Budget Deal Disadvantage
First is Uniqueness- Credit downgrade jump started a movement towards deficit reduction.
POWELL 8/18 (Scott S, a visiting fellow at the Hoover Institution and a managing partner at
RemingtonRand Corp. “Standard & Poor’s may be late to the party,” 2011
http://www.signonsandiego.com/news/2011/aug/18/standard-poors-may-be-late-to-theparty/)
The credit rating agencies are generally late to the party. By the time they take the punch bowl away with a downgrade,
things are usually worse than most people think. Standard & Poor’s has actually done the U.S. a favor by jolting many in Washington and the
mainstream media out of denial. The
trajectory of deficit spending was placing the nation at risk. As early as
January, the three credit rating agencies started warning of a possible downgrade if
Washington could not undertake structural budgetary reforms. So it is good that one of the three, S&P,
acted soon after the debt ceiling agreement. S&P’s rationale for the downgrade was specifically that the new
Budget Control Act “fell short of the amount that we believe is necessary to stabilize the general
government debt burden by the middle of the decade.” The other two rating agencies have kept
a AAA rating on U.S. sovereign debt. The net result is that the U.S. can still claim the AAA
status on a split-ratings basis. Credit repair and restoration from S&P may take years, but the
U.S. can avoid being hit with further downgrades if it can get its debt ratios more
aligned with other AAA-rated sovereign nations, like Canada. Even after wake-up calls
emanating from collapsing debt markets in Europe and the November 2010 U.S. election results, President Barack Obama,
much of the Democratic Party and many media pundits remained in denial about the urgency of undertaking
structural reform of taxes and entitlements and making deeper cuts in government spending. Excessive debt and easy
money facilitated the financial crises of the past 13 years: In 1998, it was long-term capital management that melted down; in 2000-2002 the dot-com
bubble burst; and starting in 2007 the housing and mortgage market collapsed. The debt dynamics that underlay these crises are alive and well today,
Risk has
now shifted from the private to the public sector, with the U.S. government debt market being the
new bubble . When city and state municipal bond debt and the debt of Fannie Mae and Freddie Mac are added to the national balance
having been brought more into the public sector through bailouts and guarantees, making the problem larger and more systemic.
sheet, public debt in the U.S. is now at nearly 100 percent of its GDP – far worse than any other AAA-rated country. Global financial market reaction in
we are at the tipping point and have no choice but to
get our house in order. Unfortunately, chronic deficit spending and decades of benefit promises that lacked adequate funding cannot
the aftermath of the S&P downgrade is telling us that
be solved overnight, especially when Washington resists making tough decisions on structural reform of either the tax code or entitlements. The Joint
Select Committee on Deficit Reduction that was created by passage of the Budget Control Act must make recommendations within three months to
reduce federal expenditures by at least an additional $1.5 trillion on top of the $917 billion already agreed to – for a total reduction of $2.4 trillion – as
part of the agreement. But S&P’s report accompanying the credit downgrade indicated that the U.S. needs to be closer to $4 trillion in deficit
reduction. Since markets ultimately trump politics, it’s clear now that Congress needs to act quickly .
Adopting select recommendations from the Simpson-Bowles Bipartisan Commission on Fiscal Responsibility and Reform – which was formed by Obama
and whose recommendations were made public in December 2010 – would make sense right now.
