Standard & Poor’s issues the latest wake-up call

As the fallout from downgrading America’s credit rating unfolds, it’s pretty clear the deal made to raise the debt ceiling amounts to nothing more than a down payment on the debt.

It was the first time our sacrosanct Triple-A credit rating has been downgraded (to AA+), which means U.S. Treasury bonds are no longer considered among the safest investments in the world, the U.S. government will pay higher interest to borrow, and various consumer loans (think homes and autos) will be impacted, too.

Could this be the earth-moving event that finally gets Washington to stop hitting the snooze button?

I’ve been critical of both sides in recent weeks because they took too long to reach a final compromise to raise the debt ceiling, frightening consumers and impacting the small businesses that already have borne the brunt of the recession and the sluggish recovery that has ensued.

In the end, we got some vague future commitment to cut spending by a so-called “super” congressional committee. The purported spending discipline isn’t nearly enough, but it’s probably the best we can do with the current composition in the national capital.

My hope is that Standard & Poor's will get our national government off the dime, especially if consumers feel an even greater pinch. David Beers of S&P calls it a mild downgrade that could further slide unless the government gets its act together.

These ratings services – Moody’s has not changed its Triple-A rating for the U.S. – are supposed to provide a meaningful indicator of credit risk. Global stock markets reacted negatively – Israel had to close its stock market to prevent a free fall and U.S. stocks plummeted Monday – but they might be reacting to a number of economic factors. For example, the U.S. job numbers in July (+117,000) were a pleasant surprise, but not indicative of a turnaround.

If this downgrade sends elected officials back to the drawing board to build on the deal that raised the debt ceiling, they should start by reforming the entitlement programs that are the primary cause of our debt problems. Not all the possible solutions are painful, at least not yet. For example, there is no reason the wealthiest people in the country need a full complement of Medicare benefits when they can easily afford to buy their own health insurance coverage, even in old age.

In the meantime, they also should end corporate welfare, permanently simplify the tax code (broaden the base, lower individual rates), and make it more difficult for politicians to muck it up all over again. My friends in the accounting profession might sock me in the arm for this, but it’s an outrage that American businesses are forced to spend tens of billions of dollars a year complying with the tax code. That money can be put to more productive use.

Government policy is causing a great deal of the uncertainty that is paralyzing businesses. If our elected officials don’t start dealing with it soon, 2012 will be yet another change election.

Sign up for the free IB Update – your weekly resource for local business news, analysis, voices, and the names you need to know. Click here.