Standard & Poor's Downgrade, Economy, and Solutions

Early this evening Standard and Poor’s (S&P) downgraded the United States credit rating from AAA (highest) to AA+. S&P cited political instability, a high debt/GDP ratio, and growth of government spending. S&P got this call right. The 2011 budget for the United States predicts a $1.65 trillion deficit. Note this is just an estimate and can be even more than predicted. What I find interesting is that we are predicted to bring in $2.17 trillion in revenue. The budget is divided into mandatory spending and non-discretionary spending. In 2010, over $2 trillion was spent on “mandatory” things like Social Security, Medicare, and Medicaid. Discretionary spending was a little over $1 trillion. My point would be that all spending is discretionary. No doubt the downgrade will have implications for the economy. The most noticeable difference will be a rise in interest rates charged to consumers. When Spain and Portugal faced similar downgrades the interest rates rose between .2-.4 percentage points. This seems small but when you look at how many homes, cars, and other expensive items are financed with interest rates it would have a large impact on the economy as a whole. The entity that will pay the most will be the United States government which will see higher interest payments on the debt.

This week the debt ceiling was raised yet I have a feeling pretty soon the Treasury will find itself in a bind and try to figure out how to pay their bills. The debt ceiling claimed there would be cuts; however I would question what base lines were used to determine if any true cuts were made. It would be like going into a store and learning they are having a sale on everything for 30% yet raised the prices 50% before they lowered them.

The jobs report today showed that 117,000 jobs were added making the unemployment rate 9.1%. However, if you look at the percentage of people in the labor force it was fallen to 58% which is the worst it has been in more than a decade. This I believe is a better measure of unemployment since the way unemployment is calculated is somewhat of an art. People who have stopped looking for the past month for a job are not counted as being unemployed.

The only real way for our country to avoid going down the tubes is to initiate some free market reforms. The government should first go through all regulations and figure out which ones have the highest cost and provide the least amount of benefit. Also taking money from hard working people and transferring it to others is not only wrong it’s immoral. If 47% of people don’t pay any federal income taxes why should they care if income taxes are raised? People claim that other countries in Europe are better because they provide free health care, free education, and other free social benefits that are “more fair”, help them live longer, and make them happier. I would argue our standard of living and purchasing power is much higher in the United States than in nearly any other country. The reason why people in our country don’t live as long is not because of health care, but what we choose to do with our bodies. Everyone could in America could have the best healthcare and best insurance, however if we eat too much, drink too much, or smoke too much statistically we will live lower lives. Also the United States has higher murder and suicide rates than other countries which would decrease our life expectancies.

We are at a turning point for our nation. I hope politicians embrace not only free markets but choice and liberty. If not we will be left with no choice but to succeed.