Blame Obama and Boehner for the downgrade

August 7, 2011

In April 2010, Treasury Secretary Timothy Geithner said there was “no chance” Treasury bills could lose their AAA rating. The fact that top government officials thought there was “no chance” something could happen surely is one reason it happened.

U.S. government bond ratings are falling — the S&P downgraded the US credit rating yesterday from AAA to AA-plus, the stock market is plummeting — such movements don’t necessarily have story lines like Hollywood movies. Herd instinct and randomness are factors. Even top economists can’t agree on exactly why the Dow headed south.

But the bond rating drop unequivocally is a direct result of the Barack Obama-John Boehner national-debt deal being as phony as a three-dollar-bill.

Stocks for their part began to fall two weeks ago, on rumors the Obama-Boehner deal would contain nothing but pandering. The drop accelerated – 6.1 percent of the 10.5 percent decline – pretty much to the hour, on Monday, when the deal became final and it was clear that reports were correct. Monday, markets learned that people at the top of the government of the United States were going to do nothing at all about the national debt, beyond acting like windbags.

America had been elaborately warned that endless borrowing to appease interest groups doesn’t work – the warnings have come from Greece, Ireland, Portugal and most of all from Japan. President Obama and congressional leaders of both parties ignored those warnings and ordered another round of champagne, agreeing to a deal that includes $2.4 trillion of fresh borrowing by 2012, paired with only $21 billion in specific cuts in the same period — about $115 spent for each $1 saved.

That Super Committee to which the debt can has been kicked? The core problem of U.S. fiscal policy is that federal taxes are too low and entitlement spending too high. Yet the Super Committee is all but forbidden to discuss Social Security reductions or tax increases. Good luck finding trillions of dollars of savings in the Fish and Wildlife Service.

Of course leading indicators are an aspect of the market drop. Growth is slow. European debt may be in worse shape than European Union leaders are letting on. On Monday, the Institute of Supply Management reported the lowest figure in a year for its influential Purchasing Managers Index. Though, the ISM also reported, “Economic activity in the manufacturing sector expanded in July for the 24th consecutive month.”

So factory orders aren’t great but aren’t awful either. Yesterday’s news of mildly positive jobs numbers cautions against pushing the panic button.

Even if indicators could be a lot better, the main piece of new information added to markets in the last two weeks has been that Washington is leaderless.

Both parties, and both the White House and Congress, are more interested in blowing smoke than in firm action. Both parties are terrified of offending any special-interest group. That’s a formula for turning the United States into Japan, as The Economist’s spooky cover suggested. And if you think the United States is in peril of turning into Japan economically, then stock prices should drop.

Some commentators believe Washington should be diving even deeper into debt, for Keynesian reasons. Since the recession began in early 2008, the United States has borrowed $5.6 trillion – nearly the entire national debt not in the dim past, but the year 2000. American is now on track to borrow another $2.4 trillion by the end of 2012.

That will mean $8 trillion of debt-based spending merely from 2008 to 2012. Stated in today’s money, the United States borrowed $3.9 trillion during World War II. If $8 trillion of debt-based spending in a short period doesn’t have the desired Keynesian impact on growth and jobs — then either Keynesianism doesn’t work,  or something else is happening.

The vote here is that something else is happening. The something else is that every time the United States borrows more against the future, the future becomes less valuable. If you think the nation’s leaders are squabbling children, you save rather than spend (if a consumer) and horde cash rather than invest (if a corporation). Both behaviors are being observed.

This won’t change until clear, specific action – not windbag grandstanding – is taken against debt trends. That action must include entitlement cuts and tax increases. The political parties must stop living in a dreamworld on these topics.

Democrats have taken to calling Social Security “a program for the poor.” This is pure dreamworld. Most Social Security benefits flow to the middle class, and must be trimmed; some flow to the rich, and must be eliminated.

Republicans who live in a tax-cuts dreamworld should ask, “What would Reagan do?” The answer is that Ronald Reagan would raise taxes. Faced with ballooning deficits, Reagan backed an income tax increase in 1982 and a corporate tax increase in 1986. The nation’s books righted themselves, and 20 years of boom growth and high employment followed.

