Standard & Poor’s Downgraded US Outlook – America in Decline Accepts “Negative” as “The New Normal”

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by Paolo von Schirach

April 20, 2011

WASHINGTON– The US sovereign debt outlook was just downgraded from “stable” to “negative” by Standard & Poor’s; but this downgrading has been dismissed by the White House as a non event. It has been explained away as an (inappropriate) political judgement by the credit rating group on the difficulties encountered by Democrats and Republicans about reaching an agreement on spending, taxes and raising the debt limit. The White House point is that these “political issues” have nothing to do with the fundamentals driving US fiscal problems. So we are told that what politicians in charge of fiscal policy do or do not do on spending and revenue apparently does not have any impact on national accounts).

Not to worry, America

And the S&P move came in the wake of a critical International Monetary Fund, (IMF), report in which the US has been chastised for not acting promptly in order to rebalance its federal debt. Meanwhile, now it takes 1.43 dollars to buy a Euro; last year it took 1.30. So the US dollar continues to slide.

But the message from the White House? Hey, not to worry, America. The sun is shining. The US, as always, is strong and invincible. What S&P and the IMF are worried about are just minor squabbles and they will be resolved in no time, as they always are. Besides, who would ever doubt the creditworthiness of the US? After all, America is still by far the largest economy in the world.

Dangerous indirect message: debt is fine

This way to “explain” and essentially dismiss a significant grade change from “stable” to “negative”, signaling S&P’s diminished confidence in America’s ability to take care of a chronic and deteriorating fiscal crisis is another bizarre exercise in denial. (“No, I swear to you, I do not have a drinking problem. The bottle in my closet? Not mine, really”). And this denial, while politically expedient for an incumbent president Barack Obama who just embarked in his 2012 re-election campaign, reinforces the popular feeling that, more or less, things are under control.

So, here we are in the worst fiscal predicament since WWII. Our national debt outlook has just been downgraded to “negative” and we are told that all is well. Politics aside, the perverse result of all this is to convince America that high deficits and unprecedented public debt are actually fine. The implicit, insidious message is that Banana Republic finances are the “new normal” for the US.

The issue is not today’s solvency

True enough, nobody is questioning America’s solvency today. But the world is looking at a progressively deteriorating US fiscal picture, with unprecedented levels of deficits, (now 10.6% of GDP, an astounding record), and parallel national debt increases, with the national economy doing at best so-so. And, in all this, no consensus on any new policy, let alone the right policy. So: high deficit, projected explosion of entitlement programs costs, (due to the retirement of the baby boomers), and political paralysis in Washington. And S&P taking notice of the above is “political interference”?

At some point, a risk premium

At some point, although nobody knows when, assuming no substantive policy changes, the world will start questioning America’s future solvency. This will not happen all of a sudden. It will be an incremental process. Most likely, in the future, creditors will start asking for an interest rate premium as an inducement to keep buying US Treasuries. And that will be the start.

Progressive decline

But the point here is not to indulge in doomsday prognostications about a US financial catastrophe that may never happen as “an event”. Indeed, it is not foreordained that the US will go down in flames in one big epic economic disaster after which all of America will wake up destitute. It hardly ever happens this way.

The most likely route is progressive decline. Look at other countries that declined. Spain declined. France declined. Yet, they did not disappear from the face of the earth. They are there. But smaller, less relevant and relatively poorer. Likewise, Great Britain was the great world power of the XIX Century. Today it is a vastly diminished nation. But Great Britain did not sink into the North Atlantic. You can still visit London. But the UK is there as a severely downsized power, with fewer resources and a lot less leverage and influence.


And Japan? Well, similar story. After its roaring 1980s, Japan imploded. And now it coasts along, still important; but diminished. Aside from the recent terrible earthquake-tsunami tragedy, the country carries on. But it carries on with an enormous national debt overhang patiently carried by an aging, mostly risk averse, population. Bright future ahead for Japan? What do you think?

Nations get used to decline

But the real lesson to be taken from these historic examples is that decline, unlike a sudden crisis, is hardly ever understood as it is happening. And this is because it is usually incremental and so governments and people get used to it. The aberration progressively becomes normal.

