Moody’s in a Mood

The rating agencies are at it again. Moody’s Investors Services says it’s likely to downgrade U.S. government bonds if Congress and the White House don’t reach a budget deal before we go over the so-called “fiscal cliff” on January 2, when $1.2 trillion in spending cuts and tax increases automatically go into effect.

Apparently the credit rating agencies can’t decide which is more dangerous to the U.S. economy – cutting the U.S. budget deficit too quickly, or not having a plan to cut it at all.

Last year’s worry was the latter. In the midst of partisan wrangling over raising the nation’s debt limit, Standard & Poor’s downgraded U.S. debt – warning that Republicans and Democrats didn’t have a credible plan to tame the deficit.

Now Moody’s is worried about the opposite: The spending cuts and tax increases in the Budget Control Act that will automatically kick in at the start of 2013 – unless Congress decides on a better and presumably more gradual approach — are so draconian they’ll push the economy into a recession.

The ratings agency schizophrenia is understandable. Everyone in Washington – and just about everywhere else – knows the budget deficit has to be dealt with. But anyone with half a brain (including Washington) also knows that when unemployment is high and economic growth still painfully slow, cutting the deficit too much now would make a bad situation even worse.

Remember, the real problem isn’t the deficit per se. It’s the deficit in proportion to the size of the economy. Cutting too much too soon will tip the economy into recession because it would reduce overall demand for goods and services when private demand falls way short of what’s needed. And if the economy goes into recession and begins to shrink, the ratio of deficit to the economy gets worse. That’s the austerity trap Europe has fallen into.

Even if the deficit continues to grow in proportion to the economy, we’re safe as long as those who lend money to the U.S. aren’t worried about being repaid and therefore don’t demand high interest rates in return for their loans.

By this measure, the American economy appears safer than ever. Despite all the harrumphing from the credit-rating agencies, the United States has never been able to borrow money more cheaply than it can right now. That’s because no matter how bad the deficit situation looks here, it’s worse in places like Spain and Italy. And no matter how deadlocked Congress becomes, the U.S. is still the most stable and reliable system in which to put your savings.

The fiscal cliff is a real worry. And it’s a worry precisely because the budget deficit isn’t — at least not now. When unemployment is high and growth is anemic, we need as much fiscal stimulus as we can manage.

As long as the rest of the world is willing to lend us their savings so cheaply, we’d be wise to use it to rebuild our crumbling infrastructure and our schools and parks — and thereby put more Americans back to work – rather try to cut the deficit too much and too soon.

About Robert Reich 547 Articles

Robert Reich is the nation's 22nd Secretary of Labor and a professor at the University of California at Berkeley.

He has served as labor secretary in the Clinton administration, as an assistant to the solicitor general in the Ford administration and as head of the Federal Trade Commission's policy planning staff during the Carter administration.

He has written eleven books, including The Work of Nations, which has been translated into 22 languages; the best-sellers The Future of Success and Locked in the Cabinet, and his most recent book, Supercapitalism. His articles have appeared in the New Yorker, Atlantic Monthly, New York Times, Washington Post, and Wall Street Journal. Mr. Reich is co-founding editor of The American Prospect magazine. His weekly commentaries on public radio’s "Marketplace" are heard by nearly five million people.

In 2003, Mr. Reich was awarded the prestigious Vaclev Havel Foundation Prize, by the former Czech president, for his pioneering work in economic and social thought. In 2005, his play, Public Exposure, broke box office records at its world premiere on Cape Cod.

Mr. Reich has been a member of the faculties of Harvard’s John F. Kennedy School of Government and of Brandeis University. He received his B.A. from Dartmouth College, his M.A. from Oxford University, where he was a Rhodes Scholar, and his J.D. from Yale Law School.

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