Freedomnomics

Article published Tuesday, April 19, 2011, at Fox News.

Don't Single Out Standard & Poor's for Being 'Political' Because the Agency Looked at Our Credit Rating

By John R. Lott, Jr.

If you think it's hard now to balance the budget, just wait until our credit rating gets trashed. Mondayís warning from the Standard & Poorís rating agency -- that the U.S. governmentís credit rating could be revised downward -- produced a firestorm in Washington. Republicans called it a "wake-up call," while the Obama administration's chief economist, Austan Goolsbee, lambasted Standard & Poorís actions as purely "political."

Credit ratings arenít just a matter of national pride. Less dependable, risky borrowers have to pay a higher interest rate to get people to buy their bonds. Right now the our government only has to pay 3.4% annual interest to borrow money for 10 years. But for countries who have had trouble paying their debts, interest rates are much higher. Portugal is forced to pay 9.1%Mondayís warning, Ireland 9.8%, and Greece 14.6%.

But America's financial problems are catching up to what these other countries face all too quickly. Portugal's government debt equals 83% of its GDP. Ireland is at 94%. Greece is again way up there with 144%. With this year's U.S. deficit at about 10% of GDP and with no improvement in sight, Standard & Poorís warns that the "net general government debt would reach 84% of GDP by 2013."

Having a hard time paying off the debt may lower credit ratings, but the resulting higher interest payments make it even more difficult to find the money to meet obligations. With the U.S. currently owing $14.3 trillion, each one percentage point increase in interest rates implies another $143 billion in interest payments every year. Even a few percentage points increase in interest rates would amount to half a trillion dollars more each year in spending, a considerable amount. And if we were forced to pay the same 9.8% as Ireland, we would face additional payments of about a trillion dollars.

Standard & Poorís warning was issued simply because it doubts that Americans will get these deficits under control. The report notes: "we see the path to agreement as challenging because the gap between the parties remains wide."

Unfortunately, they are right. President Obama's approach has been to publicly to call for spending controls while ruthlessly fighting behind-the-scenes even against the tiniest cuts in spending.

He refused to cut anything in this year's budget. Then his first attempt at a budget for 2012 made commitments that ended up increasing deficits over the next 10 years by $1.2 trillion.

His second attempt last Wednesday did little better, and was filled with gimmicks, commissions that kick any decisions down the road when it might be easier for him to ignore them.

The Obama administration appears to have a single-minded determination to stop budget cuts. Last week President Obama demonized Rep. Paul Ryan over his deficit cutting plan. And this week Mr. Goolsbee pooh-poohed Standard & Poorís concerns over Democrats and Republicans agreeing to significant cuts: "we are not that far apart on the number . . . so I don't make too much about it."

To make matters worse, take the administrationís handling of the coming debt limit vote. Republicans want real spending reform and some cuts in spending. On Sunday, Treasury Secretary Tim Geithner claimed that any attempt to load down the bill with spending issues risks scuttling any agreement, pushing the U.S. into default and producing a "depression." He said that failure to pass the bill "would make the last crisis look like a tame, modest crisis. It would have a permanent devastating damage on our creditworthiness as a country."

These statements are about as far over the top as one can go. Failure to raise the debt ceiling simply means that government spending will be strictly limited to the revenue that the government brings in and that no new debt can be issued. That doesn't imply a default. The interest can still be covered; Social Security and Medicare checks can still go out; the wars in Afghanistan, Iraq, and Libya can be paid for; and most other federal operations will still go on. The federal government will have about as much money to spend as it had back in 2004.

Indeed, a failure to increase the debt limit might save us from the very problems that Standard & Poorís is warning about. The Obama administration might scream, but the debt limit would at least temporarily be restrained and hopefully some long-term sanity would be imposed. Standard & Poorís warning really shouldnít be a surprise to anyone. There is politics in the budget debate, but Standard & Poorís isnít the problem. The problem is President Obamaís continued refusal to cut spending.

John R. Lott Jr. is a FOXNews.com contributor. He is an economist and the author of "More Guns, Less Crime (University of Chicago Press, 2010), the third edition of which was published in May.".

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