K-12 Tax & Spending Climate: America's AAA Bond Rating Under Threat

Gavyn Davies:

Standard & Poor's surprised markets today with a warning that the AAA rating of US debt is now on "negative watch", implying that there is a one-in-three chance that the US might lose its triple-A status in the next two years. Although there was nothing new in the underlying data cited by S&P, their judgment has clearly been impacted by the sharp political differences which have recently emerged in Washington about how to cut the deficit.

Both political parties agree that a large fiscal consolidation plan is needed, but they have widely different points of view on how the savings should be found. This has caused S&P to express scepticism about whether Washington can reach agreement on a deficit reduction plan and then stick to it over a series of difficult years.

That's how much the U.S. government spends, in inflation-adjusted dollars, per capita. Which means it's adjusted for both inflation and population increase. And note that that graph has a logarithmic scale.

A hundred years ago, federal spending for each person was the equivalent of $200 in today's dollars. After FDR, with all of his massive public spending, it was $1,000. This year, it's over $12,000. How long can this continue?

For the first time since the Great Depression, households are receiving more income from the government than they are paying the government in taxes. The combination of more cash from various programs, called transfer payments, and lower taxes has been a double-barreled boost to consumers' buying power, while also blowing a hole in the deficit. The 1930s offer a cautionary tale: The only other time government income support exceeded taxes paid was from 1931 to 1936. That trend reversed in 1936, after a recovery was underway, and the economy fell back into a second leg of recession during 1937 and 1938.

Posted by Jim Zellmer at April 19, 2011 1:01 AM
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