Argentina had its default

And even if we look at countries that have had to face sudden financial earthquakes, this is not “the end”. Look at Argentina. It went to hell; but it came back, sort of. It had a massive public debt default. And guess what. It recovered. Sure enough, given the size of the wreckage, lots of people were hurt, badly. But the country did not disintegrate. There was no civil war. The Argentina default is no longer talked about. It is history. That said, the massive default left scars. Indeed, while the US should worry about keeping its coveted AAA credit rating, Argentina has to make do with its puny B. Financial disasters do have consequences. (And in America’s case a much milder lowering from AAA to AA would already be a disaster).

America getting used to decline

So, the real problem for America is not that “we are facing the end”. The real problem is that in this land of congenital optimism, where it used to be axiomatic to state that “tomorrow will be better than today”, we are progressively becoming comfortable with a –permanent, I would argue– diminution of our overall condition. With the complicity of national leaders, negative developments are explained away or ignored, while bad polices do not stir any outrage within American society.

The “new normal” for America

In America, the new normal is:

–A Federal Government severely in debt, year after year, not because of the stimulus plan or the TARP banking rescue measures, but because of built-in, structural increases in entitlement programs for which there is no revenue.

–For America to have a federal deficit that is 10.6% of GDP, while in France it is 7%, in Canada it is 5.5%, in Australia it is 4.6% and in Germany it is 3.3% .

–A crazy health care system driven by “fee for services”, with doctors routinely over prescribing anything, confident that the insured patient will not object to “more of everything”.

–No public outcry about the above sky rocketing health care costs that have no match in any other developed country. No policy maker saying that this is an anomaly that needs to be corrected.

–The US Congress routinely failing to approve a budget for the next fiscal year by the due date of September 30.

–A cumbersome, incomprehensible, federal tax code, with loopholes, shelters and exemptions designed to favor those with enough resources to game the system to their advantage. And just navigating the code costs billions of dollars every year.

–One of the highest corporate tax rates in the world. Maybe it is alright for large multinationals that can circumvent it; but bad for small companies, and bad for economic growth.

–An obesity epidemic that will condemn millions of Americans to be chronically ill in their maturity and old age, adding hundreds of billions to our health care costs.

–To have an unresolved illegal immigration issue whereby 12 to 14 million peope live in America with no status.

–A woefully inadequate public education system that condemns generations of young people to be marginalized, as they lack not only skills and knowledge but often basic literacy.

–National teachers unions claiming that things are fine and that any attempt to change the status quo is part of a mean spirited anti-union plot.

–No serious energy policy in a country dependent on (more and more expensive) imported oil for 60% of its consumption.

–Air traffic controllers asleep on the job and pilots landing unassisted.

–Major airlines outsourcing airplane maintenance to contractors who cut corners, do not do their inspections and use non certified parts.

–For president Obama to announce grand plans for a future network of fast rail connections in America without any serious money to fund it.

–To sell to the public the corn ethanol program, in truth just a disguised agricultural subsidy to corn growers, as a major achievement in renewable energy policy.

With the old American mind set, none of this would be tolerated

If America had retained its old public policy standards, none of this would be acceptable. But today it is, indeed, “the new normal“. Whatever the Washington loud Republicans-Democrats partisan fights, The Nation as a whole tuned ”the debates” out, while it progressively accepted that mediocrity, the consequence of all these and other policies, is alright for the US.

Sub standard is the new standard

As a result, in America, now, sub-standard is the new standard. Being heavily in debt is perfectly fine; while losing ground in the competitiveness race because we are not innovating is also an innocuous development, not deserving further discussion.

If it were not so, then there would be waves of national outrage that would translate into a dramatic change in political leadership and the unveiling of a new course.

Tea Party did not grow into a serious force

While only last year the Tea Party Movement was thought to be the signal of a major turning point, now I am not so sure. Ask the Tea Party members what they are prepared to do to re-balance the national books and you get very disappointing answers, usually focusing on eliminating outrageous but financially negligible programs. Tell the Tea Party people that we have to cut down all the entitlement programs for middle class seniors and see what applause you get. The fact is that they do not know and nobody told them that the problem in Washington is much, much bigger than “fraud, waste and abuse”.

