August 5, 2011

S&P Downgrade Signals Missed Opportunities to Address Long-Term Fiscal Problems

Garett Jones

Senior Research Fellow

The bad news is the world has concluded that we're not the grown-ups they thought we were.
A credit downgrade means U.S. Treasuries will not be considered risk-free assets anymore. Instead investors will find German bonds or Singaporean bonds more attractive.
The general worry about investing in U.S. Treasuries doesn’t mean we’re at risk of a double-dip recession. But, this could be the end of American exceptionalism. The only way to bounce back is for lawmakers to go back and find another $2 trillion to $4 trillion in spending cuts, like originally suggested.

We've now botched three chances at fixing our long-run fiscal problems.

The Clinton-era surpluses were allowed to evaporate, Social Security reform never happened—it was designed to make the system more progressive, and now, with fiscal crises erupting across Europe, we passed up a chance for serious fiscal consolidation and entitlement reform.