Tuesday, August 9, 2011

Malpass: Damaging Economic Policies to Continue

The U.S. may be upset over Standard and Poor's decision to strip it of its AAA rating but will likely stick with the fiscal and monetary policies that got the country in trouble in the first place, says David Malpass, president of Encima Global and former deputy assistant Treasury secretary in the Reagan administration.
The White House says Standard and Poor's made a $2 trillion "error" when assessing its rating.
Even if Standard and Poor's uses White House math, the problem remains that U.S. debt-to-GDP ratios are worse than other countries with AAA ratings, and that's tough to correct, Malpass writes in a Washington Times column. (There are 18 sovereign entities with S&Ps top rating in all, including Hong Kong and Australia.)
"The problem is that our current federal spending system has few effective controls. The Constitution was amazingly farsighted but didn’t envision a government so successful and jaded that it could ever borrow $100 billion, much less $20 trillion as now envisioned," Malpass says.
"Washington benefits from more spending and doesn’t want it to stop. Making matters worse, an offshoot of the flawed 1974 Budget and Impoundment Act makes it a felony for executive branch officials to spend less than Congress appropriates, no matter how wasteful or misguided a program."
Moody's, another major ratings agency, has not downgraded the U.S., but says it may do so if the U.S. doesn't address its deficits.
"For the AAA rating to remain in place, we would look for further measures that would result in the ratio of federal government debt to GDP, for example, peaking not far above the projected 2012 level of near 75 percent by the middle of the decade, and then declining over the longer term," Moody's analyst Steven Hess writes in a report, according to Reuters.


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