Reading On The U.S. Debt Downgrade

S&P has downgraded U.S. debt from AAA to AA+. But what does that mean?

Dylan Matthews presents arguments both for why it might matter, and why it won’t. Tyler Cowen shares some quick thoughts (written before the actual downgrade was announced).

My initial thinking is that the AA+ rating should not have a huge impact. The debt situation was not exactly unknown, and very little new knowledge has sipped out. But to my mind the debt crisis really is a crisis, although that was just as true a year ago as it is today. I’ll reiterate that spending needs to be genuinely cut. Probably, revenues must be raised too, preferably by broadening the tax base. Perhaps a gas tax should be considered as well.

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Was Spending Really Cut?

A while back I wrote:

The way they will do it, is to cut spending in the future. Then, after they’ve been re-elected, there is a high probability that the cuts will be cancelled before they actually happen.

According to an excellent article by Will Wilkinson, that appears to be what has happened.

Unless the bill fails, which it might, it looks like our democracy will have raised the debt ceiling, didn’t really cut a thing, passed off responsibility for substantial deficit reduction to a “super committee”, which will either come up with a plan that does not bind the future executive and legislature or will trip a “trigger” that won’t go into effect until after the next election, and then, again, will go into effect only if the government of the future wants it to go into effect.

The piece is full of interesting facts, among them a graph depicting how federal spending will develop under the new bill. Hint: it’s not downwards.

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Should The Debt Ceiling Be Removed?

Thomas Sowell thinks it’s worth considering, writing in the National Review:

The national-debt-ceiling law should be judged by what it actually does, not by how good an idea it seems to be. The one thing that the national-debt ceiling has never done is put a ceiling on the rising national debt. Time and time again, for years on end, the national-debt ceiling has been raised whenever the national debt got near whatever the current ceiling was.

Regardless of what it is supposed to do, what the national-debt ceiling actually does is enable any administration to get all the political benefits of runaway spending for the benefit of their favorite constituencies — and then invite the opposition party to share the blame, by either raising the national-debt ceiling or voting for unpopular cutbacks in spending or increases in taxes.

The idea of a debt ceiling is good, provided that the law creating it is credible. In its American version, clearly it’s not. And it can’t be reformed into credibility either, because what it comes down to is not how the law is written but how it’s treated by the lawmakers.

The law should be repealed, and the debt ought instead to be debated in a more appropriate context: budget negotiations.

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