Famed Watergate reporter Bob Woodward's latest book, "The Price
of Politics," deals with 2011's standoff between Democrats and
Republicans about raising the debt ceiling. This week, the bond
rating agency Moody's provided a reminder that the price of
politics may yet get steeper.
While not yet downgrading the U.S. credit rating, Moody's warned
that the prospect for a downgrade seemed likely unless the U.S.
government found a constructive way to address its debt situation.
While a downgrade by Moody's alone is unlikely to directly impact
the interest rates the U.S. government must pay when it borrows
money, the warning by the rating agency is reflective of growing
concern within the financial community about the fiscal condition
of the U.S. That rising level of concern could eventually affect
A tough needle to thread
In its comments on the challenges facing the government, Moody's
correctly put its finger on the two variables that must be managed.
Moody's called for the U.S. to produce a plan that would stabilize
and then reduce the ratio of debt to Gross Domestic Product (GDP).
Given the slow economy, this is a tough needle to thread: Budget
cutting or tax increases could reduce debt, but doing either too
severely could also drag down GDP. The trick will be to come up
with a credible debt reduction plan that isn't seen as too damaging
to economic growth.
This would be a tough challenge under any circumstances, but it
is made all the more difficult by the dysfunctional relationship
between Democrats and Republicans in Congress. As Woodward's book
recaps, that relationship brought the nation to the brink of a
fiscal crisis last year.
Paying the price in multiple ways
If the two parties can't make the compromises and sacrifices
necessary to solve the fiscal challenge, then Americans could find
themselves paying the price of politics in multiple ways:
Credit concerns will eventually cause the U.S. to pay
higher interest rates.
In this instance, U.S. could also be written as "us" -- that is,
Savings accounts could get the worst of both
Continued economic sluggishness could mean that savings accounts
continue to pay minimal interest rates -- even as the government
has to pay rising interest rates.
Entitlements are on track to get out of control.
Without funding and benefit reform, costs will escalate sharply
as the American population
A stock market setback could cost more than a tax
The investment community seems likely to embrace a plan that
includes steady cost-cutting with selective revenue increases.
Such a compromise could very well result in a stock rally that
rewards the wealthy by far more than the cost of any tax
increase. Failure to find such a solution, however, could have
the opposite effect.
Unfortunately, major elections tend to polarize political
parties rather than bring them together. Unless that changes soon
after the election, expect the price of politics to go up in