U.S. Credit Rating Downgraded Due to Rising Debt

The world’s third largest credit agency lowered America’s credit rating from “AAA” to “AA+” yesterday, citing rapidly rising debt and future fiscal uncertainty.

Fitch Ratings cites America’s projected fiscal deterioration over the next three years, in its press release. Fitch also points to a history of debt limit standoffs and a deterioration in credit trustworthiness over the last 20 years: “The rating downgrade of the United States reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to ‘AA’ and ‘AAA’ rated peers over the last two decades that has manifested in repeated debt limit standoffs and last-minute resolutions.”

Fitch expects the federal budget deficit to rise to 6.3% of GDP in 2023, up from 3.7% in 2022, reflecting new government spending, weaker federal revenue, and a higher interest burden from already existing debt. It also predicts a mild recession to come in the fourth quarter of 2023 and the first quarter of 2024, with GDP growth slowing to 1.2% this year from 2.1% in 2022 and overall growth falling to an anemic 0.5% in 2024.

Debt limit standoffs typically do nothing to limit the rise of the national debt — indeed, politicians sometimes extract increased spending or reduced revenue as a condition for allowing the debt limit to rise. Congressional Democrats sometimes obtain increases in welfare spending in exchange for allowing the national debt limit to increase. When Congress raised the debt limit in 2019, Democratic leaders boasted that in exchange for raising the debt limit, they obtained “robust funding for” their “domestic priorities.” That funding increased the national debt. Similarly, in 2023, Republicans demanded reductions in IRS funding in exchange for raising the debt limit. Cutting IRS funding increases the budget deficit by making it harder to catch tax cheats, which reduces tax revenue. The IRS cuts Republicans obtained will offset some of the other deficit reductions the GOP extracted from President Biden in exchange for increasing the debt limit. Those other deficit reductions by the GOP could probably have been obtained through the normal appropriations process, without being included in any debt-ceiling deal.

Federal spending has risen 40 percent since 2019 — much faster than the economy, resulting in skyrocketing national debt. Biden is proposing a further “8 percent increase for 2024.” America’s national debt is now bigger than its economy, which was not the case for almost all of its history. The national debt is more than 20% larger than the economy, even if you ignore unfunded pension obligations and other hidden liabilities. And the national debt only includes federal debt, not state and local government debt.

If Democrats regain control of Congress in 2024, Biden is likely to propose much larger budgets that increase spending further. Right now, the Republican-controlled House has made it impossible for Biden to push his pet projects, such as his $5 trillion Build Back Better plan, and his plan to spend hundreds of billions of dollars subsidizing obsolete forms of transportation such as passenger rail in rural areas, which could interfere with the freight railroads that efficiently transport much of America’s goods.

Biden’s massive federal spending has caused inflation, according to economists like Bill Clinton’s Treasury Secretary, Larry Summers, and Obama advisor Steven Rattner. As Rattner noted in the New York Times last year, Biden spent “an unprecedented amount” of taxpayer money, which resulted in “too much money chasing too few goods.”

The spending would be even greater if the Supreme Court had not blocked Biden’s costly plan to forgive $10,000 or $20,000 in student loan debt for many borrowers (some of who have very high incomes), at a cost to taxpayers of $500 billion.

Jason Furman, chairman of President Obama’s Council of Economic Advisers, called Biden’s student loan forgiveness plan “reckless.” Furman says, “Pouring roughly a half-trillion dollars of gasoline on the inflationary fire that is already burning is reckless.” Biden’s plan would increase economic inequality and the national debt, as even the liberal Washington Post recognized.

The Biden administration recently issued income-driven repayment plans that will prop up high college tuition, which otherwise would have peaked and begun falling due to fewer high-school students attending college. The purpose of these new plans seems to be partly to bail out low-quality, expensive private liberal-arts colleges that fewer and fewer students would otherwise attend. Essentially, it is a bailout for progressive colleges (which have radically increased their administrative bloat and number of college administrators in the last generation). The Biden administration’s income-driven repayment plans will cost taxpayers at least $500 billion, and “will cost at least $300 billion (and probably much, much more) in the immediate future.”

As the Washington Post has chronicled, those plans encourage colleges to raise tuition like crazy, because “under income-based repayment, your payments vary with your income, not the size of the loan” you took out to pay for tuition. So you don’t mind borrowing more money, because as your debt increases, your payments remain the same (and the unpaid loan balance is written off after 10 or 20 years). As a result, if you are a student, your college will raise tuition more, and you will borrow more money to pay that tuition, knowing that taxpayers will some day pay off your IDR program loans. The Biden administration has lowered the percentage of income students need to pay under these plans, resulting in much of their loan balance never being paid off, especially if they attend an expensive college or have a useless major.

The IDR plans’ writing off student loans after 10 or 20 years will encourage colleges to jack up tuition, by making it more attractive to take out big loans to cover college tuition. When students are willing to borrow more to go to college, colleges respond by raising tuition. The Daily Caller notes that even in the past, when students had to repay their student loans in full, “each additional dollar in government financial aid translated to a tuition hike of about 65 cents,” according to the Federal Reserve Bank of New York.

As Reason Magazine explains, the Biden income-driven repayment plans:

“impact will be catastrophic. In fact, unless the government does something to constrain colleges’ ability to set their own prices, IDR could break the entire higher education financing system and lead to skyrocketing costs for taxpayers…..That’s because both the borrowers and the universities will have increased incentive to bilk the people who actually make the loan: the taxpayers….Something close to this scheme already exists in law schools, which have Loan Repayment Assistance Programs (LRAPS).“

For how this scam works, and how it will cost taxpayers hundreds of billions of dollars or more, visit this link: https://reason.com/2022/08/30/biden-student-loans-income-driven-repayment-college/