Here is the scenario. You are a college student at one of the most prestigious universities in America - Harvard, Yale, Stanford or other comparable institution of higher learning. In your entire academic life since grade school, you have posted an impressive record of straight 'A's on your tests, papers and report cards. Right now, the professor is passing back last week's challenging history assignment, but not a thought passes your mind as to the result. You are certain it will be another 'A'..
Your name is called. You pick up your bag and head for the door. As you exit, the professor's arm extends with the paper. You take it. Once through the threshold, the mark, etched in red pen, seems to hover above the page. It is something you have never seen before - a 'B'.
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A few seconds of disbelief turns into frustration, and frustration leads to a reflexive e-mail to the professor to set up a time to discuss 'the error.' During the meeting, the professor makes three salient and irrefutable points. Unlike the students receiving 'A's, your essay 1) contained only one primary source (the 'A' students had at least two), 2) lacked analytical depth and 3) had several syntactical errors in sentence construction.
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The professor, who has maintained his or her equanimity and tried to reassure you that an A- is still within range, is a million miles away. You have not heard a word of the professor's sound judgment. Feeling the electricity of anger run down your spine, you abruptly excuse yourself by saying 'Thank you for your time' and dash out of the office. The grade is not changing. An A-? It is beyond your comprehension. Running into a classmate on the walk back to the dormitory, he asks your grade. You confess to receiving a 'B', and then exclaim, "The professor made a 'terrible judgment.'"
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Those were the words ('terrible judgment') that Treasury Secretary Timothy Geithner (b. 1961) used to describe the US credit-rating downgrade by Standard & Poor's (S&P) credit-rating agency. Rather than face the facts, accept criticism and offer a bit of humility, Geithner and other officials in the US government have instead exhibited the behavior of an overconfident and self-congratulatory college student.
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From AAA to AA+: A Sound Judgment
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Geithner has been repeatedly hailed as an indispensable financial genius. Apparently however, he and others in the US government are incapable of seeing the state of American finances and the American economy for what they truly are - a current debacle and an utter disaster in the making.
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Despite the eleventh-hour agreement by the US Congress to raise the debt-ceiling and cut $2.1-2.4 trillion over the next decade, S&P still downgraded America's credit rating. Why? There are four compelling (and distressing) pieces of data behind their decision.
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1) Irrespective of the debt-deal, the amount of US debt could exceed the annual Gross Domestic Product (GDP - the amount of assessed wealth a nation produces) by 1 January 2012 - $15.5 trillion debt/$15.0 trillion GDP. Even more disconcerting is the general, long-term debt/GDP ratio over the next ten years. At best, conservative estimates place the 'net general government debt' at 74% of the GDP at the end of the year. According to S&P, the US debt will jump to 79% of the GDP in 2015 and 85% of the GDP in 2021 if the US government remains on its current fiscal course.
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2) The US economy is once again in decline. A few weeks ago, the GDP for the first quarter of 2011 was recalculated and revised down from a sluggish 1.9% to an anemic 0.4% growth. Since April, job growth has been limited, and job cuts have occurred in sectors of the economy once thought to be immune from the recession. Lockheed Martin, Cisco Systems and giant pharmaceutical firm Merck & Co. have all announced layoffs recently. As for the official 9.2% unemployment rate, that percentage does not reflect millions of Americans who have all but given up looking for work and millions more with jobs that pay a paltry $8-12 per hour - the underemployed.
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3) Entitlement programs need to be recalibrated. As the baby-boom generation, the largest segment of the population, begins to retire, the US Treasury will be increasingly strained over the next twenty-five years to make Social Security, Medicare and Medicaid payments. The retirement system simply does not reflect demographic reality. If life expectancy were still 68.0 years as it was in 1950, these programs would be sustainable. Yet, the average life-span is now 79.9 years, and Congress' failure to undertake a single step in the direction of common-sensical reform rightly alarmed analysts at S&P.
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4) Tea-Party conservatives in the House of Representatives, who ideologically oppose any tax increases whatsoever, have thrown the government into a revenue crisis. While their staunch opposition to additional taxes on the middle class is understandable, why do they insist on protecting the wealthiest citizens from paying a higher tax percentage - especially in light of the fact that the richest Americans have only become richer over the last decade? In the January/February issue of Foreign Affairs, one of the most respected journals in the world, Robert C. Lieberman, a professor of political science and public affairs at Columbia University, identified the crux of America's current financial woes in the following factual analysis:
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"And yet a curious thing has happened in the midst of all this (economic) misery. The wealthiest Americans, among them presumably the very titans of global finance whose misadventures brought about the financial meltdown, got richer. And not just a little bit richer; a lot richer. In 2009, the average income of the top five percent of earners went up, while on average everyone else's income went down. This was not an anomaly but rather a continuation of a 40-year trend of ballooning incomes at the very top and stagnant incomes in the middle and at the bottom. The share of total income going to the top one percent has increased from roughly eight percent in the 1960s to more than 20 percent today." (highlighting added)
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By protecting the ultra-rich and starving the government of needed revenue, the Tea-Party is waging war on the middle and lower classes. In defending their dogged line against any and all taxes, Tea-Party members have adopted a refrain of something akin to 'We cannot tax the job-creators. It would further erode the economy." This is patently untrue. In general, larger businesses and wealthy individuals have plenty of cash-on-hand to hire more workers. Why have they not done so? For one simple reason - demand for goods and services is flat.
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The Road Back To AAA and American Respectability
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The Tea-Party, a recrudescent movement of the Reagan-era, supply-side school of economics in the 1980s, has the equation precisely backwards. Tax breaks at the top will neither spur the economy nor solve the economic dilemma. They will only exacerbate the crisis.
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An economic recovery strong enough to create jobs and pay down the debt must be launched from the bottom-up. In taking money from higher taxes on the wealthiest Americans and closing corporate tax loopholes, the US government would not only have a considerable sum to invest in badly needed infrastructure upgrades and job-training programs, but it would also be able to pay off a larger portion of the national debt. A relatively small tax-break for middle and lower income-earners would drive-up consumer spending and more than pay for itself - by sparking those 'job creators' to begin hiring again - which would then put additional taxpayers into the economy who contribute to entitlement programs and again - pay down the debt.
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When S&P downgraded the credit rating of the US from AAA to AA+, it was a wake-up call to a nation in need of a large-scale bailout program for its struggling, hard-working citizens. Plutocracy and democracy are not compatible. If America is to live up to its billing as a nation 'of the people, by the people (and) for the people,' then its economic policies must be centered on achieving opportunities for the average citizen rather than the citizen-elite.
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From the financial data and the state of political gridlock, S&P was 100% correct in downgrading America. Indeed, it was well-earned. The question now is: Will the US reaction be that of a spoiled college student who lacks the maturity to accept sound and constructive criticism? Or will Washington take a hard look in the mirror and address the structural deficiencies in its economy with new policies based on the timeless values of fairness, common sense and human dignity? While the future cannot be predicted, one thing is for sure. Every American - and the entire world - has an enormous stake in the outcome.
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(Picture: A US $10,000 bill. President Woodrow Wilson graces the front of a rarely-seen denomination. The S&P credit rating came into existence during Wilson's presidency in 1917.)
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To read Robert Lieberman's incisive article "Why The Rich Are Getting Richer: American Politics in The Second Gilded Age," please click onto the following link: http://www.foreignaffairs.com/articles/67046/robert-c-lieberman/why-the-rich-are-getting-richer
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To view relevant additional economic data (charts and graphs) on the US economy, please click onto KleosTimes to the right and view posts under 8 August.
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The author is an American.
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J Roquen