My first reaction to Standard & Poor’s cutting its outlook on U.S. government debt to negative was, “Gee — where have you guys been?” Recall that the credit rating outfits were happy enablers of the unsustainable housing and credit bubble that ended in the near collapse of the financial system and the Great Recession.
The downturn and its costs are a huge part of the ballooning federal debt. While much of the TARP bank bailout appears — appears — to have been repaid, the recession caused lost tax revenues and new government expenditures, including the nearly $800 billion stimulus — and even that was not enough to fill the hole in demand left by the disaster in the private-sector economy. More states in fiscal trouble as their tax revenues dried up, more people unemployed, a record on food stamps. This is what happens in recessions and why government has filled the void since the Great Depression.
Of course, the costs of the stim and other recession-related damage are small compared with prosecuting two wars that have lasted longer than World War II while at the same time continuing the lowest tax rates in decades, with the Bush (and now Obama) tax cuts disproportionately aiding the richest Americans. Where was S&P when these debt-engines were being built and run for years?
The big problem now is the shape of the recovery. Corporate profits are at record levels, big companies are sitting on huge piles of cash, hedge funds are back to their holdings before the panic and the big banks are bigger than ever, returned to health by Uncle Sam. Small business, wage earners, 13.5 million souls officially unemployed and millions more underemployed continue to struggle. The big engine of the ’00s, easy Fed credit poured into construction and housing, isn’t coming back anytime soon.
This is what unsustainability combined with a dysfunctional economy and political system looks like. Imagine an America prosecuting World War II with much of the Depression lingering and the economy based largely on finance. (And, the S&P announcement is not the only thing weighing on markets — a big one is China’s warning on future growth, as Mesirow Financial Chief Economist Diane Swonk pointed out.).
The debt could be addressed, but only with a heavy focus on tax increases, including modest ones for the middle class, as well as ending much corporate welfare and the wars. It could also be aided by making public investments that would either repay their original costs or do so by adding to overall productivity. S&P acknowledges that addressing the debt is well within our means to fix.
But all this seems politically impossible, with so-called conservatives seeing an opportunity to dismantle the Great Society if not the New Deal, and a president who always backs down. Make no mistake: Draconian cuts to government will do no more to revive the economy — quite the opposite, in fact — than the tax cuts to the rich did to create jobs.
Anyway, S&P, welcome to the scene. Sorry you arrived late. Maybe you can tell us who in the casino is getting rich by shorting U.S. debt? We know they’re not paying taxes.
Today’s Econ Haiku:
Fifty years ago
The Space Needle work began
Couldn’t do today