It’s fair to question Standard & Poor’s decision to downgrade U.S. debt on Friday from AAA to AA+, but the concerns that drove it are indisputable. The ratings agency is worried that the American economy is recovering sluggishly, that government debt is mounting rapidly, and, above all, that lawmakers in Washington have mired themselves in a dysfunction that has worsened both the growth and debt problems.
It’s an astute diagnosis. Now, wouldn’t it be great if lawmakers had a blueprint to address those concerns, boost the economy and restore the nation’s perfect credit rating in the eyes of S&P?
Actually, they’ve been sitting on one for nearly a year.
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What America needs now is largely unchanged from what it needed in September of 2010, when Douglas Elmendorf, the economist who directs the Congressional Budget Office, testified before the Senate on “fiscal policy options” that would best help the economy immediately and down the road.
Elmendorf’s recommendations were simple: Pair short-term economic stimulus, such as increased aid to the unemployed and a payroll tax cut, with longer-term deficit-reduction measures such as curbing spending on safety-net programs and allowing temporary tax cuts to expire. Passed as one large package, the moves would spark growth now and reduce the debt load later.
Elmendorf told Congress that “there is no intrinsic contradiction” in a pairing. “If policymakers wanted to achieve both short-term stimulus and long-term sustainability,” he said, “a combination of policies would be required: changes in taxes and spending that would widen the deficit now but reduce it relative to current baseline projections after a few years. Developing such a combination would be feasible but not easy.”
There’s your policy blueprint – the original “grand bargain,” which economists across the political spectrum have lauded. If enacted this fall, such a bargain might include extending unemployment benefits; doubling down on last year’s payroll tax cut, by extending it and expanding it to reduce the employer-side tax, too; and phased-in cost savings for Social Security and Medicare to bring the federal budget into balance.
As Elmendorf noted last year, it won’t be easy. Frenzied bipartisan deficit talks this summer ended with no stimulus and no immediate restraint on the entitlement spending and tax policies from which the government’s debt problems stem. Congress raising the government’s borrowing limit at the last possible moment.
That’s the dysfunction that S&P cited as the primary factor in its downgrade: “The political brinkmanship of recent months,” the ratings agency said, “highlights what we see as America's governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed.”
And yet, the summer brinkmanship may have yielded a political blueprint for passing a grand bargain, ironically enough. Thanks to the debt-ceiling fight, and the budget agreement that held off a government shutdown this spring, we now have a pretty solid idea of who’s willing to compromise in Washington and who isn’t.
If they seriously want to accelerate growth and restore America’s AAA S&P rating, President Obama and congressional leaders should go back to work on a grand bargain – and they should negotiate exclusively within the center-right coalition that came together to pass the debt-limit deal. That includes a supermajority in the Senate and, in the House, 174 Republicans and 95 Democrats.
It’s a large enough group to leave room for negotiation on the size of the immediate stimulus and the shape of the long-term balancing plan. And for the next year, at least, it’s Washington’s best chance to prove S&P wrong about lawmakers’ ability to solve problems.
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