U.S. Should Take Credit Downgrade as a Warning

The U.S. government attacked Fitch Ratings, the U.S. credit ratings agency, for downgrading the country’s credit rating from AAA to AA+.

Treasury Secretary Janet Yellen called the downgrade “arbitrary and based on outdated data.” The White House, through President Joe Biden’s press secretary, also criticized Fitch. But Fitch’s decision to downgrade didn’t come out of the blue or based on temporal factors. Fitch was clear in its explanation that they were responding to long-term trends that haven’t been resolved.

In the third paragraph of Fitch’s rating action commentary, the agency writes: “In Fitch’s view, there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025.”

Yellen and the White House want to emphasize recent economic growth and a short-term deal to resolve the debt ceiling, but the same underlying problems will remain. In just over one year, the United States will have to raise the debt ceiling again in a Congress that continually argues over made-up issues that are nonsensical to outside observers.

For example, the United States Marines currently lack a commandant because a Republican member of the Senate has blocked every military appointment until President Biden agrees to ban military members or their wives from having abortions. In addition, most members of the Republican Party voted against a military funding bill because of their opposition to gay and transgender people; if they can’t even agree to routine maintenance of the military, how can we be sure they will vote to raise the debt ceiling?

Elections for President and Congress are coming up in 2024, so it’s currently unknown who will be in charge when the next debt ceiling fight takes place. The presidential election is going to match up incumbent President Joe Biden, who is 80 years old, against the 77-year-old businessman and former president Donald Trump, who is facing criminal charges for his attempt to stage a coup to remain in power after losing the 2020 presidential election.

If Trump loses again, he will likely try to sew distrust in the American political system and take power illegitimately, as he did in 2020. His last efforts to sow distrust culminated in a riot by Trump supporters at the Capitol on January 6, 2021, who demanded that Congress overturn the election results. Over 100 members of the Republican caucus voted to throw the election results in question. The fact that Americans cannot be sure their votes will be respected by their own legislature does not inspire confidence.

If Trump does win, it will also not be good for American governance, as he is demonstrably unstable. Then again, he may also be in prison by the time the election rolls around. Who knows?

In its report, Fitch also pointed to rising American deficits and a growing national debt, which has largely been driven by spending on healthcare and social security for a growing class of retired Americans. “We expect the general government deficit to rise to 6.3% of GDP in 2023, from 3.7% in 2022, reflecting cyclically weaker federal revenues, new spending initiatives, and a higher interest burden,” their report states.

This problem has also not been solved and won’t be solved anytime soon. Spending on social welfare programs for retired Americans naturally increases every year because of aging; more Americans are reaching retirement age than are being born. Immigration can only partially address the mathematical problem.

The only way to solve the long-term debt issue is to increase government revenue or decrease spending generally and on social welfare and entitlements, meaning that there will need to be a raise in the retirement age or a cut to benefits. How can a dysfunctional Congress achieve such a feat? Even a rational Congress won’t want to cut benefits as it will anger voters.

In 2013, Standard and Poor Global Ratings also downgraded the U.S. from AAA to AA+ for similar reasons. They, too, cited the unpredictability of whether the U.S. would raise the debt ceiling. At some point, American leaders need to take responsibility and solve the problem instead of blaming the messenger.

Having a rating of AA+ is not a crisis. It is the second-highest rating. It is on par with Canada, Finland, and Austria. But the negative trend is concerning. The problem did not arise yesterday, and it will not go away tomorrow. President Biden, Congress, and Americans writ large should take it as a warning and a call to act now.