American Action Forum president and former Congressional Budget Office director Doug Holtz-Eakin explains why the Moody's US credit downgrade is more serious than past downgrades and how Social Security may force a broader fiscal reckoning.
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if we see sort of the base case of this bill passing in some form, even if it's just an extension of the tax cut if indeed the base case is 10% universal tariffs that if that's where we end up, what does all of that put together mean economically?
I I think not a lot quite frankly. Um, you know, the US has a trend growth rate somewhere in the, you know, 1.8 to 2% range. Uh there's talk of somehow this moving into 3%. I I don't see anything in the tax plus tariff world that that looks like a dramatic change in that trend growth rate. Um, you know, you need to have some genuine uh powerful supply side incentives like getting the corporate rate from 35 to 21. We don't have anything like that on the table right now. And so I don't expect big changes. There might be some short-run boost from a lot of cash in that in the hands of people who get, you know, no tax on tips and no tax on overtime. But that's a transitory thing and won't get you past 2020 six probably at best.
So I'm going back to the downgrade, and I know Moody's was the last of the three, but I take a look at AAA rated US industrials. And AAA rated which the US is not anymore, have zero spread to treasuries at the three month tenor. But a 50 basis point spread to treasuries at the 10 year. So we know that time exacerbates credit risk. Are you worried at all about the downgrade or the dedollarization, any of that? Is that come into your your thought process?
Yes. I am. I'm worried about this. So, you know, we got downgraded in 2011 by S&P Global and they said, you know, boy, the politics of the United States are really bad. And then in 23 Fitch said, the US does not seem to have the political wherewith all to manage its finances effectively. Both of those are about the process. Moody said, you have too much debt and too much interest. That's the problem. It's a very different downgrade and one that I think is far more serious because it's not talking about the politics. It's saying whoever's there has has has got too much debt and and they're going to carry too much interest. That's a real concern. And, um, you know, we've seen no particular appetite for dealing with deficit fiscal position uh thus far in the Trump administration. And I certainly hope that that tune changes. We really can't afford to just blithely go down this uh trajectory much longer.
Doug, I'm sure I've heard you say that before. And a lot of our folks have been saying that for years, right? So there's no appetite for this. That much is very clear. In DC, some people are talking about it, but broadly, there's no appetite. What the thing I keep coming back to is what would change that? What would force the hand? Would it have to be a some kind of credit crisis on the part of the US? Or are we just going to kind of muddle along until something breaks?
So, you know, a a a favorite theory is it takes a crisis and I certainly, you know, have been asked a lot when does the crisis hit? And and the truth is, I I don't know the answer and I don't want to run the experiment. I don't know how long we we we can uh uh do this. I I want to tell you a short tail about how how it gets fixed and it revolves around Social Security. Uh it is the case that for years Social Security's been the third rail, no one wants to touch it, but the trust fund is going to go bankrupt in eight years, maybe less than next trust report. And that means that uh just you know, in the absence of action, retirees get a 21% across the board cut, which you and I both know is never going to happen. But that means there will be social security reform somewhere in the next eight years. And that's a good thing. And if you're 55 right now and you want to retire at 65, you don't know what your benefit will be. And increasingly people are going to understand that. And when they go to the town hall, it's not going to be, hey, don't touch social security. It's going to be, hey, what am I going to get? When are you guys going to settle this? How are you going to fix it? And that's a good thing. That's a debate we have to have. I think events are going to force it on us. Not political courage, but we're going to have to come to terms with that. And once you start, you know, pulling the social security thread, you can't do this all on seniors. They're going to start looking everywhere in the budget. And so I expect a reemergence of genuine debate over policy issues in the in the budget over the next uh five or six years.