President Obama just spoke about the downgrade and his remarks were very disappointing. He uttered some empty platitudes, offered no plan, (amazingly) called for more government spending, and continued his advocacy of class‐warfare taxation.
So what does this mean? Other than expecting volatility, I have no idea what will happen in financial markets over the next few days. But I can opine about the downgrade, Obama’s unserious response, and what it means in terms of public policy over the next few years and into the future.
Notwithstanding the President’s cavalier attitude, America is in trouble. But while the crisis is severe, we have some breathing room.
Our fiscal crisis is akin to a very dangerous, but slow‐developing cancer. It is not a car wreck with immediate life‐threatening injuries.
And there are solutions, as explained in this good news‐bad news‐bad news‐bad news‐good news‐good news analysis.
1. There is virtually zero chance of the United States defaulting in the next 10 years (heck, probably the next 20 years). Yes, fiscal policy has been reckless and irresponsible during the Bush‐Obama spending binge, but I’m guessing it will take another 10–20 years of additional over‐spending to bring America to the point of Greek‐style collapse. Simply stated, the U.S. economy is so large and so rich that it can’t be destroyed quickly.
…but…
2. The United States does not deserve a triple‐A rating, at least for long‐term debt. The nation has a giant fiscal problem, but it’s not the annual deficit or the national debt. The true crisis is the $100‐trillion‐plus unfunded liability for entitlement programs — especially Medicare and Medicaid. This is why America deserved to be downgraded.
…and…
3. The left in America, as exemplified by Obama’s vapid press statement, has no serious intention of addressing this problem. The President has failed to present any sort of plan. His budget early in the year was a business‐as‐usual document with no reforms and even the Democratic‐controlled Senate rejected it 97–0. But while Senate Democrats joined Republicans in deep‐sixing Obama’s joke budget, they have failed to produce a budget of their own for more than two years.
…moreover…
4. The left is treating America’s fiscal crisis is an opportunity to trick Republicans into a tax increase. That would be smart politics, to be sure, since it would automatically give Democrats the upper hand, but higher taxes would probably worsen the problem of excessive government since politicians would spend any additional revenue. And the kind of class‐warfare taxes Obama has in mind would further undermine growth, adding to the nation’s fiscal woes.
…however…
5. After eight years of being corrupted by “big‐government conservatism,” the GOP may finally be sincere about reducing the burden of government. Led by Congressman Paul Ryan, House Republicans approved a very serious budget plan that would have reformed both the Medicare and Medicaid and substantially reduced the long‐run burden on the U.S. economy.
…fortunately…
6. America is not at the point of no return. I’ve periodically commented about the dangers of a nation reaching a tipping point, which occurs when the people riding in the wagon outnumber those pulling the wagon. But even though dependency has jumped in America, the national spirit of self‐reliance, independence, and freedom remains strong. Indeed, I think that’s what the Tea Party largely represents.
But none of this should suggest optimism. We know the solutions, but that does not mean that the politicians will do the right thing. As I said in the beginning of this post, America is at a crossroads. We can either continue a descent into Greek‐style fiscal morass or, at some point in the next few years, we can implement reforms.
But, barring some remarkable change in attitude, Obama is mostly irrelevant except to the extent that he can make matters worse by luring Republicans into a phony tax‐hike deal.