Friday, August 05, 2011

Beyond The Outcry for S&P's Downgrade Of The USA's Credit-Worthiness

(UPDATED with Robert Reich's perspective, below my original post.)

There are those who decry the decision of Standard & Poor's to dowgrade the credit-worthiness of the United States as laughable, indefensible, and wrong. I beg to differ. S&P did the right thing, and I hope that other rating agencies will follow suit. This does not mean that S&P and other credit rating agencies do not have credibility issues of their own, nor that we should take everything they say or write as the revealed word of god. But after the the pitiful spectactle offered by the two political parties in the standoff over the debt ceiling, which ended with the side of the hostage takers getting everything they wanted (98%, according to the Speaker of the House), and the other side, the Stockholm-syndrome plagued Democrats, acting as if we have to thank the kidnappers for releasing us after paying a 2.4 trillion ransom, how can anyone blame S&P for just taking reality into account?

The American government gave the world the worse possible performance it could have given, and we should expect everybody to applaud because it decided to honor its debts? How deluded are we if we think that the world regards the current political class as responsible and trustworthy, and that we are deserving of the best possible rating?

I believe that when all the dust has settled you will see that S&P's rationale for downgrading the United States' credit rating actually makes a lot of sense. Below are excerpts from their press release, in the order in which they appear. (Emphases added.)

  • the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.

  • [we are] pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government’s debt dynamics any time soon.

  • 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 statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy.

  • It appears that for now, new revenues have dropped down on the menu of policy options. In addition, the plan envisions only minor policy changes on Medicare and little change in other entitlements, the containment of which we and most other independent observers regard as key to long-term fiscal sustainability.

  • Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues...

The conclusion of the press release states:
On the other hand, as our upside scenario highlights, if the recommendations of the Congressional Joint Select Committee on Deficit Reduction–independently or coupled with other initiatives, such as the lapsing of the 2001 and 2003 tax cuts for high earners–lead to fiscal consolidation measures beyond the minimum mandated, and we believe they are likely to slow the deterioration of the government’s debt dynamics, the long-term rating could stabilize at ‘AA+’.

The full report can be found on Standard and Poor's website.

P.S. You will hear that the Obama administration has levied accusations that S&P's numbers are off by a couple of trillion dollars, making the downgrade decision flawed or outright wrong. But you should also notice that much of the rationale for the downgrade lies in the intransigence of (Republicans in) Congress against raising revenues, and on the lack of credibility of Washington's political class. So the downgrade is less about numbers than it is about prospects and credibility. And the decision therefore falls squarely on the shoulders of those who decided to take the American economy hostage in the service of their wealthy overlords.

And now, as promised, is Robert Reich's take on S&P's downgrade of the U.S. credit rating. It is interesting, because Reich correctly points out that S&P has no business telling the United States how large a deficit it can run, unless its ability to repay its debts is in question.

While I respect Reich's point of view greatly, I still would not discount the weight that the credibility of American politics has in forecasting the nation's ability to repay its debts. In other words, I welcome S&P's downgrade IF, and that's a big if, it sends Washington the message that some things are off-limits to politicking. Which is why I also blame President Obama for not throwing the weight of the Fourteenth Amendment at the leaders of the Republican Party and at Tea Party members during the negotiations. The President is making many people regret their decision of supporting him instead of Hillary Clinton. It is hard to imagine that Mrs. Clinton could have done worse than he has in negotiations with Republicans, who have run all over him from Day 1 of his arrival in office. And that, which is that Obama is making us long for a Clinton presidency, speaks volumes to the magnitude of his failure so far.

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