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Wednesday, September 12, 2012

Fiscal Cliff of Cuts and Taxes: Downgradable?

In anticipation of the “fiscal cliff” due to go into effect for ten years from January 2013, Moody’s Investor Service served notice to Americans and the U.S. Government that the sequestration of $1 trillion over the ten years and the immediate end of all of the Bush Tax Cuts would mean a downgrade in the credit rating of the U.S. Government. The New York Times reports that the rating agency, like S&P before, “emphasized political dysfunction more than soaring government debt. The agency said that Washington must come to agreement to head off billions of dollars in simultaneous tax increases and spending cuts scheduled to begin in January—and to put the government on a sustainable fiscal trajectory. Only then would the United States keep its AAA rating.” Moody’s pointed to the need for “specific policies that produce a stabilization and then [a] downward trend in the ratio of federal debt to G.D.P. over the medium term.” There is reason to question whether the agency was being dogmatic (i.e., too arbitrary), even (God forbid) political, in its demands.

Moody's Investor Services     (Reuters)
Significant reductions in spending over ten years, plus an immediate end of the tax-rate reductions that George W. Bush had signed into law, would presumably produce a downward trend in the ratio of federal debt to G.D.P. over the medium as well as long term unless the ensuing recessionary impact would be such as to counter the effect from the sequestration and tax increase. Economists could tell us what the impact on G.D.P. would likely be. The negative impact on the debt would presumably be muted by the sequestration on the spending side, though tax revenues would undoubtedly be less, other things equal.
If the “fiscal cliff” would produce a downward trend in the ratio of U.S. debt to the G.D.P. of the union, then the agency’s insistence on “specific policies” is not necessary. That is to say, if the ratio’s trend is favorable in spite of the “political dysfunction,” then the political point that such dysfunction is not desirable can and should be regarded as an aside rather than a requirement.
To be sure, the responses of Congressional leaders that the failure to prevent the “fiscal cliff” is all the other guy’s fault reaffirms the sense at the rating agency that the elected representatives are not mature enough to manage such a debt-load. The American people can be blamed for having elected such a mentality to high office. Even so, the intentional “roadblocks by design” in the U.S. Government are not “political dysfunction.” Rather, the delegates at the federal constitutional convention in 1787 intended that such a design “push” as much of the lawmaking as possible to the system of state legislatures (i.e., one of the two systems of government in the federal system). To demand that we toss off separation of powers or that more than one political party can have a role in the U.S. Government is not to demand that we stop the “political dysfunction.” Rather, a wholesale re-design of the American constitutional system would be necessary. Surely a credit-rating should hinge on such a demand.
Indeed, the $16 trillion (and counting) federal debt can be taken as a manifestation of the failure of the federal constitution’s design to prevent political consolidation. Since the New Deal especially, the long-term trend has been in that direction. It could therefore be argued that rather than trying to eliminate the “political dysfunction” in Washington, the federal government itself should be tasked with much less, while the states reassume their dual-sovereign functions and residual sovereignty. This, more than anything else, would produce a downward trend in the ratio of federal debt to the economic output in the U.S. as a whole (though state debt might increase if the increase in power is not managed well fiscally).
Absent a realignment of federalism, Moody’s insistence for “specific policies” in lieu of a downward trend produced by the “fiscal cliff” may very well be dogmatic, or arbitrary, from the standpoint of reducing the federal debt-load (relative to G.D.P.).


Jonathan Weisman, “Moody’s Warns That U.S. May Face Debt Downgrade,” The New York Times, September 12, 2012.