“How did you go bankrupt?
“Two ways. Gradually, then suddenly.”
― Ernest Hemingway, The Sun Also Rises
The pace of the nation’s gradual pathway to fiscal ruin became a little more sudden last week with news that the rating agency Moody’s was downgrading U.S. debt one notch below its highest rating of triple-A.
The tendency may be to downplay this. After all, Standard & Poor’s did the same thing way back in 2011, and Fitch did so in 2023. And after each, the sun still rose, the dollar remained strong and life went along blissfully.
But that would be a mistake. With the federal debt-to-GDP ratio well above 100%, it ought to serve as a wakeup call.
Bipartisan commission needed
The time has come for a new bipartisan commission to be charged with drafting a workable, compromise solution to overspending. It should be similar to the Simpson-Bowles commission 15 years ago, only with the requirement that it reach a united solution that must be voted on by Congress.
It must be bipartisan because this problem transcends politics. Every American would be affected if the nation no longer could pay its obligations.
In downgrading the nation’s credit rating, Moody’s said it doubted Congress would present a plan that would lead to real debt reduction. That’s an intelligent assessment based on observations. The commission’s ultimate goal should be to reverse this perception and inject confidence into markets and the minds of investors.
There may not be much time.
Point of no return
Locals familiar with the Niagara River know that the Grand Island North Bridge is the point of no return before the deadly Niagara Falls. The water may seem relatively calm, but currents build beyond that point, making it hard even for motorized boats to return to safety.
It pays to be aware of the signs and warnings, and elected officials have had plenty of each for years now.
No one knows the exact point of no-return for runaway debt, but when the nation reaches it investors will lose faith in the nation’s ability to pay its debts, interest rates will rise, the Federal Reserve will print money to stimulate inflation and reduce the cost of retiring loans, and unemployment will become common.
The University of Pennsylvania’s Penn Wharton Budget Model predicted this would happen at about the time the national debt equals 200% of GDP, and said when this happens, “no amount of future tax increases or spending cuts could avoid the government defaulting on its debt whether explicitly or implicitly.”
Adding more debt
Against this backdrop, Republicans in Congress are debating a budget proposal that many economists across the political spectrum, including the Yale Budget Lab, say would add more than $3 trillion to the problem, above and beyond what already is projected.
It doesn’t attempt to reform Social Security, the largest annual government expense, or Medicare and military spending, which aren’t far behind.
That $3 trillion estimate assumes the tax cuts and adjustments in the budget will expire at the end of Trump’s term. If they continue, which is likely, the added debt would be much higher.
The proposal, backed by President Trump, would cut about $1.6 trillion in spending, notably including changes to Medicaid. But it would add spending for border control and defense, while reducing revenues by extending previous tax cuts and removing taxes on things such as wages from tips and overtime.
Supporters say the plan would spur economic growth that would erase deficits with new revenues. The prudent move would be to cut spending, stimulate economic growth and work on retiring today’s debt, instead.
No alternative exists
Unfortunately, there is no acceptable alternative. Democrats are not offering a plan that is more austere.
Some hardline conservatives have pushed back on the proposed bill, demanding more cuts, but it was unclear Tuesday if they could succeed. The House Budget Committee passed the bill over the weekend.
The Simpson-Bowles commission, convened in 2010, produced a workable solution that included spending cuts and targeted tax hikes. But it died because of a lack of political will.
The national debt was $12 trillion at the time, and the nation had just experienced the great recession.
If today’s politicians can’t finally get serious about corralling spending after a downgrade by three rating agencies, the results might be much more sudden and drastic some day soon.