TO: House Republicans
FR: Eric Cantor
DT: August 8, 2011
RE: S&P Downgrade of U.S.
Like many of you, I spent the weekend attempting to put Standard and Poor’s Friday night downgrade of U.S. government debt into context and understand its point of view. After hearing from many of you and from respected experts outside of government, I wanted to take a brief moment and outline my initial thoughts. I welcome and would appreciate any feedback you may have.
As we all know, America is facing two related but separate crises. The first is the federal government’s debt crisis that is the result of decades of fiscal mismanagement by both political parties. The second is the economic and jobs crisis, which has resulted in record unemployment and made it harder for businesses to grow and create jobs. I believe that America’s jobs crisis has been compounded by the Obama Administration’s anti-business, hyper-regulatory, pro-tax increase agenda –which has led to dangerous uncertainty in our economy. While much of our time this Congress has been focused on the former, it is the latter that is most directly and dramatically impacting the lives of individuals, families, and small businesses throughout this country.
Anyone who has looked at the numbers cannot seriously discount S&P’s concerns over our government’s rising public debt burden. I do, however, believe its analysis is overly focused on resolving the debt crisis in a manner that would greatly worsen the jobs crisis, which would be a catastrophic mistake. This is not surprising, as S&P’s job is to opine on the federal government’s balance sheet. Indeed, S&P makes clear in its Friday report that it takes, “no position on the mix of spending and revenue measures that Congress and the Administration might conclude is appropriate for putting the U.S.'s finances on a sustainable footing.”
As legislators focused not just on our debt crisis, but also on getting the 14 million currently unemployed Americans back to work, we cannot afford to be so ambivalent when it comes to revenues. As I learned during the two months of debt limit negotiations, ‘revenues’ is just a code word for the President’s desire to tax individuals, families, and small business people earning over $200-250,000 per year.
S&P seems particularly focused on what it sees as the inability of the political parties to bridge our differences on the best way to eliminate the deficit. By this it means – in part – our unwillingness to raise taxes. The bottom of page four of the S&P analysis describes that a base case scenario, which results in the AA+ rating with a negative outlook, “now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the [Budget Control Act].”
Now to be fair, S&P is also clearly concerned about what it perceives as an unwillingness to tackle our insolvent entitlement programs, which are the biggest drivers of our debt, “the containment of which [S&P] and most other independent observers regard as key to long-term fiscal sustainability.”
So Where Does This Leave Us?
In all of the discussions Speaker Boehner and I have had with the President this year, the President has repeatedly made clear that even if we agree to all of his requested tax increases, he would never support the type of structural changes to Medicaid, Medicare, and Social Security necessary to make these programs solvent as envisioned in our budget resolution.
More disturbingly, the President and Congressional Democrats have also argued that they will only consider modest changes to our current entitlement programs if we agree to tax increases.
For those 14 million Americans currently looking for work, this is a trade we simply cannot afford to make. Raising taxes in this economy will only make it harder for working families and the very small businesses we are counting on to create jobs and get our economy going.
But don’t take my word for it; here is what two Harvard economists concluded in a 2009 study about the various approaches to closing budget deficits, “For fiscal adjustments we show that spending cuts are much more effective than tax increases in stabilizing the debt and avoiding economic downturns. In fact, we uncover several episodes in which spending cuts adopted to reduce deficits have been associated with economic expansions rather than recessions.” (Alesina, A. and Ardagna, S., “Large Changes in Fiscal Policy: Taxes Versus Spending,” National Bureau of Economic Research, Working Paper No. 15438, Oct. 2009, p. 3, available at http://www.nber.org/papers/w15438.)
The Path Forward:
Over the next several months, there will be tremendous pressure on Congress to prove that S&P’s analysis of the inability of the political parties to bridge our differences is wrong. In short, there will be pressure to compromise on tax increases. We will be told that there is no other way forward. I respectfully disagree.
As we have said from the beginning of the year, the new Republican Majority was elected to change the way Washington does business. We were not elected to raise taxes or take more money out of the pockets of hard working families and business people. People understand Washington can’t keep spending money that it doesn’t have. They want to see less government – not more taxes. This means that spending must be reduced from its current level of 24% of GDP. This is why we were elected, and we are doing the things that we promised we would do. Since we only control one-half of one-third of Washington, these changes are happening incrementally – but make no mistake, they are happening. And that is a sign of progress.
With the Budget Control Act, we made a $917 billion down payment on deficit reduction without raising taxes. The Joint Committee created by the legislation presents another opportunity for an additional $1.2 to $1.5 trillion in savings by the end of the calendar year. Based on the savings identified in our Budget Resolution and in the Biden Group, I firmly believe we can find bipartisan agreement on savings from mandatory programs that can be agreed to without tax increases. I believe this is what we must demand from the Joint Committee as it begins its work.
Now these efforts alone will not solve our debt crisis. That will require fundamental structural reform to our entitlement programs in order to preserve the safety net for the next generation without bankrupting our nation.
Just a few weeks ago, the President himself acknowledged the resistance of his own party to such reforms, as well as the reality that without reform, entitlement programs are unsustainable. On July 11, President Obama said, “…the vast majority of Democrats on Capitol Hill would prefer not to have to do anything on entitlements; would prefer, frankly, not to have to do anything on some of these debt and deficit problems. And I’m sympathetic to their concerns, because they’re looking after folks who are already hurting and already vulnerable, and there are a lot of families out there and seniors who are dependent on some of these programs. And what I’ve tried to explain to them is, number one, if you look at the numbers, then Medicare in particular will run out of money and we will not be able to sustain that program no matter how much taxes go up. I mean, it’s not an option for us to just sit by and do nothing.”
But doing nothing is exactly what the President did in his budget. The President remains opposed to any structural reforms, and would only nibble around the edges of these programs IF taxes are increased on job creators. Given that reality, I firmly believe that these are issues that will be central to the decision that voters will make in the 2012 election.
On Fox News this past Sunday, our colleague Paul Ryan perhaps summed it up best. When discussing the Joint Committee and the goals being set for it, he said, “I think people are overemphasizing what the Committee is going to achieve. I don't think the Committee will have a full fix to the problems. Democrats do not want to address the health care bill or put out a plan. The President hasn't put out a specific plan to fix the problem and they don't want to go with structural entitlement reform which is what you have to do to get the economy growing… I want to make sure people understand that I don't think [the committee] is going to fix all of our fiscal problems. I hope it is a Committee that will get a down payment on the problems. Ultimately, I think the leadership in Washington needs to be changed.”
This is our challenge for the next 15 months.
In the meantime, our primary focus must be to get the economy going and get people back to work, which is why I have been working with many of our Committee Chairmen to prepare a fall legislative agenda focused on economic growth through reducing the regulatory and tax burden on job creators. While I will be providing you with a more detailed list of legislative proposals before we return in September, it is my intention that the House will take continual and steady action on bills to reduce or eliminate regulatory barriers to job creation this fall.
The new Republican Majority is finally holding Washington accountable, and has begun to stop business as usual. Our country currently faces two very serious crises - debt and jobs. These two crises are not mutually exclusive, but they are equally dangerous. That is why it is absolutely critical that as policies are developed to overcome each, we consider their impact upon each other. Anything less would be negligent.