The US faces serious long-term debt problems due to its unfunded social insurance programs. But the federal debt upgrade by credit rater S&P helps ensure a solution will come later rather than sooner. Erskine Bowles, Alan Simpson, and rest of the Washington debt hawks can go take a sabbatical. A “grand bargain” on spending, taxes, and debt isn’t happening anytime soon. As analyst Chris Krueger of the Washington Research Groups explains in a research note:
As if Washington needed another reason not to enact a “grand bargain” on long-term deficit reduction, credit rating agency S&P moved the U.S. credit rating outlook from negative to stable yesterday, citing an improving economy and recent budget deals.
With a credit rater downgrade threat now off the table in the near term, there is little to compel policymakers to compromise on a broad deficit reduction plan composed of revenue raisers, entitlement reform, and spending cuts before the midterm elections in November 2014. It appears that growth is the new austerity in Washington.
By revising its debt outlook to stable from negative, S&P effectively said there is a less than one-third chance of a downgrade in the next two years. And the move isn’t so surprising given the steep drop in the US budget deficit thanks to this year’s tax hikes and spending cuts. The Congressional Budget Office recently said the annual fiscal shortfall will shrink this year to $642 billion, the smallest gap since 2008 and down some $200 billion from its forecast earlier in the year.
S&P’s update and CBO’s revision are only the latest nails in the austerity coffin. Academic pushback against the famous Reinhart-Rogoff study — the one claiming high debt levels slow GDP growth — has hurt the economic case for further immediate fiscal retrenchment. And slowing health care cost growth suggests a possible lower trajectory for future government health care spending. In addition, voters seem to have a different priority, as Washington has surely noticed. A recent CBS News-New York Times poll found 34% of Americans say the weak job market is the biggest problem facing the nation. Just 6% cited the national debt. Perhaps the public has noticed interest rates are superlow, while unemployment is historically high.
America has concluded that for right now, at least, it faces a jobs crisis, not a debt crisis. So there is probably not much political gain to be had by claiming a debt crisis is right around the corner. Of course, the debt problem has not been solved. Not only is a deluge of entitlement debt still looming, it’s unlikely the spending sequestration will stick in its current form.
But if debt hawks and Tea Party Republicans are waiting for a debt crisis and interest rate spike to finally force Washington’s hand, they may be waiting for some time. As economist Brad DeLong recently theorized, the Great Recession and Financial Crisis may have made global investors severely risk averse for decades, creating high, long-term demand for AAA assets — US, UK, German, and Japanese debt. DeLong:
In this scenario, we may well find ourselves in a situation in which the U.S; government can simply borrow and borrow and never have to pay it back because the economy grows faster than interest accrues. In which case the U.S. government looks much more like the Renaissance Medici Bank–an organization you are happy to pay to keep your money safe, rather than a debtor from whom you demand a healthy return. The treasury becomes a profit center for the government rather than a cost. We will know if this scenario is true when the labor market normalizes: do we then find the interest rates environment we have had in the past five years persisting, a new normal for the long term?
If so, there will be a New Normal political and policy reality in Washington, as well.