Observations regarding S&P’s Downgrade of America’s AAA bond rating.
They say the worst news in Washington is dropped on Friday afternoon. Yesterday was no different as Standard and Poors’s decided to downgrade America’s AAA bond rating.
While many in the political establishment (that includes many of us activist) view what may be profitible for the next election, businesses look for stability and solvency to ensure a return on their investment.
As a result I believe the following observations are important to note going forward:
* Republicans offered not one (cut, cap and balance), but three plans which would cut in excess of the 4 trillion requested by S&P. This included Paul Ryan’s plan (~7 trillion) and Senator Coburn’s 9 trillion dollar reduction plan.
* Gang of Six technically reaches the magic number, but includes trillions of dollars in tax increases which offers businesses zero incentive to bring jobs or investment back to the United States.
* Democrats still refuse to provide any sort of long term deficit reduction plan outside of repealing the Bush era tax rates.
* Brinksmanship was just as much as a determining factor as the deficit its self. For those who argue conservatives could twist arms better after the August 2nd date, S&P disagree and cites such gamesmanship as a core reason as to why AAA could not be retained:
The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy.
Taking the budget to the edge makes investors and business people nervous. It adds unpredictability and concerns those who might seek to or invest in our bonds.
To be clear, I am not advocating folding like a cheap suit and implementing tax increases as Democrats sought. That is wrong.
However, to intentially want to shut the government down and even appear to threaten the situation does more harm than good. This includes the United States Senate refusal to pass a budget for in excess of 800 days or President Obama’s refusal to propose any sort of plan.
*No real structural changes were made in the budget agreement proved very costly. While obvious for many of us, at the heart of the rational for the decision to downgrade, was the fact no real changes were made to ensure the solvency of entitlement programs.
Despite this year’s wide-ranging debate, in our view, the differences between political parties have proven to be extraordinarily difficult to bridge, and, as we see it, the resulting agreement fell well short of the comprehensive fiscal consolidation program that some proponents had envisaged until quite recently. Republicans and Democrats have only been able to agree to relatively modest savings on discretionary spending while delegating to the Select Committee decisions on more comprehensive measures.
Any real reform, such at the Ryan plan or cut, cap and balance address these core concerns and provide sound fiscal policy which addresses such issues. Without reforming entitlement spending investors will continue to look at our bonds with doubt whether or not we can pay them back.
* Most importantly, poor economic growth matters greatly. While the report notes that Democrats desire to increase taxes on “upper income earners” would bring in 950 billion over ten years, it is equally important to note tax revenues are a full 3.5 percent below the Bush years and account for 300-400 billion a year.
The key element here is not just the recession, but the core cause of why businesses are not re-investing. With the passage of Obamacare and the Dodd-Frank act, the cost doing business increases greatly. Combined with Democrats current threats to increase taxes, it dramatically depresses any optimism or opportunity for investment.
While entitlement reform is key to any long term budget deal, the environment for businesses to be able to make money and invest here must be changed.
If elected officials truly seek to tackle debt or the deficit under any plan, the economy must grow. Businesses must feel comfortable investing in people and resources.
As I’ve noted before, businesses small and big need certainty and encouragement that the money they spend will return as a net positive. If the government’s policy is counter to this basic need, then the economy will not grow and our yearly deficits will only grow larger.
Simply put, Marco Rubio is correct when he stated that the system needs more tax payers as a pose to more taxes.