Late on Friday (Aug. 5), Standard & Poor’s downgraded the U.S. debt rating from AAA to AA+ status, a drop of one notch on the rating agency’s tally. Coming on the heels of the contentious debt ceiling debate of the prior week, the move seemed like another body blow to the American economy.
So today we sit in the midst of the U.S. not becoming a Third World country, but of no longer being looked as the most solid place in the world for capitalism.
What the U.S. debt downgrade means
I know to most Americans that “AAA” and “AA+” is a lot of lingo that’s not part of our lives. During the financial crisis of three or four years ago, lingo like this was noise to many folks.
So here’s the deal: If I’m considering buying the debt of the federal government or any of its allied agencies, I want to gauge what the risk is I’m not going to get paid back. A lesser rating of AA+ indicates that I’m somewhat less likely to get paid back than if the rating were one notch higher at AAA.
Think about corporate debt and junk bonds if you want to understand this a little better. When a company is so unstable or losing money that there’s doubt if they can meet obligations, they issue junk bonds. The interest rate on junk bonds is high to compensate for the risk you may never see any money.
In the case of the U.S., we’ve longed enjoyed the world’s top financial rating (AAA in this case), along with a small handful of other countries. But the downgrade from AAA to AA+ means that the whole world isn’t looking to us as the financial Rock of Gibraltar any longer.
Stop the handouts to corporations and individuals
The reason S&P did this — and they telegraphed this was coming before the frenzy about the Aug. 2 deadline to raise the debt ceiling — was because they felt the U.S. was an emperor with no clothes. In plain language, they felt that the U.S. was not taking seriously its long term commitments to people and how those commitments would be paid for.
S&P put a big emphasis on the “T” word — taxes (am I allowed to say that on talk radio?!). They feel that we the people want candy from the government, but we don’t want to pay the factory to make the candy.
Forgive my inflammatory language, but we have to decide if we will continue to be a nation of welfare queens or if people will take care of themselves.
We have become a nation where people depend on handouts. I’m not talking about welfare, I’m talking about corporate welfare. I’m talking about where companies go with lobbyists and all the dirty money they contribute to candidates to get special preference items under the law, usually involving tax deals, that allow them to avoid paying what they should as far as our system goes.
At the same time, we as individuals keep looking for what government will throw our way. As an example, the polling ahead of the Aug. 2 debt limit deadline found most people saying, “Keep your hands off my Medicare!” Even if they weren’t getting it yet, that was the response of most people!
My prescription for what ails our nation
The truth is we can’t afford a lot of what we do and what has been promised to us. The math on the expenditure projections for Medicare and Medicaid does not work. The only way to make it work is to raise taxes sky high. Not a great idea.
The problem is as you do that, you sap creativity and economic activity. Go back to the late Pres. Kennedy and you’ll see he understood that. When he took office in 1961, the tax rate on the wealthy, in some cases, was as high as 90%.
JFK later reformed that abnormally high tax rate. And it was a good thing he did because when the tax rate on the wealthy is 90%, they spend all day with their accountants figuring out ways to hide their money, rather than using it to be productive in a capitalist system.
So if I were your emperor, here’s what I would do:
- Lower corporate tax rates to zero. If you think taxing corporations is a free lunch, let me tell you, those taxes end up being paid by the end user — the consumer. Plus, so much corruption in D.C. is based on taxing corporations. We should instead give incentives. The simple way I would do this is make domestic earnings tax free while foreign earnings would be subject to U.S. tax rates.
- Eliminate all exemptions and deductions in the tax code. I would have us go to a flat income tax with only two tax rates — 10% and 25%. No games, no gimmicks, no gimmes. Mortgage interest deduction? Gone. Every deduction that you get now? Gone. This would give us a clean simple way to know when you go to work, 10% of your pay is going to the feds. Only the “rich” would get hit with the 25% tax bracket. The irony is you make economic activity more possible by simplifying the tax code.
- No government or employer involvement in health care. This whole foolishness about companies wanting to hire part-timers instead of full-timers? The employers don’t want to pay for health care! Having health care through an employer distorts the workplace and distorts efficiency in capitalism. It has to go back to being an individual responsibility. I believe the elderly and those of low income should get a voucher to go shop for coverage on their own.
What it will take to get America back on top
For us to be seen as a serious contender again in the world, that will involve the federal government being able to meet its obligations with credibility. You look at the deal with the GOP and Pres. Obama, the $2 trillion they’re talking about is really a puny amount vs. the whole federal budget over 10 years. Plus, we don’t know if those cuts will truly be real cuts. We have to attack the core of federal obligation and that’s Medicare and Medicaid.
We need to get back to health care being a customer-driven business. It should be like shopping for auto or homeowners coverage, but with a difference. If you have a lot of auto accidents, your premiums go up. With health care, if you stay covered, your premiums should only go up based on age and sex, period.
My point is we can solve a lot of ills at once. We can deal with the runaway freight train of health care expenses and get back to individual personal responsibility.
Years ago, I was a fan of a mandate to buy health insurance. But I was wrong on that. It should be a choice. If you don’t buy it, you would face an 18-month penalty period when your illness is not covered once you get in the system. That creates a marketplace incentive to keep people from cherry-picking and only getting insurance once they get ill.
The core of what we’ve got to do to get world respect — and to regain our own self-respect — is take on realistic obligations and determine that we will pay for them. It really comes down to something that simple. All the rest is details.