After the Downgrade

Standard & Poor’s has dropped the hammer, although it seems to have given itself a sore thumb in the process. U.S. Treasury securities are no longer a risk-free asset. Who is to blame?

Generally, I roll my eyes when people take the balanced approach–you know, “there’s plenty of blame to go around,” that sort of easy wisdom. But in this case, I’m afraid it’s true.

The Democrats are to blame because they are liars. They refuse to acknowledge that there is a fiscal crisis at hand because of entitlement spending, insisting on the ridiculous claim that raising taxes on “the wealthy” will fix everything. That is utterly false.

The Republicans are to blame because they are fools. They do not seem to understand that the only correct measure of the fiscal burden is spending, not taxes. If spending is not cut, then tax cuts today simply mean trouble tomorrow. Businesses are forward looking, and while they’ll be glad to pocket the revenue from a tax cut now, they’re damn well not going to invest in equipment or permanent, full-time workers when they’re pretty sure that taxes will have to be raised sooner or later. That’s one reason why U.S. firms are hoarding cash right now. Everybody knows that some kind of tax hikes are coming, either as payroll-tax increases or health-insurance mandates or income-tax “reform.” But nobody knows exactly what’s going to happen when the Congress and the President finally face reality, so uncertainty reigns and the economy stagnates.

There is only one fiscal-reform package that makes sense, both in terms of getting the job done and being politically feasible. That is to combine the entitlement-reform part of the Ryan Plan with a return to the Clinton-era income-tax rates. Those tax increases are laughably inadequate to deal with our massive deficits, but they should suffice to reveal the Democrats as the liars they truly are. Once that essential point has been established, it will be clear to all that only fundamental, structural reform of Social Security and Medicare will resolve our fiscal crisis.

This deal would give each side something that it could, and should, consider a victory. There would also be a lot of shared political grief to bear. That’s why I think it’s a good compromise. Now, lots of compromises–such as the recent debt-ceiling deal–are not very good policy. This one is. It would put us on a sound fiscal path for the long term, and our AAA rating would be restored immediately and justifiably.

Is the U.S. electorate mature enough to make this happen? Let’s hope so.

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