The Donkey Pins the Tail on Itself

If there is no debt limit increase soon, the credit ratings of the United States will go down. If there is a deal but with no significant and credible reduction in spending soon, the credit ratings will go down. Standard and Poor's does not yet expect a default; it is concerned that there must be "a 'credible' plan to increase the debt ceiling that also reduces the long-term budget deficit":

Speaking publicly for the first time about the fiscal standoff, S&P President Deven Sharma said Wednesday that the bigger risk is a downgrade in the nation's AAA credit rating because Congress and the White House cannot agree on a package of spending cuts and possible revenue increases. (emphasis added)

A diminished credit rating will increase the interest rates the government and the private sectors have to pay for new borrowing. Mr. Sharma, the president of Standard and Poor's, commented:

A credit rating downgrade would force the U.S. to increase the interest rates on benchmark Treasury securities, a move that would have a cascading effect throughout the financial markets. Borrowing costs for mortgages and credit cards would rise, and mutual funds, pension funds and other investments would take a major hit.

This would be very unfortunate in an economy already worse than merely anemic. It would also diminish tax revenues, rather than increase them:

The U.S. economy stumbled badly in the first half of 2011 and came dangerously close to contracting in the January-March period, raising the risk of a recession if a stand-off over the nation's debt does not end quickly.

The "risk" of a recession is already great. However, the debt is a symptom, not the cause. Nor is our debt likely to be diminished by increasing it -- at higher cost:

The Commerce Department data on Friday also showed the current lull in the economy began earlier than had been thought, with the growth losing steam late last year.

That raised questions on the long held view by both Federal Reserve officials and independent economists that the slowdown in growth this year was mostly due to transitory factors.

. . . .

The economy grew at a 1.3 percent annual pace in the second quarter after expanding just 0.4 percent in the first three months of the year. First-quarter growth was revised from the previously reported 1.9 percent increase.

The Democrats demand, for political rather than economic reasons, a debt limit deal sufficient to carry the country through the November 2012 elections but with no significant and credible spending cuts. Former Speaker Pelosi wants to save the world as she likes it; she probably would prefer an even better world, as it was for her before the 2010 elections. And, of course, she is a mother; our government must, in her view, behave as a mother to her children.

The Republicans, particularly the "Tea Party Terrorists" -- who "represent a clear and present danger to the United States of America and ... must be stopped before it is too late" -- refused to go along with the Boehner bill because it was flaky with inadequate credible spending cuts, because Senator Reid had declared it Dead on Arrival in the Senate if it passed the House, and because President Obama had promised, several times -- most recently on July 29 -- to veto it should it unexpectedly reach his desk for signature. Next up in the House after it passes the Senate will most likely be an even flakier Reid bill, probably amended slightly to secure quick Senate passage. The Republican opposition to it in the House will most likely surpass that to the Boehner bill.

Assume, however, that there are enough Democrats and Republicans in the House to pass the Reid bill (update: Boehner bill passes House) and that President Obama will sign it. The U.S. credit ratings will still go down because it will be clearer than ever before that the U.S. will increasingly continue to spend more than it receives in revenues; unless our already less than meager economic recovery improves dramatically, those revenues will continue to decline and government costs will continue to increase. The near certainty of another eventual debt limit "crisis" will add to the incentives for a credit rating drop -- regardless of whether it happens before or after the November elections.

Even if another debt limit "crisis" is put off until after the November 2012 elections -- which seems to be and to have been President Obama's principal objective -- the results of a credit ratings drop based on the absence of significant and credible spending cuts (along with declining tax revenues from a debilitated economy) will be felt well before then. This, combined with the current near flat-lining of the U.S. economy, will have a substantial and adverse "snowball" impact on business:

1. Due to increased borrowing costs, what modest business investment there is now will be reduced further, and along with it there will be reduced hiring of new workers and increased lay-offs of existing workers.

2. Failure to diminish regulatory impediments to business expansion, and uncertainty as to more of the same or worse, will add to the problem. Many business leaders, some of them from the Obama camp, are complaining that "President Obama’s policies are stifling job creation."

[M]any top business leaders remain largely unmoved, judging from the unemployment rate that stands at 9.2 percent. Corporate leaders are sitting on about $2 trillion in capital, and gaming magnate Steve Wynn, a self-described “Democratic businessman,” told investors two weeks ago that business leaders will be “sitting on their thumbs” until Mr. Obama leaves office.

That can't be a very comfortable position, despite President Obama's insistence on sitting on his own thumbs.

“This administration is the greatest wet blanket to business and progress and job-creation in my lifetime,” said Mr. Wynn, whose second-quarter earnings at Resorts were nevertheless up $300 million from the same period in 2010.

“And I could prove it and I could spend the next three hours giving you examples of all of us in this marketplace that are frightened to death about all the new regulations, our health care costs escalate, regulations coming from left and right, a president that seems -- that keeps using that word ‘redistribution,’” he said.

Shared sacrifice of this sort, so dear to President Obama, may not help him; it certainly will help neither the economy nor those dependent upon it.