And so Standard & Poor’s finally did it. Yesterday was the day when a credit rating agency put a large, somewhat menacing, question mark over the sustainability of US debt. And yet the agency has surely failed to get to the nub of this particular matter.
There are no shortages of press reports this morning saying ‘told you so’. The UK government has even managed to accumulate political capital out of the move. You may recall, the UK’s own credit rating was put in doubt back in May 2009, but has since, by dint of all those cuts, been put back on the best possible footing. “So well done us,” say George Osborne and his fans.
And now, they say, the Obama administration must learn the lesson of the Cameron government, and start implementing cuts.
It’s the three Cs. Cut, cuts and cuts. For the US they are surely unavoidable.
But as ever, the credit rating agencies are behaving like belligerent children who, having lost their favourite toy, look around trying to put the blame on anyone who falls within their line of sight.
The S&P timing was simply ridiculous. For the first time since the financial crisis erupted on the world-stage, both Republicans and Democrats have begun to agree the deficit needs to be pulled back. For the first time in quite a while, the Obama administration has been making noises about reining in its debt. It was as if the agency reacted to the US government acknowledging it has a debt problem on its hands by saying “Err …, what was that? Err … US debt … Let’s see … oh yes, it is high, isn’t it, we had better put out a warning.”
But then again, the timing in May 2009 was pretty bad, too. The UK was in election fever. What would the new government look like? And then slam, our triple-A credit rating was put in doubt.
But credit rating agencies should not engage in politics.
The UK was not close to bankruptcy in May 2009. In fact, we had no serious problems at all in funding our debt at that time. It is the same with the US now.
The problems in the UK and the US are long term. And whether the solution lies in cutting public spending, thereby creating space for the private sector to expand into, or whether it lies in using fiscal stimulus to inject life into the economy, is open to debate.
You may not agree with the concept behind Keynesian stimulus, but you must accept that some argue it is a legitimate economic policy. Indeed, some argue that the purpose of fiscal stimulus is to get growth moving again, so that tax receipts will rise, benefit payments will fall, and public debt will then improve. In other words, some say that government spending in the short term is an effective way to reduce government debt in the long term.
There is an argument to be made for saying that all the problems with the US and the UK economies are because companies are saving too much, and that therefore governments need to borrow from this pool of savings to stimulate the economy.
The real problem in the US lies with its healthcare, and its unwinding will take decades. Spending on healthcare is set to balloon. This can only be fixed by doing something very dramatic. For example by accepting that healthcare entitlements need to fall, or by pushing the retirement age up much higher, or by getting people to pay much higher taxes.
The George Dubya Bush regime implemented tax cuts which are still in force. Alan Greenspan now reckons they need to be restored to the levels seen during the Clinton era, and he is probably right. To a large extent, Americans saved the extra money they received in tax cuts. So all the US government is doing is helping its citizens save, and then spending that money.
The US is not facing up to the bigger problem in waiting; nor are the credit agencies; and nor are the markets.
These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees