Fitch smacks Biden for out-of-control spending

Fitch Ratings just delivered a welcome and long overdue comeuppance to President Joe Biden and his Democratic colleagues. They are not taking it well.

The ratings agency surprised investors by downgrading U.S. long-term debt one notch from AAA to AA+, citing “expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance…”

Stocks slumped in response to the move, as did whatever hope Biden might still have that he can sell the public on the virtues of Bidenomics. Presiding over the second-ever downgrade of U.S. debt is not a terrific selling point for any White House, and especially one widely criticized for spending too much money and kicking off the highest inflation in 40 years.

Treasury Secretary Janet Yellen and other Biden economic gurus responded to Fitch’s move the way any responsible stewards of our country’s finances might: They blamed Donald Trump. Oh – and they specifically cited the Jan. 6 riot, even though that event did not figure in Fitch’s review.

Instead, Fitch cites (among other worrisome trends) a rising government deficit, which they forecast increasing to 6.3 percent of GDP in 2023, from 3.7 percent in 2022.  

Let that sink in. This country – and indeed the world – survived a dreadful pandemic that killed millions of people and brought commerce to its knees. Nearly all countries boosted government spending, hoping to offset the worst effects of the COVID-19-related shutdowns. It was an emergency. Here in the U.S., we sent checks to all Americans, paid businesses to keep unneeded employees on the payroll, amped up welfare programs and beefed up city and state coffers. Drastic times indeed, and drastic measures.

But that was now three years ago. By the time Biden took office, the economy was roaring back, growing at better than 6 percent. The need for extra spending had passed, but Democrats refused to let a crisis go to waste. Hence the passage – with only Democrat votes – of the $1.9 trillion American Rescue Plan, which mainly went to pay off special interest groups like the teachers’ unions that had elected Biden.

That wasn’t the end of the spending. Biden pushed through the $500 billion Inflation Reduction Act, which the Congressional Budget Office declared would actually increase inflation, and the $1 trillion infrastructure bill and then the $280 billion Chips Act, and then the $400 billion student loan forgiveness plan, which has thankfully been put on ice by the Supreme Court.

The net result of all those bills, some of which passed with Republican support because few politicians balk at “infrastructure” for heaven’s sake, is that our deficit is skyrocketing. Instead of getting the nation back on a sustainable path, or even just back to the kind of budgets we had pre-COVID, Biden has gone berserk.

Instead of our long-term spending looking like a python that ingested a pig – with COVID providing a sizeable one-time bulge in the middle – it looks like one of Elon Musk’s rockets, heading into the stratosphere.

Fitch also rattled the happy talk from Biden’s economic team by projecting a mild recession, pointing to “tighter credit conditions, weakening business investment and a slowdown in consumption.”

Those realities stem from the Federal Reserve’s efforts to fight Bidenflation. The Fed has dramatically ratcheted up interest rates; with ballooning debt, interest costs are expected to double by 2033 and will soon be one of our largest expenditures, reaching 3.6 percent of GDP.

Janet Yellen called Fitch’s downgrade “entirely unwarranted.” She found Fitch’s decision “puzzling in light of the economic strength we see in the United States…”  But, of course, much of that “strength” is being boosted by the sugar high of record spending. Yellen probably thinks our spending problem is “transitory.”

That Fitch included “governance” problems in its decision was a balm to the White House. One director at the agency told Reuters that the Jan. 6 riot was an example of the deterioration in governance, though it sounded like Treasury officials had actually plopped that dreadful day’s events into the conversation. Of course, the White House immediately pinned the downgrade on the Trump administration, which has been out of office for three years.

What Fitch actually meant was that there was little bipartisan appetite for cutting spending, and that brinkmanship often took the place of reasoned negotiations. It was amusing that Yellen boasted that she and the president took fiscal responsibility very, very seriously, and referenced the debt ceiling pact with Congress, which reduced the deficit by $1 trillion over 10 years, as a sign that our government could actually function like grown-ups. That agreement emerged only after an obdurate Biden refused for months to consider any spending cuts or even talk to House Speaker Kevin McCarthy (R-Calif.). Biden was the poster child for brinksmanship.

The statistics are clear: Relative to historical norms, the U.S. is spending way too much. Also, rising entitlements costs cloud our long-term prospects. These issues have been simmering for decades, but the pandemic brought the problem closer to home.

Our country’s challenge is not just an aging population, however. It is also that Democrats in power tend to reward voters who support them with ever-expanding benefits; hence, Biden’s seemingly desperate attempt to pay off student loans. Not only does the welfare state expand inexorably, but Democrats also want the government to occupy and ever-greater piece of the economic pie. The biggest gains in employment this year have not been in manufacturing or retail, they have been in government.

By definition, when government crowds out the private sector, productivity lags and growth slows. That is where we are now, and that is the essence of Bidenomics.

Republicans have talked about cutting spending and the danger of growing deficits, but their credibility is tarnished by their participation in corporate boondoggles like the CHIPS Act.

Therefore, the Fitch wake-up call, coming from a neutral source, is welcome. Let’s hope our legislators actually wake up.

Liz Peek is a former partner of major bracket Wall Street firm Wertheim & Company. Follow her on Twitter @lizpeek.