Monday, July 18, 2011

Sometimes Rating Agencies Suggest Smart Things

Given the complete failure of the major rating agencies leading up to the sub-prime mortgage fiasco and subsequent financial crisis, I'm not entirely sure why they still have the quasi-official power they have in the markets. Alas they still do, so when they talk we listen. Moody's suggested the United States eliminate the debt ceiling. This is such a simple but brilliant idea that I have to give them credit for suggesting it. They aren't the first ones to suggest it, but their reasoning behind it basically underscores why making a deal to cut the deficit is so difficult.

The debt ceiling is theoretically a tool to constrain future Congresses from irresponsible fiscal actions. Unfortunately, it is impossible for a present Congress to restrain a future Congress in this way since future Congress can simple vote to raise the debt ceiling in a hope to restrain an even more future Congress. It simply doesn't work. My understanding of the debt deal being discussed is that present Congress will vote to cut $1.5 trillion over ten years. But a future Congress could decide that cutting the $1.5 trillion was a bad idea (which it is in the short term), and vote to restore funding. Or it could create a whole new program that costs a whole new $1.5 trillion. Or it could vote to raise taxes, the horror! We just don't know what the political situation will be in 5-10 years. Republicans want guarantees that taxes will remain low and spending will get slashed, but there is no way to truly guarantee the cuts are maintained.

This entire conversation about deficit reduction with Defaultpocolype is two weeks away is an exercise in futility. Talking about reducing unemployment from 9.2% without the use of Confidence Fairies would be a meaningful conversation that could actually make a difference in people's lives.  But that wouldn't be a Serious adult conversation, only the Shrill Hippies would ever have that kind of conversation.

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