My friend Xuan is angry, pissed even. So much so that she wrote a blog entry while I was out salsa dancing and emailed it to me asking me to post it as soon as I got home. Well, it’s a little after midnight, and I’m ready to crank out this bad boy. She is frustrated with what’s happening in the US. Who can blame her? So without much further adieu, here is her entry. Enjoy!
It’s Friday evening. I, like millions of other Americans, should be relaxing right now. It has been a long week involving the following: default crisis, grand compromise, stock market volatility, another possible Eurozone financial meltdown, possible double-dipped recession (although I am not sure when we got out of the last one!), higher-than-expected job numbers, etc. Instead, it’s 10 PM and I am sitting here writing about Standard & Poor’s downgrading of US long-term debt from triple A to AA+.
According to the S&P, it is downgrading US long-term debt for the following reasons:
- The US government spends too much and borrows too much.
- The US government does not have a plan to pay for existing and future debt. In particular, the S&P decided the US government has to cut $4 trillion from its budget in the next ten years.
- The political gridlocks in the US make it unlikely that Congress or the executive branch can “resolve” the debt crisis.
None of these are “good” reasons, and here’s why.
The US economy can be represented by a simple equation:
US output = consumer spending + investment spending + government spending + (exports- imports)
Consumer spending has been down because Americans are unemployed. Those with jobs are being forced to take pay cuts and give backs. So how can US consumers spend money when they aren’t working or when their wages are being slashed?
Corporations have received trillions of bailout dollars and much more in tax breaks, while our government officials have begged them, prodded them and pleaded with them to hire Americans back to work. What have these corporations done? Well, they have been paying down their debts and buying financial investments, but American workers can rot for all they care.
The US has seen a small uptick in exports, but we import more than we export. You can thank American companies who have outsourced your job for this.
Given these circumstances, what is the U.S. government to do but spend? Unemployed Americans want their unemployment benefits (heck, they deserve it!). Their children need access to basic shelter, healthcare, and food. Why do you think 1 out of every 7 Americans is currently receiving food stamps? On top of all this, the U.S. government is expected to take some of the pressure off the unemployment problem via public sector hiring. In case the S&P forgets, U.S. government spending has been a POSITIVE—not a negative—on the struggling economy. If the S&P is worried about the US government spending and borrowing so much, then let’s see how worried it will be when there is no US economy.
The US government does not borrow money from American households or Chinese or whomever. The US government is a sovereign power that prints its own currency. It cannot default on its debt, plain and simple. For more, refer to my August 1 entry here.
Political gridlocks are acts of one-upsmanship. If the S&P thinks political gridlock is what will cause the US government to permanently default on its debt, it needs a refresher course in monetary economics. Again, see the above.
It was President Obama who first floated the idea of cutting $4.4 trillion in the next 12 years (that number was cranked out by the Office of Management and Budget). The GOP originally wanted to cut $6.2 trillion in the next 10 years. Where in this debate did economists at the S&P crunch their own numbers and decide on the magical number of $4 trillion? It seems odd that a credit ratings agency is requiring the federal government to cut its spending using this magical figure when the agency got the figure from the US government in the first place! What part of this story seems irrational to you?
Besides all of these reasons, there is one more thing I think we Americans need to consider. The federal government bailed out banks and corporations during the 2007 financial crisis. The US government investigated the credit ratings agencies’ overly optimistic ratings for companies like AIG, Bear Stearns, Goldman Sachs, Bank of America, WAMU, etc. The US government looked the other way even though it knew the credit ratings agencies screwed up. The government wanted the rest of the world to keep its faith in US corporations. The government gave millions (if not billions) of tax breaks to credit ratings agencies year in and year out. Is the S&P this stupid? You do not bite the hand that feeds you.
If our politicians were not all trained as lawyers and their economics knowledge was not limited to whatever some businessmen shouted at them, we would have a different government. We would have elected representatives who would be holding emergency meetings right now with the executive branch. And by Monday morning, we would have Congress calling for a congressional hearing and the Justice department calling for another round of investigation of credit ratings agencies. Instead, we have an ineffective government that is quarreling with the S&P over a $2 trillion oversight.
We have sold this country—wholesale—to financiers tonight. It’s an evening of shame for our country. Alexander Hamilton, our first Treasury secretary and one of the founding fathers who understood how government spending works, is rolling over in his grave right now.