This week on Facing the Future, we check in once again with Ben Ritz, who directs the Center for Funding America’s Future at the Progressive Policy Institute. Ben has written a number of new pieces recently including one entitled: “Why The Fitch Downgrade Should Be a Wakeup Call to Washington, Even If It’s Wrong.” This piece explored the recent downgrade of the U.S. credit rating by the Fitch rating agency. Ben also wrote recently about the level of investment from the federal government in research and innovation, a year after the enactment of the Chips and Science bill aimed at boosting domestic semiconductor manufacturing. Concord Coalition chief economist Steve Robinson joined me for the conversation.
Earlier this year was the second time since 2011 that the federal government has come close to defaulting on its obligations. After that near catastrophe a dozen years ago, rating agency S&P issued a credit rating downgrade during the heat of the crisis and before President Obama and the Republican Congress struck a deal to avert default. This time, Fitch’s downgrade did not come immediately before or after President Biden and House Speaker Kevin McCarthy struck a deal of their own, but a couple of months later. Among other reasons for downgrading U.S. credit from AAA to AA+, Fitch cited our growing national debt burden, as well as the increasing frequency of political dysfunction putting at risk the full faith and credit of the United States. Ben Ritz says none of these problems are getting better or going away anytime soon.
“These ratings are meant to reflect the probability that an entity is going to make all of its bond payments on time,” said Ritz. “We have seen folks in the [Biden] administration who say the downgrade doesn’t really make any sense. The United States has never missed a bond payment, the government raised the debt ceiling before possibly missing a bond payment this time, and a bunch of economic indicators are positive. The economy is growing, we have low unemployment, we’ve actually had better growth than most of our peers. So nobody really questions the federal government’s ability to make any payments on time in the near future. It seems no more likely to default on its debts than it has been at any other point in the last decade when Fitch has said we’re a AAA country. On the other hand, folks on the Republican side say we’ve had this coming. We’ve not done anything about our fiscal situation, it has continued to deteriorate, and that will create more fiscal pressure over the coming decades, and this is a wakeup call that we do need to get our fiscal house in order. The reality is, both sides have a reasonable point. We do need to get our fiscal house in order, and there is a long term economic risk here, and that’s true whether or not the Fitch downgrade made sense at this particular time.”
So what are the potential consequences of a bond rating downgrade? Ritz says it will certainly not help our debt problem.
“The ratings agencies don’t have any power in and of themselves, but they are a signal to investors, who really do have the power to determine in the market what rate at which they are willing to lend money to the federal government,” said Ritz. “If they are concerned that we are not going to pay back our debts on time, then they will demand a higher interest rate to compensate for that risk. That leads to higher interest costs for the federal government, and that’s money that doesn’t go to other public needs. Everybody who is investing has a sense of what the value of U.S. Treasuries are. The rating has less significance for the U.S. government than for lesser known entities. But at the same time, if it is signaling a broader loss of investor confidence or presaging it, that does have the potential to lead to higher borrowing costs.”
Higher borrowing costs for U.S. debt also has another impact in that it can squeeze out important priorities, including budget resources for research, development, and innovation. The level of federal investment in scientific and technological innovation is the subject of another piece co-written by Ben Ritz called “A Year After the Chips and Science Act, Congress is Starving Science”. Ritz argues that despite the federal legislation that was supposed to give domestic semiconductor manufacturing a boost and make this and other manufacturing less dependent on China, we are nowhere near the level of federal investment in innovation that we need to be.
“Federal investment in scientific research is really one of the building blocks for vibrant economic growth,” said Ritz. “When the federal government invests in research, generally it’s basic research not being done by the private sector. These are projects that don’t have a clear commercial application, but they unlock the ability for and lay the building blocks for the private sector to build upon and turn into commercially viable technologies. Look at the space program and the scientific achievements that spun off from that. The internet was built on top of federally financed research, as was GPS. There is no shortage of technologies that can point to federal investment as the seed that led to their growth. When our government reduces investments on these projects, it could slow technological and future economic growth. It also doesn’t make sense from a fiscal perspective. Spending on R&D is only 3% of the federal budget, and about 1% of Gross Domestic Product. So even if you cut out all investment from the federal budget, you wouldn’t save very much and you would significantly reduce future economic growth.”
In fact, federal investment in scientific research and development has dramatically declined as a share of the federal budget since the 1960s, when it was nearly one third of all federal spending. Ritz gives the Biden administration some credit for increasing investment in science through the Inflation Reduction Act, but Congress is already falling behind the commitment it set when it passed the Chips and Science Act in the summer of 2022.
“The Biden Administration really did put a strong foot forward in reversing this decline in investment, and a year ago it looked very promising,” said Ritz. “But if you look at the Inflation Reduction Act, there’s some good stuff in there, but more of those credits are for procuring green technologies and adopting them, rather than researching and developing them. With the Chips and Science Act, it was supposed to herald about $200 billion in new R&D spending above baseline projections over the coming decade, which was going to be a huge reversal of the trend of starving R&D. But when it came time to actually appropriate the money, Congress didn’t do it. It fell far short of reaching those objectives, and if you look at the appropriations bills that are being considered for next year, it’s even worse. Even the Senate -which has appropriated at a level slightly higher than the levels agreed to in the debt limit deal -heir appropriations bills would cut R&D spending relative to last year’s levels, which themselves failed to meet the target set by the Chips and Science Act.”
Hear more on Facing the Future. I host the program each week on WKXL in Concord N.H., and it is also available via podcast. Join us as we discuss issues relating to national fiscal policy with budget experts, industry leaders, and elected officials. Past broadcasts are available here. You can subscribe to the podcast on Spotify, Pandora, iTunes, Google Podcasts, Stitcher, or with an RSS feed. Follow Facing the Future on Facebook, and watch videos from past episodes on The Concord Coalition YouTube channel.