S&P rating: How to get back to AAA

@CNNMoney August 8, 2011: 5:29 AM ET
President Obama and lawmakers should seize the opportunity to start making real changes to reduce the debt, budget expert Maya MacGuineas argues.

President Obama and lawmakers should seize the opportunity to start making real changes to reduce the debt, budget expert Maya MacGuineas argues.

Commentary: Maya MacGuineas is the director of the fiscal policy program at the New America Foundation.

Oh, AAA credit rating -- we never knew how much we loved you until we lost you. Just one more chance, please!

It's like a bad breakup. The warning signs were there. He starts to nitpick and then complain so much more than when the romance began. Remember when you could do no wrong?

He went along when you demanded all the luxuries in life even though you couldn't afford them. What's a few overextended credit cards when you are having a good time?

And then, he started issuing those self-important warnings? Who does he think he is?

But you never really believed he would walk. Just like that. And he even has the nerve to compare you unfavorably to German, Canadian, British and French girls (all of whom were still rated AAA in his book). The indignity of it all.

No question: This hurts. But still you can't let go. What will it take to get him back?

S&P rating downgrade: FAQ

Pick a fiscal goal: We know where we need to get. The rating agencies have made it clear, as have other outside groups (including the Peterson-Pew Commission on Budget Reform, on which I served).

Here it is: We need to generate enough savings to stabilize the federal debt so that it is no longer growing faster than the economy.

I wish I could say the goal was to "balance the budget." It's clearly a better bumper stick slogan than "stabilize the debt." But the truth is that we are so far from balance it will probably take decades to get there.

So stabilize the debt it is. It would be best to get it back to about 60% of GDP (historically, it has been below 40%). But that might be tough in the next decade. The outer limit should be 65%, and that will take at least $4 trillion to $5 trillion in savings over the next decade. Nothing less will suffice.

Put a multiyear plan in place: Congress must pass and President Obama must sign a plan this year that generates these trillions in savings. Not next year when more downgrades may have come. And not after the election when politicians will have dug themselves deeper into unworkable promises and a full-blown market crisis could have kicked in. This year.

The plan should not just cut spending in the next few years. It must phase in medium-term changes aggressive enough to show that we are serious, but not so front loaded as to derail the recovery.

Such a multiyear plan would help the economy. It would add stability and transparency for households and businesses and reassure markets, but without threatening things in next few fragile years.

Address the toughest pieces of the budget: The debt ceiling negotiations were about taking things off the table. The result was a small deal that didn't fix the big problems. And thus the downgrade.

Now we have to put things back on the table.

Your money in a AA-rated world

We have to fix Social Security once and for all. Let's start with the obvious: Raise the retirement age, fix cost-of-living adjustments and add a "means testing" component to how benefits are calculated so benefits are better apportioned according to need. (Read: Maya MacGuineas on how to fix Social Security)

We need multiple layers of health care reforms starting with a stringent budget for spending and a willingness to try different structural reforms, including premium support and opening up traditional Medicare.

Discretionary spending does need to be cut overall, but some major areas of public investments need to be increased. And we should adopt more performance measures so programs that aren't working can be quickly eliminated.

And, of course, we have to consider revenues. Tax reform is a no-brainer. Getting rid of the hundreds of billions of dollars in regressive tax breaks would allow us to lower rates and generate more revenue to close the deficit.

Enact real spending caps and triggers: Putting in place a multiyear budget plan that tackles entitlements and tax reform won't be enough. There will still be the risk that promises of future savings won't materialize.

We also need spending caps and trigger mechanisms. So far, though, the Balanced Budget Amendment or Cut, Cap and Balance plan recently bandied about have been suggested as replacements for specific policy reforms -- they allow lawmakers to sound tough without doing any of the real work of getting specific.

Instead, such budgetary limits should be used to enforce a deal and make sure it stays on track: Cap spending, threaten across-the-board cuts if the full savings don't materialize and build in a mechanism so new revenues are only included if all the entitlement reforms are enacted. (Video: S&P on why it downgraded U.S.)

If we do all of this, we'll win back the heart of Mr. AAA by the end of the year. I would bet my dwindling retirement account on it. If we don't, we will all pay a very steep price. And assuming we do get him back, we should never let him get away again. To top of page

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