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Fitch Ratings Warns: Congress Must Address the Fiscal Crisis

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Unread 07.12.12, 04:00 PM
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Fitch Ratings Warns: Congress Must Address the Fiscal Crisis

On 07.12.12 10:00 AM posted by Patrick Louis Knudsen

Proof of President Reagan’s wisdom keeps cropping up. A fresh example: The U.S. has retained its AAA credit status with Fitch Ratings, mainly due to the fundamental strengths of its free-market economy; but a long cloud threatens the outlook—and it comes from the government’s increasingly unstable fiscal condition. In short, government is the problem, just as the Gipper said.

The good news from Fitch is the “highly productive, diversified and wealthy economy” in the U.S., as well as the country’s “respect for property rights, the rule of law and high degree of political and social stability.”

But Congress and the President have thrown sand in the economic gears with their refusal to address the onrushing fiscal debacle, including deep, indiscriminate spending cuts and the suffocating “Taxmageddon“—both scheduled to hit on January 1.

The uncertainty over these matters, says Fitch, already “weighs on the near-term economic outlook.” In addition, the broader and longer term fiscal problems, resulting mainly from federal entitlement programs, jeopardize the country’s future prosperity. This has caused Fitch to call the long-term outlook “negative” and warn that continued failure to address the problem will result in “downgrading the U.S. sovereign rating.”

That brings us to a few key points.

The near-term fiscal crises are entirely manufactured. Congress and the President knew exactly what they were doing in December 2010 when they extended the Bush-era tax policies only through December 2012—dropping the threat of a massive tax hike right in the middle of an election year.

They also understood the consequences of starting huge, indiscriminate, and defense-devastating spending cuts called “sequestration“—a product of last year’s debt ceiling agreement—in January 2013, making that problem campaign fodder as well. Both decisions created huge incentives to push off resolution until after Election Day to another eleventh-hour lame duck session—the kind that inevitably yields bad policy.

Congress and the President can begin to resolve these problems right now—if they truly want to. *There is even evidence of common ground regarding certain spending cuts.

An exceptional account in the July 9 edition of CQ Weekly identified more than $500 billion in reductions, developed during last year’s various deficit-reduction talks, “that would probably be agreeable to all sides.”

Reporter Paul M. Krawzak acknowledges the large hurdles in reaching an actual agreement on even some of these proposals, but says they can form a solid foundation for restarting budget reduction efforts. If that is so, then progress on spending reduction is possible—if lawmakers simply accept President Obama’s admonition from just the other day: “Let’s agree to do what we agree on. Right?”

Of course, the President himself keeps blocking any agreement by insisting on a tax increase that he could not pass during his first two years in office with an overwhelmingly Democratic Congress.

The largely cynical “wisdom” in Washington says that nothing can happen until after the election. But there is already bipartisan concern in both the House and the Senate about the hazards of letting sequestration happen, and the threat of Taxmageddon is already slowing the recovery and limiting job creation.

Congress and the President should not wait. They should take steps now to avoid a needless budgetary collision in December. That would reassure financial markets and the public that even a divided Congress can function. It would also put lawmakers in a far better position to address the real crisis of uncontrolled long-term spending and debt.

Regardless of the political incentives to delay, this much should be understood: These decisions are entirely under the control of Congress and the President; if they fail to address them, it will be because they chose not to. The incentives will change when politicians embrace the premise that good policy is good politics.

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