RUNNING AFOUL OF CREDIT RISKS WITH LACK OF LEADERSHIP

by Lowell L. Kalapa, Tax Foundation of Hawaii

The town, if not the entire nation, was “a-twitter” with the question of what the downgrade in the nation’s debt rating would mean not only to the economy as a whole, but what it will mean to their own pocketbooks.

First the question as to why the nation’s debt rating was downgraded from a “triple A” rating to an “AA+” rating. As the rating agency noted, their job is to be “forward-looking” as to how safe is an investment in an institution - in this case, our nation’s debt. That is, how certain will the institution be able to repay that debt given its financial situation. More specifically, the bond rating agency pointed to the weakened “effectiveness, stability, and predictability of American policymaking and political institutions . . at a time of ongoing fiscal and economic challenges.” In other words, the bond rating agency doesn’t have much faith in our political leaders being able to step up to the plate and addressing our nation’s fiscal crisis.

The rating agency went on to point out that their outlook on the long-term rating is negative and that the rating could be lowered even more if there is “less reduction in spending than agreed to, higher interest rates, or new fiscal pressures” which result in higher debt than has currently been projected under the debt ceiling agreement. In other words, if political leaders in Washington don’t live up to their recently approved agreement to curb spending, the nation could see another downgrade of its debt rating.

This sharp criticism comes as no surprise and the events of the past few weeks were almost predictable given the first round of economic snafu in late 2008 when agreement had been reached on the bailout of the financial mess on Wall Street only to have the then Speaker of the House lead her band of partisan patriots to reject that agreement. That action shook the confidence of not only Americans but also observers around the world that hurled the global economy into full tilt. Investors pulled back and companies around the world curled their toes refusing to spend their endangered cash on expansion and the creation of jobs.

Although politicians have attempted to lure businesses out of their shells to spend that cash to create jobs, the lack of confidence in our political leaders continues to keep that cash frozen. Instead of creating certainty and restoring the confidence of industry, the federal government did the only thing it knows how to do - spend money to “stimulate” the economy. But spending all that money meant that the federal government had to borrow even more money to fund that jump start.

Given the inability of both the administration and Congress to resolve the debt issue, Wall Street and the bond rating agencies obviously lack confidence that either branch is capable of dealing with the issue. Spending cuts or tax increases, Congress needs a game plan that will reduce spending and encourage economic growth that will generate the needed revenues to restore fiscal order. More than anything else, the government needs to get out of the face of not only industry, but of taxpayers too if jobs are to be created.

So what does this downgrade of the nation’s debt rating mean for the average taxpayer? Because our lenders see more risk, they will probably want more money for lending that money which translates into higher interest rates. Higher interest rates mean it will be more costly for businesses to borrow funds to either expand their business or to just maintain a line of credit so that they can meet their current payroll. Should funds become more difficult to obtain, either because of higher interest rates or just because funds are not available, some businesses may just go out of business. Increased interest rates will have to be recovered in the cost of goods and services which will be passed on to you and me as consumers.

Interest rates to finance a mortgage or to be paid on unpaid credit card balances will also rise, eating even more into our take home pay. Of course, those higher interest rates will have a dramatic impact on Hawaii’s already expensive housing and construction market. With a weak economy already on the mainland, Hawaii may see yet another round of slumps in visitor traffic and spending.

While we may benefit from those generous federal dollars and programs, if spending is not reined in now, the situation will get even worse. If political leaders don’t have the courage to rein in spending, then perhaps voters should find elected officials who will make those tough decisions.

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