The Debt Deal Won't Save America's Credit Rating

At some point, a deal to raise the federal debt limit was going to be necessary. Not pleasant, not fun, not in any way something to look forward to or cheer, but necessary as a consequence of prior profligacy and fiscal recklessness. Washington's decade-long, taxpayer-financed spending binge made it a requirement, not an option: Even the House Republican budget plan drafted by Rep. Paul Ryan was built on increasing the amount of federal debt, and thus the federal debt limit, in the near term.

But even if the deficit reduction mechanisms outlined by this weekend's plan work, it won't be nearly enough. In the long term, the biggest driver of the federal debt growth is health spending, and while the deal that's now hurtling toward a vote might result in some tweaks to the payments the government makes to health care providers, it essentially does nothing to combat the unsustainable long-term growth of health spending. Some of the potential health reforms that might come out of a deficit commission package might be worth doing, but none represent the sort of fundamental reforms that will be necessary to head off the basic math of the budgepocalypse.

And so it's no surprise to see that the credit raters at Moody's are warning that neither of the deals that were being talked up by Republicans and Democrats last week—both of which ended up being fairly similar to the joint agreement we're looking at now—would protect America from a potential credit rating downgrade. From The Hill:

The limited magnitude of both debt plans put forward by congressional leaders would not put the nation's AAA credit rating back on solid footing, Moody's Investors Service announced Friday.

Reductions of the magnitude now being proposed, if adopted, would likely lead Moody's to adopt a negative outlook on the AAA rating, the credit rating agency said in a new report. The chances of a significant improvement in the long-term credit profile of the government coming from deficit reductions of the magnitude proposed in either plan are not high.

It added that prolonged debt ceiling deliberations have increased the odds of a downgrade, but that the firm is still confident policymakers will avoid a default.

The best reason to have a big showdown over raising the debt limit was to start the process of figuring out how to deal with a federal fiscal trajectory that is simply not sustainable. Instead, we ended up with a politically motivated showdown that resulted in gimmick-filled plans full of likely-bogus spending reductions. If anything, the showdown and the deal it gave us ultimately made our credit outlook slightly worse by illustrating, in painful and prolonged detail, how difficult it will be for our political system to truly come to terms with the nation's debt problem when it eventually has to.