There is no path out of the current problem that does not include tax increases and entitlement cuts. On Monday, Washington’s leaders showed they are terrified of that fact. When will they find resolve?





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at the end a balanced approach to this problem… tax increase and expenditure cuts are the only way out of this mess… we need politicians for America not for socialistic ideology or paid corporate america puppets… tax cut pray god will not work… also trying to spend more than we earn will not work… lets cut spending and increase taxes…

Posted by Ocala123456789 | Report as abusive

Agreed – there are no leaders in Washington – only politicians – licking boots to keep their ratings high.

Where are the men and women of character who have strong egos and care little for the ratings game? I guess they are murdered or never make it past the slimy roads to higher office. – higher indeed.

Posted by Butch_from_PA | Report as abusive

the political battle goes beyond any collateral damage to the dollar or economy. the fight is about power, societal direction, and which party will control it. at present, the democrats are plotting strategies that were fine during reagan’s time, but irrelevant to cantor’s time.

Posted by SanPa | Report as abusive

[…] “markets learned that people at the top of the government of the United States were going to do nothing at all about the national debt, beyond acting like […]

Posted by Is the debt-ceiling deal hated because it will work, or won’t work? | The Great Debate | Report as abusive

The bottom line is that Social Security and Medicare are nothing more than Ponzi schemes, and we can only move forward when everyone who conspired to foist these schemes upon the American people is tried, convicted and locked up behind bars. If that takes revolution in the streets, then so be it.

Posted by ParContre | Report as abusive

“Most Social Security benefits flow to the middle class, and must be trimmed; some flow to the rich, and must be eliminated.”
That’s either bad journalism or an attempt to prevaricate. Most Social Security benefits flow to the poor elderly, and the program is not the driver for our present and future economic woes. Rich, middle class, or poor, ALL american workers must contribute to Social Security so yes, even rich people deserve what they put in.

Posted by snpeebles | Report as abusive

You hit the nail on the head when you talked about 3.9 trillion borrowed for WWII. How much have we borrowed for the wars we’re fighting now? High tech wars are much more expensive to fight than the previous world wars.

We have been fighting three or four wars (Iraq, Afghanistan, Libya and the “War on Drugs”). Yet nobody has mentioned that we have to pay for them. In fact, GWB dramatically lowered taxes while starting the wars in Iraq and Afghanistan. At least in the Vienam war days there was a surtax. Where is the surtax now? Where is the notion of sacrifice in time of war?

GWB not only told everyone you could have your cake and eat it: he told us we don’t even have to pay for the cake in the first place!

This whole philosophy is where the problem lies. Someone has to have the courage to tell Americans they actually have to pay for things like these wars.

Posted by loveone | Report as abusive

Social Security was intended to be a retirement program for those who did not have a retirement program in place through their employer. Far from an entitlement, workers pay a hefty fee into Social Security each payday, yet these funds were not put into a “locked box,” as Gore had recommended, but into a general fund for Congress to dip into.
The problem in the U.S. is the endless drum of war. In February the Pentagon rolled out a record base budget for fiscal year 2012 of $553 billion. Add interest rates to this type of spending, and it does not take long for one to determine where the debt comes from.

Posted by Steeljubei | Report as abusive

This should not be relegated to an aside comment: “Of course leading indicators are an aspect of the market drop. Growth is slow. European debt may be in worse shape than European Union leaders are letting on.”

The pseudo debt “debate” covered up the reporting of a number of indicators that our economy is not recovering – far more important than a distracting political debate.

Growth has been below the breakeven point of ~3% for over four years. This means we’re still in the Great Recession. Oops! Since it’s more than two years, that qualifies as a Depression. Of course, Nobel Laurette Paul Krugman has been saying this for almost two years.

Real unemployment has been steadily increasing for over four years according to the United States Labor Department’s Bureau of Labor Statistics (BLS), the same BLS that reports the phony official unemployment rate under mandate of the Congress. Tens of millions of people are homeless or in the process of losing their homes. In addition to the human toll, our society is suffering in a number of different ways. This is akin to debating while our country is burning.

