There “has been a steady deterioration in standards of governance over the last 20 years,” read an undeniable observation by the credit-ratings agency Fitch on Tuesday. That is particularly so “on fiscal and debt matters,” it continued. “The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management.” These conclusions around America’s “complex budgeting process” led the agency to downgrade the United States from AAA level to just AA+.
The reaction from the Biden administration and its allies to this unfortunate development has been two-fold. It was met first with outrage. Treasury Secretary Janet Yellen called Fitch’s decision both “arbitrary” and “based on outdated data.” White House press secretary Karine Jean-Pierre denounced the move as a belated response to metrics that have recovered somewhat in recent years. Former Treasury secretary Larry Summers called Fitch’s maneuver “bizarre and inept” based on its own admission that the dollar’s status as the global reserve currency provides “the government extraordinary financing flexibility.”
The second reaction to this development contradicts the first. Of course America’s credit rating was downgraded, Democrats and their supporters insist. The GOP so often plays a reckless game of chicken with America’s debt ceiling that their brinkmanship was invariably going to invite consequences like these.
“I’m mad as hell,” economist Justin Wolfers declared, “because it’s the direct result of a multi-decade campaign of fiscal vandalism and political sabotage by Republicans, and the rest of us are left footing the bill.” Democrats on the House Ways and Means Committee agreed. “This is the result of Republicans’ manufactured default crisis,” they insisted. “Republican extremism and recklessness has undercut the American economy,” said the Democratic ranking member on the House Budget Committee, Representative Brendan Boyle (Pa.). Senate Majority Leader Chuck Schumer appeared to agree, adding that “House Republicans’ reckless brinksmanship and flirtation with default has negative consequences for the country.”
So, Fitch’s downgrade of America’s credit rating is hopelessly flawed and predicated on a misreading of the financial landscape and, also, a perfectly justified response to Republican negligence.
The Democrats’ first reaction is more defensible than their second. As a chart-filled analysis of Standard & Poor’s 2011 decision to raise America’s credit risk, Nate Silver compellingly demonstrated that credit-rating agencies tend to overread ephemeral political events. But there can be no doubt that the semi-regular standoffs in Congress over hikes to the national borrowing limit are one of those events that are easy to read as tremors that forecast a fiscal earthquake. That’s hard to argue against, but not because the American political class is responding in fractious ways to America’s growing debt obligations. It’s America’s growing debt obligations that are the problem here.
America’s political projects are financed by deficit spending, and they have been for decades. In recent years, the country spent trillions in borrowed cash on the government’s essential obligations, emergency disaster relief, and pet political projects. Servicing the nation’s interest payments alone ballooned by 35 percent between 2021 and 2022. Interest threatens to become America’s single largest nondiscretionary obligation — a menace hastened by rising interest rates, which were a necessary response to rising rates of inflation exacerbated by the federal government’s efforts to stimulate consumer demand. The Congressional Budget Office projects that Social Security will be unable to meet its obligations early in the next decade. Medicare’s Hospital Insurance Fund is projected to become insolvent by 2028. Spending is the problem.
America’s debt obligations are rapidly becoming unsustainable. The fact that one of America’s major political parties responds to that prospect with some measure of urgency is not “reckless brinkmanship” or “fiscal vandalism.” It is an effort to contend with a set of undesirable circumstances that no amount of table pounding can dismiss.
These inescapable fiscal realities will become a crisis soon enough. The sooner the political class starts treating them like a crisis, the better.