Morici: Downgrade US Treasurys to Junk

[Poboy]

Published: Monday, 20 Dec 2010 | 11:15 AM ET
By: Peter Morici
Professor, Smith School of Business, University of Maryland


With the new tax cuts, rating agencies should downgrade U.S. government debt to junk.

Economists, pundits and politicians had little choice but to endorse the tax deal between President Obama and Congressional Republicans, because snapping back to pre-Bush tax rates would crush the economic recovery. But Washington exhibited not even the shadow of self-restraint and cut taxes far beyond what is needed or smart.

Newly emboldened Republicans demanded all the Bush tax cuts be extended. President Obama argued the country couldn’t afford those for families in the highest tax brackets, but failed to apply such reasoning to temporary benefits bestowed on Democratic constituencies by his 2009 stimulus program.

Instead of compromising, with each side getting half of what it wanted, Washington feasted—everyone got everything they wanted and more. Business got its R&D tax credit and a temporary tax holiday on new investments. The wealthy got Bush-era tax rates and even lower rates through temporary elimination of income-triggered phase outs on deductions and personal exemptions. The poor and middle class got a temporary 33 percent cut in social security taxes.

In 2012, when the Congress must revisit the personal and corporate tax codes, permanent reductions in Social Security taxes will be politically necessary to win extensions for the Bush tax cuts benefiting even middle income families and the truly essential benefits businesses need to create jobs, not to mention all the additional goodies the Congress has just bestowed.

This renders the Social Security system absolutely insolvent, and makes permanent budget deficits upwards of $1.5 trillion and about ten percent of GDP permanent. Moody’s would be hard pressed to give any government with budget projections like those an investment grade rating, but the United States is different.


FULL-
http://www.cnbc.com/id/40749001