WASHINGTON – U.S. Sen. David Vitter, R-La., became somewhat of a political soothsayer when he took to the Senate floor last week as the first to criticize the debt and deficit agreement crafted by President Barack Obama and congressional leaders.
Vitter said he would vote against the package because it failed to adequately rein in runaway federal spending. Then, Vitter was among those who predicted that the agreement would have a detrimental effect from financial rating agencies.
“The so-called solution doesn’t fundamentally change our spending and debt picture,” Vitter said. “I don’t want to default under any circumstances, but I don’t want a downgrade of our credit rating either.”
And that’s exactly what happened last week when Standard & Poor’s dropped the rating for the U.S. from AAA to AA+.
A solid blow to the world’s economic leader, the agency slapped Washington citing “political brinkmanship” as the reason for the lost confidence in U.S. financial instruments.
The bipartisan, bicameral deal last week for $2.1 trillion cuts over 10 years didn’t go far enough to plug the holes in the nation’s record $1.4 trillion federal budget deficit, the agency said.
The fight between Republicans and Democrats in Congress took the battle of the national debt and federal budget deficit to the final hours of a potential default on its borrowing last week. It made the government’s ability to manage its finances “less stable, less effective and less predictable,” Standard & Poor’s said.
And the credit agency took a swipe at the so-called supercommittee that is being formed by congressional leaders to come up with additional cuts, saying Congress would likely not be able to accomplish the savings in the future.
The downgrade, Vitter said, would result in higher interest rates, first for the government and then for everybody else with bills such as home mortgages and car payments.
LSU finance professor Rajesh Narayanan isn’t ready to go that far. Narayanan said the current activity of the markets is reason to believe that impacts of the downgrade won’t happen soon, if at all.
Japan and Germany went through economic meltdowns, yet government financial instruments, such as, bonds remained steady, Narayanan said. The key to interest rates, he said, is inflation in the U.S., which has been low for years and shows no signs of rising.
But Narayanan also expressed concern over the Washington political climate. It’s not the nation’s debt – borrowing that stands at about 65 percent of the economy measured by the gross domestic product – that is a problem but the budget deficit, the spending side of the equation.
“We’ve got to address the structural budget and most people understand it but the politicians can’t get it done,” Narayanan said.
Because 60 percent of the federal budget is taken up by the mandatory programs of Social Security, Medicaid and Medicare, Congress is hampered, Narayanan said. Government will have to rely on tax revenues to get out of its budget mess, he said.
Standard & Poor’s criticized the government for not coming up with $4 trillion in savings. Obama and Republican congressional negotiators at one point had a “grand bargain” deal that would have reached the level yet include $1.2 trillion in tax revenues, which Republicans balked at.
The political intransigence in Washington can be shown through the dichotomy of Louisiana’s two freshman congressmen, U.S. Rep. Jeff Landry, R-New Iberia, and U.S. Rep. Cedric Richmond, D-New Orleans.
Landry voted against the agreement, saying that it contained a diluted version of a balanced budget amendment. Landry was one of 20 Republicans who pushed House Speaker John Boehner, R-Ohio, to include the provision in the last deal.
But when it came to the floor, Landry was not happy.
If the supercommittee failed to reach a $1.8 trillion cut target, or Congress failed to approve its recommendations by the end of 2011, lawmakers would then have to vote on a proposed constitutional balanced-budget amendment, under the terms of the deal.
The agreement, however, didn’t say that the amendment would be sent to the states for ratification, as is required by the Constitution, for Obama to get an increase in the national debt.
Critics of the amendment contend that it would tie the federal government’s hands on spending for crucial programs such as the big three in mandatory spending.
“There is no simpler solution than a balanced budget amendment sent to the states,” Landry said. “But that’s what I’ve learned here. The simpler the solution, the harder it is to get through.”
Richmond, who voted for the agreement, wants more tax revenues. Any cuts to the budget will hurt Louisiana, which is already struggling in the categories of education, health care and poverty, he said. One thing the two men agree on is their disdain for the supercommittee.
Congress is the ultimate committee, Landry said.
“We wouldn’t need the committee if we had a balanced budget amendment,” Landry said. “If we had a balanced budget amendment we’d be forced to have one big whole committee, the committee of the whole, the one who is supposed to be there.”
Richmond also doesn’t like the committee idea, he said.
“You decide to let a panel of 12 decide the future of your state,” Richmond said. “I think that gets into some dangerous territory.”
In the first full day of trading since the Standard and Poor’s announcement, the stock market dropped by more than 600 points, the biggest loss in three years.
“Investors are extremely concerned about the future,” Narayanan said.
Obama weighed in Monday with his first comments since the downgrading. The president also took a swipe at Congress.
“It’s not a lack of plans or policies that’s the problem here,” Obama said. “It’s a lack of political will in Washington.”
“It’s the insistence on drawing lines in the sand, a refusal to put what’s best for the country ahead of self-interest or party or ideology” the president said.
Obama, however, tried to calm the nation against proclaiming that the financial sky is falling.
“No matter what some agency may say,” Obama said. “We’ve always been and always will be a triple-A country.”