It’s irksome!
by August 7, 2011 7:46 pm 70 views
guest commentary by David Potts
It’s irksome that Standard and Poor’s downgraded the United States’ credit rating from AAA to AA+ for the first time ever. In reality, I doubt the downgrade has any great immediate effect on our economic standing in the world. AA+ is still a solid rating and the United States will continue to be a safe haven for foreign investment.
More irksome than the credit downgrade is the reason for the downgrade. Here is an excerpt from Standard and Poor’s as to why they downgraded our country’s debt:
“Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government’s debt dynamics any time soon.”
The statement is a little highbrow so let me paraphrase this for you. Our present leadership in the White House and in Congress is inept in dealing with the most important problems that affect our lives, our jobs, and businesses. They are cowards who would prefer to defer the difficult decisions. They are more interested in protecting their party’s ideology and their own re-election chances than in doing what is necessary to preserve our country’s future economic prosperity.
Said another way, you’re not important, they are.
Oh, before I forget, Standard and Poor’s also said: “The outlook on the long-term rating is negative. We could lower the long-term rating to ‘AA’ within the next two years if we see that less reduction in spending than agreed to, higher interest rates, or new fiscal pressures during the period result in a higher general government debt trajectory than we currently assume in our base case.”
Let’s review the problem.
Listening to all the pundits on TV and radio seem to confuse me but I found the following excerpt to help me focus on the total problem. The National Commission on Fiscal Responsibility and Reform was created by President Barack Obama in 2010 to identify fiscal policies to balance the budget by 2015 excluding government interest payments. The Commission is also referred to as the Boyles-Simpson Commission.
The commission released a report in December 2010 that included the following summary of our present budget crisis. It helped remind me of what exactly all the fuss is about. I added the emphasis in bold type.
“Our nation is on an unsustainable fiscal path. Spending is rising and revenues are falling short, requiring the government to borrow huge sums each year to make up the difference. We face staggering deficits. In 2010, federal spending was nearly 24 percent of Gross Domestic Product (GDP), the value of all goods and services produced in the economy. Only during World War II was federal spending a larger part of the economy. Tax revenues stood at 15 percent of GDP this year, the lowest level since 1950. The gap between spending and revenue – the budget deficit – was just under nine percent of GDP.
“Since the last time our budget was balanced in 2001, the federal debt has increased dramatically, rising from 33 percent of GDP to 62 percent of GDP in 2010. The escalation was driven in large part by two wars and a slew of fiscally irresponsible policies, along with a deep economic downturn. We have arrived at the moment of truth, and neither political party is without blame.
“Over the long run, as the baby boomers retire and health care costs continue to grow, the situation will become far worse. By 2025 revenue will be able to finance only interest payments, Medicare, Medicaid, and Social Security. Every other federal government activity – from national defense and homeland security to transportation and energy – will have to be paid for with borrowed money. Debt held by the public will outstrip the entire American economy, growing to as much as 185 percent of GDP by 2035. Interest on the debt could rise to nearly $1 trillion by 2020. These mandatory payments – which buy absolutely no goods or services – will squeeze out funding for all other priorities.
“Federal debt this high is unsustainable. It will drive up interest rates for all borrowers – businesses and individuals – and curtail economic growth by crowding out private investment. By making it more expensive for entrepreneurs and businesses to raise capital, innovate, and create jobs, rising debt could reduce per-capita GDP, each American’s share of the nation’s economy, by as much as 15 percent by 2035.
“Rising debt will also hamstring the government, depriving it of the resources needed to respond to future crises and invest in other priorities. Deficit spending is often used to respond to short-term financial “emergency” needs such as wars or recessions. If our national debt grows higher, the federal government may even have difficulty borrowing funds at an affordable interest rate, preventing it from effectively responding.
“Large debt will put America at risk by exposing it to foreign creditors. They currently own more than half our public debt, and the interest we pay them reduces our own standard of living. The single largest foreign holder of our debt is China, a nation that may not share our country’s aspirations and strategic interests. In a worst-case scenario, investors could lose confidence that our nation is able or willing to repay its loans – possibly triggering a debt crisis that would force the government to implement the most stringent of austerity measures.
“If we do not act soon to reassure the markets, the risk of a crisis will increase, and the options available to avert or remedy the crisis will both narrow and become more stringent. If we wait ten years, CBO projects our economy could shrink by as much as 2 percent, and spending cuts and tax increases needed to plug the hole could nearly double what is needed today.
“Continued inaction is not a viable option, and not an acceptable course for a responsible government.”
The above definition of the problem seems clear enough. I’m sure every Senator and Representative read this report a few months back. What can they not understand about their need to address this issue immediately?
In my mind the problem goes deeper than fiscal responsibility or the lack of. Our government is broke. It cannot govern effectively and we all suffer. Business has to operate with great uncertainty as to future economic growth and therefore hesitates to invest in their future. College graduates have to delay their careers since job openings are few. A huge number of employed workers are underemployed. What our government does or doesn’t do affects our daily lives.
So how do we change direction? Many of us were alive to see the Soviet Union come to an end because the people of the Soviet Union no longer consented to its government’s rule. Is the United States on that path? Are we seeing the end to the United States’ economic dominance and world leadership? Are we handing our future generations a future without continuing prosperity?
Let me make a request. I don’t have the answers. I only know how the present state of affairs affects small business and common people and both have seen better times. The great thing about The City Wire is that it allows you to voice your ideas. Hit the “comment” button below and offer a practical idea (versus and ideological idea) on what we could do to change our government in a manner that would insure a brighter economic future for us and for future generations. If change is to happen, the discussion and idea creation has to begin somewhere. Let’s start here.
About Potts
David Potts is a certified public accountant also accredited in business valuation. Owner of Potts & Company, Certified Public Accountants for more than 25 years, his practice focuses on small and medium size businesses and their owners in the areas of taxation, accounting and bookkeeping, business valuation and business advisory services. He is a Fort Smith native and a graduate of the University of Arkansas. You can follow more of his thoughts at ThePottsReport.com. Although every effort is made to provide you accurate and timely tax information, it is general in nature and not specific to your facts and circumstances. Consult a qualified tax professional to discuss your particular case.
Also, feel free to e-mail topic suggestions or questions to [email protected]