AAA USA credit rating at risk

Long before the current financial crisis, nearly two years ago, a
little-noticed cloud darkened the horizon for the US government. It
was ignored. But now that shadow, in the form of a warning from a top
credit rating agency that the nation risked losing its triple A rating
if it did not start putting its finances in order, is coming back to
haunt us.

That warning from Moody’s focused on the exploding healthcare and
Social Security costs that threaten to engulf the federal government
in debt over coming decades. The facts show we’re in even worse shape
now, and there are signs that confidence in America’s ability to
control its finances is eroding.

Prices have risen on credit default insurance on US government bonds,
meaning it costs investors more to protect their investment in
Treasury bonds against default than before the crisis hit. It even,
briefly, cost more to buy protection on US government debt than on
debt issued by McDonald’s. Another warning sign has come from across
the Pacific, where the Chinese premier and the head of the People’s
Bank of China have expressed concern about America’s longer-term
credit worthiness and the value of the dollar.

The US, despite the downturn, has the resources, expertise and
resilience to restore its economy and meet its obligations. Moreover,
many of the trillions of dollars recently funnelled into the financial
system will hopefully rescue it and stimulate our economy.

The US government has had a triple A credit rating since 1917, but it
is unclear how long this will continue to be the case. In my view,
either one of two developments could be enough to cause us to lose our
top rating.

First, while comprehensive healthcare reform is needed, it must not
further harm our nation’s financial condition. Doing so would send a
signal that fiscal prudence is being ignored in the drive to meet
societal wants, further mortgaging the country’s future.

Second, failure by the federal government to create a process that
would enable tough spending, tax and budget control choices to be made
after we turn the corner on the economy would send a signal that our
political system is not up to the task of addressing the large, known
and growing structural imbalances confronting us.

For too long, the US has delayed making the tough but necessary
choices needed to reverse its deteriorating financial condition. One
could even argue that our government does not deserve a triple A
credit rating based on our current financial condition, structural
fiscal imbalances and political stalemate. The credit rating agencies
have been wildly wrong before, not least with mortgage-backed
securities.

How can one justify bestowing a triple A rating on an entity with an
accumulated negative net worth of more than $11,000bn (€8,000bn,
£7,000bn) and additional off-balance sheet obligations of $45,000bn?
An entity that is set to run a $1,800bn-plus deficit for the current
year and trillion dollar-plus deficits for years to come?

I have fought on the front lines of the war for fiscal responsibility
for almost six years. We should have been more wary of tax cuts in
2001 without matching spending cuts that would have prevented the
budget going deeply into deficit. That mistake was compounded in 2003,
when President George W. Bush proposed expanding Medicare to include a
prescription drug benefit. We must learn from past mistakes.

First, Washington is about to embark on another major healthcare
reform debate, this time over the need for comprehensive healthcare
reform. The debate is driven, in large part, by the recognition that
healthcare costs are the single largest contributor to our nation’s
fiscal imbalance. It also recognises that the US is the only large
industrialised nation without some level of guaranteed health
coverage.

There is no question that this nation needs to pursue comprehensive
healthcare reform that should address the important dimensions of
coverage, cost, quality and personal responsibility. But while
comprehensive reform is called for and some basic level of universal
coverage is appropriate, it is critically important that we not shoot
ourselves again. Comprehensive healthcare reform should significantly
reduce the huge unfunded healthcare promises we already have (over
$36,000bn for Medicare alone as of last September), as well as the
large and growing structural deficits that threaten our future.

One way out of these problems is for the president and Congress to
create a “fiscal future commission” where everything is on the table,
including budget controls, entitlement programme reforms and tax
increases. This commission should venture beyond Washington’s Beltway
to engage the American people, using digital technologies in an
unparalleled manner. If it can achieve a predetermined super-majority
vote on a package of recommendations, they should be guaranteed a vote
in Congress.

Recent research conducted for the Peterson Foundation shows that 90
per cent of Americans want the federal government to put its own
financial house in order. It also shows that the public supports the
creation of a fiscal commission by a two-to-one margin. Yet Washington
still sleeps, and it is clear that we cannot count on politicians to
make tough transformational changes on multiple fronts using the
regular legislative process. We have to act before we face a much
larger economic crisis. Let’s not wait until a credit rating
downgrade. The time for Washington to wake up is now.