Moody’s sends a message

In case anyone had forgotten, Moody’s Investors Service issued a stark reminder Tuesday that the federal government is speeding headlong toward a political and financial cliff. On Jan. 1, a number of temporary tax cuts are due to expire just as new spending restraints kick in, pulling hundreds of billions of dollars out of the U.S. economy and potentially triggering another recession. At the same time, Washington is expected to reach the limit of its borrowing authority, necessitating another increase in its debt limit. If lawmakers and the White House can’t reach a budget deal that effectively manages those problems, Moody’s said, it expects to downgrade the federal government’s credit rating.

That might seem unduly pessimistic if so many congressional Republicans hadn’t called for the government to stiff its creditors last year instead of raising the debt ceiling. One of the three major ratings agencies, Standard & Poor’s, downgraded U.S. debt after that acrimonious episode; now, Moody’s is threatening to do so as well.

Considering the sorry state of other governments’ finances, even downgraded U.S. debt is likely to remain attractive to investors in search of a safe harbor. But once the global economy improves, the ratings downgrade could force the Treasury to pay higher interest rates, which would only make it harder for the federal government to close its budget gap.

We shouldn’t have to reach that point. Regardless of the outcome of November’s elections, Congress faces a tough choice before the end of the year. The economy isn’t strong enough to withstand the looming tax increases and spending cuts, but any move to soften the economic blow would add to a debt load that’s already too large. Complicating matters is the sharp disagreement between the parties over how to generate the strong economic growth that’s crucial to improving the country’s fiscal health.

The message from the analysts at Moody’s and S&P; is that lawmakers can’t keep putting off the day of reckoning. Moody’s set a reasonable condition for avoiding a downgrade: adopting policies that stabilize, then reduce the debt as a percentage of the U.S. economy over the next several years.

Achieving that goal will require Democrats to agree to slow the growth of federal spending, particularly on healthcare entitlements such as Medicare and Medicaid, more than President Obama’s budgets have proposed. It also will require Republicans to agree to raise taxes, which Democrats have rightly made a precondition to any deal. In short, it means bringing the two polarized and recalcitrant sides together in a compromise, something Washington’s current occupants have been singularly unable to do. They’re running out of time to learn how.