That will force the deficit committee to reach a deal—but, sequestration is key
Matishak, 8/5 (Martin, Global Security Newswire staff reporter, 8/5/11,
http://www.globalsecuritynewswire.org/gsn/nw_20110805_9870.php)
The newly minted agreement also establishes a 12-member bipartisan panel charged with coming up with a strategy to reduce the
deficit by $1.5 trillion on top of the initial $350 billion cut. If the joint committee fails to reach an agreement, the debt package
would trigger another $1.2 trillion in cuts, including an additional $600 billion that would be stripped directly from the Pentagon's
coffers over the next decade, an action the administration would like to avoid, according to Lew. "Make
no mistake: the
sequester is not meant to be policy. Rather, it is meant to be an unpalatable option that all
parties want to avoid," he wrote. Defense Secretary Leon Panetta on Thursday issued a message saying that the first round
of reductions in military spending are "in line" with what officials had been anticipating. President Obama in April directed the
Pentagon to find $400 billion in budgetary savings over the next 12 years. However, Panetta warned, if the bipartisan committee
fails to reach a compromise, the requirements of the debt package could trigger "dangerous across-the-board defense cuts that
would do real damage to our security, our troops and their families, and our ability to protect the nation." "This potential deep cut in
defense spending is not meant as policy. Rather, it
is designed to be unpalatable to spur responsible, balanced
deficit reduction and avoid misguided cuts to our security," he wrote. "Indeed, this outcome would be
completely unacceptable to me as secretary of Defense, the president, and to our nation's leaders." A senior administration
official on Thursday predicted the new panel would strike an agreement. "The trigger was
crafted to create a huge incentive for Congress to act and avoid painful cuts to both security and
domestic programs," the official, who was not authorized to speak on the record, told GSN by e-mail. "We're confident
that it will work and Congress will produce a package that allows the country to meet deficit
reduction targets in a fair and balanced way."
Plan takes away the threat of “across the board” cuts
Adler & Akabas, 11 (Loren, and Shai, staff of the Economic Policy Project at the Bipartisan Policy Center (BPC),
8/2/11, “How the sequester works if the join committee fails”, http://www.bipartisanpolicy.org/blog/2011/08/howsequester-works-if-joint-select-committee-fails)
Now that the Budget Control Act (BCA) has been signed into law, the focus shifts to the Joint Select
Committee on Deficit Reduction (JSC) tasked with finding $1.5 trillion in spending cuts and/or revenue
increases over the next ten years (These savings would come on top of the roughly $900 billion saved upfront from capping discretionary spending; for details, see our earlier post). But what happens if they fail
to come to an agreement? That’s what the “sequester” is for. It will act as a “sword of Damocles”
hanging over the JSC in the hopes of forcing action. Each party would face cuts to spending
categories that it generally tries to protect – the hope being that both parties will have sufficient
incentive to move towards the middle and strike a deal. Motivating Democrats are potential cuts to
domestic discretionary programs, the Affordable Care Act’s (ACA) cost-sharing (exchange) subsidies,
Medicare, and a couple other mandatory spending programs. On the Republican side, defense spending
would be cut by a hefty 10 percent. If the JSC cannot agree to at least $1.2 trillion in deficit reduction (or
the package fails to be enacted into law), these automatic sequester cuts would take effect to bring the
budget savings up to $1.2 trillion through 2021. The sequester would be implemented beginning in
2013 as an across-the-board cut to all non-exempt budget accounts. (The cut to Medicare is
capped at 2 percent.) Like most previous sequesters, however, this one is riddled with exemptions. Social
Security, veterans’ benefits, Medicaid, the Children’s Health Insurance Program (CHIP), unemployment
insurance, Temporary Assistance for Needy Families (TANF), food stamps (SNAP), and a host of other
programs (mostly those benefitting individuals with low incomes) are all exempt from sequester – see the
Statutory Pay-As-You-Go Act of 2010, starting on page 22, for a list of most of the exempt programs.
Revenues, which many Democrats were arguing to be included in the sequester, are also exempted. But,
as detailed above, important priorities of both parties are still laid on the chopping block.
