Wake-Up Call

S&P downgraded the sovereign debt of the U.S. from AAA to AA+ on Friday evening. The press release read more like a political manifesto than any kind of serious credit evaluation, so I’m not sure what the point of the exercise was. Especially coming from the folks who brought you the AAA mortgage CDO.

However, there is a point and that is that the U.S. government is overspending and over-committed. We are spending almost as much as the entire rest of the world on our military, yet we are not threatened by our land neighbors – Canada and Mexico – so essentially all the military budget goes on adventurism and foreign empire. Yet the defense secretary tells us to cut pensions and health care rather than the military budget.

Instead of slashing defense, Panetta said, the bipartisan panel should rely on tax increases and cuts to nondiscretionary spending, such as Medicare and Social Security, to provide the necessary savings.

Sheer insanity.

Speaking of which, our health care and pension commitments, both to citizens and government employees, are generous and have no cost containment and so are an open invitation for the unscrupulous to help themselves, which they do, with our health care costs being twice as high as other developed countries yet delivering poorer results in aggregate.

The longer this goes on and the bigger government grows, the larger the ultimate shrinkage will have to be and so will the resultant shock to the economy. Yes, reducing government spending will cause GDP to shrink. There’s no way around that. But all the “stimulus” spending is doing is putting off the inevitable at the expense of a bigger crash later. As Caroline Baum observes:

Ten years and $8.35 trillion later, what do we have to show for this decade of deficit spending? A glut of unoccupied homes, unemployment exceeding 9 percent, a stalled economy and a huge mountain of debt. Real gross domestic product growth averaged 1.6 percent from the first quarter of 2001 through the second quarter of 2011.

It is time to put aside Paul Krugman and his Keynesian ilk, and deal with reality rather than fantasy. Yes, it will hurt. But it will hurt less now than later.

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