The euphemisms of the “new normal

The truth is that the national leadership managed to create a consensus whereby the bidf mess we are in is gently toned down. For every problem there is a euphemism that will take the bite out of it. A “crisis” is renamed a “challenge”, a “failure” will be your “achievement gap”; a horrible “debt” will be a “revenue shortage”. And “illegal aliens” are now “undocumented workers”.

No outrage

Sure enough some cry out. By they are dismissed as fringes, colorful crackpots, material for sensational cable TV shows, or amiable old uncles who always complain but are really OK people, just like Erskine Bowles and Alan Simpson.

Bowles-Simpson and “The Moment of Truth”

Senior statesmen Bowles and Simpson, co-chairs of the “debt commission” created by president Obama, in December 2010 presented their serious Report –aptly titled “The Moment of Truth”– on what to do about US chronic fiscal imbalances. In an unadorned way, they plainly stated that there is a need to take immediate action on systemic imbalances, now, before it is too late. They presented to president Obama a reasonable menu of recommended policies, supported by a (small) majority of the commission members. A debatable menu, if you want, but doable.

Moment came and went, president Obama ignored it

Well, what happened to “The Moment of Truth”? Nothing. The two senior statesmen got a polite hearing, a good dosage of media attention and probing questions in some serious fora. But the president of the United States –he is the one who actually created the “debt commission” that issued the Report– vaguely nodded and did absolutely nothing. In other words, the US president used the “bully pulpit” to say nothing about the issue of deteriorating US public accounts, after his commission made recommendations for swift action.

And, with this inaction, the public got the unspoken presidential hint: “These are just a few old guys venting steam. Yes, we may have a problem on debt and revenue, but nothing we cannot handle, trust me”.

Paul ”Path to Prosperity” dismissed as “unserious”

Then a month ago came Congressman Paul Ryan and his Republican House Budget Committe proposal titled “The Path to Prosperity” for next Fiscal Year. This plan contains radical reform ideas for Medicare and Medicaid, (more radical than Bowles-Simpson), aimed at seriously transforming the US system providing health care assistance to the poor and the elderly. A radical plan, no doubt, with controversial ideas in it; but not a crazy plan.

This could have been material for debate on fiscal policies. But no; no debate. The president, afraid that he may concede the fiscal reform ground to the Republicans, counterattacked. He dismissed Ryan’s the plan as “unserious” and thus unfit for discussion, while demonizing the Republican proponents as cold hearted cynics who want to balance the national accounts on the back of the elderly, the sick and the poor, while doling out more goodies to the super rich. A balanced and fair characterization, what do you think? And so, instead of the beginning of a debate, we had another exercise in posturing, while the public is fundamentally disengaged because none of this looks serious.

General public tuned out, and no appetite for any reforms

Indeed, in the midst of all this political theatre, the real “news” is that the general public does not want to do much of anything regarding real spending cuts. Opinion polls indicate that Americans do not like the Republican deep cuts bitter medicine; but they do not like much the milder cure proposed by president Obama either. And nobody as yet managed to convince America that we are facing a serious problem.

Translation: middle America is not in this conversation, such as it is. The general public is yet to be persuaded that we have a problem with runaway public spending, most of it due to skyrocketing medical costs. Again, lacking consistent national leadership via a clear message from credible policy makers, the American anomaly of forever growing debt is now “the new normal” and most people are not clamoring for corrective action. With no consensus on a credible new policy approach, very few believe that there is a real problem out there. Americans continue to believe that we can have the welfare state more or less as is, while it is alright to pile up debt as the means to finance it.

In the “new normal” fiscal recklessness is fine

In the end, the worrisome conclusion is that –not consciously but rather unwittingly and by default– we have created a new conformism, whereby chronic fiscal recklessness is fine, while national underachievement and eventually decline is normal. The famous historian Arnold Toynbee is often quoted for having written that civilizations are not murdered; rather, they commit suicide. Meaning that “the end” is a self-inflicted wound. And this may be America’s eventual fate.

Toynbee: a sign of decline is uncritical uniformity

But Toynbee also gave us hints about signs of incipient decline: ”Civilizations in decline are consistently characterized by a tendency towards standardization and uniformity“. And this describes America today. The new intellectual uniformity is uncritical acceptance that the current mediocrity is the new standard for America.

Whatever happened to the “can-do” Frontier Spirit of the scrappy pioneers?

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