Sequestration failure uniquely causes Moody’s downgrade
Panchuk, 8/3 (Kerri Panchuk, “Moody's affirms US triple-A rating, but risks remain”,
http://www.housingwire.com/2011/08/03/moodys-affirms-us-triple-a-rating-but-risks-remain)
Moody's Investors Service (MCO: 30.47 +3.29%) confirmed the U.S. government's triple-A bond
rating after lawmakers reached a deal to raise the debt ceiling by $900 billion in the short-term and
another $1.2 trillion to $1.5 trillion. President Obama signed the deal into law Tuesday, just hours before
a deadline set by the Treasury. But Moody's warned the U.S. is not out of the woods just yet. The
ratings agency assigned the U.S. government's bond rating a negative outlook, saying a downgrade
could occur if fiscal discipline weakens in the coming year. If additional fiscal consolidation
measures are not adopted in 2013, the economic outlook deteriorates or there is an appreciable
rise in the U.S. government's funding costs, a downgrade is still possible. Moody's affirmed the triple-A
rating after lawmakers and the president signed off on a two-pronged debt reduction and debt ceiling
deal. The first prong includes raising the debt ceiling by $900 billion and making close to $1 trillion in
spending cuts. To complete the second prong, a committee of lawmakers will go back to Washington and
search for $1.5 trillion in cuts before the ceiling is raised again. Moody's said the deal, which includes
a trigger for $1.2 trillion in automatic spending cuts if lawmakers fail to find $1.5 trillion in cuts on their
own, is a "step toward achieving the long-term fiscal consolidation needed to maintain the U.S.
government debt metrics within the triple-A parameters over the long run." Even still, Moody's
expressed concerns, saying the deficit reduction committee and triggers are designed to induce
fiscal discipline, but remain untested in a real world scenario. "Should the new mechanism put in
place by the Budget Control Act prove ineffective, this could affect the rating negatively," Moody's
said.
Kills the economy
Goldwein, 8/11 (Marc, senior policy analyst for the fiscal policy program at the New America
Foundation and former Associate Director of the National Commission on Fiscal Responsibility and
Reform, The Atlantic, Drawing a AAA-Road Map for Post-Downgrade America,
http://www.theatlantic.com/business/archive/2011/08/drawing-a-aaa-road-map-for-post-downgradeamerica/243463/)
Rather than going up, interest rates have actually fallen a bit since the rating downgrade. This is
not inconsistent with what has happened to other AAA-downgraded countries, where interest
rate effects have generally been quite small. ... Okay, Panic a Little If rating downgrades don't augur
immediate crises, they tend to indicate trouble on the horizon. Of the 10 other countries that have been
downgraded from AAA, eight experienced further downgrades and five have still never recovered their
AAA rating. Deeper downgrades have been associated with interest rate spikes, and the fact that both
S&P and Moody's have us on a negative outlook suggests that more downgrades could be in our
future. What are the consequences of further downgrades? The most direct one could be higher
interest rates, as investors insist on a risk premium. Even a 0.1 percent increase in interest rates
would mean an additional $130 billion in government spending on interest over the next 10 years
that we would have to offset in hiring taxes or fewer investments to meet the same debt goal. A
0.7% increase in interest rates would be enough to erase all of the gains from the recent debt
deal. In addition, higher interest rates could reverberate throughout the market, impacting
everything from mortgages to small business loans - and ultimately leading to something
economists call "crowd out," where fewer dollars go into growth-driving investments. The
biggest concern, though, should be that these rating downgrades could advance the day of a
fiscal crisis. At some point, if we don't make some changes, investors will lose confidence in our
nation's ability to make good on its debt. When that occurs, it is possible we could experience a
global economic crisis akin to the financial crisis of 2009, except with no one available to bail out
the U.S. government. It's Not About the Money The United States has a higher burden of gross
debt than any other AAA-rated country in the world. We're also the only country besides Finland to
expect our debt share to grow through 2016. Our entitlement programs are growing uncontrollably as a
result of an aging population and rapid health care cost growth - structural problems that make it difficult
to deal with our debt.
