The recent debt “deal” which is really not a deal at all threatens to widen the already wide class divide in America to historic proportions. It has already affected our credit rating.  A clean raising of the ceiling should have been done as a simple act of Congressional standard operating procedure as has been the case dozens of times in the past. Instead, proposed adjustments to the existing debt and deficit were tied to it,  holding the economy ransom with the middle class suffering extensive collateral damage.

First, let’s establish a little perspective on debt and deficits.  With one exception, the federal government has run deficits since 1776. We seem to have survived.  In addition, it’s generally agreed that when  a budget shortfall results from less revenues during a recession, it is better for government to have short-run increases in taxes rather than short-run cuts in spending. In the long run, running a deficit can be a healthy way to invest in the economy, producing future gains in GDP. In that sense, it’s an asset, not a liability.   Spending on the right things like infrastructure investment to create jobs.  Investment in bridges, roads and transit can actually boost the economy over time.  As long as it’s so popular to talk about the legacy we leave our children, let’s throw education in to boot.

Many developed countries have run up to 100 percent debt v. GDP without going into crisis. We wer running at 100 percent after WWII.   We’re now around 55 percent.   An extra trillion in borrowing an additional trillion dollars would add 0.07% of GDP in future debt service costs.  That assumes interest
rates will remain stable, a point I’ll get to in a moment.

It’s unfortunate that the statutory debt ceiling and the threat of default have become bargaining chips in the debate over fiscal policy.   Is that what’s it’s come to?   We no longer simply debate policy in good faith. A “policy” of imposing sweeping cuts in vital social programs upon which millions of working people depend without a penny in tax increases on the corporations or the wealthy now trumps the welfare of our nation in the new rules of the game.

While more layoffs add to the current 9.1 percent unemployment, programs such as food stamps, home heating assistance, public health, housing aid, basic health care and pension programs for the elderly and the poor are scheduled t0 be cut, when millions of unemployed and underemployed Americans require them for their survival.

Then of course there’s this week’s downgrade coming in the wake of the deal. This may be the most immediate result of the debt agreement. While default has been avoided, at least temporarily, the agreement has not done much to assuage investors’ fears about American debt. This, in turn could affect interest rates on borrowing additional debt.

True, the credibility of the ratings agencies has rightly been called into question over the last couple of years. Credit ratings of AAA (the highest rating available) were given to large portions of even the riskiest pools of mortgage loans before collapsed in 2008.  Investors, trusting the near-absent risk that AAA implies, purchased large amounts of collateralized debt (mortgage) obligations that later became unsellable and therefore without value. Those that could be sold often took huge losses.

In addition, corporations pay Standard & Poor’s to rate their debt issues. As a result, some critics have contended that Standard & Poor’s must not look a gift horse in the mouth when it comes to rating the credit of these issuers of debt.   So, there’s been some understandable skepticism of the validity of Standard
and Poor’s downgrade of US debt from AAA to AA+.  The rating agency apparently made an error in its recent assessment of US debt. However, S & P acknowledged making a $2 trillion error but stated that it “had no impact on the rating decision”.  “A judgment flawed by a $2 trillion error speaks for itself, said a spokesman for the United States Department of the Treasury.

Despite this erosion of credibility, I still put some stock into the report.  As flawed as the analysis may or may not be, the downgrade has some basis in fact and will have an impact that should not be ignored.  In their statement, the analysts stated, “More broadly, the downgrade reflects  our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing  fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.  As big a number as two trillion may be, it doesn’t overshadow the political dysfunction that has come to characterize Washington, thanks in part to ideological intransigence.

The “minor” jump from AAA to AA+ might seem miniscule to some.  However, this downgrade could have a global impact. The analysts at S & P mention that they could lower the rating even more if they detect, among other things higher “interest rates”.  I find this to be a bit ironic since this very downgrade could produce exactly that result on both short and long term debt.

Getting back to the temporary agreement struck this past week, the entire premise of this debate on the deficit has been based on the lie that there is “no money” for social programs.  It’s interesting that no such objection was raised a couple of years ago when Wall Street demanded trillions of dollars in taxpayer funds for TARP. Now don’t get me wrong.  I still believe that TARP was necessary to keep the economy from deteriorating to a far greater degree.   Several banks have now repaid nearly half a billion dollars of those funds, bringing the total bank repayment under the Troubled Asset Relief Program to 99%.

That said, since the bailout, corporate profits have soared along with CEO pay, while household wealth of ordinary Americans has fallen off a cliff and wages have also continued to fall and the median wealth of white households is 20 times that of black households and 18 times that of Hispanic households.  National wealth continues to concentrate more than ever before.

Corporate America is sitting on cash in excess of $2 trillion. Despite that promontory of green, there’s been no promissory of jobs. Instead, what we’re seeing is a refusal to invest the cash to hire people. A cynic might be tempted to say that corporations can utilize mass unemployment to blackmail workers into accepting wage cuts and sweatshop conditions. This mountain of cash is actually comparable to the agreed upon increase in the debt limit. However, the bread and butter of the middle class – jobs, wages, health care, schools and pensions have been taking a beating.

The debt deal has widened the moat  between the Beltway and American people. It has also further widened a growing gap  between a small oligarchy in American society and the other 98 percent.   Not all of our representatives in Washington have betrayed our best interests. However, the interests that have driven the essential parts of this deal with no explicit consideration of revenues and with social programs on the table have increasingly made the debt do us part.

As the impacts of these social cuts is felt by working people and young folks, awareness of the American people will  demand a rethinking of the reactionary public policy that we have witnessed with increasing momentum since November 2010.  We can only hope that the parting among the classes will begin to reverse course. That will take an objective eye of the people, an articulate voice and a receptive ear on Capitol Hill.

Thomas P. Davis

Thomas P. Davis

I'm a freelance writer based in New Jersey. I've been writing about public issues for 10 years.

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