Posted by ptiffany | Report as abusive

Typical of the guy who wrote one of the windiest environmental tomes ever written (A Moment On The Earth) and a novel )This Magic Moment) that rivals the 100-page speech in Atlas Shrugged for verbose blather.

Gregg: This was not Obama’s and Boehner’s deal. The entire Congress had to vote on it. And if the Republicans are going to continue to vote “no” on any tax hikes whatsoever for the rich, we need to replace the Republicans. Reality is what it is; you so often come up with the quirkiest takes on cause and effect, and for reasons I have long been unable to fathom, people buy your bull****.

By the way: the reason “This Magic Moment” won’t make a movie is that you took a potentially likeable premise and gave it an utterly depressing ending in which they both die in the end. Believe it or not, people don’t want crushingly unhappy, resolutely illogical endings.

And get rid of all those essays between chapters. BOOOORRRRRIIIINNNNGGGGGGGGGG!!!!!!

Posted by JohnQSmith | Report as abusive

Why do laymen bring up Keynesian economics failing during the recession? The whole idea of Keynesian economics is ‘save for a rainy day’, ie sock away money with federal surplusses during good times and spend heavy during bad times to make up demand. Clinton was doing that and Bush2 reversed him completely, giving away $3T in tax cut giveaways during his presidency and spending $2T on wars without raising taxes to pay for it – something unprecedented in the history of America. If you insist on bringing on Keynesian economics at least be intellectually honest about what the theory entails, not reduce it to ‘America spent a lot and we’re still in trouble’… it’s dishonest and detremental as well as confusing Americans about how best to get out of this mess. Just as an aside, to rollback the tax cuts and wind down the wars would cut deficit spending by at least $5T over ten years, not to mention the $1.2T already identified waste in defense and medicare over ten years. That’s $6.2T that no one has really put on the table – America wouldn’t have a problem really if they were!

Posted by CDN_Rebel | Report as abusive

Tax outsourcing, tax limit loopholes and lower small business corporate tax rates.

Posted by robb1 | Report as abusive

How can the entire blame be placed on President Barack Obama and John Boehner? Both men were dealing with a faction in the Republican party that doesn’t care about anything more than an ideology. The Tea Party and the idiots who put them into government in the first place are entirely responsible for the wasted time and poor result! There is no room in government for those not willing to compromise… that is the entire basis of our system of government!

Posted by abkisa | Report as abusive

[…] drop unequivocally is a direct result of the Barack Obama-John Boehner national-debt deal,” says Gregg Easterbrook at Reuters. The last-minute agreement is “as phony as a three-dollar-bill,” with no real effort to […]

Posted by The U.S. credit downgrade: Who’s to blame? (The Week) | Breaking News Today | Report as abusive

@ OneOfTheSheep: YOU want war. GWB wanted war. Cheney still wants it. You believe that it is productive. You believe that we are doing something moral by invading these other countries, slaughtering the people there, blowing things up and increasing the militarization and surveilling of our own people.

I do agree with your statement that “no sane persons WANTS war.” Washington warned against it. As did Eisenhower. And Orwell. And many others.

You do not realize that producing bridges and water transit systems also brings dollars into the society. But when we’ve built those things, they remain, and continue to benefit. But as Orwell explained, that would unduly empower people, and this “we” must never do.

Your argument is depressingly oppressive. Take your Sparta elsewhere.

Posted by BowMtnSpirit | Report as abusive

The central fallacy of this article is the equivalence of Obama and the House Republicans, particularly the Tea Party freshmen. Obama is not a king, nor is he an emperor. The House of Representatives holds the purse strings. Obama had very little leverage, and was forced to make huge concessions to avoid a total calamity. The ones directly responsible for bringing us to the brink of that calamity are the Tea Party and by extension the senile apoplectic voters who elected them.

Obama did the best he could. The House did the worst they could. Please understand and report the difference.

Posted by BajaArizona | Report as abusive