Raising the debt limit might put off a downgrade disaster in August, but that still isn’t enough—as Standard & Poor’s recent warning made clear. Perhaps the most important shot not heard around the world was S&P’s other admonition: Namely, that the U.S. bond rating will be downgraded in three months, if not sooner, unless we do something about government spending. Beyond raising the debt limit, S&P laid out clear criteria for avoiding a downgrade: 1) reduce the debt by about $4 trillion; 2) agree to a credible plan within three months; and 3) guarantee that this newfound fiscal discipline will actually stick.
If S&P isn’t bluffing, then lawmakers should get serious about reducing the debt-to-GDP ratio, and they should do it quickly. But how do we achieve such a task? In her latest appearance on Bloomberg TV, Reason columnist and Mercatus Center economist Veronique de Rugy explains the facts about spending cuts, the debt, and the GDP.