In the Wake of the US Credit Downgrade Cuts to Entitlements may be the Key for the Green Economy

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Now is the time to begin developing the green ecomomyA truly balanced approach to managing America’s debt involves reduced mandatory spending while at the same time, investing in the green economy. Despite the doom associated with Standard & Poor’s downgrading of U.S. treasury debt, a political window may have opened that could see entitlement reform as a means of advancing the low carbon economy.

Sustainability is the biggest opportunity of the century, and an extraordinary jobs creator, however this is a global competition which America cannot win without government support. With governments like the UK and China investing in sustainability, the global competition for green leadership is a powerful incentive for Congress to act. Growing the green economy will also provide significant additional government revenues.

Some resist the green economy by pointing to the costs associated with combating global warming, but what they ignore is that this is a fraction of the costs if we continue with business as usual. According to an analysis by Google, failure to move aggressively to implement a clean energy economy will cost the US GDP “trillions” over just the next five years. In 2009, the International Institute for Environment and Development (IIED) published a report authored by the co-chair of the IPCC and other climate science experts, revealing that the net present value of climate change impacts, i.e. the costs to civilization, are US$1,240 trillion under our current emission path and $410 trillion if we manage to stabilize atmospheric carbon at 450ppm. Most climate scientists would like to see that number at 350ppm or less.

According to conventional logic, the credit downgrade makes it that much more likely that Congress will not get involved in efforts to combat climate change. Economic uncertainty has already taken a toll on the government’s environmental initiatives. The recession killed climate change legislation in 2008 with opposition coming from Republicans and Democrats from the Rust Belt and coal-friendly regions.

As Yvo de Boer, former director of the United Nations Framework Convention on Climate Change said, “If industry is in a difficult pass, most sensible governments will be reluctant to impose new costs on them in the form of carbon-emissions caps.”

In 2008, Rep. John Dingell, chairman of the House Energy and Commerce Committee said,”In times of economic downturns, members [of Congress] are extremely reluctant to add burdens to the economy.” In addition to the cap-and-trade bill that failed in the Senate in 2008, the financial crisis also helped to bury the Kyoto Protocol.

The credit downgrade further weakens America’s economy which is still struggling to recover from the recession. Ironically, a stronger-than-expected July jobs report helped steady global markets on Friday August 5, but hours after the close of U.S. stock markets, Standard & Poor’s downgraded the U.S. credit rating from AAA to AA+. The credit downgrade caused stock markets around the world to decline resulting in the loss of trillions of dollars.

Many stock market insiders are expressing concerns about another recession. In response to an informal Dow Jones questionnaire, two-thirds of 45 economists, portfolio managers and financial consultants surveyed gave a better than 50 percent chance of recession in the next year. About 25 percent put the odds of recession at better than 75 percent.

Even if the U.S. does not fall into another recession, S&P’s downgrade of America’s sovereign debt is a psychological blow that will have significant consequences. The credit downgrade will add $100 billion a year to government costs, it will also further weaken an already weak dollar, increase costs for US companies and undermine the economic recovery. Some investors and analysts are saying that over time, Standard & Poor’s downgrade may mark a moment in the decline of U.S. economic strength.

Despite accusations from both sides, Republicans must assume the bulk of the responsibility for the US credit downgrade. The credit downgrade could have been averted if Republicans would have accepted putting an end to Bush tax cuts for the wealthiest 2 percent. The GOP’s refusal to work with President Obama and the Democrats has hog-tied the US economy and undermined efforts to implement policies that spur job growth.

Standard & Poor’s said that GOP strategy had shaken its confidence. The agency explained its downgrade by citing heightened political risks:  “The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed.”

The GOP has been hijacked by the Tea Party whose intransigence over the debt ceiling is responsible for the political deadlock that led to the downgrade. The Tea Party’s woeful ignorance on the role of government has fueled the political insanity that has created this economic uncertainty.

The downgrade prompted Gregory Ellena, chief executive of First National Bank of Santa Fe, to say, “It’s very disappointing that the money markets have become hostage to political maneuvering.”

Sen. Mike Crapo (R., Idaho) said the credit downgrade will put pressure on the bipartisan commission to go beyond the minimum $1.2 trillion in savings threshold set in the debt ceiling agreement. In an interview with the Wall Street Journal, Mr Crapo said, “This decision focuses us on the scope of the issue we are facing. It increases the momentum for a much larger plan.” Sen. Mike Crapo is a member of the bipartisan group of six senators who sought to craft their own deficit reduction plan earlier this year.

S&P criticized the $2.4 trillion debt ceiling deal as too limited and singled out Republicans for failing to increase taxes on the wealthy and Democrats for refusing cuts to entitlements. With Standard & Poor’s warning of further downgrades, it will be hard to avoid deep cuts, including mandatory spending.

As his first term winds down, President Obama could yet show leadership on the politics of climate change. Republicans claim they want deeper cuts and economic growth. Entitlement reform provides a way of cutting spending while simultaneously investing in American competitiveness.

America is confronted with the need to make major budget cuts while finding funds to invest in the green economy. Both taxes and entitlement programs will be on the table as lawmakers seek a broader package of cuts.

Entitlements consume a large share of the U.S. government budget. According to Congressional Budget Office records, federal outlays for entitlement spending was 33.8% in 1965. According to a CF&P Foundation article “Prosperitas,” as of 2000, entitlement spending almost doubled, accounting for 62.6% of the U.S. budget.

More cuts are needed and the debt downgrade may present the right conditions for the President to propose cuts to entitlements. In exchange for reductions to mandatory spending, Republicans may even consider a compromise, if not, the GOP may risk being punished by voters in 2012.

Although many Americans many not see it, the US is at a crossroads that could very well determine its future prosperity or ongoing decline.

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Richard Matthews is a consultant, eco-entrepreneur, green investor and author of numerous articles on sustainable positioning, eco-economics and enviro-politics. He is the owner of THE GREEN MARKET, a leading sustainable business blog and one of the Web’s most comprehensive resources on the business of the environment. Find The Green Market on Facebook and follow The Green Market’s twitter feed.

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