In the week since President Obama signed the debt limit deal into law, stock prices have become highly volatile, Standard & Poor’s dropped its U.S. credit rating a notch below AAA, and political maneuvering began over the special congressional committee that will be charged with finding most of the deficit reduction promised in the new legislation.
The debt deal fell far short of what is needed to put the country on a sustainable path, making the familiar Washington mistake of focusing mostly on discretionary spending. In many ways, Concord Coalition Executive Director Robert L. Bixby writes in a new blog posting, the deal seems “specifically designed to avoid the two greatest fiscal challenges – entitlement and tax reform.”
On Monday pessimism swept through global financial markets, with the Dow Jones Industrial Average dropping 635 points. This followed substantial market losses last week amid worries about the European debt crisis, the faltering U.S. recovery and excessive partisanship in Washington.
Standard & Poor’s announced late Friday that it had dropped the U.S. government’s credit rating to AA+, saying the debt deal was insufficient. This week it also lowered credit ratings for government-backed entities, including mortgage giants Fannie Mae and Freddie Mac.
Two other ratings agencies, Moody’s and Fitch, have also expressed great concern about the nation’s fiscal path but have not downgraded the government’s credit rating.
On Monday President Obama sought to build public confidence, saying the country’s economic problems were “eminently solvable” and that he hoped the S&P downgrade would create “a new sense of urgency” about fiscal reform.
But if those who are named to the new Congressional Joint Committee on Deficit Reduction decide to take their mandate seriously, Bixby says, “they will likely have to make decisions in the public interest that will not sit well with the party leaders who appointed them.”
Fortunately, the committee -- with a target of at least $1.5 trillion in additional deficit reduction over 10 years -- need not start from scratch. Bixby points out that the president’s fiscal commission and other bipartisan groups have created templates for a “grand bargain” that would take a more comprehensive approach to fiscal reform. These proposals, he notes, “don’t pretend there is a magic solution that will preserve everyone’s favorite programs and simultaneously cut taxes.”