Global war
Royal 10 – Jedediah Royal, Director of Cooperative Threat Reduction at the U.S. Department of Defense, 2010, “Economic
Integration, Economic Signaling and the Problem of Economic Crises,” in Economics of War and Peace: Economic, Legal and Political
Perspectives, ed. Goldsmith and Brauer, p. 213-215
Less intuitive is how periods of economic decline may increase the likelihood of external conflict. Political
science literature has contributed a moderate degree of attention to the impact of economic decline and the security and
defence behaviour of interdependent states. Research in this vein has been considered at systemic, dyadic and national levels.
Several notable contributions follow. First, on the systemic level, Pollins (2008) advances Modelski and Thompson's (1996)
work on leadership cycle theory, finding that rhythms in the global economy are associated with the rise
and fall of a pre-eminent power and the often bloody transition from one pre-eminent leader to
the next. As such, exogenous shocks such as economic crises could usher in a redistribution of relative
power (see also Gilpin. 1981) that leads to uncertainty about power balances, increasing the risk of miscalculation
(Feaver, 1995). Alternatively, even a relatively certain redistribution of power could lead to a
permissive environment for conflict as a rising power may seek to challenge a declining power (Werner. 1999).
Separately, Pollins (1996) also shows that global economic cycles combined with parallel leadership cycles impact the
likelihood of conflict among major, medium and small powers, although he suggests that the causes and connections between
global economic conditions and security conditions remain unknown. Second, on a dyadic level, Copeland's (1996, 2000)
theory of trade expectations suggests that 'future expectation of trade' is a significant variable in
understanding economic conditions and security behaviour of states. He argues that interdependent
states are likely to gain pacific benefits from trade so long as they have an optimistic view of future trade relations. However,
if the expectations of future trade decline, particularly for difficult to replace items such as energy resources,
the likelihood for conflict increases, as states will be inclined to use force to gain access to those
resources. Crises could potentially be the trigger for decreased trade expectations either on its own or
because it triggers protectionist moves by interdependent states.4 Third, others have considered the link
between economic decline and external armed conflict at a national level. Blomberg and Hess
(2002) find a strong correlation between internal conflict and external conflict, particularly
during periods of economic downturn. They write: The linkages between internal and external conflict and
prosperity are strong and mutually reinforcing. Economic conflict tends to spawn internal conflict, which in turn returns the
favour. Moreover, the presence of a recession tends to amplify the extent to which international and
external conflicts self-reinforce each other. (Blomberg & Hess, 2002. p. 89) Economic decline has also
been linked with an increase in the likelihood of terrorism (Blomberg, Hess, & Weerapana, 2004), which
has the capacity to spill across borders and lead to external tensions. Furthermore, crises generally reduce the popularity of a
sitting government. “Diversionary theory" suggests that, when facing unpopularity arising from
economic decline, sitting governments have increased incentives to fabricate external military
conflicts to create a 'rally around the flag' effect. Wang (1996), DeRouen (1995). and Blomberg, Hess, and Thacker (2006)
find supporting evidence showing that economic decline and use of force are at least indirectly correlated. Gelpi (1997), Miller
(1999), and Kisangani and Pickering (2009) suggest that the tendency towards diversionary tactics are
greater for democratic states than autocratic states, due to the fact that democratic leaders are generally more
susceptible to being removed from office due to lack of domestic support. DeRouen (2000) has provided evidence
showing that periods of weak economic performance in the United States, and thus weak Presidential
popularity, are statistically linked to an increase in the use of force. In summary, recent economic scholarship
positively correlates economic integration with an increase in the frequency of economic crises, whereas political science
scholarship links economic decline with external conflict at systemic, dyadic and national levels.5
This implied connection between integration, crises and armed conflict has not featured prominently in the economic-security
debate and deserves more attention. This observation is not contradictory to other perspectives that link economic
interdependence with a decrease in the likelihood of external conflict, such as those mentioned in the
first paragraph of this chapter. Those studies tend to focus on dyadic interdependence instead of global
interdependence and do not specifically consider the occurrence of and conditions created by
economic crises. As such, the view presented here should be considered ancillary to those views.