After the first day of trading following Standard and Poor’s downgrade of the U.S. government’s credit rating, markets around the world tumbled well into the red for the day. In particular the U.S.-based Dow Jones Industrial average fell over 630 points, losing 5.55% of its value in a single day.
This is the second drop of over 500 points in less than a week, the biggest dip in value in U.S. stocks since the 2008 financial collapse. While stocks recovered on Friday following the latest U.S. jobs report, S&P released its downgrade after the markets closed for the weekend, reducing the government’s AAA credit rating to AA+. S&P cited the political impasse in Washington, the “rising public debt burden,” and the fact that the debt ceiling deal reached by the President and Congress last week “falls short of the amount that [they] believe is necessary to stabilize the general government debt burden by the middle of the decade.” (Read the full report here.) Naturally, the economic pains felt in the United States and around the world are not purely a result of this downgrade, but the downgrade itself is far from negligible.
While the motives of credit agencies can always be questioned, what is unquestionable is this: despite the cries of foul coming from Washington, investors are beginning to lose faith in the ability of the United States of America to repay its public debts.
However, these concerns do not even necessarily stem from a fear of actual default. As former Chairman of the Federal Reserve Alan Greenspan accurately pointed out in an interview on NBC’s Meet the Press, “The United States can pay any debt it has because we can always print money to do that, so there is zero-probability of default.”* Instead, the fear is the fact that “we can always print more money,” because doing so to pay off our debts would devalue the U.S. dollar so immensely that investors would actually take a loss and currencies around the world would begin to collapse (as many foreign currencies hold the U.S. dollar as a reserve).
As a result, the President took to the media today in an attempt to push for policies that he feels are economically beneficial. Primarily, the President urged Congress to extend his 2% payroll tax cut into 2012, yet another example of his philosophical pragmatism rather than his reliance on any lasting ideals, and to create a further extension of unemployment benefits. Sadly, these policies are unlikely to assuage America’s economic fears, and they certainly will not aid in reducing the federal debt.
So long as the two percent tax cut is not extended to employers as well as employees, then it is unlikely to produce jobs. While the President and other adherents to Keynesian economics argue that consumers and spending are the motive forces behind an economy, the truth of the matter is that it is the producers that drive the economy. Unless employers are freed from the tax burden that already weighs them down, then any increase in economic efficiency and productivity will be marginal, and the number of unemployed workers and discouraged workers in this nation will remain stagnant.
Furthermore, if the cuts in Social Security taxes are not matched with greater cuts in the entitlement itself, the U.S. deficit will only increase further as more of the “Baby Boomers” enter retirement. S&P is unlikely to reverse its credit rating at such a prospect. Increasing unemployment benefits, another popular move amongst Keynesians, would only exacerbate America’s debt worries.
Essentially, if the President wants to revitalize the economy, yes, taxes should be cut but across the board. If he wants to restore confidence in America’s credit, he must cut spending rather than allowing it to increase.
Despite the cries from the Progressives in the U.S. government that the measures proposed by the Tea Party in the recent debt ceiling and fiscal debate went too far, one thing is clear – S&P is quite sure that the recent plan passed by those same Progressives simply did not go far enough.