The Moody’s Downgrade Is an Alarm. Washington Better Pay Attention.

Opinion|The Moody’s Downgrade Is an Alarm. Washington Better Pay Attention.

It may be a cliché, but Ernest Hemingway’s quip about going bankrupt “gradually and then suddenly” feels very much on point if you look at America’s spending and debt situation — deteriorating, with momentum building toward a crisis.

The latest step along that path came Friday, when Moody’s Ratings removed the final major Triple-A credit rating for the federal government. That means America’s debt is officially no longer considered pristine by any of the main companies that rate it. Moody’s cited successive bipartisan failures to reverse the growing U.S. budget deficit, which it estimated could increase to 9 percent of the gross domestic product within the coming decade, from the 6.4 percent it hit last year. It has previously reached those levels only during times of global crisis: World War II, the 2008 financial crisis and the Covid pandemic.

It’s easy to downplay these fears after decades of hand-wringing that have come to naught. In 1988 — 37 years ago — when U.S. federal debt was less than half what it is today, measured as a percentage of G.D.P., the Federal Reserve chairman, Alan Greenspan, warned of the country’s fiscal situation. He said that “the long run is rapidly turning into the short run.” He added that “the effects of the deficit will be increasingly felt and with some immediacy.”

It turned out that domestic and foreign investors were willing to buy ever-larger amounts of government debt to finance America’s overspending. Investors even continued to buy debt after America’s first credit downgrade, by what’s now known as S&P Global Ratings, in 2011. The coming week seems unlikely to repeat such a rosy scenario.

Dynamics today are changing in ways that finally make Mr. Greenspan’s warnings urgent. Some investors are questioning how much exposure they want in U.S. financial assets. Politicians clinging to increasingly thin majorities in Congress are more willing to encourage voters with spending or tax cuts than they are to tackle the problem. The combination will lead to investors demanding higher interest rates to buy U.S. debt, which slows economic growth by raising borrowing costs for households and businesses. It also eats into the cash available for the government itself, worsening the underlying budget math. Wash, rinse, repeat.

Politicians from both parties have tried to meet that challenge not directly, but by fussing with the arcane way Congress accounts for spending. Take a look at the budget legislation recently released by the House Ways and Means Committee. Several of the tax cuts would not last through the typical 10-year time frame, but instead would expire at the end of President Trump’s term. They include a removal of taxes on tips and overtime pay, and increases in standard deductions and child tax credits.