a lender to feel that his money is safe at the hands of lunatics who may refuse to honor their future obligations even if they have the ability to pay.MythThe Tea Party is solely responsible for the S&P downgrade of the American credit ratingFactObama’s poor negotiating ability is partially responsible for the debt ceiling crisis. The president bought into the Republican strategy of linking the lifting of the debt ceiling to the budget deficit reduction. In fact, he kept reinforcing that false notion by stating his refusal to using the 14th amendment. He brought a knife to a gun fight; he should have threatened to raise or eliminate the debt ceiling regardless of the Republican’s position on the budget deficit. Had he done so, he would have eliminated the threat of default; he would have taken the extortion power away from the Tea Party by amputating the hand holding the gun to the US economy’s head. And he would have emerged a winner out of the budget deficit debate.Obama should have made clear that he had not agreed to acknowledge any dependence between the lifting of the debt ceiling and the budget deficit. He should have tried to rip the debt ceiling to shreds, knock it down altogether. He should have made clear that the American government must honor its obligations regardless of the budget deficit’s size, since each and every time we approach it, we realize that we have no choice but to raise it yet again. Government spending must be conducted responsibly with an eye on the size of the deficit regardless of the existence or the absence of a debt ceiling.The US is the only country in the world, which has a limiting debt ceiling (Denmark has one, but it is much too high in comparison to its budget, making it irrelevant). Having an arbitrary debt ceiling is the only reason the US credit rating comes into question.Myth Conservative CEOs and politicians have claimed that every individual and every responsible business owner or manager do balance their budget. The US government must do the same. A balanced budget amendment forces government to live within its means. Fact A balanced budget means that government expenditures must be equal to its revenues. Moreover, it implies that the government’s borrowing should be curbed because selling of treasury bonds enables it to spend over and above its revenue. This myth is ironic. Living within one’s means does not require that person or business to balance income versus expenses. Most of us sign in on a mortgage when buying our homes, take student loans, finance the purchase of a new car or incur some other form of debt to enable investments and other capital intensive purchases. Businesses sell stocks and bonds to support growth, investments and expenses exceeding their current income. In short, most people and businesses use leverage to facilitate growth, investments and expenses. They all balance their budget eventually, after loans are fully paid. Except they do so over a long period of time rather than within a single year as proposed by the Congressional Republicans’ balanced budget amendment.A cyclically balanced budget was first proposed by the biblical Joseph who argued that government should create a budget (food) surplus in (the next seven) boom years to cover for a budget deficit in (the next seven) lean years. He applied the Keynesian economic model (thousands of years before Keynes was born) of an active government fiscal policy designed to smooth and level economic cycles by providing restrains (in the form of higher taxes and spending cuts) in boom years, while growing government expenditures and lowering taxes during recessions.Joseph was proved right. He saved Egypt (including his own brothers) from mass starvation. Myth There is plenty of proof that the Keynesian economic model does not work. Obama tried it with the failing stimulus; Japan applied it during the 90’s but still lost the decade to anemic growth; Roosevelt implemented it during the Great Depression, but it took more than a decade to finally spawn real economic growth. Fact Jumping out of an airplane while the parachute opens, but only partially, may lead to serious injury short of death. Witnessing this tragedy, some may argue that parachutes are useless. Some others may counter by saying that the parachutist would have been killed had he jumped without it.Truth is, parachutes work when they operate to their full extent. The same is true with Keynesian economics. During the Great Depression Roosevelt’s policies were able to stop the down spiral of the US economy. The American way of life was saved, but it was still in bad shape. Following Roosevelt’s ascent to power the economy changed course. It embarked on a positive trajectory until 1937. Then, fiscal conservatives were able to shape the agenda and force a reduction in government spending. The inevitable outcome turned out to be an economic contraction and a second dip in economic activity. World War II lifted the US out of the Great Depression thanks to massive government spending supported by a massive budget deficit (emphasis on massive).History has demonstrated that the Keynesian model proved right when implemented to its full extent.Japan’s lost decade can be characterized by government’s half measures. When economic activity seemed to converge on a positive trajectory, the Japanese government pulled back, bringing progress to a standstill once again. They kept playing the same music throughout the anemic decade.Most objective economists agree that the US government’s (including the Federal Reserves’) economic programs saved the US from another Great Depression. TARP was a great success. The lowest ever tax rates during the past three years have helped lift the US economy out of its negative GDP growth. Other stimuli were not highly successful due to typical government inefficiencies, but they did save thousands of teachers’, police’s and firefighters’ jobs. The Feds’ double-phased Quantitative Easing was helpful in stabilizing the financial system and lifting the stock market. Overall, government spending during the Great Recession was high; it contributed to a pull from the brink of another Great Depression. It has been insufficient. Unemployment is still high. The deficit has soared to a level unparalleled in history, giving birth to those claiming that Keynesian policies do not work—the Tea Party. The parachute opened half way only because fiscal conservatives were able to dominate the economic agenda. They were successful in changing the topic from job growth to deficit reduction. They were intent on repeating the mistakes of 1937.Myth Obama is a liberal Marxist FactObama’s track record is one of a person who has saved big business from massive failures. He saved the auto industry, the big banks, and AIG. Although TARP was initiated under his watch, his government’s ownership of these companies has never intended to assume permanency or operational control. In fact, most of the TARP money has been repaid and capitalism has been revitalized thanks to it. Charging a president with communist tendencies may be more appropriate to someone who tries to control inflationary pressures, not through reduction in government spending, but rather via price, wage and rent control. These administrative measures represent a great departure from the free market forces of supply and demand. These are measures taken by communist s and socialists. These measures were taken by Richard Nixon, a Republican president.Obama caved in to the Tea Party demands in his attempt to forestall a US government default on its debt. He sided with most of the conservative agenda. He did not raise taxes; he agreed to severe budget cuts. These facts make him more conservative than most members of his Democratic Party.
Myth The Tea Party victory in the latest election represents the will of the peopleFact In spite of numerous claims by members of the Tea Party, they do not represent the majority of the American people. They are a small minority elected out of highly conservative districts. Their agenda is not the “people’s agenda”, but rather a "small group of people’s agenda”. The Tea Party’s source of power is their disregard to the welfare of the American people. When you say “No compromise” from the outset, your negotiating position is enhanced. When you take hostages and threaten to kill them if your demands are not met by the deadline, your negotiating position is enhanced as long as the other side cares. When you are willing to commit suicide defending your religion or your ideology, when you are willing to kill and be killed in the process, you become an extremely tough opponent. Your aggression may pay off if the other side cares about the rest of us, if the other side is civilized.The Tea Party’s winning record has made them more confident, more arrogant, more aggressive and more dangerous. S&P must have taken that fact into account when considering the probability of the US becoming irresponsible when it comes to fulfilling its financial obligations.
